What is Feasibility Study?
Feasibility study examines the viability or sustainability of an idea, project, or business. The study examines whether there are enough resources to implement it, and the concept has the potential to generate reasonable profits. In addition, it will demonstrate the benefits received in return for taking the risk of investing in the idea.
These studies analyze strengths, weaknesses, opportunities, and threats to determine whether the proposals are cost-effective and beneficial to a company’s long-term success. Furthermore, investors can benefit from evaluating the problems and solutions listed in the study and determine whether a proposed project is the right choice for a company.
Table of contents
- Feasibility Study analyses whether the proposed business ideas will succeed or fail. It determines the practicality by assessing the opportunities and threats of the proposed plan.
- There are different types of studies to check feasibility, such as technical feasibility, market feasibility, organization feasibility, and financial feasibility, that help a company determine the viability of a business plan.
- They reveal the return on investment, the risk involved, methods of mitigating risks, whether the company can complete it within the scheduled time, the best alternatives available, etc. It helps companies assess the market demand and position their products and services to gain maximum profits or discard the plan if there is no cost-benefit.
Feasibility Study Explained
A feasibility study of a business is an assessment tool that analyses the cost-benefit factor of an idea. The feasibility study meaning covers tasks like preparing an executive summary, a detailed description of products and services, technological requirements, marketplace compatibility for desired products or services, etc. The study also involves an analysis of marketing strategies, the organizational structure of the business, financial projectionsFinancial ProjectionsFinancial projection is a statistical forecast of a company's future revenue and expenditure based on historical market patterns, internal factors, data interpretation, anticipated market developments, and experiences. To meet production or sales targets, both short-term and long-term financial estimates are sometimes evaluated., etc. A well-executed study will include factors focusing on the central idea of the business organization and the components in support of it.
In detail, they:
- Provide a preliminary analysis to eliminate business scenarios that are not in tune with the organization’s motives. Specifically, it looks for ways to position the product in a marketplace. A negative preliminary analysis does not mean the plan is a failure; companies can correct the shortcomings to perfect it.
- Help assess the demands in a market and the price at which a company can reap profit. In addition, such market assessments can provide information on marketing feasibility.
- Provide insights to address gaps in the organizational structure of the company. Labor and management alignment, human resource requirements, and talent acquisition processes are assessed.
- Project an idea of revenue and expenses that the plan might require in the future.
- Point out factors that make the business idea vulnerable and the short-term and long-term steps to correct it.
- By analyzing the above factors, one can categorize business ideas into feasible and non-feasible.
Types of Feasibility Study
There are several different kinds of feasibility studies. Understanding the types of feasibility studies and the technicalities of the concept is important for any business. They are elaborated below:
#1 – Technical Feasibility
Technical feasibility study checks for accessibility of technical resources in the organization. In case technological resources exist, the study team will conduct assessments to check whether the technical team can customize or update the existing technology to suit the new method of workings for the project by properly checking the health of the hardware and software.
Many factors need to be taken into consideration here, like staffing requirements, transportation, and technological competency.
#2 – Financial Feasibility
Financial feasibility allows an organization to determine cost-benefit analysisCost-benefit AnalysisCost-benefit analysis is the technique used by the companies to arrive at a critical decision after working out the potential returns of a particular action and considering its overall costs. Some of these models include Net Present Value, Benefit-Cost Ratio etc.. It gives details about the investment that has to go in to get the desired level of benefit (profit). Factors such as total cost and expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital. are considered to arrive simultaneously. With this data, the companies know their present state of financial affairs and anticipate future monetary requirements and the sources from which the company can acquire them. Investors can largely benefit from the economic analysis done. Assessing the return on investmentReturn On InvestmentThe return on investment formula measures the gain or loss made on an investment relative to the amount invested. The net income divided by the original capital cost of investment. Return on Investment Formula = (Net Profit / Cost of Investment) * 100 of a particular asset or acquisition can be a financial feasibility study example.
#3 – Market Feasibility
It assesses the industry type, the existing marketing characteristics and improvements to make it better, the growth evident and needed, competitive environment of the company’s products and services. Preparations of sales projections can thus be a good market feasibility study example.
#4 – Organization Feasibility
Organization feasibility focuses on the organization’s structure, including the legal system, management team’s competency, etc. It checks whether the existing conditions will suffice to implement the business idea.
A feasibility study of a business can help choose the best available alternative by assessing the opportunity cost. The reasons for rejecting one option can reveal weaknesses of the company; investigating options can lead to undiscovered opportunities. From these, a company can assess why certain factors pull them down and find measures to mitigate them. When these steps are executed, and necessary corrective actions are taken, it reflects on its performance. Thus profits can follow easily and attract investors. This analysis can also help in securing funds from financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. . These studies analyze the company’s existing business models and the gaps it carries. Solutions suggested by them reduce the risk of failures. They tell us whether a proposed business idea shall be taken forward by its practicality. Finally, it checks whether it is doable by estimating the opportunity and threats of the plan.
Frequently Asked Questions (FAQs)
It is crucial to check whether the proposed business plan is within the achievable limits of the company. The companies can do studies regarding resources, return on investment, technical capabilities, organizational competencies, whether they can complete the plan within a proposed time frame, etc.
It evaluates whether the project is likely to succeed or not. It highlights the key objectives of the project and lists out the benefits, risks, and roadblocks. It also offers alternative solutions and the means to achieve them.
General components of a feasibility study include defining the project scope and determining whether they are feasible technically, organizationally, and financially. The others include charting out the market demand and risk associated with moving forward and finally evaluating the cost-benefit factor of the ideas.
To understand when a feasibility study needs to be done, one must understand its meaning and importance. In simple words, it answers whether the proposed idea is the right fit for the company’s objectives.
This has been a Guide to Feasibility Study & its definition. Here we explain feasibility study types, examples, and purposes along with their explanations. You can learn more about accounting from the articles below –