CHAPTER 4Conducting a Feasibility Analysis and Crafting a Winning

Business Plan

FEASIBILITY ANALYSIS

the process of determining whether an entrepreneur’s idea is a viable foundation for creating a successful business.

A feasibility analysis consists of three interrelated components: an industry and market feasibility analysis, a product or service feasibility analysis, and a financial feasibility analysis.

INDUSTRY AND MARKET FEASIBILITY ANALYSIS

1) Determine how attractive an industry is overall as a “home” for a new business.

2) Identify possible niches a small business can occupy profitably.

FIVE-FORCES MODEL

A model that recognizes the power of five forces on an industry:

• rivalry among competing firms, • bargaining power of suppliers, • bargaining power of buyers, • threat of new entrants, and • threat of substitute products or services.

PRODUCT OR SERVICE FEASIBILITY ANALYSIS

determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce the product or provide the service.

RESEARCH

Primary Research: Information that an entrepreneur collects firsthand and analyzes.

Secondary Research: Information that has already been compiled and is available for use, often at a very reasonable cost or sometimes even free.

TYPES OF RESEARCH

• Customer Surveys and Questionnaires• Focus Groups• Trade Associations and business Directories• Direct Mail Lists• Demographic Data• Census Data• Market Research• Articles• Local Data• Internet

HANDS-ON RESEARCH

Prototype: an original, functional model of a new product that entrepreneurs can put into the hands of potential customers so that they can see it, test it, and use it.

In-home Trial: A research technique that involves sending researchers into customers’ homes to observe them as they use the company’s product or service.

FINANCIAL FEASIBILITY ANALYSIS

The major elements to be included in a financial feasibility analysis include the initial capital requirement, estimated earnings, and the resulting return on investment.

BUSINESS PLAN

Business Plan: a written summary of an entrepreneur’s proposed business venture, its operational and financial details, its marketing opportunities and strategy, and its managers’ skills and abilities.

To get external financing, an entrepreneur’s plan must pass three tests with potential lenders and investors:

1) the reality test,2) the competitive test, and3) the value test.

FINANCIAL CRITERIA

Small business owners need to be aware of the criteria bankers use in evaluating the creditworthiness of loan applicants – the five Cs of credit: capital, capacity, collateral, character, and conditions.

CAPITAL

• Lenders expect small businesses to have an equity base of investment by the owner(s) that will help support the venture during times of financial strain.

CAPACITY

• A synonym for “capacity” is “cash flow.” The bank must be convinced of the firm’s ability to meet its regular financial obligations and to repay the bank loan, and that takes cash.

COLLATERAL

• Collateral includes any assets the owner pledges to the bank as security for repayment of the loan.

CHARACTER

• Before approving a loan to a small business, the banker must be satisfied with the owner’s character.

CONDITIONS

• The conditions (interest rates, the health of the nation’s economy, industry growth rates, and so on) surrounding a loan request also affect the owner’s chance of receiving funds.