Feasibility study

Meaning of a feasibility study

Not every business opportunity can be turned into a profitable project. A feasibility study is a detailed investigation made before a venture is launched to check whether the project is viable and whether the opportunity can be exploited at a profit. In setting up an enterprise it comes after an opportunity has been spotted and an idea generated, and before the business plan is prepared. Promoters of a company carry it out with the help of experts such as engineers and chartered accountants, who do not become promoters merely by assisting.

Aspects examined

• Financial. The total cost of the project, projected cash flows and profits, how it will be financed and how much the promoter will contribute are estimated. If the outlay is too large to raise from available means, the idea is dropped.
• Technical. Location, plant size, raw materials, labour, machinery and infrastructure are studied. The site must allow low-cost operation, a plant below optimum size raises unit cost, and every input must actually be obtainable. A good idea can fail here if a key material cannot be produced or imported.
• Socio-economic. A social cost-benefit analysis weighs what the project costs the nation against what it gives, such as jobs, infrastructure, development of backward areas, foreign exchange and import substitution.
• Commercial. A technically sound project means little unless it sells, so present and future demand at home and abroad, profit margins, competition and market stability are examined. Even a technically and financially workable project may be abandoned if its chance of profit is slim.

What follows the study

The results are appraised in depth to decide whether to accept or reject the project. If it is accepted, the findings go into a project report, which is needed to obtain sanction from authorities and financial institutions; it covers the entrepreneur, a summary of the project, the inputs, the financial details, market potential and the project's value to the national economy. Only when the investigations are positive do the promoters actually launch the company.

Why it matters

The study keeps money out of ventures that cannot work. Suppose a group in Nashik plans a grape-wine unit. The study might show steady demand and good margins, but also that the plant size they can afford is below the efficient scale, pushing unit costs up. Learning this on paper, before land is bought, lets them resize the plan or seek a partner.