What is the purpose of the feasibility study? We offer the development of a feasibility study for the successful start of your new project

30.09.2019

A significant part of the financial analysis with a special impact assessment form shows how to write a business case. An example of the use of such a form, tracing the process of changes in net financial flows that arise as a result of the implementation of measures, will be presented in this article. In such a plan, the assessment of cash flows in corporate programs should be aimed at positive changes in the socio-economic sphere.

Law

Russian legislative practice has clearly outlined how to write an economic justification, an example of which is presented in Article 105 (Rules of the State Duma of the Russian Federation), and it concerns financial feasibility when introducing bills that require certain material costs for implementation. The government reviews relevant materials before submitting the bill.

First of all, an explanatory note is prepared, which sets out the concept of the bill with all the subjects of legislative regulation. The second document demonstrates how to write a business case. This example is not universal, since it is designed for a specific project and respects the interests of a specific customer. Naturally, each case requires an individual approach - each time with different calculations and plans, since financial justifications are written everywhere and by everyone - from legislators of the State Duma to students in technology lessons in high school.

FEO

How to write a business case? You can see an example below. It all depends on the object to which it is dedicated: whether it is technical regulations, organizations with their own standards, or even a national economy looking for financial ways for economic recovery. Let's take, for example, technical regulation, which requires clearly defined financial justification for changing norms or technical regulations.

When implementing a project, the costs, benefits and risks of each state entity, enterprise or community will inevitably be redistributed. Not many people know how to write a business case. A pattern exists for every type of activity, but it cannot be called universal. The implementation of such a procedure is required at the initial stage - during design, which allows you to avoid many mistakes and gain a lot of opportunities.

Advantages of the business case

First of all, when writing a justification, changes in costs are predicted, risks and benefits of all economic entities are identified. This is due to an accurate assessment of the financial and economic effect in connection with changes in certain norms. Costs are optimized by adjusting the direction of economic development, and the development of new standards will help fulfill this task.

Concrete modeling of the ensured impact of these developed standards will tell you step by step how to write a business case. The sample hardly reflects the actual situation of a given enterprise, industry, or society. Only a person inside the situation can identify the winning and losing sides. The demands for change must be effectively harmonized with all systems subject to technical regulation, taking full advantage of the implementation of any project.

Bills

Regulatory legal acts also require material or financial costs, and therefore the legislator proposing a new project must write an economic justification, that is, provide specific financial calculations. These justifications, directly related to the introduction of a new norm or change in a legal act, must indicate the income and expenses of budgets at all levels, the costs of each economic entity, the costs of society (or third parties), tax revenues, and budget efficiency.

This is how all reforms in the state are made: management mechanisms are changed, self-regulatory organizations are introduced, the rules of trade and production are changed, and certain new services are provided by members of associations and associations. In truth, the effectiveness of the introduction of any bill can rarely be directly and accurately calculated, as society is now witnessing with its own eyes - many errors and inaccuracies accompany them. Apparently not all legislators know how to write an economic justification for ongoing operations. When carrying out reforms, the forecast of socio-economic consequences and effects is especially important.

How is it necessary?

The financial and economic assessment of any innovation should be as accurate as possible and identify political, administrative, economic and other effects and consequences in advance. The “young reformers” know best how to write an economic justification for the alienation of property from the state, but society is now overcoming the consequences of this knowledge - with great difficulty, pain and losses. But it was necessary to evaluate in monetary terms not only our acquisitions, but also our losses (this is from the section of the economic justification called “additional costs”). Has the impact of such changes on the finances of all stakeholders and budgets at all levels been identified? And this is an indispensable condition for the correct preparation of an economic justification.

No, nothing was revealed, it’s just that a huge number of the country’s citizens “didn’t fit into the market.” How to write a business case for a lack of wages that people have not seen for several months? It was necessary to conduct a thorough analysis of all changes in the structure of income, expenses and risks of economic entities, the entire society, that is, third parties, and this is an unshakable rule for drawing up economic justifications. A detailed analysis of everything related to changes in control mechanisms was needed. In this financial calculation, it was necessary to honestly evaluate (monetize!) the redistribution of benefits, and for absolutely all parties interested or affected by the changes.

About feasibility

It is an honest and impartial analysis of the situation even before the start of any changes that can help in assessing the feasibility of any project, primarily in monetary terms. Then recommendations are given on its compliance with this state of affairs. Economic justification procedures should be carried out at the very first stage, when the project is still in the development stage. Designing changes to legal regulations requires fairly strong justification, since only then can the risks, benefits and costs of a variety of economic entities be predicted. Only a business case can outline costs based on expected revenue increases or cost reductions. Money is spent in order to earn much more in the future or spend less.

Financial subtleties

How to write a business case for a bank to convince it to invest in a project? First, we need to understand some hard truths about borrowing. Does the written rationale take into account that money is generally worth more today than it will be in even the shortest time? After all, the bank will give them, of course, at interest. But even if there are personal available funds that can cover expenses, has the justification calculated the percentage on the deposit that will inevitably be lost when investing money in the project?

How to write an economic justification for an agreement with a bank so that it proves that all expenses will be effectively and more than repaid, that is, future income will pay off the interest on the loan or exceed the interest on the deposit? You need to find the most promising aspects of a given project and prove in a justification that all proposed expenses will actually bring savings or revenues equal to those planned. And you don’t need to look for ready-made forms and printed forms. It must be remembered that there are simply no hard and fast rules for documenting a financial or feasibility study.

The form of the economic justification should be the simplest and must indicate the reason that influenced the decision of the organization to carry out this project. But the discussion of the expected benefits should be very detailed, with the application of alternatives, which may be useful, and a detailed financial analysis that will determine the investment attractiveness of the project. In practice, usually no one knows how to write a feasibility study, especially for projects where significant risk is involved. Most often, it is drawn up as a separate document and serves as an annex to the exact form of initialization of this project. If, in fact, the project is small, then all the benefits can be listed directly in the initialization form.

Individual elements

Typically, the results of the project are determined and indicated in its material aspect, that is, all parameters are measurable: cost savings, increased capacity or productivity, increased market, increased income, and the like. Before writing a justification, it makes sense to talk with people interested in investing in the project, or with licensing authorities, about what exactly they want to see in the justification, what is most important to them.

And yet, some material elements must be kept in mind when writing justifications. And the more complex the project, the greater the number of such elements will be present in it: cost reduction, savings, the possibility of generating additional income, increasing the company’s market share, complete customer satisfaction, directions of cash flows. The latter is documented as a major part of the project's business case.

Cash flows

This analysis aims to help committees or individuals reviewing projects to select the most suitable ones for implementation. The measurable elements are already listed above, but the business case does not end with them. There are also intangible ones, and there are many of them. For example, the main ones include the transition period and its costs, operating costs, business process changes, personnel replacement, and the like.

It is necessary to give due credit to alternative solutions in the economic justification, listing all available methods for implementing the project in practice. For example, among thousands of suppliers with millions of identical products offered, almost no one has the same price.

How to make the acquisition profitable? The economic justification will have to answer many, often inconvenient or simply difficult questions. It is more profitable to buy a ready-made solution or find an alternative, your own option. Or you can partially buy and partially sell it yourself. There should be many such answers in the economic justification.

Guardianship

Depending on the culture of the organization, the business case is written by the trustee or the project manager himself. But in any case, the trustee, that is, the investor, is responsible for the project; it is he who is responsible for financial efficiency, while the manager plans, carries out and practically implements it. The leader is the form, and the guardian is the content, that is, the investment. And therefore, the main thing is to convey to the investor the exact amount of costs for the entire project, indicate the correct payback period and predict attractive results.

How to make a business case correctly? Recommendations with examples. (10+)

Economic justification. Example

The material is an explanation and addition to the article:
Rationale. Tips for writing
How to write, compose a justification? How to justify the proposed solution?

A business case justifies expenses based on expected increases in revenue or reductions in costs. That is, it is proposed to spend certain money in order to earn more or spend less in the future.

There are two subtleties in the economic justification. Firstly, you need to take into account the fact that money today is more valuable than money after some time. Often there is no free money, they have to be borrowed at interest. Even if there is free money, the alternative is to place it on deposit. When deciding to invest this money, we lose the interest that we could earn on the deposit. So we must prove that the effect of our proposed expenses will pay off the interest on the loan or exceed the interest on the deposit. Secondly, we need to prove that the expenses we propose will actually bring the planned income or savings.

I will give an example of an economic justification for automation with comments. All numbers are fictitious.

Economic justification

Project Description

A cleaning company (a company that cleans clients’ premises) proposes to implement an automatic cleaning system based on a specialized robot. The capacity of one system module is 200 sq. m/hour, which corresponds to the work of two employees (employees work 40 hours a week, and the module can work 24 hours a day). Electricity consumption - 0.3 kW. It is proposed to introduce 10 such modules.

Initial Investment

The cost of the system is 300 thousand rubles. Financing is planned to be carried out through a loan at 12% per annum.

Current expenses

Operating 10 modules will require hiring one employee for administration, programming and system maintenance. The salary of such an employee will be 50 thousand rubles. Taking into account the unified social tax, the cost of payroll will be about 65 thousand rubles. Interest on the loan will be 30 thousand rubles. Electricity costs will be (at a cost of kWh 5 rubles) about 11 thousand rubles.

Cost savings

The introduction of robotic modules will make it possible to reduce 9 employees involved in manual cleaning of premises. There are currently 10 employees. One must be left to perform delicate operations. Payroll costs for one such employee are 40 thousand rubles. Total savings of 360 thousand rubles.

Additional income

The implementation will double the capacity of the enterprise and attract additional space for maintenance. Taking into account the fact that the enterprise’s monthly income is 600 thousand rubles excluding VAT, the income after implementation will be 1.2 million rubles.

In addition, the risks associated with personnel difficulties, employee disability, and temporary downtime will be reduced. Temporary downtime may occur if one of the clients refuses before attracting a new one. The cost of idle time for a cleaning module is significantly lower than for an employee.

Conclusions. Draft decision

The net effect from the introduction of modules will be 1,454 thousand rubles. It is proposed to approve the decision to purchase and implement the system.

Applications

Technical documentation for cleaning modules. Preliminary agreement for a bank loan. Detailed economic calculations.

Law

FEO

Advantages of the business case

Bills

How is it necessary?

About feasibility

Financial subtleties

Individual elements

Cash flows

Guardianship

Therefore, issues related to analysis and marketing research are not discussed in it. The business case usually contains a detailed description of the technologies and equipment, as well as the reasons for their selection.

When drawing up a business case, it is necessary to comply with certain requirements. It starts with initial data, information about the market sector. Then the existing opportunities for business development, sources of raw materials, material resources for business expansion, the amount of capital expenditure required to achieve the goal, production plan, financial policy, and general information about the project are described.

Thus, the economic justification contains a description of the industry in which the enterprise operates, the type of products supplied, and the price level for it. The financial part of this document for attracting borrowed funds, sources of their coverage. Calculations are given in tables that reflect cash flows.

When drawing up an economic feasibility study, it is necessary to study the current position of the enterprise, its place in the market, the technologies and equipment used. In addition, it is necessary to determine ways to increase the profitability of the company and business development, predict the level of profitability that can be achieved when implementing the project, study the necessary technical data, and analyze the level of staff training. You will also need to draw up a project implementation plan, cost estimate and cash flow plan, as well as give a general economic assessment of the investment.

Justification stage project very important. During it, you can identify and, if possible, correct those moments that could lead to failure in the future. Focus on starting early and you will achieve better results.

Instructions

Define the goals and objectives of the justification project. You need to answer the main question: is the project necessary? Based on how well you develop the idea and convey the benefits that the new business can bring, a decision will be made whether to accept or not project.

Describe the essence project. Tell us what exactly you plan to do and what goals are being pursued. Explain how the need for a new business arose and why this particular path was chosen.

Convey to the reader or listener the main ideas and ways in which the result will be achieved. Convince him that the chosen methods are the most effective in this case.

Tell us how many employees will be needed to implement your project, and what qualifications they should have. Give reasons why the workforce should be exactly like this. Describe in detail the functions of each team member. If you already have candidates, voice their names. In addition, committee members or your management should know how participation in the project will affect the core work of these employees.

Establish a sequence of actions and announce deadlines project. Clearly list the main stages of its implementation. Then go into detail about each stage. There should be a visible logical relationship between actions so that it is clear why one point follows another. Talk about realistic deadlines; if this is problematic, do not just name the possible completion date project, it is better to indicate the maximum period. Explain what factors may affect task completion time.

Provide a calculation of the material resources that will be involved in the project. Show what each expense item consists of. Before the presentation, count everything again. Remember that if you make inaccurate calculations or leave out an important item, it may blur the impact of the rest of your case and result in your rejection. project.

Video on the topic

Before starting any type of construction or installation work, it is advisable to draw up a list of quantities for the planned scale of construction and repairs. Without taking into account the cost of materials and services for performing certain types of work, it is not possible to sign an agreement with a construction and installation organization or plan expenses. These instructions will help you in correctly drawing up an estimate.

Instructions

Any program for developing estimate documentation usually includes some kind of industry price guides. Most of them are tied to a specific type, others to the regional level of prices and costs. All additions to estimate programs are indicated by abbreviated links to price tables. Study the following standards first and decide what you will take as the basis for your future estimate:
- GSN – state estimate standards;

FSN – branded estimate standards;

ISN – individual estimate standards;

TSN - territorial estimate standards - the so-called TERRA - are used most often;

Include in the estimate of work on its preparation, and the necessary tariffs for the estimated overhead costs. Study the pricing procedure; to do this, read all the letters from the Federal Agency for Construction and Housing and Communal Services. Remember that you cannot include the same cost in the estimate for different types of work.

Enter the budgeting program. Activate the directories you need in it and, when creating a new document, set the necessary coefficients.

Enter all types of work item by item, and under each type of work indicate the volume of material and its cost.

Add coefficients for the entire estimate and add up the total. Then, print the document.

Video on the topic

Helpful advice

If you work in a construction company, when drawing up estimates, use the calculated percentage markups indicated in the project documentation, but recalculated into current prices. Take into account all costs; to do this, read the drawings, specifications, and purchase prices for materials. Thus, you will know the price minimum (market value) and maximum (set in reference books).

There is an opinion that a feasibility study is a reduced copy of a business plan containing all its main points and characteristics. In reality this is not the case. Despite the similarity of the two concepts, there are significant differences between them. What a feasibility study is, the procedure and rules for its preparation, as well as the differences between a feasibility study and a business plan will be discussed in the article.

What is feasibility study?

A feasibility study (TES) is a printed confirmation of the technical viability of the project and the feasibility of its implementation from an economic point of view. In other words, a feasibility study is an idea implemented on paper, the purpose of which is, for example, the creation of a new facility or the modernization of an existing structure.

The main task in developing a feasibility study is to estimate the costs of implementing an investment project, predicting the results, and determining the payback period for investments.

Differences between a feasibility study and a business plan

In some ways, both concepts are identical to each other. The main difference is that the task of a feasibility study is to justify a project already implemented at an enterprise, and a business plan is to justify the existence of the company as a whole. Therefore, when drawing up a feasibility study, the document does not take into account the research of the marketing department, market competition, production technology from start to finish, and the process of selling finished products. That is, a feasibility study is a shorter, but succinct, meaningful document.

When compiling a feasibility study, the following points are taken into account:

features of the production process;
basic requirements for equipment, technical equipment of the enterprise, state of communications;
personnel, costs associated with organizing the work process;
free price for manufactured products;
timing of the project;
economic result;
environmental component.

The business plan includes four main information blocks:

marketing research that most fully reflects all the components that are expected to influence the market during the implementation of the project;
production and technological planning, which reflects all aspects, from production technology, raw material base, to the range of products, cost, timing, quality of goods;
management section, which describes the procedure for managing the enterprise, draws up a plan for the development of investments, and other parameters with the help of which it is planned to attract labor resources and manage them;
the financial and economic block contains basic calculations, efficiency coefficients, and the final decision on the feasibility of implementing the project.

There is no marketing block in the feasibility study, but in the production and technological section more attention is paid to the justification of the technology and methods of organizing production.

In other words, if it is not necessary to provide the investor with a description of why the manufactured product will be well purchased at the prices stated by the manufacturer, then a feasibility study can be drawn up.

In what cases is a feasibility study needed: goals and objectives

Throughout the economic development of an enterprise, various changes constantly occur. The essence of a feasibility study is to calculate possible or expected changes. It also reflects the costs that the organization will incur to complete a particular project.

A feasibility study answers the question of whether it is worth investing in a project in a specific amount, and helps to assess the situation that will arise at the enterprise after qualitative or quantitative changes are made to its work. When compiling a feasibility study, many different factors are taken into account that can directly or indirectly affect the enterprise and show how much the company’s performance will change.

In a well-drafted document, the effectiveness of investments will be immediately visible, and it will become clear whether it is necessary to implement other changes in the production process or personnel management, or whether lending may be necessary because own and borrowed funds will not be enough.

A feasibility study is compiled when equipping production technologies, purchasing new equipment, selecting and implementing improved technologies.

As a rule, a feasibility study is compiled by an entrepreneur developing a new line of business, independently or with the involvement of a group of experienced specialists. If he is looking for a source of financing, then any investor, before investing money in a project, will request a feasibility study.

Structure and process of preparing a feasibility study

Feasibility study in the business world is the most frequently encountered concept. There is a certain structure, but it is not mandatory and allows for changes and deviations. It all depends on the category of the project, its features, and the complexity of the proposed changes.

As a rule, this document describes the direction of the company’s activities, the choice of location of the enterprise, the type of goods, and a detailed justification for the cost of products. The main point of the feasibility study is the financial part of the project. The main sources of investment are also indicated here, as well as the procedure and timing of debt repayment.

The feasibility study includes the following sections:

baseline indicators, information about the direction of business;
the capabilities that a particular enterprise has at the current moment in time;
raw materials for production, opportunities for further development of the organization;
the costs that the company will have to incur to achieve its goals;
development plan;
a list of the organization’s financial goals;
in the final part, all digital values are calculated, the effectiveness of the implemented project, and the approximate payback period are determined. For this purpose, tables are compiled that reflect the movement of all material assets.

Preparation time

The preparation time is affected by several points:

detailed description;
the volume to be developed;
number of processes considered;
the quality of the preparedness of the material, the relevance of regulations and other current documents;
infrastructure readiness.

Thus, to prepare a feasibility study, you will have to spend at least 1 month. The maximum period for preparing a document reaches a year or even more.

Example of a project feasibility study

Options for feasibility studies are different, depending on the problems being considered and put forward for solution:

Option #1

Current state of the enterprise.
Indicators of activity, production capacity.
Technical documentation.
Labor resources, their condition.
Ongoing costs associated with production and management.
Forecasting the timing of the project.
Attractiveness of the project from material and economic points of view.

Option No. 2

Features of the project: goals, methods of implementation.
Description of the business direction.
Engineering and technological aspects of the project.
Financial and economic indicators.
Assessment of the effectiveness and profitability of the project, repayment terms of loans provided.
Analysis of how susceptible the new product will be to business risks and the constantly changing economic conditions of the country.
Analysis of the possible results from attracting external investment.

Option #3

List of all main points of the feasibility study.
The conditions under which the project will be implemented (preparation, research, etc.).
Determining sales channels, calculating the organization’s capabilities, identifying the strengths and weaknesses of the company in this direction.
Analyze the activities of competitors, determine your own capabilities.
Location of the company, identifying possible difficulties associated with it.
Documentation is an engineering project, a list of actions without which the implementation of the project will be impossible.
Staff.
Project start date.
Projected benefits: material and economic.

Example of a loan feasibility study

If you need to get a loan to develop your business, then you can’t do without drawing up a feasibility study. With the help of the document, the borrower will prove to the lender what the funds will be spent on when the money is returned. Typically, a feasibility study for a bank is not very large. Nevertheless, the decision will depend on a well-written justification: whether the borrower will be given a loan or not. An approximate feasibility study for a credit institution looks like this:

Date of conclusion of the contract.
Funds available to the organization at the moment.
Currency fluctuations during the period of the transaction.
Transaction cost.
Projected profit from the project.
Possible costs.
The amount of tax on projected profits.
The specific amount of money that will remain with the borrower after all loan and tax obligations have been repaid.

Conclusion

A good example of a feasibility study is a document that briefly and concisely reflects all the aspects of the project being put forward for implementation. After reading the information contained therein, the investor or bank must clearly understand the idea and feasibility of the new direction. The process of implementing the project itself does not need to be described here; all that is required is to attract the attention of the investor.