Feasibility Study (TES)

A feasibility study (TES) is a study of the economic profitability, analysis and calculation of the economic indicators of the investment project being created. The purpose of the project may be the creation of a technical facility or the construction or reconstruction of an existing building.

The main task in drawing up a feasibility study is to assess the costs of an investment project and its results, and analyze the payback period of the project.

It is necessary for the entrepreneur himself to draw up a feasibility study to understand what to expect from the project, and for an investor, a feasibility study of an entrepreneur requesting investment is necessary to understand the payback period for the money invested. The development of a feasibility study can be entrusted to a group of specialists (in complex projects), or it can be compiled independently by an entrepreneur.

What are the main differences between a feasibility study and a business plan?

Typically, a feasibility study is compiled for new projects at an existing enterprise, so blocks such as marketing research, market analysis, description of the enterprise and product are not described in such feasibility studies.

But sometimes a situation arises and additionally the feasibility study provides detailed data on the analysis of technologies and equipment and the reasons for their choice.

Thus, a feasibility study (TES) is a shorter and more substantive document than a full-fledged business plan.

Methodology for compiling a TECHNICAL AND ECONOMIC JUSTIFICATION

When compiling a feasibility study, the following sequence of thematic parts is allowed:

Initial data, information about the market sector,

Existing business opportunities of the enterprise,

Sources of raw materials, material factors for business development,

Capital costs expected to achieve the goal,

Operating costs during project implementation,

Production plan,

Financial policy and financial component of the project,

General information about the future project.

In general, the feasibility study provides a description of the industry in which the enterprise operates, and provides a rationale for the choice of territorial and geographical location of the existing and proposed business, as well as describes the type of products manufactured. Here it is necessary to describe and justify prices for manufactured products. At the same time, the financial part of the feasibility study contains information about sources of financing and debt repayment terms, conditions for the use of borrowed funds.

Calculations in a feasibility study consist of tables that present cash flows and balance sheets.

This structure of the feasibility study may not be the only correct one and may vary depending on the specific project. Also, it can be expanded for large and complex business projects.

What is the difference between a feasibility study (TES) and a business plan?

In modern business and office work, the terms business plan and feasibility study have firmly entered the vocabulary of entrepreneurs and economists, but there is still no clear division of such concepts. The material attempts to highlight the similarities and differences between a business plan and a business feasibility study.

Theorists suggest that a feasibility study is the result of a variety of studies, both economic and marketing research. But at the same time, a conclusion is made about the feasibility of the project, and a range of economic, organizational and other proposed solutions for optimizing the production process is determined. At the same time, a feasibility study is often an integral part of a business plan.

At the same time, there is an opinion that a feasibility study, to some extent, is either an abbreviated version of a business plan, or, on the contrary, it is a regular business plan, which is called a feasibility study.

It should be noted that if the procedure for drawing up and the structure of a business plan are clearly spelled out, then when drawing up a feasibility study you can find several different writing options, which differ depending on the problems being considered.

There are the following options for feasibility studies in practice:

Example No. 1

1. the real state of the enterprise;

2. market analysis and assessment of the production capacity of the enterprise;

3. technical documentation;

4. situation with labor resources;

5. organizational and overhead costs of the enterprise;

6. estimation of project duration;

7. analysis of the financial attractiveness and economic feasibility of the project.

Example No. 2

1. the essence of the proposed project, presentation of the basics of the project and the principles of its implementation;

2. a short overview of the market, a presentation of the results of various studies in order to study the demand for a new service or product;

3. technological and engineering aspects of the project:

a) description of the production process;

b) evidence of the need to purchase new equipment or modernize old equipment;

c) comparison of the new product with current quality standards;

d) review of the strengths and weaknesses of a new product or service;

4. financial and economic indicators, including:

a) expected and necessary investments in the project;

b) expected internal and external financial sources;

c) production costs;

5. assessment of the effectiveness and payback of the promoted project, guarantee of repayment of external borrowings;

6. susceptibility of the proposed new product or service to existing risks in the markets, as well as resistance to possible risks in the future;

7. general assessment of the effectiveness of possible external borrowing.

Example No. 3

1. a summary of all the main provisions of the feasibility study;

2. conditions for implementing a new project (who owns the authorship of the project, source material for the project, what preparatory activities and research have already been carried out, etc.);

3. analysis of proposed sales markets, review of the production capabilities of the enterprise, as well as calculation of the peak capabilities of the enterprise and a number of other factors;

4. This section reflects everything related to ensuring production (necessary inventories and production resources), analysis of existing contractors and possible suppliers, analysis of possible costs for various production factors;

5. The section is devoted to the territorial location of the enterprise and the costs associated with this position (approximate estimate of where the enterprise will be located, preliminary calculations related to the payment of rent for a site for production or office space);

6. design and project documentation (assessment of the necessary technologies for a new project, assessment of additional auxiliary facilities, without which production would be impossible;

7. organizational and other additional costs associated with the new project (calculation of additional costs, as well as an outline of the expected structure of future production);

8. analysis of labor resources for a future project (assessment of the human resources that will be needed to launch a new project). The estimated number of workers and maintenance personnel and the required number of engineering and technical workers are indicated. In addition, it is indicated whether only local workers or non-resident (foreign) specialists will be involved. The same section indicates calculated labor costs, taxes associated with wages and a number of other points;

9. progress schedule of the presented project;

10. general assessment of the economic and financial viability of the planned project.

Note that many of the examples of feasibility studies given, especially the last example, resemble a detailed business plan.

There is a fine line between a feasibility study and a business plan, and this leads to the fact that with a high degree of confidence we can say that if you are required to provide a feasibility study for a project, you can safely draw up a detailed business plan, while leaving unnecessary disputes - theorists of economic science, but it’s better to get down to business.

Methodology for compiling a feasibility study (TES):

2. General description of the project, introductory information about the project. Information about studies that have been carried out in advance, an assessment of the necessary investments.

3. Description of the market and production. Assessment of demand and forecast of future sales, description of the enterprise's capacity.

4. Raw materials and resources. Calculation of the required volumes of material resources, forecast and description of the supply of resources to the enterprise, analysis of prices for them.

5. Selecting the location of the enterprise (enterprise facilities). Justification for choosing a location and assessment of the cost of renting a room or site.

6. Project documentation. Description of the production technology for future products, characteristics of the necessary equipment, additional buildings.

7. Organizational structure of the enterprise. Description of the enterprise organization and overhead costs.

8. Labor resources. Assessment of the need for labor resources divided into categories (workers, employees, top managers, executives, etc.). Estimating salary costs.

9. Timing of the project. Project schedule, cost estimate, trench sizes, etc.

10. Economic calculations. Estimation of investment costs, production costs, financial assessment of the project.

A significant part of the financial analysis with a special impact assessment form shows how to write a business case. An example of the use of such a form, tracing the process of changes in net financial flows that arise as a result of the implementation of measures, will be presented in this article. In such a plan, the assessment of cash flows in corporate programs should be aimed at positive changes in the socio-economic sphere.

Law

Russian legislative practice has clearly outlined how to write an economic justification, an example of which is presented in Article 105 (Rules of the State Duma of the Russian Federation), and it concerns financial feasibility when introducing bills that require certain material costs for implementation. The government reviews relevant materials before submitting the bill.

First of all, an explanatory note is prepared, which sets out the concept of the bill with all the subjects of legislative regulation. The second document demonstrates how to write a business case. This example is not universal, since it is designed for a specific project and respects the interests of a specific customer. Naturally, each case requires an individual approach - each time with different calculations and plans, since financial justifications are written everywhere and by everyone - from legislators of the State Duma to students in technology lessons in high school.

FEO

How to write a business case? You can see an example below. It all depends on the object to which it is dedicated: whether it is technical regulations, organizations with their own standards, or even a national economy looking for financial ways for economic recovery. Let's take, for example, technical regulation, which requires clearly defined financial justification for changing norms or technical regulations.

When implementing a project, the costs, benefits and risks of each state entity, enterprise or community will inevitably be redistributed. Not many people know how to write a business case. A pattern exists for every type of activity, but it cannot be called universal. The implementation of such a procedure is required at the initial stage - during design, which allows you to avoid many mistakes and gain a lot of opportunities.

Advantages of the business case

First of all, when writing a justification, changes in costs are predicted, risks and benefits of all economic entities are identified. This is due to an accurate assessment of the financial and economic effect in connection with changes in certain norms. Costs are optimized by adjusting the direction of economic development, and the development of new standards will help fulfill this task.

Concrete modeling of the ensured impact of these developed standards will tell you step by step how to write a business case. The sample hardly reflects the actual situation of a given enterprise, industry, or society. Only a person inside the situation can identify the winning and losing sides. The demands for change must be effectively harmonized with all systems subject to technical regulation, taking full advantage of the implementation of any project.

Bills

Regulatory legal acts also require material or financial costs, and therefore the legislator proposing a new project must write an economic justification, that is, provide specific financial calculations. These justifications, directly related to the introduction of a new norm or change in a legal act, must indicate the income and expenses of budgets at all levels, the costs of each economic entity, the costs of society (or third parties), tax revenues, and budget efficiency.

This is how all reforms in the state are made: management mechanisms are changed, self-regulatory organizations are introduced, the rules of trade and production are changed, and certain new services are provided by members of associations and associations. In truth, the effectiveness of the introduction of any bill can rarely be directly and accurately calculated, as society is now witnessing with its own eyes - many errors and inaccuracies accompany them. Apparently not all legislators know how to write an economic justification for ongoing operations. When carrying out reforms, the forecast of socio-economic consequences and effects is especially important.

How is it necessary?

The financial and economic assessment of any innovation should be as accurate as possible and identify political, administrative, economic and other effects and consequences in advance. The “young reformers” know best how to write an economic justification for the alienation of property from the state, but society is now overcoming the consequences of this knowledge - with great difficulty, pain and losses. But it was necessary to evaluate in monetary terms not only our acquisitions, but also our losses (this is from the section of the economic justification called “additional costs”). Has the impact of such changes on the finances of all stakeholders and budgets at all levels been identified? And this is an indispensable condition for the correct preparation of an economic justification.

No, nothing was revealed, it’s just that a huge number of the country’s citizens “didn’t fit into the market.” How to write a business case for a lack of wages that people have not seen for several months? It was necessary to conduct a thorough analysis of all changes in the structure of income, expenses and risks of economic entities, the entire society, that is, third parties, and this is an unshakable rule for drawing up economic justifications. A detailed analysis of everything related to changes in control mechanisms was needed. In this financial calculation, it was necessary to honestly evaluate (monetize!) the redistribution of benefits, and for absolutely all parties interested or affected by the changes.

About feasibility

It is an honest and impartial analysis of the situation even before the start of any changes that can help in assessing the feasibility of any project, primarily in monetary terms. Then recommendations are given on its compliance with this state of affairs. Economic justification procedures should be carried out at the very first stage, when the project is still in the development stage. Designing changes to legal regulations requires fairly strong justification, since only then can the risks, benefits and costs of a variety of economic entities be predicted. Only a business case can outline costs based on expected revenue increases or cost reductions. Money is spent in order to earn much more in the future or spend less.

Financial subtleties

How to write a business case for a bank to convince it to invest in a project? First, we need to understand some hard truths about borrowing. Does the written rationale take into account that money is generally worth more today than it will be in even the shortest time? After all, the bank will give them, of course, at interest. But even if there are personal available funds that can cover expenses, has the justification calculated the percentage on the deposit that will inevitably be lost when investing money in the project?

How to write an economic justification for an agreement with a bank so that it proves that all expenses will be effectively and more than repaid, that is, future income will pay off the interest on the loan or exceed the interest on the deposit? You need to find the most promising aspects of a given project and prove in a justification that all proposed expenses will actually bring savings or revenues equal to those planned. And you don’t need to look for ready-made forms and printed forms. It must be remembered that there are simply no hard and fast rules for documenting a financial or feasibility study.

The form of the economic justification should be the simplest and must indicate the reason that influenced the decision of the organization to carry out this project. But the discussion of the expected benefits should be very detailed, with the application of alternatives, which may be useful, and a detailed financial analysis that will determine the investment attractiveness of the project. In practice, usually no one knows how to write a feasibility study, especially for projects where significant risk is involved. Most often, it is drawn up as a separate document and serves as an annex to the exact form of initialization of this project. If, in fact, the project is small, then all the benefits can be listed directly in the initialization form.

Individual elements

Typically, the results of the project are determined and indicated in its material aspect, that is, all parameters are measurable: cost savings, increased capacity or productivity, increased market, increased income, and the like. Before writing a justification, it makes sense to talk with people interested in investing in the project, or with licensing authorities, about what exactly they want to see in the justification, what is most important to them.

And yet, some material elements must be kept in mind when writing justifications. And the more complex the project, the greater the number of such elements will be present in it: cost reduction, savings, the possibility of generating additional income, increasing the company’s market share, complete customer satisfaction, directions of cash flows. The latter is documented as a major part of the project's business case.

Cash flows

This analysis aims to help committees or individuals reviewing projects to select the most suitable ones for implementation. The measurable elements are already listed above, but the business case does not end with them. There are also intangible ones, and there are many of them. For example, the main ones include the transition period and its costs, operating costs, business process changes, personnel replacement, and the like.

It is necessary to give due credit to alternative solutions in the economic justification, listing all available methods for implementing the project in practice. For example, among thousands of suppliers with millions of identical products offered, almost no one has the same price.

How to make the acquisition profitable? The economic justification will have to answer many, often inconvenient or simply difficult questions. It is more profitable to buy a ready-made solution or find an alternative, your own option. Or you can partially buy and partially sell it yourself. There should be many such answers in the economic justification.

Guardianship

Depending on the culture of the organization, the business case is written by the trustee or the project manager himself. But in any case, the trustee, that is, the investor, is responsible for the project; it is he who is responsible for financial efficiency, while the manager plans, carries out and practically implements it. The leader is the form, and the guardian is the content, that is, the investment. And therefore, the main thing is to convey to the investor the exact amount of costs for the entire project, indicate the correct payback period and predict attractive results.

The economic justification is the reason that motivates an organization to undertake a specific project. This concept includes consideration of the benefits that the enterprise will receive as a result of the project. In addition, the business case examines various alternatives and also analyzes the project from a financial and economic point of view. The latter allows you to assess the investment attractiveness of the project. How to write a business case? An example is in this material.

The essence of the concept

The economic justification is reminiscent of the analysis that we conduct when planning some kind of serious purchase. For example, your own car. Let's assume that we can allocate 35 thousand US dollars from the family budget for this purchase. The first step is to find out which automobile concerns produce cars of the class we are interested in. Then we determine the main technical characteristics and agree on the final price with the company that sells these products. But that's not all. How to write a business case? An example in the matter of choosing a payment scheme.

At the same time, there may be another situation when the buyer is primarily interested in the total amount that will have to be paid for a new car. This is especially true in a situation where the final price is affected by the amount of interest if we are talking about buying on credit. In this case, it is advisable to choose the option that provides the lowest interest rate. Another way is to look for an offer with the lowest monthly payment. Such an acquisition will allow you to stretch out payments for as long as possible. At the same time, the monthly amount of such a payment will not hit your pocket too much. When carrying out a financial and economic feasibility study, attention is paid to similar aspects.

Components of a business case

There are no clear rules for documenting a business case. Its main task, as in the case of a feasibility study of a project, is to determine the material or intangible results of its implementation. Tangible results mean those that can be measured.

Below is a list that gives an idea of ​​those material components that are important in the process of preparing the financial and economic feasibility study of the project. It would be useful to say that not all of them require mandatory documentation. The need to record them on paper depends on the complexity of the project, cost and number of risks for the enterprise.

Material elements of the business case

So, the main tangible components of the business case include savings, cost reduction, the likelihood of generating ancillary income, an increase in the enterprise's market share, customer satisfaction and cash flow assessment. In addition to the material components of the business case, it must also contain intangible components.

Intangible elements of the business case

These may include probable, but not pre-planned, company costs. Among the main intangible elements of the business case are transition costs, operating costs, transformation of business processes, as well as reorganization affecting company employees. In addition, the intangible components of the business case include recurring benefits. How else can you write a business case? Example below.

Other components of the business case

It should be emphasized that along with the benefits and assessment of cash flow in the EO, it is necessary to pay attention to alternative approaches and methods for implementing a specific project in practice. How to write a business case? An example in the following situation.

It is known that there are a large number of manufacturers of different products on the market. However, each of them sets its own price for its own products. What to choose? An option that is a turnkey solution costing $2 million. Or an alternative solution that involves partial purchasing from a third-party manufacturer and, to some extent, using its own resources?

In fact, aspects of precisely this nature often have to be considered when drawing up an economic feasibility study for an enterprise. Any of the proposed options must include the previously listed tangible and intangible components. At the end of the business case, proposals and conclusions must be stated. In addition, you can add additional materials to it.

A business case in its simplest form states the reason why the organization concerned intends to undertake a given project. The business case usually includes a discussion of the benefits that the organization can receive as a result of the successful implementation of a given project, possible alternatives, as well as a financial analysis to determine the investment attractiveness of the project.

In practice - especially in the case of large projects or projects that involve significant risk for the organization - the business case is often drawn up as a separate document and attached to the project initiation form. In the case of small and medium-sized projects (which are most common), the benefits include savings, cost reduction, the possibility of generating additional income, etc. can be listed directly in the project initialization form.

A business case is much like the analysis we perform when making a large purchase. For example, let's say you're about to buy a new convertible and you're willing to pay no more than $35,000 for it. First, you need to find out which automakers make convertibles that fit within your price range (with from a project management perspective, you are considering alternative options).

You then determine your desired vehicle specifications and negotiate the final price with the distributor (from a project management perspective, you determine the benefits of those specifications). You may also want to consider financial alternatives and decide what interest rate and payment type fits within your budget.

If you're primarily interested in the total price you'll pay for the car (including interest payments), then you should choose the payment option with the lowest interest rate you can find. But if the amount of monthly payments is important to you, then when searching for the same options with the lowest interest rate, you should give preference to those whose terms allow you to stretch payments over as long a period as possible. The business case considers similar factors.

Elements of the business case

There are no hard and fast rules for documenting the business case. Typically, you are trying to determine the tangible results of completing (or not completing) a given project. By tangible we mean “measurable” - cost savings, increased productivity or capacity, increased revenue, increased market share owned by the company, etc. By communicating with those interested in your project, you can find out what is most important to them.

The list below will give you some idea of ​​the types of physical elements that need to be kept in mind when determining the business case for a project. Not all of these elements need to be documented for every project; however, the more complex the project and the greater the risk it poses to your organization, the more of these elements you need to include in the business case:

• saving;
• cost reduction;
• opportunities related to receiving additional income;
• increasing the market share owned by the company;
• customer satisfaction;
• cash flow analysis.

The cash flow analysis is documented as part of the business case for the project involved. The purpose of this analysis is to assist the persons (or committees) reviewing requests to select projects suitable for implementation. We will look at several methods for analyzing cash flows in the article about “Project Selection Criteria”. In addition to the measurable elements, the business case should also include intangible elements, including possible, although unplanned, costs to the organization. The list below contains a number of examples of this type:

• transition costs;
• operating costs;
• changes in business processes;
• changes regarding personnel;
• recurring benefits.

Other business case considerations

Along with costs, benefits and cash flow analysis, the business case must take into account alternative solutions or methods of practical implementation of the relevant project. For example, there are thousands of suppliers offering millions of products that do x, y and z, but each of them has a different price. Is, for example, an off-the-shelf solution offered for $2 million a better option than an alternative solution that is partly purchased externally and partly implemented in-house?

Questions of this kind very often have to be considered in economic justification. Each of the alternatives must include both the tangible and intangible elements listed in the previous section. The economic justification should end with certain conclusions and recommendations. If the business case is properly prepared and documented, it speaks for itself. However, in any case, it is a good idea to indicate which alternative is the best for your organization.

The business case can be prepared by the trustee or the project manager - this depends on the culture of the organization concerned. However, regardless of who prepares the business case for the project, it is the trustee who is responsible for its financial viability, while the manager is responsible for the successful planning, execution and practical implementation. Figuratively speaking, the manager monitors the correct implementation of the project form, but the guardian fills this form with content (investments), which ultimately determines the amount of profit provided by the final product (or result) of this project.

What is a Feasibility Study - Feasibility Study

Feasibility study or Project feasibility study is perhaps one of the most important documents in the creation and development of any modern company. Most often, a project feasibility study (or feasibility study of the project) it is necessary if a company or enterprise is going to introduce some new technology, to obtain any funds for the implementation of production goals.

Many entrepreneurs confuse the concepts of “Business Plan” and “Feasibility Study”, believing that developing a feasibility study is no different from writing a regular business plan. In fact, draw up a feasibility study and writing a business plan are slightly different things, the main difference is that drawing up a feasibility study is not as complex and detailed work as a business plan.

Feasibility study of the project(feasibility study of the project), as a rule, is devoted to only part of the company’s overall business and, as a result, should not contain sections describing the entire business as a whole. That is, the feasibility study of a project includes only those data and calculations that will describe future changes in the company’s activities directly related to this project.

Feasibility study, unlike a business plan, does not contain details in the form of a marketing promotion strategy, description of goods or services, or risk analysis. A feasibility study is compiled precisely so that the results of innovations can be calculated and all possible problems of this process can be seen.

Why do you need a feasibility study?

In order to clearly see the situation developing at an enterprise after any changes in its work (no matter whether quantitative or qualitative), as a rule, a feasibility study (TES) of the project is developed. At drawing up a feasibility study project, a variety of factors that have a direct or indirect impact on the enterprise, as well as all changes in financial indicators, are carefully taken into account.

A well-drafted feasibility study allows you to see how effective investments are in the development of new or refinement of old activities of the enterprise, whether the enterprise needs mergers or acquisitions, and whether there is a need for lending. Also, a feasibility study of the project will help select the necessary equipment, select and implement appropriate production technologies, and properly organize the activities of the enterprise.

Feasibility study ( Feasibility study) is necessarily included in the package of documents that are submitted to the bank to obtain a loan. In this case, the feasibility study makes it possible to show the profitability of lending, an increase in the level of activity as a result of lending, as well as a guarantee of repayment of the loan to the bank.

How to draw up a feasibility study

When developing a competent feasibility study The feasibility study must include the following provisions:

1. Project Summary
2. Project idea. What is the idea of ​​a feasibility study for a project, and why is it needed? Project feasibility study plan with step-by-step explanation.
3. Rationale. Why exactly such solutions are proposed, the reason for choosing this particular material, type of activity or equipment. It is also necessary to include all possible calculated risks in the feasibility study calculation.
4. Calculations of production requirements (financial, raw materials, labor, energy). It is necessary to calculate how much money will be required to launch this project. If you are preparing a feasibility study to obtain a loan, you should indicate all possible sources of income
5. Economic justification (calculations that show the result of the enterprise’s activities after changes)
6. Conclusions and proposals (summarizing, conclusion, evaluation)

At the same time, a feasibility study (feasibility study of the project) can further serve as the basis for drawing up a business plan, the main document that serves for making decisions regarding the introduction of new technologies or equipment into the enterprise’s production.

Sergey Pankratov
10/2011