Feasibility Studies Are Also For Small Businesses

I am sure all of us know people who started successful businesses without doing any feasibility studies, much less business plans. But you will be drawing an erroneous conclusion if you think that feasibility studies do not matter. For every business that made it big, there are probably 10 that failed due to matters that would have been revealed had they made a feasibility study.

A feasibility study is different from a business plan. A feasibility study aims to find out if a certain objective can be met. If the objective were to see if a particular business would be profitable, then you would in fact be doing a series of different feasibility studies since a lot of factors must be checked to ascertain viability. On the other hand, a business plan already assumes that it is feasible and focuses on the strategies and tactics to start and grow the business.

To answer whether or not the business is feasible, you need to gather and analyze a lot of quantifiable data. Because of this, a feasibility study normally takes much longer to make than a business plan. In fact, it can be the foundation on which you draw up your business plan since virtually all the critical information can be extracted from the feasibility study.

It is due to the costly and time consuming nature of feasibility studies that many entrepreneurs prefer to bypass this step and go directly to business planning. Many people think that feasibility studies are not applicable to small businesses. This is like throwing the baby along with the bath water. While it is true that the needs of large companies are different from the small ventures, feasibility studies are important to all enterprises. The large number of failed start-ups that should never have started is testimony to this blunder.

It is in fact not only possible but also more practical to apply shortcuts in doing feasibility studies for small firms. Comprehensive feasibility studies for large projects could come to millions of pesos and take years to complete. For most small- or medium-sized start-ups, you only need to focus on the following:

Market and location feasibility. While large corporations sort through data gathered on a national or even on a worldwide scale, a small company should monitor only the geographical area that will have a significant influence on their sales to save on expenditures. Nevertheless, time and money must not be spared in doing an adequate study of potential sales. Usually this is the most critical for small businesses and the area where the most mistakes are made. Most have an overly optimistic projection especially when forecasting sales. This is mostly due to the failure to appreciate the effect of competition from famous brands. An entrepreneur sees a good location and estimates that sales of his new store will be comparable to the well-known chains in similar places. Unfortunately, the common result it that sales are less than half of the leading brand. With sensitive items like medicine, the disparity may even be tenfold. Instead of basing sales on the leading company, it would be more prudent and realistic to compare your estimate to a new company. An unknown retailer would pull in less customers and the distance where people would seek them out is much less by a factor that is best observed than guessed at. Other matters that should be studied under market feasibility are the ideal price you should set and the target market. Just remember to limit your market research to affordable levels.

Financial feasibility. This involves analyzing the financial aspects of the operation. Total beginning capital needed is the most crucial for small businesses. Too often ventures are launched and then could not take off due to lack of funding. Usually, the error lies in underestimating the working capital and cash buffer needed to sustain operations while the company is still in the process of gaining customers. In the financial feasibility study, it is important to have a good projection of cash flow and return on investment.

Technical feasibility. In the case of small enterprises, technical feasibility studies are often not needed or are not that important, as in the case of retailers or service-oriented ventures. However, if you are in manufacturing, this issue must be addressed. Technical feasibility basically studies if you can produce your product or service at a cost where you can price it profitably. The cost of needed logistical support to deliver to your target market must also be factored in.

*Originally published by the Manila Bulletin. C-4, Sunday, October 14, 2012. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.