Feasibility study development
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The beginning of any project is a troublesome period. To make sure that the case works out, it takes a lot of calculations and sound conclusions. Taken together, they constitute a feasibility study for an investment project (TEO). I propose to find out what this document is.
What is it
With the help of the feasibility study, the financial benefit from the implementation of the investment project is determined (the industry does not matter). The information obtained helps to make an investment decision.
Development of a feasibility study is required for:
- creating a new business;
- entering new markets;
- launching a new direction;
- reorganizing or technical modernization.
The feasibility study is developed by the initiator of the project independently or with the involvement of third-party specialists. If you plan to attract investors or a bank loan, then it is advisable to resort to the second option.
Purpose and main tasks of the document
- Investors to understand the borrower's solvency based on the study of the cash flow and the likelihood of return on investment (a good project, if poorly drafted, will be unattractive for investors).
- For entrepreneurs to assess the likelihood of making a profit.
- To the bank to decide on the provision of debt financing.
- State bodies in the implementation of initiatives with state participation.
The main goal of a feasibility study for an investment project is to determine the feasibility of its implementation. The main tasks of the feasibility study:
- tracking the dynamics of financial indicators;
- cost analysis;
- determining the effectiveness for all participants;
- understanding the deadline payback;
- forecasting cash flow;
- choosing the best financing option, technology, sales channels, etc.;
How it differs from other similar documents
Feasibility studies are often confused with a business plan or investment memorandum. They have one thing in common - a focus on planning future activities.
A feasibility study (feasibility study) of a project is a set of documents in which calculations and comparisons of all financial indicators, technical features, mediocre and other indicators that help to calculate the feasibility of the program are carried out.
The most important distinguishing feature of a feasibility study from a business plan is the individuality of the created calculation related to the construction and reconstruction of a business.
The production and technical features of the development of a feasibility study for the plan, leave the monetary component not disclosed. The business plan is based on development highlights, not like a feasibility study. Further follows from the above, the business plan is designed for a narrower focus, based on the main aspects of the technical part in comparison with the business plan.
Feasibility studies are a way to carry out scientific and technical experiments capable of making changes both in a certain research institute or pulp and paper mill, but also in the scope of an entire state. The duty of engineers is the correct calculation when building new production facilities, bringing existing buildings to new standards. It should be added that even one event, even minor modifications to the structure or serial assembly of equipment, is not complete without calculating the feasibility study.
Purpose and objectives of the feasibility study of the project
The purpose of the feasibility study of the project is - easy-to-understand information summarizing income in comparison with the money invested in starting a new business or improving an existing one.
Researching and writing a feasibility study helps to trace the situation in an investment project, and calculate all external and internal factors affecting the continued existence of an investment project.
The preparation of a feasibility study is also necessary for bank lending, since one copy of the document is handed over to a bank branch. The feasibility study may contain several calculations that will show significant changes in the growth of the business, and the solution of unforeseen problems, to ensure the safety of the monetary investments of the inverters.
Thanks to the feasibility study of the business plan, you can see the pitfalls for people running the enterprise and solve the following problems:
choosing the most profitable plan;
obtaining additional financing from third party investors;
increase in profitability (for a feasibility study for an operating enterprise).
Considering the above, the feasibility study of the project helps to identify the financial productivity of the plan, which describes the individuality of the investment project during the construction of the plant, and provides information for the investing or crediting entity when calculating the applicant's ability to implement the plan and pay money. In this connection, the feasibility study becomes a fundamental pre-investment form that helps to inform the customer, partner, the success of the project, relying on the technical and economic miscalculations of the plan.
It often happens that a fairly promising project that can bring investors a good profit is simply not noticed and is not implemented. What comes up between an entrepreneur and an investor? Daydreaming, outdated views of the market and facts that are not supported by arguments, or something else? The answer is very close, ineffective business planning is to blame for everything. To do everything correctly, you need to develop a feasibility study.
Content of the article:
What is a project feasibility study
A feasibility study, abbreviated as a feasibility study, is an analysis, assessment and calculation of the economic feasibility of implementing a project for creating an enterprise, reconstruction and modernization of existing facilities, construction or construction of a new technical facility. It is based on comparing the assessment of results and costs, determining the effectiveness of the application and the period for which the investment is paid off. These can be third-party investments, we wrote about their attraction here.
It is also needed to confirm the advisability of choosing a new production technology, processes, equipment. Most often this is suitable for already operating enterprises.
Feasibility study required for every investor. In the course of its development, a sequence of works is carried out to analyze and study all components of the investment project and calculate the return on investment.
Difference from the business plan
Business plan and feasibility study are often not distinguished. The main difference between their structures is that in the second, there is almost no description of the company and product, market analysis, risk analysis and marketing strategy - the most important aspect in a business plan. You can read more about the marketing strategy in the article "Marketing plan". This abbreviated structure is due to the fact that it is written for projects of introducing new processes, technologies and equipment to existing enterprises. The feasibility study provides information on the reasons for choosing certain solutions, processes and technologies, economic calculations of the effectiveness of their implementation.
So, we can say that the feasibility study is specific in comparison with the business plan, and is more narrow.
What is the feasibility study for
Correctly drafted feasibility study will allow you to see the effectiveness of investments in the development of new or revision of previous types of company activities, the company needs a merger or acquisition, is there a need for lending. The feasibility study also helps to select the necessary equipment, select and implement suitable production technologies, and correctly organize the company's activities.
The package of documents that must be submitted to the bank to approve a loan must include a feasibility study. In this case, the feasibility study shows the profitability of providing a loan, an increase in the level of activity due to lending, and, of course, a guarantee of the return of the loan to the bank. Before taking a loan from a bank, we advise you to read the article Sources of business financing, which describes the advantages of two main types of business financing - lending and finding an investor.
The implementation of large business projects implies a detailed analysis of the risks and profitability of the future enterprise. The development of a feasibility study (FS) is needed not only to justify the planned investments, but also to find funding for rebranding or the introduction of new technologies into an existing business.
Feasibility study development
Experienced investors prefer programs that have a detailed feasibility study. A feasibility study is a documentation containing information on the feasibility of a product. Unlike business plans, feasibility studies only reflect the digital indicators that the business needs. The specificity of the feasibility study depends on the type of business and its purpose:
Construction of new buildings and structures.
A well-developed feasibility study makes it possible to consider the project from different angles. The document often becomes decisive for depositors. The economic feasibility study allows you to visually represent the amount of capital investment, the amount of expected profit, taking into account all risk factors, during the period of the project.
A detailed study of the feasibility study allows investors to draw conclusions about the presentability of the case. Investors choose economically viable projects that will attract additional sources of funding, as well as increase the profitability of a future or existing business. Feasibility study design depends on the target audience for which it is being developed.
Feasibility study appointment
Based on the initial data on the financial resources of the organization, the services provided and the description of the products, a feasibility study is drawn up. The development of a feasibility study precedes the adoption of an important decision when creating or modernizing any large production.
The use of feasibility studies is relevant in the construction and industrial segment of the business. The implementation of projects related to the repair or reconstruction of buildings, without a feasibility study, often becomes unprofitable. The main task of the feasibility study is a qualitative assessment of the efficiency of capital investments, the effectiveness of the business program and analysis of the planned payback periods. Additionally, the rationale will outline the important components of the project:
determination of implementation time and duration;
VVS provides exclusively analytical services and does not advise on theoretical issues of marketing fundamentals (calculation of capacity, pricing methods, etc.)
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The feasibility study of the project (FS) serves as the basis for identifying the investment efficiency of the product being created, and the investment and economic trends in the development of the region will depend on how effective it will be in terms of invested funds. A poorly prepared feasibility study of a project is most often the reason for its low investment efficiency. For the same reason, or because of a poorly drawn up business plan, banks reject many potentially attractive investment projects at the stage of consideration.
What is the feasibility study of the project
The feasibility study is to study the potential economic benefits of the investment projects created by analyzing and calculating their financial indicators. Financial and economic activity can be considered as an investment project: the creation of various technical facilities, the construction of new buildings, the reconstruction of existing ones, the creation of various products and services, activities related to the expansion, modernization or reconstruction of production, and so on.
The entrepreneur himself is interested in the feasibility study of the project (whether the expectations placed on the project will be met) and the investor, who rely in his assessment of the project's effectiveness on the estimated time frame for which the project will pay off. Depending on the complexity of the task, the feasibility study of the project can be drawn up by the entrepreneur himself or hired specialists.
What is the fundamental difference between a feasibility study and a business plan? Unlike a business plan, a feasibility study of a project is required for a new investment product implemented on the basis of an existing enterprise, respectively, when creating this document, there is no need to describe such voluminous information blocks as the results of marketing research, the results of market analysis, a description of the the enterprise and the product being created. However, there are cases when, within the framework of the feasibility study of the project, the technologies and equipment used are analyzed, indicating the reasons for their choice.
In fact, a feasibility study is a shorter and more informative document in comparison with a full-fledged business plan.
What is the feasibility study for? If we consider the situation from the point of view of the activities of a certain enterprise, then the feasibility study of the project is drawn up to predict possible changes in the operation of this enterprise in connection with the proposed introduction / release of a new product. In this case, a variety of influencing factors (both indirect and direct), as well as the financial dynamics of the object under study, are taken into account.