Significance of a Feasibility Study

February 2, 2023

A feasibility study is the most important step at the concept or idea stage of any new business venture. This analysis helps determine the commercial and financial viability of a business idea by analysing the market, competition, strategy, business model, and other factors. It can help the entrepreneur adapt the strategy and business model to the competitive landscape. This exercise also equips the entrepreneur with important tools such as the financial model that can later be used to develop a detailed business plan, minimize cost-overruns and monitor performance.

In this post, we will explain why it is important for startups to conduct a feasibility study, various types of feasibility studies, and how to perform one.

The Need for Feasibility Study

Starting a new business is always risky, and unfortunately, statistics show that 9 out of 10 startups fail. The reason could be several, ranging from a flawed business model to having the wrong team in place.

A feasibility study is a valuable tool for startups as it allows them to anticipate and mitigate potential risks associated with their new business idea. By conducting a comprehensive analysis, startups can gain a deeper understanding of the market, competition, strategy, business model and other factors that may impact the success of their business. The study also helps evaluate the financial viability of the idea, as well as the resources and capabilities required to bring the product or service to market. This information can then be used to make informed decisions on whether to proceed with the business idea, or what steps to take to minimize potential risks. In this case, the key is to have a sound business and revenue model. The feasibility study helps the entrepreneur understand whether a business model is viable or whether it needs to be further optimized to improve returns for investors.

It is also important to understand that conducting such studies can help a start-up make a more compelling case to potential investors while raising capital. Investors prefer founders who have a solid understanding of the industry, the technology and the market, and that their team has a realistic plan to bring the product or service to market. In some cases, a feasibility study may be a required document for debt and equity funding by investors.

Types of Feasibility Study

There are several different types of feasibility studies that can be conducted. The most common include market feasibility, technical feasibility, financial feasibility, and operational feasibility.

Commercial feasibility involves analysing the supply and demand for a product or service in the target market. This includes researching the size and growth of the market, as well as identifying potential customers and competitors.
Technical feasibility involves determining if the necessary technology and resources are available to bring the product or service to market. This includes analysing the availability of the necessary equipment and materials, as well as the technical capabilities of the team.
Financial feasibility involves analysing the potential costs and revenue associated with the business idea. This includes creating a financial model to project future revenue and expenses, as well as identifying potential sources of funding.
Operational feasibility involves determining if the necessary resources and processes are in place to successfully operate the business. This includes analysing the availability of skilled workers and the efficiency of the production process.

Commercial and Financial Feasibility Study

The most common type of scope of feasibility studies involves business and financial aspects. The objective is to understand the market fundamentals and the financial viability of a business idea. This project is divided in two phases. The first phase is market assessment, which concludes with a clear vision of the attractiveness of the market. The second phase consists of analysing the financial viability of business-based financial projections.

Market assessment begins with research to gather information about industry structure, key trends, competition, demand drivers, market segmentation, best practices and other factors that may affect a company’s success. This phase also includes the estimation of market size and supply and demand deficit for the forecast period. Following the research, structured frameworks for industry analysis are used to gather additional information. These frameworks include PESTLE, Porter’s Five Forces and SWOT. The goal of this assessment is to answer the following queries:

Is this an attractive industry to operate in?
What is the outlook on pricing and margins?
What are the Critical Success Factors to operate in this industry and geography?
What are the key opportunities and challenges?
What works and what does not from a strategy perspective?

Once we have gathered all the necessary information, we use it to create a financial model, analyse revenue and expenses and identify potential sources of funding. We also perform a technical analysis to determine if the necessary technology and resources are available to bring the product or service to market, and an operational analysis to determine if the necessary resources and processes are in place to successfully operate the business. A financial model is prepared with projections of income statement, balance sheet and cash flow statement. The following tools are used to determine whether the project is financially feasible:

Project NPV and IRR
Equity NPV and IRR
Equity payback period
Money over invested capital (MoIC)
Sensitivity analysis of Project and Equity IRR to key inputs

The project ends with strategic recommendations on the following aspects:

Clear Go/No-go recommendation
Business model and strategy recommendation
Investment risks and mitigation

How We can Help you Conduct a Feasibility Study

Our team has extensive experience in conducting feasibility studies across various industries, and we tailor our approach to meet the specific needs of each client. We also have a wide network of industry experts and resources to ensure that the technical inputs in the feasibility study are robust. Additionally, we offer ongoing support to help startups implement the strategic recommendations, and optimize their strategy & business model. Our credentials of working with start-ups and investors allow us to add value from the concept/idea stage of business, increasing the chances of success.

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