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Sub-Module 1: The Feasibility Study Exploring Your Business Ideas in Paper
Sub-Module 1: The Feasibility Study Exploring Your Business Ideas in Paper
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I. Definition
As an evaluation and exploratory tool, the feasibility study finds wide uses for a
variety proposed ideas; from the introduction of a new business, the adoption of new
methods, a change in organizational structure, the adoption of new technology, or to
simply choose from various alternatives.
If you are having an idea for a business venture, then the feasibility study will be
your first recourse. By conducting a feasibility study, you will be on your first step
towards putting your business ideas towards reality. Through a feasibility study, your
idea starts to become real. Things that are real are easier to deal with, than when they
are unreal.
Any undertaking will require the use of resources (money, time, and
manpower), and generally, these resources are scarce and valuable. Through a
FS one can immediately determine whether such resources are to be committed
to an undertaking or should have been committed to somewhere else, where
expected benefits are higher.
Module 1: Feasibility Study, Business Plan & Project Proposal 4
You might have already invested a large amount of your savings in a
business, worked hard on it, and spent countless hours working, only to find out
invested. You might have been better off, if you placed your money in the bank
and just wait for the interest to accumulate.
The feasibility study will serve as the initial guide in an undertaking. It will
You might have already bought equipment for use in your business, only
to find out later that it did not perform as expected. Deciding to sell them back
at a lower price will already entail losses on your part.
A properly prepared feasibility study, will at the onset, guide you in the
purchase of your equipment for your undertaking.
The feasibility study will enable you to identify critical issues and critical
resources that threaten the success of the business. Critical resources may not
be available at a time when they are needed in the operation of a business.
Critical issues that will greatly affect the cost of operation have not been
resolved.
The expectations that you have made regarding your income all look so
good in paper. However, will the money be available at the time when you need
it? Are your raw materials available at the time when the demand is high?
A feasibility study is a technical paper, as such, not just any person can
make it. It requires information and skills that generally not one single individual
can provide. Specialized skills are needed in its preparation; accountancy skills,
management skills, skills and information about the undertaking itself, and
writing skills as well.
subject.
Module 1: Feasibility Study, Business Plan & Project Proposal 5
Thinking of preparing a feasibility study on a venture with seaweeds, for
example, will require that you have some knowledge on accounting in order that
you can prepare your financial projections. Reading from the library will provide
you with an understanding on management, or your next door neighbor might
help you. And of course, you might have already an idea about growing
seaweeds plants, which you can enhance by asking an expert (surely, you must
have already given enough thought about it, since you are already in the stage of
preparing a feasibility study).
The feasibility study as an evaluative tool is used for a variety of purposes. Some
of the uses of a feasibility study are the following:
Although a feasibility study is used for a wide variety of purposes, this module
focuses on the feasibility study as a tool for explorations on the profitability/viability of a
business idea; as such it will be a business feasibility study.
If you are going to prepare a business feasibility study, then you will be
interested to know on whether your business idea is viable and if it will give adequate
returns for the money, time and effort that you have invested in the business.
IV. Preparation
Inasmuch as the feasibility study will serve as a the basis for making a decision
about the viability/profitability of a given business undertaking, then the information
contained in it must have the following characteristics:
A. Accuracy
Accurate information means that the data are not an estimate of the
writer but should be the actual information in the industry/ market. Inaccurate
information leads to inaccurate conclusions.
B. Reliability
Reliable information means that the source of the data must not come
from hearsay or persons not related to the industry or market that you are
studying, but must come from dependable sources and sources in the industry or
market.
Timely information means that your data are current and are one that
most closely reflects the present situation.
Real world situations will set limitations to the characteristics of the
information collected. However, attempts must be made in order that accurate
assumptions maybe built upon them.
You may have experienced only recently how the prices of engine fuels have
been fluctuating from high to low. If fuel price is one information that you need
in your feasibility study, then you should anticipate its impact on the feasibility
study of your business venture.
There are four basic components that are common to all feasibility studies,
which are: the market feasibility, the production/ technical feasibility, the
organizational/ management feasibility and the financial feasibility.
A. Market Feasibility
This portion of the study gives a thorough description of the industry that relates
to the product or services that you want to produce. The purpose of this is to fully know
and get detailed information about your market in order to devise plans and strategies
to establish a market share. The outcome of this study is sometimes sufficient to decide
ity study or
not. Gathering the necessary information that will give you a thorough description of
the industry where your products or services belong requires that you have to conduct a
Market Research.
A.1 Definition
A.2 Purpose
get involved in the business, as well as other factors that may become an
obstacle in the future. Acquiring such information may require that you have to
conduct a Market Research.
If you cannot get your information accurately and reliably through
market research, then most probably the business idea is not viable. If your
market research and analysis cannot substantiate and support the information
that you have, then any analysis and conclusions that you will arrive at, will also
be unsubstantiated, and therefore will be unreliable as a basis for making a
business decision.
When you are planning to make a market research, you have to carefully
balance between the cost of the research, the accuracy and reliability of the
information that you have to collect, and of course the time. It is possible to
have a very accurate and reliable market research that is not expensive, but will
give you unreliable and not so accurate information. You may have accurate and
reliable information, but they are expensive. You may have expensive, accurate
and reliable information, but because of the time element in their collection they
are no longer reliable. When undertaking a market research, you have to
consider the cost, the accuracy and reliability, and the time it takes to collect the
information.
It would be effective and efficient on your part to collect as much
information as possible that you need when you will be conducting a market
research. This would mean that you have to identify before hand, what are the
information items that you will be needing in your market feasibility,
organizational feasibility, technical feasibility, and financial feasibility, and then
combine all together into one survey (so that it will become a feasibility survey).
Before you conduct your feasibility survey, you have to decide on the
different types of information that you will need. Some of this information can
be obtained freely such as looking for it in the internet, or going to the library, or
Module 1: Feasibility Study, Business Plan & Project Proposal 9
asking somebody. In some cases the information that you will need will entail
hire people
to conduct the survey for you.
You have to remember that not all of the above mentioned items have to
be included in your feasibility survey. Include only those items that are important
and will have an impact on your feasibility; the above serves only as a general
guide.
It is even possible to subdivide your feasibility survey into two portions.
The first portion will involve acquiring information that you can immediately use
This will be generally the financial aspects of your survey. Should the data
gathered in the first portion suggest a very small profit margin, then you might
not as well continue with the second portion, and altogether abandon the idea.
In some cases, it is the technical feasibility that will serve as a decisive factor.
However, if your initial survey does suggest that the profit margin is
large, then this suggests that it might be worth pursuing, and proceed and
conduct the second phase of the survey to further the details of the study.
2
Final Report of the Regional Workshop on Continuing Education Programmes Focusing on Small-Scale Enterprise for
Neo-
Module 1: Feasibility Study, Business Plan & Project Proposal 10
A.4 Sources of Information
Before you start preparing your feasibility survey, you should know how
to ask the right question. Knowing how to ask the right question will make your
survey short, will give you accurate and reliable information, and reduce the
time to conduct the survey. So, where will you get the information that will guide
you to ask the right questions?
Having decided the kinds of questions that you will be asking, you will
need to formulate the feasibility survey that will provide you with an accurate
and reliable answer. Below are some general questions that you will be asking to
yourself that might help you to prepare your feasibility survey. The questions are
details based on the ten broad areas classified above and do not necessarily be
of the same order as in the feasibility survey (How the questions are to be
arranged and validated is the area of survey design. For our purpose, we will
presume that we have an acceptable survey tool).
The above serves only as a guide that will be of help in formulating the
right questions that you could possibly include in your market research, or
questionnaires. They do not necessarily all have to be included as questions in
your market research. Only the relevant questions shall be included.
Having decided the kinds of questions to ask, your next problem is who
can answer your questions. The following are suggested possible sources for
answers to your questions:
1.1 Market description a brief description of the market to describe the buyers and
users of the product/ service and the areas of dispersion. See Sample write-up 1
below.
Interviews from 3 egg producers in the Zamboanga City indicate that buyers and
users of eggs in Zamboanga City are broken down as shown in Error! Reference
source not found.Error! Reference source not found.
Sample write-up Table 1. Interview data obtained from 116 respondents on their weekly
egg buying and using pattern.
1.Intermediate Buyers
a. Wholesalers 7 20.8 18 23.6 24,960 748,800
c. Retailers 20 2.3 1.5 3 448,200 13,446,000
TOTALS 27 23.05 19.5 26.6 473,160 14,194,800
1. Wholesalers - are buyers who buy directly from the egg producer in
volume. Of the seven egg wholesalers in Zamboanga City interviewed,
their average weekly sale is 20.8 trays with an average minimum of 18
trays and an average maximum of 23.6 trays. Of the 7 wholesalers in
Zamboanga City, all require that the eggs be delivered to their outlets by
the local egg producers. Furthermore, the 7 wholesalers are located
inside a circle whose radius is approximately two kilometers, with the
exception of one establishment which is located at a distance of
approximately 5 kilometers from the center.
2. Retailers these are buyers who buy eggs in small quantities and resell
-
- terviews with 20 randomly
-
sold, with a minimum average of 1.5 and a maximum average of 3 trays
per week.
B. Institutional Buyers/ Users these are buyers who buy in bulk and are end
users themselves.
One should note in the above table that the household sector could
have either bought their eggs from wholesalers or retailers.
The large difference between the minimum and maximum trays sold
per week by the caterings services/ houses arises due to the nature of
their services, which is highly dependent on the occurrence of special
occasions.
2. Households households are buyers who are end users themselves. They
-
a 100 random sampled houses indicate that an average family size of 5
consumes an average of 0.15 trays of eggs per week.
H o te ls
E g g
P ro ducer R e sta u ra n ts
B a k e r ie s
H o u s e h o ld s
W h o le s a ler s
R e t a il e r s
1.2 Demand data about the consumption in the past five years; major users of the
product; and the projected consumption for the next five years (See Sample
write-up 2 below).
Data on egg consumption in Zamboanga City by the various egg buyers and
users for the past 5 years are not available. However, projections can be made by
assuming that egg consumption will proportionately increase with population increase
in Zamboanga City.
Egg is one important source of protein for human diets; hence any increase in
population will likewise create an increase in the demand for eggs.
At present, projections made by the Statistics Bureau indicate that the rate of
population growth in Zamboanga City is 7.2% per year, with Zamboanga City having
170,025 households at an average 5 heads per household. On this assumption, the
demand situation for eggs in Zamboanga City for the next five years is shown below:
Sample write-up Table 2. Five year projected demand by household egg users in
Zamboanga City
%
No. of Ave. Egg
Egg buyers Increa
House- Consumed Year
and user's se/
holds Per/year
year
2010 2011 2012 2013 2014
Household
170025 36,725,486 7.20% 39,369,721 42,204,341 45,243,054 48,500,554 51,992,594
users
Sample write-up Table 3. Demand projections for egg by retailers in Zamboanga City
The 7.2% increase in demand was also used on hotels, bakeries, restaurants and
caterings to arrive at a five year projected demand. The results are summarized below:
Sample write-up Table 4. A summary of the five year demand projection for the different
buyers and users of eggs in Zamboanga City
Ave. Egg
Consumed %
Egg buyers
or sold Increase/ Year
and user's
Per/year year
(pcs)
2010 2011 2012 2013 2014
1.Intermediate Buyers
a. Wholesalers 748,800 7.20% 802,714 860,509 922,466 988,883 1,060,083
c. Retailers 13,446,000 7.20% 14,414,112 15,451,928 16,564,467 17,757,109 19,035,620
TOTALS 14,194,800 15,218,836 16,314,448 17,488,945 18,748,005 20,097,717
2. Institutional buyers/ User's
1. Hotels 89,712 7.20% 96,171 103,096 110,518 118,476 127,006
2. Restaurants 119,520 7.20% 128,125 137,350 147,240 157,841 169,206
3. Bakeries 343,440 7.20% 368,168 394,676 423,092 453,555 486,211
4. Catering 43,200 7.20% 46,310 49,645 53,219 57,051 61,159
3. Household
36,725,486 7.20% 39,369,721 42,204,341 45,243,054 48,500,554 51,992,594
users
TOTALS 37,321,358 40,008,496 42,889,108 45,977,124 49,287,477 52,836,175
GRAND
51,516,158 55,227,332 59,203,556 63,466,068 68,035,481 72,933,892
TOTAL
The above projection was substantiated through further interviews with egg
producers regarding their experience and their projections on the industry. They believe
that the above assumption is justifiable enough and the resulting projection is close
enough to what they anticipate for the next five years.
The Grand total in the above table should however be interpreted with caution.
The relationship of the intermediate buyers with the household users as shown in
Error! Reference source not found., suggests that satisfying the demand of the
intermediate buyers will have the consequent effect of decreasing the demands by the
households on the producers.
It is also in this portion of the study that the methods by which the
projections were made must be made clear, for each method has its own
advantages and disadvantages. A number of statistical tools are available for
making reliable projections; linear regression is one of such tools. A much
simpler approach would be to use a graphing paper and a ruler. A common
approach is to use the mean (or the average) as used in Sample write-up Table
3).
1.3 Supply data about the product or services being provided by other businesses
engaged in the same industry for the past five years (broken down as to source
whether imported or locally produced); projected supply situation for the next
five years; and the factor affecting trends in the past and future supply (See
Sample write-up 3 below).
Sample write-up 3. Supply
Data from the Agriculture Bureau regarding egg producers in Zamboanga City
provided the information shown below:
Sample write-up Table 5. Average and total volume of eggs produced by the major egg
producers of Zamboanga City
Number of producers 12
Average distance from ZC City Hall (km) 19.75
Average years in operation 5.4
Average no. of layers maintained/year 9,333
Average no. of eggs produced/year 2,775,200
Combined volume of eggs produced/year 33,302,400
The above information suggests that since the amount of eggs sold by the
intermediate buyers who buy directly from the producers has an average of 14,194,800
eggs per year (see Write-up Table 4), the remaining of the combined volume produced
per year, must have been directed to the institutional buyers/users and the households.
The combined demand caused by the institutional users has an average of 595,872 eggs
per year with the remainder of 18,511,728 (=33,302,400 14,194,800 595,872) being
sold directly to the households. The remainder constitutes 55.5%
(={18,511,728/33,302,400} x 100) of the total average volume of eggs produced by the
major suppliers in a year.
Of the 12 major egg suppliers in Zamboanga City, only 3 obliged to supply the
proponent for information regarding their egg production volume for the last five years.
Based on the past records of the three major egg suppliers, a simple average is
used to determine the projected supply situation. It is done as follows;
1. Compute for the difference of the totals between two succeeding years starting
from the earliest years to the next year. Thus the first computation will involve years
2004 and 2005 and equals -212, 640 (= 2,244,000 2,456,640). The resulting
computations for the other years are shown below;
An average of 0.935 % suggest that the supply of eggs from the major egg
producers of Zamboanga City will increase on the average by as much as 1 per 100
eggs per year.
Having determined the rate by which supply of egg increases, the projected
supply situation will be as shown below;
Currently there are 12 major egg producers in Zamboanga City (see Write-up Table 3).
For the year 2008 alone, they supplied Zamboanga City with 33,302,400 eggs. Their average year
in operation is 5.5 years, and they are situated at an average distance of 19.9 km from the City
proper. The major producers of egg in Zamboanga City who have been in the business of
producing eggs longer than 5.5 years most presumably have already established good business
relationships with the intermediate buyers as well as the institutional egg user. Likewise, the same
can be said to the new entrants in egg production who have been in the business from 3 to 4
years already. Considering that the new entrants to the business are already operating on an
average of 9, 333 heads of layers per year is suggestive that they must have very good
connections in the distribution channel to venture in egg production.
The above discussion suggests that a high potential for failure will be encountered if the
target of the venture will focus on the intermediate and institutional market as its buyers. On the
other hand, the risk potential for failure will be lower if the main target market will be the
household buyers.
The intermediate buyers serve as a direct outlet for egg produce; hence, they are also
competitors. Their strength lies in having good business relationships with the egg producers, and
on attracting customers due to the variety of products that they sell. At any given time, they
entertain a large number of customers, selling eggs to their customer either in trays or in dozens
is also their strength.
The intermediate buyers absorb only 42.62 % (=14,194,800/33,302,400), while the
institutional buyers absorb only 1.19% (= 638775//33,302,400) of the total volume of eggs
produced in the City.
Based on personal interviews with the supervisors of the egg producers, all of the major
egg producers grade their eggs into three classes: small, medium, and large. Producers prices for
small eggs range from 3.50 3.75 pesos, medium grade is priced from 3.75- 4.00 pesos, while
large grades are priced from 4.00- 4.25 pesos.
From the same interview, 4 of the 12 producers unload 2 to 3% of their eggs to
institutional buyers, using vans, directly through prior contracts at discounted prices. Forty two to
forty four per cent (42 to 44%) are unloaded to the intermediate buyers. The remaining produce
of the egg producers are sold to direct retailers within their immediate community.
The above discussion suggests that in order for the proposed venture to be competitive
with the intermediate buyers market, the proposed undertaking will have to produce eggs equal
to or lower than the price schedule offered by the competitive egg producers.
The product.
The egg, particularly chicken egg is rich in nitrogenous elements. It is one of the most
highly concentrated forms of nitrogenous food, about one third of its weight being solid
nutrient. It is also confirmed to have a low-calorie source of protein, Vitamin A, riboflavin,
Vitamin B-12, iron, zinc, phosphorus, calcium, potassium and other nutrients.
The average weight of an egg is about two ounces (or approximately 37.7 gm), of
which 10% consists of shell, 60% of white, and 30% of yolk.
Table egg is commonly consumed as viand. It is also used as ingredient for desserts
like pastries, cookies, pies, cakes and others. It is sometimes processed into "itlog na maalat"
or salted egg. It is also effective in some beauty regiment. In a recent study done at the
North Carolina State University, eggs may be the next source of protein for drugs, which can
create a specialty market for farmers, who can produce eggs specifically for drug companies.
(Source; http//.www.rcbral@bar.gov.ph ).
Grading of eggs.
National grading standards for eggs sold, are according to size; small, medium, large,
extra large, and assorted or unclassified. Farm gate prices in 2002 and 2003 were 35.76 and
37.48 pesos per dozen respectively (2.98 and 3.12 pesos per piece respectively).
(Source; http//.www.rcbral@bar.gov.ph)
Grading can be made advantageous in two ways; grading in terms of appearance can
be advantageous where the target clientele purchases in bulk, and where appearance do not
matter; such as among institutional buyers. Grading in terms of appearance is advantageous
where households belonging to the upper segments of society, are willing to pay a price for
eggs with good appearance (such as the egg being ovate, white, and clean).
This undertaking will grade eggs as follows; AA, A, AB, B, BC, and CC. With AA being
in the heaviest category, and class CC will be in the lightest range. This will effectively
subdivide the existing retail price range of 4.75 5.50 pesos into 6 ranges, as shown below;
Target Market.
Targeting the institutional users and that of the wholesalers will expose the venture
to a high potential for failure. However, focusing on household egg consumers and with good
marketing strategy and efficient production process will lower the risk for failure
With 6 range price category, flexibility in giving discounts to buyer becomes easy.
Packaging
Packaging of the eggs will involve using egg trays that can carry 30 and 12 eggs in a
tray. Awareness of the existence of the product will be achieved by using light green colored
tray. Cell phone and telephone number will be imprinted on each tray to facilitate calls for re-
1.6 delivery
S at any time. Thirty egg trays will cost 2.00 pesos each tray package, and 1.00 peso for
a 12 egg tray.
for delivery can be immediately responded to and re-delivery can immediately be done.
-
-
Alternative marketing channels will be utilized. Retailers located within the vicinity
- the eggs
from the farm to the retailer.
1.6 Projected Sales for the next five years considering the supply and demand
situation, the competitive position, and the marketing program.
The projected sale is determined as the difference between the supply and demand for
eggs in Zamboanga City.
Based on the past records of the three major egg suppliers, a simple average is used to
determine the projected supply situation. It is done as follows:
1. Compute for the difference of the totals between two succeeding years starting from the
earliest years to the next year. Thus the first computation will involve years 2004 and 2005
and equals -212, 640 (= 2,244,000 2,456,640). The resulting computations for the other
years are shown below:
An average of 0.935 % suggests that the supply of eggs from the major egg producers of
Zamboanga City will increase on the average by as much as 1 per 100 eggs per year.
Having determined the rate by which supply of egg increases, the projected supply
situation will be as shown below;
The projection may also be done using the statistical method of linear regression.
Computational procedures for linear regression is facilitated by the use of a spreadsheet
computer application program such as MS Excel.
Using MS Excel requires familiarity with the Graphical Unit Interface of MS Excel.
However the computational procedures is as follows;
1. Open MS Excel.
2. Type your data so that it will appear as shown below;
3. Type the following formula as shown below. Observe the row and column
labels .
4. After entering the formula, and then pressing the ENTER key in each, the results will look
something similar to the one shown below;
The results of the formula are the projected supply per producer per year. Since
the formula gave an average for each producer, each has to be multiplied by 12, the total
number of producers, to get the projected total annual yearly supply for the next five
years. The final projection is shown below;
For this study and considering the available data at hand, the projected supply
shown in Sample write-up Table 8 will be preferred over the one that is arrived at when
using only the mean. Linear regression minimizes fluctuations about the mean as
opposed to the ordinary mean
Black pepper is a is a vine perennial plant producing berry like and aromatic pungent
Flowers are white which produce fruits when unripe and become red at maturity. Fruiting stage of
the plant occurs after three years from its initial date of planting. When dried, the fruits shrink
and maybe sold as dried black pepper, or it may be partially grounded to produce cracked black
pepper, or white pepper when finely grounded.
B.2 Production Process description of the process and technology used indicating
material, equipment and energy requirements at each step (can be indicated in a
flow chart).
Black pepper is transplanted in a plowed and harrowed land at the start of the rainy
season. Because of their vine characteristics, their growth is guided by planting them besides a
that can be planted will be maximized. Transplanting is done during the rainy season to take
advantage of the additional moisture.
Routine management practices (application of fertilizers, control of pest and disease,
pruning) for the cultivation of black pepper is followed while they are in the growing stage.
Routine management practices (application of fertilizers, control of pest and disease, pruning) for
the cultivation of black pepper is followed while they are in the growing stage.
( 3 m o n th s )
D R Y IN G H A R V E S T IN (2 R O U T IN E
( 2 m o n th s 2 x / y e a r ) m o n th s 2 x / y e a r ) MANAG EMENT
( C o n ti n u o u s )
1 . w e e d in g
2 . . M u lc h i n g
3 . P ru n in g
4 . C o n tr o l o f P e s t s
a n d D is e a s e s
W r it e - u p F i g u r e 1 . F lo w p r o c e s s in t h e p r o d u c t io n o f B la c k Pe p p e r
B.3 Plant size and production schedule rated annual/ monthly/ weekly or daily
capacity, operating days per year, expected production volume for the next five
years considering start-up and technical factors
Ten hectares of land will be apportioned in the production of black pepper. At a spacing of
250 cm between post, 3,000 seedlings are needed per hectare or a total of 32,000 seedlings and
16,000 post. Maintenance of the seedlings will be a year round operation. The plant at maturity
will start producing on their third year. Harvesting, drying, and grinding will be additional activities
on the third year onwards. Production activities are shown in the diagram below:
The proposed project will be acquiring the following machineries and equipments:
Sample write-up Table 10. Machineries and equipments needs for the proposed black pepper
production.
Machineries & Equipments Purchase cost Life span Depreciation
(Years)
Tractor 1,500,000 10 150,000
Mechanical drier 520,000 15 52,000
Farm Tools 103,000 10 10,300
Delivery Truck 800,000 10 80,000
Pulvorizer 70,000 10 7,000
Drip irrigation system 1,800,000 15 120,000
Grinder 57,000 10 5,700
B.6 Building and facilities type(s) of building and cost of construction, floor area,
land improvement such as road, drainage, etc. and their respective cost
The proponent will spend a total of 5,920,000 for the construction of the buildings and
land improvements. The table below shows the estimated expenses for buildings and land
improvements. (Note that this portion of the study requires that the floor plans, the lay-out of the
farm site should be attached as an Appendix).
Sample write-up Table 11. Estimated Expenses: Buildings and land Improvement
A scaled lay-out of the farm as well as the various buildings for the project is included in the
Appendix. (Note that this lay-out should be drawn to scale and attached as an Appendix for
reference).
B.8 Raw materials current and prospective costs, availability, continuity of supply,
current and prospective sources
Sample write-up 14. Raw materials
The raw materials in the production of black pepper will include fertilizers, fungicides and
weedicides, and plastic bags. The raw material requirements and their costing are shown below:
B.9 Utilities electricity, fuel and water supplies indicating the uses, quantity
required availability, sources and costs
B.10 Waste Disposal description of the waste disposal method and the cost
involved
Sample write-up 16. Waste Disposal
All wastes expected from the project are organic in nature. All organic waste materials
will be converted into compost. Compost making will entail a cost of labor for maintenance. The
composted material will be used as soil amendments, and the resulting benefits of the soil
amendments will not be reflected as savings or incomes. Labor cost for maintenance of the
compost is expected to approximately 200 per month.
This portion discusses the structure of the organization of the business and the
justification for such a structure. It discusses the duties and functions of the different
positions in the structure. It describes how the different manpower resources and
their activities will operate in an efficient and effective manner and the costs involved
(salaries, fringe benefits, etc.).
G e n e r a l M a n a g e r s J o b d e s c r i p ti o n s :
G e ne ral M a n ag er 1. A s s u m e s o v e r - a l l r e s p o n s i b i l i ty o f th e
d i r e c ti o n o f t h e o p e r a t i o n o f th e p r o j e c t.
2. Im p o s e s p o l i c i e s a n d d i s c i p l i n e s to
s u b o r d i n a te s .
3 . fi r e s a n d H i r e s w o r k e r s
A c c o u nta nt C le r k
C le r k s J o b d e s c rip tio n s :
1 . F i l e s , d r a ft s a n d m a k e s c o m m u n i c a t i o n s .
2 . F i l e s F ie l d S u p e r v i s o r s D a i l y r e p o r t .
3 . A s s i s t th e G e n e r a l M a n a g e r s
F ie l d s u p e r v is o r c o m m u n i c a tio n s n e e d s .
A c c o u n ta n ts J o b d e s c r i p t i o n :
4. M a k e s d a i ly jo u rn a l e n trie s .
5. P r e p a r e n e c e s s a r y a c c o u n ti n g r e p o r ts . .
L a bo rers
F i e l d S u p e r v i s o r s J o b D e s c r i p ti o n ;
1. P re p a re d a il y p ro d u c tio n re p o rts .
2. A s s i g n a n d c o o r d i n a t e th e d a i l y ta s k o f
la b o re rs .
3. R e p o r t a n y f i e l d p r o b l e m s to th e
G e n e ra l M a n a g e r
W r it e - u p F ig u r e 1
D. Financial Feasibility
The financial feasibility study determines the amount of money required in the
realization of the project: the sources of financing and the cost involved. This portion
basically addresses money matters for the project; how much money the project
needs, how such financial requirements will be raised, and how soon the money
invested can be earned and recouped. This aspect is a very crucial component of the
feasibility study. This portion however requires an understanding of basic concepts
from accounting.
1. Assets
Assets are what the business owns. These consist of the
properties of the business and include the building(s), machineries,
equipments, service vehicles, cash, inventories (unsold products of the
business), unused supplies, and all other things owned and used by the
business in its operations.
Assets are classified as Current assets: assets that can easily be
converted to cash usually in one year or less, and Non-Current Assets: all
other assets not classified as current and used by the business for its
operation like building, machinery, equipments, etc.
All the assets of the business have two sources for its financing:
through credit
There is no other source for the ownership of the assets of the business,
equation form:
2. Liabilities
Liabilities, in very simple term, are what the business owes. These
are the financial obligations of the enterprise which the business has to
pay or settle. Liabilities are incurred because of purchase of assets and
past transactions or events of the business. Liabilities are classified as
current liabilities: financial obligations of the business which are to be
settled within one year; and Non-current Liabilities: financial long-term
obligations of the business which are due and payable for more than one
year. Liabilities can be determined by deducting
equity or in equation form:
3.
is the residual claim of the owner in the assets of the enterprise after
deducting all its liabilities. It is expressed in the equation:
LIABILITIES
1. Projected Revenue
In business, revenues are realized because of the sale of
products/merchandise or the delivery of a service. Revenue can either be
Cash Sales: sales of products or services done in cash, or Credit Sales:
sales done on credit by the buyer which will be paid in some agreed
future date. Revenue realized through the sale of a product or
merchandise is called sales income; while revenue made through delivery
of a service is called Service Income.
Sales Income is a function of the quantity/volume sold of a
product and its price. In equation from, this is expressed as:
2. Projected Expenses
Expenses are made by the business for the materials and labor
that are needed to produce the product. These payments are also
referred to as costs. Payments paid for labor are called labor Expenses;
payments made for the purchase of raw materials are known as Raw
Material Expenses; a rental payment is called Rental Expenses. Expense
or cost is something that your business has to give away in order that it
can produce and deliver its products, goods, and services. These
expenses are sometimes collectively called Production Expenses or Input
Costs.
The projected expenses for the study can be obtained from the
Market feasibility (marketing expense), the production Feasibility (raw
material expense, depreciation expense, labor expenses, and all other
From the above table, one can take note of the fact that the TOTAL LIBILITY & EQUITY
always equals the TOTAL ASSETS for every projected year.
In the above table, negative values in the Net Income indicates that a net amount of money
has left the business, while positive values indicate that a net amount of money has entered the
business. Below is a sample of a Cash Flow statement, taken from the Black Pepper project,
Pre-
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
operating
Cash inflows:
Gross Income 0 0 0 9,600,000 16,896,000 23,232,000
Loan 9,000,000 0 0
6,000,000 0 0
Total cash inflow 15,000,000 0 0 9,600,000 16,896,000 23,232,000
Cash outflow
Cash Operating Expenses 0 1,896,000 1,107,400 1,176,040 1,251,544 1,334,598
Income tax 0 0 0 2,400,458 4,927,631 7,366,162
Principal (Loan) 0 0 0 1,800,000 1,800,000
Fixed assets 9,000,000 0 0
Organizational cost 30,000 0 0
Total Cash Outflow 9,030,000 1,896,000 1,107,400 3,576,498 7,979,175 10,500,760
Net Cash Flow 5,970,000 -1,896,000 -1,107,400 6,023,502 8,916,825 12,731,240
Add: beginning cash balance 0 5,970,000 4,074,000 2,966,600 8,990,102 17,906,927
Ending Cash Balance 5,970,000 4,074,000 2,966,600 8,990,600 17,906,927 30,638,167
Note how the beginning cash balance is brought forward to the next year. Also, the negative
values indicate a Net Cash Outflow.
Sample computation 1. Payback period when the cash flows are not uniform.
The method shown below uses the algebraic method of interpolation to arrive at
the payback period.
For the black pepper project, the returns are shown below:
Year Net income Cumulative
1 -2,604,367 -2,604,367
2 -1,815,767 -4,420,134
3 5,315,135 895,001
4 10,008,458 10,903,459
X - 15,000,000
5 13,822,873 24,726,332
The X represents the point in time where the accumulated Net income equals the
Capital outlay. X maybe determined using interpolation as shown below:
x 4 15,000,000 10,903,459 0.421
5 x 24,726,332 15,000,000 9,726,332
x 4 5 x 0.421
x 4.30years
An ROI of 0.33 indicates that for every 1.00 peso invested in the business, return
of 33 centavos will be generated each year.
4. The Net Present Value and the Internal Rate of Return (IRR)
These two financial evaluation tools are very popular evaluation
tools; both however require an understanding of the value or worth of
money with the passage of time. Manual computational procedures are
elaborate and will not be presented here. However, a demonstration to
compute NPV and IRR will be done using a computer application
Excel) powerful financial formula towards the end of this
topic.
In evaluating the feasibility study, one has to recognize that the
value or the worth of money is related to the passage of time, and most
of the time it is a relationship that causes the worth of your money to
lessen (such as in an inflationary economy, or if the money was borrowed
from the bank, the real interest will always be increasing, well at least we
have not heard of a bank charging a negative interest!). To put it simply,
100 pesos today cannot buy the same number of sardines a year after. So
what has it to do in the pricing and in the costing of the product of the
business? That your assumption about your fixed cost and variable cost
Module 1: Feasibility Study, Business Plan & Project Proposal 37
will no longer be as equally valid as it is after your first month of
operation! Whether you used your personal money, or you just simply
borrowed the money from the bank, it is still subject to the same
principle that it is a function of time.
If you are planning to put 100 pesos in a bank starting tomorrow
for a period of one year with an interest rate of 10%, then after one year
your money will be worth 110 pesos. The 100 pesos is referred to as the
Present Value (PV) of your money and the 110 pesos is the Future Value
(FV) of your money. If a friend has invited you to invest 100 pesos in his
business, and after one year he will give you in return 110 pesos, then
your money earned an interest of 10%. If your father promised you 110
pesos after a year, but you were given the option to get it now on the
condition that you will receive only 100 pesos, then you will have been
subjected to a discounted rate of 10%.
The concept of PV and FV are employed in two most commonly
used management investments decision tools: Net Present Value (NPV)
and the Internal Rate of Return (IRR). The NPV is the sum of all the PV of
the money that gets into the business (considered positive) and the PV of
all the money that gets out of the business (considered negative) at a
certain discount rate. The discount rate is set by the goals of the
business. In general a higher positive NPV is preferable.
Consider a hypothetical situation wherein all of your investments
were borrowed from the bank, then you started computing for the NPV
ive it indicates that it is
not worth pursuing after all and your business ultimately earns money to
pay only your loans. . If the NPV is zero, it suggests that you would be
better off putting your money in the bank and let the bank s interest rate
increase your money without the headaches of running the business. If
on the other hand the NPV is positive, then this is suggestive that the
business ideas are worth pursuing after all, and you can pay your loans to
the bank with some more remaining for your business.
Computations using the IRR will yield a discounted rate of return
where the NPV is zero. The IRR provides an answer to the question,
hat is the rate of return when the NPV is zero? while the NPV
answers the question, What is the present value of all the investments
when the discount rate is known?
The next two examples illustrate the use of a computer
application program (MS Excel) to compute for the NPV and the IRR of
the projected income statement of the black Pepper Project.
Step 2. Type the Net Income projections from Year 1 to Year 5 so that they will appear as
shown below
Step 3. Type in the desired, desired discounted rate, for example 12%, in the location shown
below
Step 4. Type in the formula for the NPV as shown below, then press the ENTER key,
The value of 14,214,387.45 suggest that the present value of all the Net income, is
Computations of the IRR for the Projected Income Statement of the Black Pepper Project
using MS Excel is as follows;
The IRR computed by MS Excel was 0.98 or 98%. Values as big as this, gives you a
second thought of revisiting your assumptions and computations
4.1 Socio-Economic Analysis - This portion of the study analyzes the socio-
economic impact of the project/ business to the community in terms of
employment generation of uplifting the status of the community.
4.2 Conclusion of the study - This portion of the study gives the conclusion on
whether the proposed undertaking is viable/ profitable or not.
VI. Format
Feasibility study format varies and will depend upon the reader. If the business
owner himself prepared the feasibility study, and the business will be financed by the
owner himself, then much of the details may not necessarily be included. If on the other
hand, you have just hired the services of experts (or consultants) to prepare your
feasibility study, they will prepare it in a proposal format ready for submission to a
funding or lending institution. A typical format is as follows:
I. Executive summary
II. Introduction - a brief description of the business, the product or service that you
produce or deliver, and the rationally why the feasibility study is being
undertaken.
III. The Market feasibility
IV. The Production/Technical Feasibility
V. The Organizational Feasibility
VI. Financial Feasibility
VII. The Socio-Economic Impact
VIII. The Conclusion of the feasibility study on whether the proposed undertaking is
viable/profitable or not. The conclusion will provide an outline of how the
business will succeed. The discussion will be based upon the strength and the
weakness of the four components of the feasibility study. Areas for improving
Module 1: Feasibility Study, Business Plan & Project Proposal 41
the strength will be pointed out; strategies to overcome areas of weaknesses will
also have to be pointed out.