Module 2- Analyzing Project Feasibility

A project feasibility analysis, also known as a feasibility study or feasibility

report, is a way to evaluate if a project is viable and can be successfully
completed. It's a tool that helps companies make decisions about projects
and reduce risk.
Feasibility analysis includes :
• Economic analysis: Projecting income statements and balance sheets
• Technical analysis: Assessing the project's technical feasibility
• Legal analysis: Reviewing legal and environmental considerations
• Market research: Analyzing the marketability of the product or service
• Organizational analysis: Examining the project's organizational aspects
Benefits of conducting a feasibility study
• There are several key benefits to conducting a feasibility study before
launching a new project:
• Confirms market opportunities and the target market before investing
significant resources
• Identifies potential issues and risks early on
• Provides in-depth data for better decision making on the proposed
project's viability
• Creates documentation on expected costs and benefits, including
financial analysis
• Obtains stakeholder buy-in by demonstrating due diligence
Market analysis
A "market analysis" within a feasibility study is a comprehensive
assessment of a potential market to determine if there is sufficient
demand for a proposed product or service, evaluating factors like
market size, target customer demographics, competition, market
trends, and potential revenue to gauge the viability of a business
venture in that space; essentially, it's a key component of a feasibility
study that helps decide if the project is likely to succeed in the market
based on existing conditions and potential customer interest.
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Key points about market analysis in a feasibility
study:
• Market size: The total potential customer base for the product or service.
• Market growth rate: How quickly the market is expanding
• Target market segmentation: Identifying specific customer groups within
the broader market with similar needs and characteristics
• Customer behavior and preferences: Understanding what customers want
and need from a product or service
• Competition analysis: Identifying and evaluating existing competitors in
the market, including their strengths and weaknesses
• Market trends: Analyzing emerging trends that could impact the market
potential
Technical analysis
Technical analysis in a feasibility study is the process of evaluating the
technical aspects of a project to determine if it's feasible. It involves
analyzing the technology, materials, labor, and other resources needed
to complete the project.
What does technical analysis in a feasibility study
consider?
• Technology: Whether the technology is reliable and available, and if
it's the right choice for the project
• Materials: Whether the necessary materials are available
• Labor: Whether there are enough technically skilled employees to
complete the project on time and within budget
• Transportation: How the goods or services will be delivered
• Business location: Where the business will be located
Why is technical analysis important?
• Technical analysis helps determine if the project is technically
feasible, meaning it can be completed with the available resources
• It helps identify any potential technical challenges that might arise
during the project
Technical feasibility analyzes the reliability of the technology to be used
and the analysis of the delivery of goods or services, including
transportation, business location, and the need for technology,
materials, and labor.
Operational Analysis
In a feasibility study, "operational analysis" refers to the evaluation of whether a
proposed project can be successfully implemented within an organization's existing
operations, taking into account factors like current workflows, staffing capabilities,
organizational structure, and resource availability to determine if the project is
practically feasible to execute within the company's current environment.
Key aspects of operational analysis in a feasibility study:
• Process assessment:
• Analyzing how the proposed project integrates with existing business processes, identifying
potential bottlenecks or disruptions, and assessing the need for workflow adjustments.
• Resource evaluation:
• Determining if the organization has the necessary human resources (skills, staff levels), physical
assets, and technology to support the project.
• Stakeholder engagement:
• Assessing the level of support and commitment from key stakeholders within the organization
towards the proposed project.
• Change management considerations:
• Evaluating how the new project will be implemented and how employees will adapt to new
processes or systems.
• Scalability analysis:
• Assessing whether the project can be scaled up or down to meet future needs and changing
business demands.
Example scenario:
A company is considering implementing a new customer relationship
management (CRM) system. An operational analysis would assess if the
sales team has the necessary training to use the new CRM, if existing
workflows can be adapted to integrate the system, and if the current IT
infrastructure can handle the additional data load.
Financial Feasibility
Financial feasibility is a way to determine if a project is financially
viable, or if it will be profitable. It's an assessment that considers the
costs, benefits, and risks of a project.
Financial feasibility describes whether or not your project is fiscally
viable. A financial feasibility report includes a cost-benefit analysis of
the project. It also forecasts an expected return on investment (ROI)
and outlines any financial risks.
Types of Financial Feasibility
• Cash Flow Feasibility
• Debt Capacity Feasibility
• Growth Potential Feasibility
• Income Potential Feasibility
• Liquidity Feasibility
• Tax Efficiency Feasibility
• Reliability Feasibility
• Social and Environmental responsibility Feasibility
• Governance and Risk management Feasibility
• Business Relationship Feasibility
The steps involved in the financial feasibility
process include:
1. Identification of the business goals and objectives.
2. Assessment of the financial resources available to the business.
3. Evaluation of the projected cash flow and profitability of the
business.
4. analysis of the risk factors associated with the business venture.
5. Determination of the feasibility of achieving the business goals and
objectives.
6. Recommendation of any necessary changes or adjustments to the
business plan.
Funds Estimation and Risk Management
• Risk management analyzes an investment's returns relative to its risk
level, with higher risk typically expected to yield higher returns.
• Statistical methods based on historical data are used to measure risk,
which is the probability of a loss.
• Common risk management techniques include standard deviation,
Sharpe ratio, and beta.
• Value at Risk (VaR) and related metrics quantify potential dollar
impacts and assess the likelihood of specific outcomes.
• Risk management addresses both systematic risk (affecting all
investments) and unsystematic risk (specific to individual
investments).
Risk Measurement vs Risk Assessment
• Risk measurement generally involves using statistical tools and
metrics such as the above, among other methods). This process
provides numerical values that represent the degree of risk associated
with an investment. By using these, investors can easily compare the
risk levels of different investments and make data-driven decisions.
The primary aim is to provide a concrete and precise understanding of
risk through measurable data.
• Meanwhile, risk assessment has a broader scope, focusing on
identifying, analyzing, and prioritizing potential risks. It involves
looking at sources of risk, evaluating the potential impact, and
determining the best strategies to mitigate or manage them. Risk
assessment is more qualitative and strategic, often involving scenario
analysis and expert judgment.
Types of Financing
There are many types of funds that can be used in project management, including
debt financing, equity financing, grants, crowdfunding, and venture capital.
Debt financing
• Borrowing money from a bank or other financial institution to fund a project
• The borrowed money must be repaid with interest
• Lenders have a claim on the project's future cash flows
Equity financing
• Investors provide funding in exchange for ownership of the project
• Investors can include venture capitalists, angel investors, or everyday people
• A way of raising capital without having to take out a loan
Types of financing
Grants
• Funds provided by government agencies, foundations, or
corporations to support specific projects
Crowd funding
• Funding from a large number of individuals via the internet
Venture capital
• Funding from professional investors, typically focused on early-stage
startups
• Venture capital firms are private companies that specialize in
investing in new businesses
Sources of Finance
Project finance may come from a variety of sources. The main sources
include equity, debt and government grants. Financing from these
alternative sources have important implications on project's overall
cost, cash flow, ultimate liability and claims to project incomes and
assets.
Financial resources are the money that is needed to fund a project.
They include the budget, funding sources, and cost allocations.
Industries that rely heavily on financial resources include construction,
research and development, and entertainment.
Sources of financing
Retained Earnings
• Businesses aim to maximize profits by selling a product or rendering a service for a price higher than what it
costs them to produce the goods. It is the most primitive source of funding for any company.
• After generating profits, a company decides what to do with the earned capital and how to allocate it
efficiently. The retained earnings can be distributed to shareholders as dividends, or the company can
reduce the number of shares outstanding by initiating a stock repurchase campaign.
• Alternatively, the company can invest the money into a new project, say, building a new factory, or
partnering with other companies to create a joint venture.
Debt Capital
• Companies obtain debt financing, or debt capital, privately through bank loans. They can also raise capital by
issuing debt to the public.
• In debt financing, the issuer (borrower) issues debt securities, such as corporate bonds or promissory notes.
Debt issues also include debentures, leases, and mortgages.
• Companies that initiate debt issues are borrowers because they exchange securities for cash needed to
perform certain activities. The companies will be then repaying the debt (principal and interest) according to
the specified debt repayment schedule and contracts underlying the issued debt securities.
• The drawback of borrowing money through debt is that borrowers need to make interest payments, as well
as principal repayments, on time. Failure to do so may lead the borrower to default or bankruptcy.
Equity Capital
• Equity capital, or equity financing, refers to the funds a company raises by offering ownership stakes, either
publicly or privately, in exchange for investment. Compared to debt capital funding, companies with equity
capital don’t need to make debt and interest payments. Instead, company profits are shared with investors.
Stock Market
• Companies can raise funds from the public by offering ownership stakes in the form of stock. These
ownership stakes are represented by shares issued to a wide range of institutional and individual investors.
When investors purchase these shares of stock, they become shareholders.
• However, one disadvantage of equity capital funding is sharing profits among all shareholders in the long
term. More importantly, shareholders dilute a company’s ownership control as long as it sells more shares.
Private Market
• Private equity capital is secured from private investors, such as venture capitalists or private equity firms.
Companies raise funds from private investors in exchange for significant ownership stakes, often with a
hands-on role in the company’s strategic direction. Private equity and venture capital are common sources
of equity capital for companies that are not yet publicly traded or are in the early stages of development.
Other Funding Sources
• Other funding sources include crowdfunding, donations or grants, and subsidies that may not have a direct
requirement for return on investment (ROI).
What Factors Affect the Need for Sources of
Funding?
For businesses, the most relevant factors influencing the need for funding
typically include:
• Growth plans
• Operational needs
• Capital structure, i.e., a mix of debt and equity
• Research and development (R&D)
• Asset acquisitions, i.e., purchasing real estate, equipment, or technology
• Stage of business development
• Economic conditions or unexpected events, i.e., natural disasters
Types of debts equity financing
Different types of equity financing include shareholder equity, angel
investors, and equity crowd funding, whereas other types of debt financing
include personal loans, SBA loans, and conventional loans.
Equity financing involves receiving funds from an investor in exchange for a
certain percentage of business ownership, making the investor a business
partner, while debt financing involves borrowing money without trading
business ownership.
Equity financing means that there's no additional financial burden on a
business and no loan to pay back. For example, if you make and sell hats and
want to buy a storage facility to store more inventory, you may receive funds
from an investor. You can trade 15% of the ownership in your hat business to
an investor who can provide the capital your business needs to develop its
operations. The investor then owns 15% of the company and contributes to
important business decisions.
Factors that affect equity financing
• Retained earnings: These are cumulative net earnings or profits of the
owner of the business after considering dividend payments. An increase in
the retained earnings is an increase in the owner's equity, while a decrease
in those earnings is a decrease in the owner's equity.
• Treasury shares: These are stocks repurchased by the issuing company
from shareholders. If the business owner resells treasury shares, the cash
account increases and the treasury stock account decreases, increasing
total shareholder's equity through a credit.
• Net income: Net income is a company's profit after subtracting costs and
expenses. When a company makes a profit and keeps some of it after
removing all costs, the owner's equity increases.
• Dividend payments: Dividend payments involve a sharing of profits by a
business to its shareholders. When a business earns a profit or surplus, it
can pay a portion of the profit as a dividend to shareholders, which affects
the owner's equity.
Types of debt financing
• Personal loans: If you're using your own assets or if your business is brand
new, you may borrow a fixed amount of money to get capital for running
operations, buying new equipment, or increasing your storage capacity.
• Small Business Administration (SBA): You can get financing from a
government body dedicated to providing small business owners with the
funding and materials they require to grow their business. This funding
offers a variety of loan programs with creditors.
• Credit cards: You can apply for your own business card like a personal
credit card. These credit cards have the same terms as personal credit
cards, such as repayment schedules and interest rates.
• Conventional loans: This financing option provides you with a sum of
money that you're obligated to repay with interest over a pre-defined
timeframe.
• Cash flow loans: This loan allows you to receive a set amount of money
based on your current earnings.
Short-term sources of Capital
• WHAT IS WORKING CAPITAL?
Working Capital (WC), also known as Net Working Capital (NWC), is the difference between a company’s
current assets and current liabilities. It is a good indicator of a business’s liquidity and short-term financial
health and its ability to utilise its assets efficiently.
• SOURCES OF WORKING CAPITAL:
A company has various sources of working capital. Depending upon its condition and requirements, a company
may use any of these sources of working capital. These sources may be spontaneous, short-term, or long-term.
• Spontaneous Sources: The sources of capital created during normal business activity are called spontaneous
sources of working capital. The amount and credit terms vary from industry to industry and depend on the
business relationship between the buyer and seller. The main characteristic of spontaneous sources is ‘zero-
effort’ and ‘negligible cost’ compared to traditional financing methods. The primary sources of spontaneous
working capital are trade credit and outstanding expenses.
• Short-term Sources: The sources of capital available to a business for less than one year are called short-
term sources of working capital.
• Long-term Sources: The sources of capital available to a business for a longer period, usually more than one
year, are called long-term sources of working capital.
SHORT-TERM SOURCES OF WORKING CAPITAL
• Short-term sources of capital may further be divided into two
categories – Internal Sources and External Sources.
The short-term internal sources of working capital include provisions
for tax and dividends. These are essentially current liabilities that
cannot be delayed beyond a point. All companies make separate
provisions for making these payments. These funds are available with
the company until these payments are made. Hence, these are called
the internal sources of working capital. However, this value is relatively
small and thus not that significant.
• On the other hand, the short-term external sources of working capital
include capital from external agencies like banks, NBFCs, or other
financial entities.
Primary sources of short-term external sources of
working capital are listed below:
• Loans from Commercial Banks: Businesses, mostly MSMEs, can get loans from commercial banks with or
without offering collateral security. There is no legal formality involved except creating a mortgage on the
assets. Repayment can be made in parts or lump sum at the time of loan maturity. At times, banks may offer
these loans on the personal guarantee of the directors of a country. They get these loans at concessional
rates; hence it is a cheaper source of financing for them. However, the flip side is that getting this loan is a
time-consuming process.
• Public Deposits: Many companies find it easy and convenient to raise funds for meeting their short-term
requirements from public deposits. In this process, the companies invite their employees, shareholders, and
the general public to deposit their savings with the company. As per the Companies Act 1956, companies
can advertise their requirements and raise money from the general public against issuing shares or
debentures. The companies offer higher interest rates than bank deposits to attract the general public. The
biggest of this source of financing is that it is simple and cheaper. However, its drawback is that it may not be
available during the depression and financial stringency.
• Trade Credit: Companies generally source raw materials and other items from suppliers on credit. The
amount payable to these suppliers is also treated as a source of working capital. Usually, the suppliers grant
their buyers a credit period of 3 to 6 months. Thus, they provide, in a way, short-term finance to the
purchasing company. The availability of trade credit depends on various factors like the buyer’s reputation,
financial position, business volume, and degree of competition, among others. However, when a business
avails trade credit, it stands to lose the benefit of cash discount, which it would earn if they make the
payment within 7 to 10 days of making the purchase. This loss of cash discount is treated as an implicit cost
of trade credit.
• Bill Discounting: Just as business buys goods on credit, they offer credit to their buyers.
The credit period may vary from 30 days to 90 days and sometimes extends, even up to
180 days. During this period, the company funds get blocked, which is not good. Instead
of waiting that long, sellers prefer to discount these bills with a bank or NBFC. The
financial entity charges some amount as commission, called a ‘discount’, and makes the
balance payment to the sellers. This discount compensates them for the time gap
between disbursing and collecting the money on the maturity of the bill. This ‘discount’
charged by the bank is treated as the cost of raising funds through this method.
Businesses widely use this method for raising short-term capital.
• Bank Overdraft: Some banks offer their esteemed customers and current account holders
a facility to withdraw a certain amount of money over and above the funds held by them
in their current account with the bank. The bank charges interest on the amount
overdrawn and the period it is withdrawn. The overdraft facility is also granted against
securities. The bank sets this limit and is subject to revision anytime, depending upon the
customer’s creditworthiness.
• Advances from Customers: One effortless way to raise funds to meet the short-term
requirement is to ask customers for some payment in advance. This advance confirms
the order and gives much-needed cash to the business. No interest is payable to the
customer for this advance. Even if any business pays interest, it is very nominal. Hence,
this is one of the cheapest sources of raising funds to meet companies’ short-term
working capital requirements. However, this is possible only when the customers do not
choose the terms of the sellers.
Venture capital
A venture capital investment fund is a pooled investment vehicle that primarily
invests in startups and small- to medium-sized enterprises with high growth
potential. These funds are managed by VC firms, which raise capital from LPs, such
as pension funds, endowments and high-net-worth individuals.
Despite the long odds, venture capital is a major economic engine that:
Generates job growth
Spurs innovation
Creates new business models that change the world
The funding VCs provide gives nascent businesses - and industries - the chance to
flourish. They help to bring ideas to life and fill the void that capital markets and
traditional bank debt leave due to the high risk associated with limited operating
history, lack of collateral and unproven business models. VC funds play a
particularly important role when a company begins to commercialize its innovation.
Why venture funding?
Tapping venture capital is a logical choice. There are many sources and,
as noted above, non-traditional investors are joining an already large
mix of traditional VC firms. Many funds target a specific industry or
sector, geography or stage of company development. Many
connections are made through startup networking groups, accelerators
and mentoring programs. Among the first items is to create a pitch
deck and target firms that appear to be good fit for your company and
business model.
If an investor is impressed by your pitch deck and business plan, they
will do their due diligence to verify your point of view. This will include
a full analysis of your business model, products or services, financial
position and performance - now and in earlier ventures.
Risk analysis
Risk analysis in project management is the process of identifying, evaluating,
and planning for potential risks that could impact a project. It helps ensure
that a project's quality and deadlines are not compromised.
Steps in risk analysis
• Identify potential risks
• Assess the probability of each risk
• Determine the impact of each risk
• Calculate a risk score for each event
• Understand the risk tolerance
• Prioritize risks
• Plan how to avoid or mitigate risks
Types of risk analysis
Quantitative risk analysis: Uses mathematical models and simulations to analyze the impact of a risk on the
project
Qualitative risk analysis: Uses subjective judgment to determine the probability of a risk occurring
Importance of Risk Analysis in Project Management
Proactive Identification: It helps in identifying potential threats and opportunities early in the project lifecycle,
allowing teams to plan and prepare accordingly.
Risk Mitigation: Risk Mitigation includes analyzing risks, project managers can develop strategies to mitigate or
minimize their impact on project objectives, thus reducing the likelihood of project failure.
Resource Allocation: Understanding project risks enables better allocation of resources, ensuring that
resources are directed towards addressing high-priority risks and opportunities.
Decision Making: Risk analysis provides valuable insights that inform decision-making processes, enabling
project managers to make informed choices about project scope, timelines, and resource allocation.
Stakeholder Confidence: Demonstrating proactive risk management practices instills confidence in
stakeholders, including clients, sponsors, and team members, as they perceive the project as being well-
managed and prepared for potential challenges.
Cost Control: Effective risk analysis helps in identifying potential cost overruns and budgetary risks, allowing
project managers to implement cost-saving measures and maintain project profitability.
Quality Management: By anticipating and addressing risks early on, project managers can ensure that project
quality standards are maintained, preventing issues that could compromise the final deliverables.