CARRYING CARRYING OUT A FEASIBILITY STUDY An idea for a business is not a sufficient reason to begin production straight away. It is essential to be aware of the different aspects involved in actually running the business. To reduce the risk of failure, producers should first go through the following aspects and finally develop a business plan. 1. Assess 1. Assess yourself as an entrepreneur The success of any business depends largely on the entrepreneur’s personal characteristics, skills and financial situation. To be a successful entrepreneur you need to: • Have a strong commitment to your business • Have strong motivation to own your business • Be able to take considered risks and to make important decisions • Have the support of your family and friends • Have the necessary technical skills to produce the product of your business • Have enough business management skills, such as selling, record keeping and costing, to run a business of your own • Have sufficient knowledge of your line of business • Have sufficient personal funds. 2. Conduct 2. Conduct a feasibility study To reduce the risk of failure it is necessary to decide whether the idea is feasible. This involves carrying out a short market survey and feasibility study. The following are the stages of a feasibility study: stage: 1st stage: Market feasibility • Market research • Selling strategy • Expected market size/share • Competitors stage: 2nd stage: Technical feasibility • Scale of production needed to meet market share • Equipment, materials, services and labour needed for scale of production selected • Quality control • Distribution stage: Financial 3rd stage: Financial feasibility • Start-up costs • Loan required • Cash-flow for one year (income and expenditure) • Business development over three years • Profitability/sustainability DECISION DECISION Practical Action, The Schumacher Centre, Bourton on Dunsmore, Rugby, Warwickshire, CV23 9QZ, UK T +44 (0)1926 634400 | F +44 (0)1926 634401 | E infoserv@practicalaction.org.uk | W www.practicalaction.org Practical Action is a registered charity and company limited by guarantee. Company Reg. No. 871954, England | Reg. Charity No.247257 | VAT No. 880 9924 76 | Patron HRH The Prince of Wales, KG, KT, GCB Carrying out a Feasibility Study Practical Action Market feasibility The first stage is to collect as much information as possible on the potential market for the products you intend to make. This is achieved by carrying out market research, usually in the form of a market survey of the target population in the area you intend to sell the product. I. I. Market Market research: the necessary steps of market research are as follows: a. Work a. Work out the size of the potential market: What is the potential market area? Who will be the potential customers? What are the potential outlets? Who will be the competitors? How much of the product can be sold? (what quantities of the product are already sold and what quantities of similar products are being sold?) What is the seasonality of demand? What What is market research? Market research is the process of investigating a market to find out the sales prospects for a product and how to achieve success with it. It is the set of activities necessary to obtain the information required about the market. Market research activities include the following: • Consumer questionnaires • Tasting tests to see if people accept the product or which taste they prefer • Interviews with retailers and wholesalers. Market research is important to avoid the failure of food processing ventures. Research attitudes b. Research consumer attitudes towards the new products: What, where and when do consumers buy? What are consumers’ preferences about tastes, smell, texture etc? What is the consumers’ reaction to packaging and labelling? Find c. Find out how the new products can be made attractive to consumers: consumers: What are the size units and prices of competing products according to location? Where are quality weaknesses of the competition? Which containers are used for competing products? Which labelling is used by competitors and what are the legal obligations regarding label and contents? Identify d. Identify the most appropriate option for distributing products: Direct to consumers? To suitable retailers in an area? To supermarkets (if sufficient quantities can be delivered)? To wholesalers (suitable for larger processors)? To institutions and the catering trade? The e. The factors to be considered in deciding on the marketing channel to use include: Quantities processed and quantities required by distributors, transport and payment arrangements, margins and mark-ups Notes on calculation to find the daily production rate Notes Estimated 14,240 Estimated market size kg/month Estimated share of market Estimated 5% Production Production required per month to meet 712 kg market share Production per Production required per day @ 20 days 35.6 kg work per month Minimum 4.5 kg/hr Minimum process throughput @ 8 hours per day 2 Carrying out a Feasibility Study Practical Action II. Market Market Share Estimate the proportion of the total market that the new business could expect to have (likely market share) III. III. Scale Scale of Production The figure for the daily production rate is central to all following calculations of production capacity and investment requirements and therefore should be as accurate as possible. Once you have found information about potential customers, their requirements and the likely share of the market that could be obtained for a new product, it is necessary to calculate the monthly and daily production required to meet that demand (see example). Technical Technical feasibility After calculating the scale of production needed to supply the estimated likely share of the market. It is necessary to assess whether production at this scale is technically feasible. The following steps have to be taken: − − − − − − − − − − Identify the raw material supply, their quality and buying costs Identify production location and product quality Identify price and price seasonality Research sources and costs of services (fuel, water, electricity etc) and other processing inputs Identify sources and costs of packaging and label design Identify distribution procedures to retailers or other sellers Research availability of information and expertise to ensure that products are always made at the required quality Research availability and costs of the equipment needed Research availability of maintenance and repair costs of the equipment needed Clarify labour requirements, costs and availability. To plan the different aspects of the production process, first put together a modified process chart showing the scale of operation and daily requirements for production (see the example at the end of the brief). This chart is used to identify the following; I. Weights of raw materials and ingredients that should be scheduled for each day II. Number and size of equipment required to achieve the planned throughput of product III. Number of packages that are required each day IV. Number of workers and their different jobs. I. I. Weights Weights of raw materials and ingredients The different steps to identify the weights of raw materials and ingredients are as follows: • Experiment with different mixes of ingredients to produce a product that has the colour, flavour, appearance etc that the consumers like. Weigh each ingredient carefully and record all weights for each formulation tried. • Develop a successful formulation. Take care that it is always made in exactly the same way. • Experiment with different varieties of fruits and the particular process that is being used to calculate the actual amount of losses (see also table showing typical losses during the processing of fruits). 3 Carrying out a Feasibility Study Practical Action • Calculate the amount of raw materials and ingredients that are needed to produce the required weight of product each day. II. II. Equipment Equipment required Calculate the weight of food that should be processed at each stage (in kg per hour) using the process chart. Then decide on the type and size of equipment required. It is preferable to buy equipment from local suppliers because servicing and obtaining of spare parts should be faster and easier. III. III. Packaging Packagin Packaging Typical losses incurred while processing fruits Process Process Typical losses (%) Washing fruits 0-10 Sorting 5-50 Peeling 5-60 Slicing/dicing 5-10 Batch preparation/weighing 2-5 Boiling 5-10 Drying 10-20 Packaging 5-10 Accidental spillage 5-10 Rejected packs 2-5 Decide on the type of packaging material and calculate the number of packages that are needed daily. Take into account the technical requirements of the product for protection against lights, crushing, air, moisture etc, the marketing requirements and the relative cost and availability. IV. IV. Number Number and type of workers Use the process chart to break down the production into different stages and then decide on the number of people need for each stage of the process. Include tasks such as store management, quality assurance and book-keeping. Each day’s work will initially involve preparation of the raw materials and then move through processing and packaging. You can have all workers doing the same type of activity throughout the day but it is often more efficient to distribute different jobs to each worker as the day progresses. Financial feasibility Financial After completing the technical feasibility study, you should have sufficient information to determine the costs involved in production. Additionally, the market survey will have supplied information about the sale price that could be achieved for the new product. You can now calculate the expected income and expenditure and the gross profit that can be achieved. I. I. StartStart Start-up costs Calculate the start-up capital and initial working capital to determine whether your savings (also known as equity) will be sufficient to start the business. If not, a loan may be needed from a bank or other lender. II. II. Operating Operating costs Calculate your fixed and This is the difference between the expected income and variable operating costs in the total operating costs over the first year, including any load repayments. Income is calculated as follows: advance based on the likely Income = selling price per unit x number of units sold market share. If a loan is taken, the costs of repayment should be included in the fixed costs. What What is gross profit (or loss)? III. III. Income Income and profit Calculate the expected sales and income using information from the market survey. The income depends on both the price of a product and the amount that is sold. 4 Carrying out a Feasibility Study Practical Action Setting the price of the product What What is the breakeven point? The correct price is important to This is the production level at which the total costs be able to enter the market and to will equal the total income if everything produced is sell the product at a profit. There sold. The breakeven point is calculated as follows: are two approaches: a. Base the price on production Fixed costs = Production level at costs and set it to ensure that Revenue – Variable costs breakeven point income exceeds the total costs b. Take into account competitor’s prices and set the price of the new product at or below the price of similar products. Don’t forget to include the profit expected by the wholesaler or retailer. IV. IV. Financial planning Financial planning If the gross profit indicates that the proposed business venture is likely to be successful, you still need to carry out a cash-flow analysis: 1. Compile a table (see example) showing CashCash Cash-flow plan sales incomes and expenses on a monthly basis for the first year. Work out Cash Cash beginning of the when you have to spend money for month equipment, raw materials and employees Cash in from sales and when you can expect to be paid for Any other cash in your deliveries. TOTAL TOTAL CASH IN 2. Calculate the monthly profit or loss by Cash out for staff costs subtracting the expenses from the Cash out for operation income. This will show when there are costs profitable months or when a loss is Any other cash out expected and further loans are needed. TOTAL TOTAL CASH OUT 3. Prepare a similar table for the next two Cash Cash at end of month years, taking into account increases in price, changes in sales and the action of competitors. Jan Feb Mar The production level should be above the ‘breakeven point’ for the business to be profitable. If this is not the case, you should examine the data to see if production costs can be reduced. If not, you should forget the idea and start again with a different product. It is important to carry out a cash-flow analysis to ensure that the cash you plan to put into the business will be enough to meet your needs on a continuing basis. • Will you spend all your available cash before you are earning any revenue? • Will you be able to pay your bills? • Will you be able to buy raw materials and ingredients? If not, you are likely to have problems, even if your earlier calculations have shown that the business will be profitable. 5
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