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Financial indicators are of high importance, but there are other factors to consider as well. A feasibility study may be a requirement to raise bank, non-bank or equity finance, but is important to do anyway even if finance is guaranteed (such as a government-guaranteed project).
The main aim is to find the go-no go factors that could prevent the project from being successful or maximizing its potential.
The critical factors must be solved first, otherwise there is no point in continuing (no go), eg, if there is no way of repatriating profits no international investor will show an interest in the project.
The feasibility study takes a dream or an idea and analyzes whether it is possible to implement. Most business ideas do not reach fruition and of those that start many close within the first year. A great deal of time and effort can be wasted trying to implement an idea that is flawed. Worse still, much capital can be invested in a project that has to close because it is impractical.
The feasibility study aims to test the initiative. It should be done neutrally. We all like to think our intuition is perfect, but this has to be tested against the hard anvil of facts.
In the long run, an investment in a quality feasibility study is very rewarding. If the result is positive, then you will have a firm foundation on which to move forward. The feasibility study may be followed up by a full business plan, which will be the road map for the project.
A feasibility study is like a teaser for a full business plan and the result might indicate that the project can return its investment in a short time.
If for some reason the result is negative, then this is also very valuable information. It is better to know in advance if a project might fail rather than investing time, effort, reputation and money in a project that is flawed.
A feasibility study is like a teaser for a full business plan and the result might indicate that the project can return its investment in a short time. At this stage, it is really of no importance if this will take three or five years. The order of magnitude is what is important. Assuming this is an acceptable return, it is worth investing in a full business plan.
Example – The current market for eggs In Europe is shifting rapidly towards cage free. Most investors realize they should stay away from cage eggs, but do not fully understand the difference among the alternatives, such as barn, aviary, free range and organic. The plan needs to assess how consumers will behave in the future and how future regulations will be formulated. The decision might be critical to the project’s future. So, for example, if the barns are placed too close together there will be no future room to move into free range.
If the market is an established one, such as the American broilers market, there is plenty of data and it is relatively easy to assess market trends (though no one can predict future disruptions).
If the market is new or small, then the assignment becomes much harder. The fact that poultry production and consumption is low might be because there is little production, but might also be the result of limited demand or a preference for pork.
If the project’s size is too large compared to the local market, then you have to consider what effect new production will have on market price. A classic mistake I witnessed: the price of quail eggs in a certain market was very high, so a farmer built a 40,000 egg a day project. He did not consider that before he began the market was balanced at production of 2,000 eggs a day for specialty restaurants, among others. Once he flooded the market, the price dropped to close to zero.
Another consideration is how competitors will react. For example, if a large company is dominating a market importing meat, it has the option of dropping its prices to preserve its market domination.
Need to make a detailed and high-level sketch of the project.
The model needs to be challenged and stress tested using WCGW (what can go wrong) analysis. This is the time to identify possible hurdles and see if they can be resolved.
The financial analysis at this stage should focus on the key indicators of success.
There is a need to analyse capital, costs, running and fixed costs, and compare with estimated revenue.
The key indices will be return on investment (ROI) and net present value (NPV), or time to return investment. Some sensitivity analysis should be done, e.g., price of product (chicken eggs), how well-founded the indices are. Even if NPV is good, you need to calculate whether a small reduction in price will cause a big fall in NPV.
One key reason why no two feasibility plans are the same is that the project has to be considered as part of the company’s or investor’s current portfolio.
Is the project green field or an expansion? Is it more of the same? For a large existing company building a new 24,000-ton integrated project will not cause many capability or technological challenges. Most of the concern will be focused on how the project links with the company's overall structure and market. A new investor will have a completely different perspective as the risks are different.
It is highly recommended to growers and entrepreneurs to make this extra investment at the first stage and avoid complications and unnecessary waste of resources and efforts.
Two investors may conduct a feasibility study for the same project and get completely different answers. If investor A owns or is aligned to a chain of supermarkets, he wants the egg production to vertically integrate. He knows he can sell the eggs because he owns the shelf space. Investor B grows corn and has a feed mill, which is operating at 50% capacity and he is interested in synergies with the grain business. In such a case, each investor will get a different answer from a feasibility study.
A feasibility study is of high importance and can save a lot of money and future grief. It is highly recommended to growers and entrepreneurs to make this extra investment at the first stage and avoid complications and unnecessary waste of resources and efforts.