Translate
Leveraging the expertise of our SCORE Greater Cincinnati Ohio counselors, we have written 70+ easy-to-understand FREE Business Briefs on a wide variety of business subjects.
Business Feasibility Analysis - SCORE 4.15
July 29, 2021
Rating
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.
.tg {border:none;border-collapse:collapse;border-spacing:0;} .tg td{border-style:solid;border-width:0px;font-family:Arial, sans-serif;font-size:14px;overflow:hidden; padding:10px 5px;word-break:normal;} .tg th{border-style:solid;border-width:0px;font-family:Arial, sans-serif;font-size:14px;font-weight:normal; overflow:hidden;padding:10px 5px;word-break:normal;} .tg .tg-kftd{background-color:#efefef;text-align:left;vertical-align:top} .tg .tg-lqy6{text-align:right;vertical-align:top} .tg .tg-0lax{text-align:left;vertical-align:top} .tg .tg-my2k{background-color:#efefef;text-align:right;vertical-align:top}| 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.
If you would like to request a Cincinnati SCORE counselor, please click here, for a Dayton counselor click here
Disclaimer
The information contained in these briefs is for general information only. While we endeavor to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the information, products, services, or related graphics contained in the briefs Through these briefs you may be able to link to other websites which are not under the control of SCORE therefore the inclusion of any links does not necessarily imply a recommendation or endorse the views expressed within them. Any reference from SCORE to a specific commercial product, process or service does not constitute or imply an endorsement by SCORE, SBA, SCORE Chapter 34, SCORE Chapter 107, or the United States Government of the product, process, or service or its producer or provider.
SHARE THIS ARTICLE
CONNECT
3700 Park 42 Drive, Suite 140A
}
Cincinnati, OH 45241
(513) 549-0818
Copyright © 2024 SCORE Association, SCORE.org
Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.
In partnership with
