19 Essential Points for Any Business Owner Who Wants to Conduct a Feasibility Study or Verify It

These points should serve as a reference for those wishing to measure the economic feasibility of the project.

A feasibility study is a tool for evaluating the project's viability, so it should not be solely blamed for the success of the project.

The feasibility study should address legal matters, as they impact costs and licensing requirements. For example, a training center or school has space requirements, and these spaces will affect costs and equipment.

Sometimes, the study is limited to the legal status, as some requirements may be unreasonable for the project founder or beyond their financial capacity. For example, someone wishing to establish a law office must obtain a license.

For example, if someone wants to establish a financing institution with a minimum capital requirement of 10 million, the project should stop here if this is beyond their financial capacity.

Any feasibility study must estimate the market size, demand, and be logical and consistent with production capacity, number of employees, space, and machinery and equipment capacity. Otherwise, the study will be inaccurate.

It is essential to review the regulations and procedures related to the project, as there are specific conditions on salaries, for example, in schools in education, such as a minimum salary for Saudi employees, and the social insurance percentages vary between Saudis and non-Saudis.

I have previously discussed important points, but here I will continue with the key financial indicators, starting with:

The project's investment cost, which includes (fixed capital + working capital + establishment expenses).

Working capital covers expenses during the economic cycle of the project’s life, usually cash, receivables, and inventory, and it varies in technical projects. It ranges from one month to two years in manufacturing and medical fields.

Establishment expenses are all costs incurred before the start of the business activity.

Annual return (net profit) = annual revenue – annual costs.

Return on investment: annual return (net profit) / total investments, which is usually around 25% in commercial projects, while in technical projects it can reach 75%. Of course, the study should be logical, and risks should be well studied, but in reality, it may exceed this if the project succeeds.

In real estate, the return on investment is usually between 7% to 10%, depending on the project type, but there are exceptions.

Break-even point = fixed costs (revenues – variable costs).

The internal rate of return (IRR) is crucial for studying inflation, the value of money, and comparing it to financial ratios, especially when financing. The net cash flows are calculated at the present value / total investments.

The payback period is calculated by determining the net cash flows and when the invested capital is recouped.

Sensitivity analysis is a hypothetical process for studying the project’s sensitivity to market fluctuations. We assume a 10%, 15%, or 20% decrease in sales and test the project’s response to determine whether it will incur losses or show excellent indicators.

We also increase costs by 10%, 15%, or 20% and examine the financial indicators to see if the project incurs losses. This is useful for risk assessment and decision-making. Does the project suffer from higher costs or lower sales, and should I focus more on sales and marketing, or on costs? Both are important, but the focus should be on one side.

In conclusion, the feasibility study may contain more points, but these points are considered the most important. Missing any of them compromises the study and the ability to make the right decision regarding the project’s feasibility.