Learn How to Write a Financial Feasibility Study
Part 1 - Start-Up Capital Requirements
A financial feasibility study projects how much start-up capital is needed, sources of capital, returns on investment, and other financial considerations. It looks at how much cash is needed, where it will come from, and how it will be spent.
The Purpose of a Financial Feasibility Study
A financial feasibility study is an assessment of the financial aspects of something. If this case, for starting and running a business.
It considers many things including start-up capital, expenses, revenues, and investor income and disbursements. Other portions of a complete feasibility study will also contribute data to your basic financial study.
A financial feasibility study can focus on one particular project or area, or on a group of projects (such as advertising campaigns). However, for the purpose of establishing a business or attracting investors, you should include at least three key things in your comprehensive financial feasibility study:
- Start-Up Capital Requirements,
- Start-Up Capital Sources, and
- Potential Returns for Investors.
Start-Up Capital Requirements
Start-up capital is how much cash you need to start your business and keep it running until it is self-sustaining. You should include enough capital funds (cash, or access to cash) to run the business for one to two years.
Finding Start-Up Capital Funding Sources
There are many ways to raise capital for your business, but no matter what route you take, investors are more likely to invest, banks are more likely to approve loans, and large corporations are more likely to give you contracts if you have personally invested in the business yourself.
When you make a list of funding resources, be sure to include anything that you can contribute to the business, including free labor. If you are starting a nonprofit organization, your donated professional time may even be tax deductible for you.
Potential Returns for Investors Feasibility Study
Investors can be a friends, family members, professional associates, client, partners, share holders, or investment institutions.
Any business or individual willing to give you cash can be a potential investor. Investors give you money with the understanding that they will receive "returns" on their investment, that is, in addition to the amount that is invested they will get a percentage of profits.
In order to entice investors you need to show how your business will make profits, when it will begin to make profits, how much profit it will make, and what investors will gain from their investment. The investment return section should offer both a description of how investors will be involved and discuss different variables that will affect the profitability of your business, offering more than one scenario.
How You Should Pay Back Investors
How investors will be paid will vary according to individual investment offers. Read every offer over very carefully - not all investors may be right for your business.
The investment section of your financial feasibility study should not make specific or binding offers to investors. Do not state investors will be paid specific dollar amounts by certain dates. Instead, list general practices for how investments return will be distributed, assuming different business scenarios.
For example, you might state that investors will be paid X amount of dollars or X% on their investment at the end of any business quarter where profits exceed a certain threshold.
Project total revenue, deduct business expenses, and then from the remaining amount, decide what percentage will be distributed to investors. You should never promise 100% of the remaining amount to investors. You need to keep cash on hand to continue operating your business, to grow your business, and to build reserves.
Most investment returns are typically distributed on a quarterly, bi-annual, or annual basis. Consider how the various distribution cycles could affect your business' cash flow during the first two years of operation. In other words, do not just run one set of numbers, examine each type of distribution and support why you think the option you choose is the best one.