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About the feasibility study method

About the feasibility study method

A guide on how to do a feasibility study for a small project. In this article, we will share with you how to complete a complete economic feasibility study for your project in a comprehensive and simplified manner.

An economic feasibility study is a process of gathering information about a proposed project and then analyzing it to know the possibility of implementing and reducing the risks and profitability of the project, and the main outcome of the feasibility study is answering the question “Is the project worthwhile for investment?” Yes or no.

How to do a feasibility study for a small project

The establishment and continuity of any project requires taking into account its various needs and requirements in terms of marketing, technical and financial, and the feasibility study aims through its three components: market study, technical study, and financial study to identify those requirements and needs.

The first step: studying the market

1. Determine the extent of the market’s absorption of the commodity by knowing the expected volume of demand for it, by studying who the consumers are, the quantities consumed and the expectations of increasing or decreasing market demand.

2. Determine the market share by comparing the quantity supplied of goods and the quantity required by comparing the quantity supplied of goods and the quantity required by understanding the competition methods used.

3. Determine the volume of sales taking into account the pricing policy, the quality of production and the method of distribution and promotion.

The second step: technical study

Summary: the different production stages in terms of:

Determine fixed assets by knowing the suitable location, construction and rates necessary for manufacturing.
Determine the requirements of production of raw materials, labor and public facilities.
Determine the production process in terms of the stages of production up to the storage process, the duration of the production cycle, and the amount produced in it.
The third step: financial study

Step 1: List the types of total costs of the project:

A – Foundational costs: These are costs that are paid once and are not refundable and are linked to preparation for commencement of work (legal fees, licensing and registration fees, consultations and studies).
B- Capital costs: It is the cost of obtaining the elements of production (land, buildings, machinery and equipment) and disposes of once before the start of production, but it can be recovered by sale.
C- Operating costs: These are the costs resulting from the production process, and they are calculated for the duration of one production cycle, taking into account the dates of fixed costs.
1. Fixed costs: It is the cost necessary to operate the project, that is, it does not change with the change in the volume of production, such as land rent, periodic maintenance and salaries.
2. Variable costs: These are costs that relate to the level of production, that is, they change with the volume of production and include raw materials, workers ’wages, and energy bills.
D- The total total costs of the project: It represents the total costs mentioned above for starting and operating the project.

Step 2: Calculating the monthly and gross profit:

Monthly Revenue: It represents the quantities sold multiplied by their price, which is the monthly cash income in the project.
Monthly operating costs: the sum of the fixed and variable monthly costs.
Gross monthly profit: It is the residual income from sales after subtracting operating costs.

Step 3: Calculate the net monthly profit:

In this step, all non-cash expenses will be subtracted from the gross profit (such as depreciation, average base costs, and financing costs such as bank interest).

Monthly net profit = monthly revenue – monthly expenses

Monthly revenue: (from the second step)
Total monthly expenses: It is the sum of the cash and non-cash expenses and includes the monthly operating costs, the average monthly foundational costs, the depreciation of machinery and the monthly construction, and the monthly financing cost (often represented by the monthly interest).
Net monthly profit: It is the remaining income from sales after subtracting the total monthly expenses. .

Step 4: Calculate the bank’s monthly installment:

The bank’s monthly installment = loan value + monthly interest / [(6 years x 12 months) – exempt months]

Step 5: Financial tests:

Calculation of break-even point: The break-even point is the point at which the project does not achieve any profit or loss and the total revenue is equal to the operating costs.

A- Calculation of break-even point: It is the point at which the operational costs are equal to the revenues, before this point the project achieves losses and after this point the project begins with operating profit.

B- Calculating the rate of return on investment: It is the ratio of the annual net profit to the total costs of the project. This ratio represents the percentage of investment that will be recovered after a full year from the start of the project.

Summary: financial study

Calculate the total costs of the project by adding up capital costs, constitutive costs, operational costs, and quantifying the investment.
Calculate the expected monthly gross profit by subtracting the monthly operating costs from the monthly returns.
Calculating the monthly net profit by subtracting the total monthly expenses from the monthly returns.
Create a cash flow schedule by identifying cash inflows and outflows from the project during a specific time period.
Performing financial tests to measure the feasibility of the project by:
A- Calculate the break-even point.
B- Return on investment

How a feasibility study works for a small project differs from large commercial projects that need a lot of studies and data and need to be prepared in a longer time.