NC SBTDC Publications
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PDF FormatIII. FEASIBILITY ANALYSIS
A. RESPONSIBILITIES
An important point to consider is the ability of you (and your associates, if any) to successfully carry out all of the responsibilities that will be required to start and manage a company. There is a wide range of responsibilities that must be fulfilled if the company is to succeed and some of them required considerable skill and/or training. The relative importance of each responsibility varies from company to company, depending on characteristics of the industry and the specific nature of the business.
The following page is a representative list of the responsibilities that will typically need to be fulfilled. Some of them need to be done many times each day, while others may only be done once or twice each year; however, they are all important, regardless of their frequency.
Across the top of the following page, enter your name and any associates, if any. Then, in the boxes on each responsibility line, check off those that you (or each associate) feel comfortable fulfilling. You can assign a grade to each, if you wish, with "F" meaning no ability at all and "A" representing high expertise.
If you and your associates have too many responsibilities with "Fs" or blanks, you will need to purchase these services from appropriate professionals or capable employees. Assuming that the responsibility doesn't need to be fulfilled or that it will "just go away" is a mistake that often leads to failure, so take this worksheet seriously.
RESPONSIBILITIES OF MANAGING A BUSINESS
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B. CAPITAL SOURCES & REQUIREMENTS
PREREQUISITES: THE 5 Cs OF CREDIT
Capacity—The borrower's ability to repay the loan from the normal course of business operations.
- Must be able to demonstrate sufficient cash flow to make monthly loan payments
- Existing businesses must be able to demonstrate, through historical financial statements, that sufficient cash flow exists, prior to loan, to support operations.
- The growth of revenues generated by application of the loan proceeds must match the terms of repayment.
Character/Credit—The borrower's demonstrated willingness and ability to repay the loan as agreed.
- Must have a clean credit history.
- Start-up business—the owner must have clean personal credit, which means, few, if any, delinquencies, no repossessions, and no judgments.
Collateral—Provides a secondary source of repayment for the loan and is critical in start-up situations. Most banks like to be 100% collateralized.
- Common collateral values:
- Certificate of deposit 100%
- Stock (publicly traded) 75%
- Vehicles 70%
- Equipment 10%-75%
- Real Estate 75%-80%
- Inventory 0%-35%
- Accounts Receivable 50%
Capital—The amount of equity invested in the business by the owner(s) and/or investors or from retained earnings.
- Banks and the SBA prefer to see at least 30% equity invested in a business.
Conditions—Factors in the economy that might impact the business' ability to repay its debt or deteriorate its collateral position. (Example: A seller of pleasure boats will see a sales decline during a recession.)
CAPITAL SOURCES & CONSIDERATIONS
The following table summarizes the basic elements of the most common sources of capital. The notes for each source are generally true at the present time; however, it should be noted that there are frequently exceptions to some these due to unusual circumstances in the situation of the owner or business.
FAMILY COMMERCIAL BANK / SBA SELF-HELP CREDIT PRIVATE
CONSIDERATIONS & FRIENDS BANK GUARANTEE CREDIT UNION CARDS INVESTOR
|
Type of Capital |
Loan or Equity |
Loan |
Loan |
Loan |
Advance |
Loan or Equity |
|
Owner Cash Percentage |
0% - ??% |
25% - 30% |
10%-20% |
5% - 10% |
0% |
10%-20% |
|
Collateral Required |
none |
100% |
40% - 80% |
minimal |
none |
none |
|
Credit Rating |
N/A |
620 + |
620 + |
540 + |
N/A |
N/A |
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Interest Rates |
base rate |
base rate ++ |
bank rate +.5% - 1.0% + fees |
bank rate + 2% - 3% |
bank rate + 5% - 15% |
20+% return |
|
Availability of Funds |
individual circumstances; depends somewhat on amount |
available funds; must demonstrate ability to repay |
available funds if bank wants backup; must demonstrate ability to repay |
available funds; must demonstrate ability to repay |
relatively easy to obtain |
difficult to find and obtain capital |
|
Required Information |
varies widely; depends on lender & amount |
business plan; financial projections; personal financials |
business plan; financial projections; personal financials |
business plan; financial projections; personal financials |
none; personal financials |
business plan; financial projections |
|
Control Asserted by Lender |
could be considerable |
none to some |
none to some |
none to some |
none |
could be considerable, especially with equity capital |
|
Consequences of Default |
family problems |
loss of collateral & company; bad credit |
loss of collateral & company; bad credit |
loss of collateral & company; bad credit |
bad credit |
loss of company |
NOTE THE FOLLOWING WEBSITES:
- www.SBTDC.org/Publications/Capital Opportunities Report
- www.SBTDC.org/Publications/Business Start Up & Resource Guide
- www.cris.state.nc.us (for grant information)
- www.cfda.gov (for grant information)
C. FINANCIAL FEASIBILITY
It is important to know, as early as possible in the business planning process, whether the business has a financial future – i.e., whether it is financially feasible. This analysis consists of three parts that must each pass the feasibility test. In addition, they must work together to yield a "whole" business that is feasible (the fourth part). These four parts are as follows:
- Revenue from Sales of Products / Services
- Variable Margins of Products / Services
- Overhead (aka Fixed) Costs of the Business
- Profit that Represents a Fair Return on the Owners' Investment
The following pages explain how to systematically perform this Financial Feasibility analysis, along with formats and completed examples.
FEASIBILITY ANALYSIS – MARKET SIZE & REVENUE
There are two ways to evaluate the feasibility of revenue projections:
Are the projected units of sales reasonable in light of customer trends, competitive activities and company capacity?
Are the projected prices per unit of sale reasonable in light of customer demand and competitive practices?
The following example shows the relevant data for a product/service or for a group of related products/services; this information should be prepared for each product/service (or group) offered by the company.
MARKET SIZE
EXAMPLE COMPANY INFO RESOURCES
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Total Market Size (Total Population of Area) |
165,000 |
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Estimated Market Potential (No. in the Total Market Matching the Target Demographic Profile) |
50,000 (a) |
Trade Journals Trade Association Web Sites Chamber of Commerce Wilm.Industrial Development |
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Number of Competitors in the Market Area |
40 (b) |
Phone Book Industry Publications Business Directories |
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Average No. of Customers per Competitor |
1,250 (a / b) |
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No. of Customers to Purchase from Company |
900 ( c ) |
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No. of Sales to each Customer |
5 (d) |
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Avg. Price / Sale |
$8.90 (e) |
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Total Revenue (Sales) for Company |
$40,050 (c x d x e) |
FEASIBILITY ANALYSIS – REVENUE CALCULATION
There are two ways to evaluate the feasibility of revenue projections: (1) Are the projected units of sales reasonable in light of customer trends, competitive activities and company capacity? (2) Are the projected prices per unit of sale reasonable in light of customer demand and competitive practices? The following example shows the relevant data for two products/services (or for the same product in different years); this information should be prepared for each product/service offered by the company.
REVENUE CALCULATION – EXAMPLE
Product A Product B Product C Product D TOTAL
|
Company Units of Sales/Service |
1,000 |
1,400 |
500 |
1,600 |
4,500 |
|
Avg. Price / Unit |
$9.25 |
$7.25 |
$11 |
$9.47 |
$8.90 |
|
Total Product/Service Revenue |
$9,250 |
$10,150 |
$5,500 |
$15,150 |
$40,050 |
FEASIBILITY ANALYSIS – VARIABLE MARGINS
Variable Margins represent the profits that are generated by sales, and are calculated as follows:
Variable Margins = Sales Revenue minus Variable Costs
Variable Costs are the costs directly associated with production and distribution of products. They are called "variable" costs because the amount of these costs varies directly with the level of production and sales. In other words, if you double production and sales, your level of Variable Costs (and Margins) will also double; if you increase your sales by 20%, your Variable Costs (and Margins) will increase by 20%.
Variable Costs consist of three main components – Material, Labor and Contract Labor/Subcontracting. Material may consist of several subcategories, such as Purchased Components and Raw Materials, depending on the type of business. Labor represents work performed by company employees, those to whom "W-4s" are issued. Contract Labor/Subcontracting services represent labor that is contracted to third parties, those to whom "1099s" are issued.
The table below represents an example and a blank format for developing Variable Costs and the resulting Variable Margins.
Example-
Product A
|
Material Costs |
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Purchased Components |
3.50 |
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Raw Materials |
||||
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Total Material Costs |
$3.50 |
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Labor Costs |
$2.00 |
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Contract Labor & Subcontracting |
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Total Variable Cost / Unit |
$5.50 |
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Avg. Price per Unit |
$9.25 |
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Variable Profit / Unit (= Price – Variable Cost) |
$3.75 |
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Variable Margin Pct of Sales (= Var Profit / Avg Price) |
40.5% |
OVERHEAD (FIXED) EXPENSES
Overhead Expenses, which are also referred to as Fixed Expenses, represent the basic costs of running the business that do not change when the level of sales changes. In other words, these are expenses that will begin when you open the doors for business, even though production and sales activities may not have begun. The level of Overhead Expenses will remain relatively constant and are independent of production and sales. It is possible for sales to double while Overhead Expenses are unchanged.
It is generally preferable to exclude salaries of the owner(s). Instead, it will be much simpler to consider that the profit that falls to the bottom line is the owners' compensation rather than trying to plan on a salary.
The example on the next page includes a selection of accounts that will normally be included in Overhead Expenses. Note that the company's more-than-doubling of revenue is only accompanied by a small increase in Overhead. Some increase was necessary in Vehicles (more customers to service) and Office Supplies (more correspondence means more paper and postage).
OVERHEAD EXPENSES
EXAMPLE FORMAT
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Admin. Salaries (non owners) |
1,000 |
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Facility Rent |
600 |
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Utilities |
200 |
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Insurance |
50 |
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Advertising & Promotions |
300 |
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Equipment Rental |
80 |
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Maintenance & Repairs |
60 |
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Vehicles |
350 |
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Travel / Meals & Entertainment |
100 |
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Professional Services |
50 |
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Office Supplies |
100 |
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Phones |
100 |
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All Other |
475 |
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Total Overhead |
$3,465 |
CALCULATION OF OWNER'S TARGET
As shown the example below, a salary of $2,500 per month earned as an employee equates to $3,024 per month of pre-tax profit from a business as a self-employed person. The higher level of income is needed to replace the benefits provided by an employer, to pay the employer's portion of the social security tax (you are now the employer) and to earn a modest return on the capital invested in the business. Enter your desired monthly salary and calculate your business income target.
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CALCULATION OF OWNER'S TARGET |
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EXAMPLE |
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MONTHLY SALARY |
$2,500 |
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LESS: |
PAID MEDICAL INSURANCE |
(100) |
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EMPLOYEE RETIREMENT |
(50) |
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EMPLOYEE FICA |
(191) |
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NET PRE-TAX INCOME |
$2,159 |
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ADD: |
RETURN ON $10,000 @ 10% |
83 |
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TOTAL PRE-TAX INCOME & INVESTMENT RETURN |
$2,242 |
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TOTAL INCOME AS AN EMPLOYEE (ABOVE) |
$2,242 |
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ADD: |
EMPLOYER & EMPLOYEE FICA |
382 |
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MEDICAL INSURANCE |
300 |
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PORTION RETIREMENT |
100 |
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TOTAL BUSINESS PROFIT NEEDED |
$3,024 |
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BREAKEVEN ANALYSIS
You may have heard the term "Breakeven Point." The Owner's Target is essentially the Breakeven Point for the business. It represents the sales volume at which the business will pay the owner a suitable salary/return and cover all costs. At volumes below the Breakeven Point, it will be losing money and at volumes above the Breakeven Point it will be making money.
The following example, taken from the foregoing Owner's Target analysis, demonstrates how this works:
EXAMPLE FORMAT
|
Operating Profit at Breakeven |
$ 0 |
|
Add: Overhead to be Covered |
$3,465 |
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Add: Owner's Salary & Return to be Covered |
$3,024 |
|
Total to Cover by Variable Margin from Sales <A> |
$6,489 |
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Variable Margin Pct. <B> |
40.5% |
|
Breakeven Revenue <= A / B > |
$16,022 |
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Breakeven Sales Units < = Breakeven Revenue / Avg. Price > |
1,800 |
Using the above format, you can work out your own situation and get a better understanding of the calculation of your Breakeven Point.
If the Breakeven Point is too high to be reasonably achievable, then the business might not be feasible as developed at this point.