Module 3: SESSION TWO: INTRODUCTION TO FEASIBILITY STUDY

OBJECTIVE:

At the end of the session, you will be able to:

a) discuss the importance of a feasibility study; and

b) enumerate and describe the parts of a feasibility study.

DISCUSSION:

What is a feasibility study? 'What is its importance to someone who wants to start a business?

THINGS TO DO:

Examine the preparation of a feasibility study on a step- by-step basis using the story of Farah Matias as an example. You
will be guided by your instructor.

HERE IS THE STORY OF FARAH

FARAH'S PROJECT IDEAS

1. This is Farah. She lives in Dasmarinas, Cavite. What do you imagine is she thinking about? (Discuss students'
answers.) Yes, one of her big concerns is her children. She would like them to go to school, but she can't afford the
notebooks, pens, and other things they will need. She'd also like them to have better food. Farah has been thinking
about what she can do to solve these problems. She's saved some money.

2. Farah has saved P1000 so far. She recalls that her sister-in-law in Munoz sews cushion covers and sells them. She
had watched her sister-in-law sewing, so she thinks it will be easy for her to sew cushion covers, too. Farah says to
herself, "I'm going to make a cushion covers and sell them for P100 each. Then, I'll make P1000." Farah is very
excited about her idea. (Discuss: How true is it that Farah will "make" P1000 from her project?)

3. Farah goes to town and stops at the first store where she sees the materials she need. She buys the needed
supplies, and she's surprised that she must spend more than half of her P1000. She had P420.00 left to take home.

4. But she goes home feeling happy thinking about how successful her project will be. When she gets home she goes
right to work. She's never sewn cushion covers before and she isn't sure of some of the steps. It's a lot of work to
make the cushion covers.

5. After a week, Farah's husband is upset with her. (Discuss: Why is her husband upset?) Yes, the sewing took so much
time that Farah couldn't watch the children and do work around the house. What will happen if Farah's husband
isn't happy with her work? (Discuss). Farah thinks, "My husband may be angry now, but he'll be happy when he
sees the 1000 I will earn."

6. Farah goes to sell her cushion covers at the market close to home. At the end of the day, she was only able to sell six
cushion covers. And she thought she would make P1000 from the sale of all the cushion covers! Now, Farah made
less money than she thought she would make at first. (Discuss: How much less can she make now? How much can
Farah still make?) However, Farah had already spent (P580 on supplies). Farah is discouraged. She decides to sell the
four remaining cushion covers at a much lower cost, P55 each, and do better next time.

7. She gets up early the next morning to go to another market, farther than the one she went to yesterday. She is
planning to be home by lunchtime because she only has four cushion covers to sell. To her dismay , when she gets to
the market, there are many women selling cushion covers like hers for P50each. Since people haggle with the
 women for the prices, the actual price must be less than 100 each. Farah thinks. Farah sits down to sell. (Discuss:
How long do you think she stays at the market? What do you think happens?)

8. Now Farah is very, very discouraged. She can't understand what she did wrong. (Discuss. what should she have
done differently? Discuss these issues. Farah should have found out how to produce cushion covers of good quality;
she could have worked with , her sister-in-law, practiced on old pieces of cloth; etc. She didn’t think about how
much time the production and selling of the cushion covers would require she should have visited the market place
to find out the selling price of the products, how long it takes to sell, how much the women make it in a day, a
week , a month, who takes care of thins at home when they’re at the market, where the women buy supplies, why
people buy from one woman not another, etc.)

9. Farah wants to try again, and has call together four friends. She tells them what happened. One of her friends
wants to try sewing school uniforms. Let’s think of something else, she says, Heidi, one of the friends, response:
My grandmother used to make soap, and I help her. I know how to make soap. Who needs soap? (Discuss:
Imagine that you are one of the women discussing the project with Farah and Hadi. What are the pro’s and con’s of
making soap? Where can you sell soap? Why would people want to buy your soap?)

10. A cake of manufactured soap that's sold in the store weights 200 grams and sells for P19.00. The women think they
can make and sell good quality soap for a cheaper price in Dasmariñas.

11. Two of Farah's friends go to the market. They want to be sure they can make money producing and selling soap.
(Discuss: What do they see? How many women are selling soap? Is there much left?) The women find out that the
demand for the soap is great, and that it costs between P19.00 and P20.00 a cake. There is yellow soap and white
soap. The white soap sells better. (Discuss: What else do you think should the women want to know about? What
other information must they ask about?)

12. The women decide that they need to be careful about how much money they would spend on soap making and
how much they would earn. First, they find out the cost of starting soap production. They will need a large steel tub
for boiling- P140, a medium-sized plastic bucket for carrying water - P50, and three wooden molds - P75 each. The
total cost of the equipment is P ______ .

13. Now the group calculates how much it will cost to produce one batch of soap, or three molds (one batch of soap
makes three molds). They need 2 liters of coconut oil at P33.00 each; 500 grams of soda which will cost P15 in all;
and 10 liters of water, which is free. The total cost of supplies is P ________ (Is water really "free?)

14. Next the women figure out how much they can earn from each mold of soap. Each mold can make 6 bars of soap. 6
x 3 molds yields 18 bars. If a bar is sold at P20.00 each, total sales sill be P________ . The women know they must
deduct the cost of the linseed oil and soda for each batch.

15. However, the women remember the cost of equipment. (Discuss: How many batches will it take to pay back these
costs?)

16. The women think some more about then production and sales. (Discuss: Let's say they have already made two
batches and paid back their initial investment. How much will they make on 10 batches? Besides profit, what else
do the women need to think about? Discuss further how long it takes to make the soap; how quickly they can earn a
profit; whether the demand for soap is constant or varies; etc.)

17. The women think they can make money making soap. But they ask themselves, "Have we taken all the costs
involved into account?" Have they? (Discuss: The group needs to think about transportation and their time as well).
The women still think the business can be profitable. Now they discuss how they will work: How might they
organize themselves? Which tasks would take the most time? How would they take care of their children and other
responsibilities at home?
18. The women now study the soap making idea. They each have P400 to use for starting the business, and there are
five of them. (Discuss: How much is the total sum of money that they have? Should they start the soap-making
operation? Why or why not? Encourage the students to consider profit, as well as time, the production process,
acquisition supplies, transportation, etc.). Will be project idea succeed?

BRIEF DESCRIPTION OF THE FEASIBILITY STUDY

A business idea must be both possible and feasible. “ Possible” involves that the availability; ability of skills, technology,
hardware, and infrastructure to set up the business, i.e., manufacture the product or offer the service idea. “Feasible”
lies in the realm of financing and profitability. Will the product or business idea not only supports itself through sales but
also earn more, in terms of profit to give the entrepreneur a sufficient stock of extra money to cover up unexpected
events, downturn, or to support expansion and other new endeavors?

When using the term Feasibility Study, most development workers and development agencies already include the idea
of "possibility". This area is mostly covered by the marketing, production, and organizational plans which can tell
whether it is possible' to launch the business idea.

Components of the Feasibility Study

1. General Description of the Business. A summary statement of :

 the type of business being planned and what it will set about to do;
 which needs of the market it will seek to fill;
 the means by which the business intends to be different from other businesses;
 the principal strengths and opportunities of the business and the threats and weaknesses it will face;
 management philosophy, in general terms.

For on-going businesses, this will be a description of the current state of the business as well as that of the expansion or
the innovations being planned for.

2. Statement of Goals

General Objective: A summary statement of what the business aims to do including general time frame, dates, numbers
and percentage (Long range).

Specific Objectives: A series of short statements which gives an indication of how each part of the plan will contribute to
the achievement of the main goal or general objective.

3. The Market Study. This is an analysis of the possible position and opportunities of the business being planned in the
present market. If the business is on-going, this includes the present position of the business in the market and how
it compares to other similar types of businesses. It covers the following:

 The on-going trends arid opportunities in main and secondary markets, which the business will target: market
segments, customers' needs, buying patterns, technology, regulation, demographics, life-style and other forces.
 Qualified statements of markets' sizes, growth, and expected market shares.
 The position of the competitors.
 The impact of change in other markets on the products or services, which the business intends to sell.
 An analysis of the value, functions and uses of the products or services being planned.

This should answer questions such as: what are the needs, which will be satisfied by the products? Satisfied in what
way? And how well? For on-going businesses, an analysis of current products, and an analysis of the expansion or
innovations being planned.
  Analysis and selection among alternative ways to communicate with and influence customers (Promotions).
 Selection of distribution channels and logistical alternatives in moving products and services to customers.
 General statement of current market prices of similar products, possible prices which the market can afford,
possible price ranges of the products or services under study.
 Much of what is expected from sales follows from the marketing plan. Sales projections cannot be very accurate
but should be approximated as best as possible. Financial plans will be based on what amount of income is
expected from sales to keep the business (or the expansions) going.
 The plans for recruiting, training, organizing, informing, and motivating the sales force are part of the market
plan.

4. The Production/Technical Study. This is an analysis of the projected needs for manufacturing the proposed products
or offering the proposed services. For on-going businesses which arc planning on expansion or on manufacturing
new products or giving new services, the production plan focuses on existing facilities and analyses projected
changes to meet new production needs. These include:

 capacities required on the long-term and the short-term to meet the market demands
 quantities estimated to be produced or services delivered
 production standards and quality objectives
 specifications of machines, tools, and equipment required.
 business site, location required
 production flow and layout
 raw materials standards, amounts, stocks required
 purchasing plans, re-order level plans
 inventory plans for stocks, work in-progress, finish products
 production control requirements
 definition of future technical or service requirements
 any research and development plans
 steps for monitoring external technology and process changes which can affect current production processes
 any specifications for new systems, building and location studies.

5. The Financial Study. This covers the financial requirements of the proposed business idea. It includes
projections outcome and of profit, projection of balance sheets and of cash flows required by the proposed
business.

The financial study must include answers to questions like:

 How will the proposed business he financed?

 Which sources will be tapped?
 How will the income be used?
 What steps should be taken for expansion?

 What should the future balance sheet look like at a given period?

6. The Organization Study. This is the “skeleton” or frame around which the people, the machines, the equipment and
the outer physical parts of the plan are put together to have a moving organization. The basic questions for
organizational planning are:

 What is the project trying to accomplish?

 Since what the project is trying to accomplish cannot be done all at once and only by one person, it has to be
broken down into:
 o the time dimension: which things must be done ahead? which cannot be done unless something else has
been done first? which things can be done at any time and are not related to others being done first?
o the people dimension: who arc the people who will work on the line (operator, and their supervisors)? who
are the people who will not work on the line but who will do staff work, whose talents, skills and knowledge
are needed by those on the line but not directly (work analysts, financial analysis, personnel analysts.
accountants, auditors, etc.)?

For an on-going business, this may start with an assessment of the quality or quantity of the existing people at all levels
and a projection of the skills needed for the expansion or innovation to take place. The plan should project how future
needs will be met by giving current employees an opportunity to grow and finding new employees if needed knowledge
and skills are not found among present ones. The plan should also include the type of legal organization which the
business should have to achieve its purposes and goals.

For a new business being planned, this must include:

 description of each type and level of jobs to be done in the business

 levels, kinds and quality of skills, background knowledge and education needed fir do each job
 number of people required per job
 age requirements, with a thought on future requirement plans
 benefits, both those required by law and those planned by the entrepreneur to keep and maintain a satisfied
workforce.

Other questions to answer are:

 How will individual responsibilities be described to encourage the people to do their best and accomplish the
business objectives and purposes?
 What types or styles of leadership, motivation, communication, and accountability will be best to knit the people
together to achieve the project's objectives and purposes ?