Lecture 3.ppt

ANALYSIS, PREPARATION AND PLANNING

LECTURE 3

Feasibility Business Plan

The feasibility study provides an investigating function.

The business plan provides a planning function.

Answers the question: is the project viable?

Lays out the actions to be taken to bring the ‘ideas’ to ‘reality’.

The feasibility study outlines and analyses several alternatives or methods of achieving project success. Therefore it assists to narrow the scope of the project to identify the best project scenario(s) to about two or three.

The business plan focuses on only one alternative or scenario.

The feasibility study is conducted before the business plan.

A business plan is prepared only* after the business venture has been deemed to be feasible.

It is a decision point; to continue or not based on the outcome.

The outcome does not provide information to continue or drop the project.

Feasibility provides information to choose the ‘blue print’ or ‘roadmap’.

The business plan provides a ‘blue print’ or ‘roadmap’.

• Some argue that:

• ‘We know it’s feasible. An existing business is already doing it.’

• Feasibility has been done a few years ago so there is no need to do another one.

• Feasibility studies are just a way for consultants to make money.

• The business is too small for a feasibility study.

• Some argue that:

• The market analysis has already been done by the business that is going to supply the equipment.

• By hiring a general manager, the study can be accomplished.

• Feasibility studies are a waste of time. Money is to be spent on building, tie up the site and bid on the equipment; why spend money on feasibility.

Reasons For Feasibility• Once decisions have been made about

proceeding with a proposed business, they are often very difficult to change. An entrepreneur may have to live with these decisions for a long time.

• Successful businesses thoroughly examine all of the issues and assess the probability of business success first before going into it.

Reasons For Feasibility

• Feasibility studies gives focus to the project and outline alternatives and narrow project alternatives

• Feasibility studies bring to the fore new opportunities through the investigative process.

• They identify reasons not to proceed. • They enhance the probability of success by

addressing and mitigating factors earlier on that could affect the project.

Reasons For Feasibility

• Feasibility studies provide quality information for decision-making.

• They help to increase likelihood of finding funds and investors for the project.

• And provide documentation that the business venture was thoroughly investigated.

Aspects of Project Preparation and Analysis

• Technical

• Institutional-Organisational-Managerial

• Social

• Commercial

• Financial

• Economic


• Technical• Relates to underlying principles of

knowledge where the product and or the method of the project

• For a crop production project, the concerns will be agronomy; knowledge of plants and crops, effects of weather, soil conditions, seeds; generally, inputs and outputs.


• The relationship among the various factors; with the final product or method in mind.

• Internet café project; the knowledge area is information and communications technology (ICT).


• Issues about computers,

• Internet connectivity,

• networking of computers

• business management


• The purpose is to assess the current status of the essentials with the view to identify gaps.

• The team to be selected or put together depends on the technical areas involved


• Institutional, organisational

• How does the proposed project relate to the various levels of power as well as the existing institutions?

• What are the links of the projects and team with existing government departments and organisations are considered here?

Within the project, what are the lines of authority, delegation, line of reporting, and organisational procedures?


Will the project keep and operate its own accounts?


• Managerial

• Assessment of availability of staff to manage the project; if there is a gap will there be the need to train or hire others locally or for expatriate staff?

• Are the target groups equipped to use the product or adopt the technology or innovation being introduced?


• Social• Social implications of projects are important.• For public projects the social aspect vis-à-vis the

objectives are crucial. • For non public projects the review of social

aspect is to assess the negative impact on society if the project is implemented.

• Where positive influences they are often secondary in importance.

• The focus is on income distribution, the response of the project to national objectives.


• Social

• Effect of project on employment, possible side effects on some people, issues of quality of life.

• For the company, how does the project fit into the mission and vision of the organisation?


• Social

• Environmental issues are social issues.

• Both locally and internationally, there are regulations and laws on governing the effects of undertakings on the environment.


• Social• What are the possible effects of the undertaking

on the physical environment; water, air, soil. • Noise pollution is to be considered. • Projects in mining do have tremendous adverse

effects on the environment. • The outcome of these considerations is to

identify the enable the planners to find ways of mitigating the environmental effects.


• Social

• At this stage environmental regulations have to be reviewed to appreciate the requirements and limits within which the project can or cannot operate.


• Commercial• This relates to the product. • The sale of the output produced, arrangements

for sale, and pricing. • This stage is also referred to as market

feasibility stage. • The demand of the product or service is needs

to be assessed; the potential demand as well as the effective demand, the size of the market, segments, and targets of the product.


• Commercial• What advertising means are available, media

consumption habits of the target market or consumers?

• Questions like what is the buying behaviour of the target market, income their income distribution and some other characteristics of the customers.

• On the input side what are the sources of the raw material, what are the pricing mechanisms, regularity of supply etc.


• Financial • Under the financial aspect, the totality of

the financial dimension of the proposed project is examined.

• In social or public projects, there are several participants.

• These participants in an agricultural project include; farmers, suppliers, project agencies and customers.


• Financial • In a production and distribution project of a

manufacturer, the participants are customers, distributors, transporters, and finally the company or manufacturer.

• Financial effects must be examined for each participant because participants are impacted differently.

• The financial effects of the participants in the project are examined here.

• There effect on them must be appropriately assessed.


• Financial

• Separate budgets and accounts (income and expenditure, balance sheet and cashflow) must be prepared.

• The aim is to make judgements of the financial efficiency, incentives, creditworthiness and liquidity of the project and its participants.


• Financial • In private sector projects the proforma or

projected final accounts (profit and loss, balance sheet, and cashflow) are prepared.

• And this is from the perspective of the company initiating the project.

• It must be stated, that, several participants (suppliers, competitors, customers) are affected differently, but the company is mostly interested in effects on her.


• Financial

• At this stage what is most required to assess financial feasibility using the cashflow.

• The others only serve as an input. Indeed, some approaches to building the cashflow do not use the income statement and balance sheet.


• Financial • From the cashflow the feasibility of the project is

established using measures such as Net Present Value (NPV), Internal Rate of Return (IRR), and Benefit Cost Ratio (BCR) among others.

• The aim is to find out if the project is viable or not.

• The issue of profitability does not arise here at all. If the project is viable, then, a detailed project plan is prepared.


• In the case of projects with profit motive, a detailed business plan follows.

• The time frame for considered fro projections in feasibility study is quite long, longer than that of the business plan which is the magic five years.

• In unstable economies, this can be as short as three years.


• Economic

• Economic aspects of project analysis use financial aspects as raw materials.

• Essentially, the financial analysis is adjusted to accomplish economic analysis.

• The overarching goal of economic analysis is the determination of the contribution of a proposed project to the total economy.


• Economic

• The principal question is: does the level of contribution of the project warrant the use of scare resources of the society to execute it?

• Despite the complementary nature of the financial and economic analysis there are some differences.

Basis Financial Analysis Economic Analysis

Taxes Treated as costs to the project

Part of project benefit, treated as transfer payments and not to be considered as cost.

Subsidies Treated as returns to the project

Cost to society because it is expenditure of resources by government thus from society

Prices Market prices Prices adjusted to reflect economic or social values; the prices are ‘shadow’ or accounting prices. Subsides and taxes are used in the adjustment.

Basis Financial Analysis Economic Analysis

Interest on capital

Treated thus: interest paid to capital suppliers external to the economy is subtracted from benefits. The result is what is available to owners of capital. Interest imputed to the entity from whose dimension analysis is being done is part of total return not cost

Used as quoted. It is total return to society

Viewpoint Prepared from the viewpoint of an individual; person, company etc.

From the viewpoint of the economy or society as a whole.

Documents

Lecture 3.ppt