Business Feasibility Analysis (BFA)

In order to complete a BFA for a business, a rough-cut simplified business plan needs to be formulated. Refer to SCORE Brief #03.01 for a Comprehensive Business Plan Outline.

The object of the BFA is to establish whether or not the venture is worth (1) putting the time, effort and expense into proceeding with all the steps necessary to start a new business, and (2) taking on the risks associated with business start-ups. It comes down to whether the risk is worth the reward.

To validate the financial elements of your business plan, you need to see if your financial inputs are consistent. To do this, you need to generate a Projected Financial Statement for your business. For a discussion of this statement, see SCORE Brief # 04.05 and for an Excel spreadsheet tool that provides a step-by-step approach to developing this statement, see SCORE Brief Excel 1000.

The following discussion of the BFA will lead you through the process of populating this model:

First, in your BFA, make sales projections for the business by year for the first three years.

Many prefer projecting sales by month at startup, for example:
Jan Feb Mar Apr May Jun ... Total Sales, 2012
$42,000 $45,000 $48,000 $51,000 $54,000 $57,000 ... $709,000



Second, make a rough estimate of the Percentage Gross Margin you believe your product or service will produce. The Gross Margin, also known as Contribution Margin, is simply the sales price of the product or service minus Cost-of-Goods-Sold. Dividing this margin by the Sales Price times 100 is the Percent Gross Margin. For example:

Calculation of % Gross Margin
 
Sales of 4,200 items @ $10
SALES   $42,000
 
Let's say that it costs $6.50 in materials and related items for each $10 of Sales
The Cost of Goods Sold in then 65% of sales:
TOTAL COGS 65.00% $27,300
 
Gross Margin is then the difference between Sales and COGS:
GROSS MARGIN 35.00% $14,700
The % Gross Margin is highlighted



Third, make a rough estimate of your expected fixed or overhead costs, including principal and interest on any loans. Divide that by the Sales Price and multiply by 100 to get fixed costs as a percentage of sales, or Percent Fixed Margin.



EXPENSES (FIXED)
Owner's Salary $5,000
Staff Salaries $4,000
Other Pay and Benefits $0
Advertising and Marketing $600
Administrative Fees $400
Legal and Professional $700
Rent $750
Utilities $240
Insurance $250
Travel and Entertainment $100
Dues and Subscriptions $24
Contributions $0
Interest Paid $0
Supplies $175
Debt Service, Short-Term $338
Debt Service, Long-Term $251
Other Fixed Expenses $0
 
TOTAL EXPENSES (Operating) $12,828
 
As % of Sales ($42,000) 31%
= Percent Fixed Margin  



Fourth, calculate your expected Percentage Net Margin by subtracting the Percentage Fixed Margin from the Percent Gross Margin.

35% (Gross Margin) – 31% = 4%

The Net Margin is a financial ratio that indicates how effective and profitable a company may be at cost control as compared with an average of other companies in the same industry.

Fifth, divide the amount of money you wish to make from the first step by the Percent Net Margin. This will provide you with an estimate of the total sales you must achieve to meet your desired income.

Current annual sales of $709,000 times net margin of 4% will produce a salary of $28,360/yr.

If your goal is to make $60,000/yr, then annual sales must be $60,000/4% = $1,500,000/yr.

Now, using the total required sales, re-examine your estimated overhead costs to see if they are sufficient to support the facilities and staff needed to support that level of sales.

Other considerations for business feasibility include:

  • Are your projected sales achievable given your experience, capabilities, and the market potential?
  • Can you go it alone, or do you need extra staff to cover extended hours beyond 8 hours/day, 40 hours/week?
  • Is your planned facility big enough to support the required sales?
  • Is the size of the business realistic compared to competition?
  • What is your estimate of their sales?
  • How many staff do they employ?
  • What size facility do they have? Estimate cost?
  • Who/where is your competition?
  • How will you compete with your competition?
  • What is your estimate of funding requirements, not just for start-up, but also for several months until the business gets up to speed?
  • Where will you get this money? How much do you have which you can afford to put into the business? How much more will you need?
  • Do you have collateral to cover the rest?
  • How is your credit rating? Can you get a loan?

Now, do you think the results show you can meet your desired income with a reasonably sized business that you can afford to finance? If YES, proceed with a more comprehensive business plan to really establish the business’s feasibility. If NO, either revise your plans or drop the idea without expending the time and effort on a full business plan.

For help in estimating the numbers above, there are several good resources available online to help in building a business plan. The Cincinnati main library has many sample business plans for a wide range of businesses.

Additionally, check your estimates of gross margin, overhead and net margin percentages against those in the business plans for similar businesses to see how realistic you have been.

Finally, visit BizStats.com for examples of industry norms. Norms are items expressed as a percentage of sales that is typical for specific industries.

Financial Norms for

Food Manufacturing:

Sugar and Confectionary
 
Sales 100.00%
Cost of Sales 49.68%
Gross Profit 50.32%
Officers’ Compensation 0.69%
Salaries and Wages 5.67%
Rent 0.13%
Taxes 1.23%
Interest paid 3.93%
Amortization and
Depreciation 3.17%
Advertising 5.71%
Benefits and Pension 1.81%
Other SG&A Exp. 20.35%
Net Profit 7.63%



These resources are extremely valuable in assessing the validity/realism of your feasibility analysis, but are of equal value in preparing and measuring the realism of your business plan should you choose to proceed further.

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