Feasibility study/Business plan
Pages Appendix1 Appendix2 References
 

Feasibility study

 

A feasibility study’s main goal is to assess the economic viability of the proposed business.  The feasibility study needs to answer the question: “Does the idea make economic sense?”  The study should provide a thorough analysis of the business opportunity, including a look at all the possible roadblocks that may stand in the way of the cooperative’s success.  The outcome of the feasibility study will indicate whether or not to proceed with the proposed venture.  If the results of the feasibility study are positive, then the cooperative can proceed to develop a business plan.

If the results show that the project is not a sound business idea, then the project should not be pursued.  Although it is difficult to accept a feasibility study that shows these results, it is much better to find this out sooner rather than later, when more time and money would have been invested and lost.

It is tempting to overlook the need for a feasibility study.  Often, the steering committee may face resistance from potential members on the need to do a feasibility study.  Many people will feel that they know the proposed venture is a good idea, so why carry out a costly study just to prove what they already know? The feasibility study is important because it forces the NGC to put its ideas on paper and to assess whether or not those ideas are realistic.  It also forces the NGC to begin formally evaluating which steps to take next.

The NGC’s organizers will typically hire a consultant to conduct the feasibility study. Because the consultant is independent of the cooperative, he or she is in a better position to provide an objective analysis of the proposed venture.  The consultant should have a good understanding of the industry as well as the new generation cooperative model of business.  He or she should have previous experience in directly related work.  To get an estimate of the costs of a feasibility study, prepare a rough outline of the work needed to be done.  Contact several consultants and provide them with a copy of this rough draft to see what sort of estimates they give.  When the time comes to hire a consultant, prepare a formal request for proposals that outlines the information that is needed and send this to several consultants. 

It might be tempting to choose the lowest-cost consultant or a personal acquaintance of one of the NGC’s organizers, but always remember that quality work is the most important factor when choosing a consultant.  Make sure that the consultant can provide an independent assessment of the business opportunity.  For instance, hiring an engineering firm or an equipment manufacturer to conduct market analysis may lead to biased results in favor of proceeding with the venture.  Engineering firms and equipment manufacturers may have an incentive to show positive results so they can obtain contracts with the cooperative once it chooses to start up operations.  Engineering firms and equipment manufacturers are needed in order to provide information about equipment requirements and costs, but an independent consultant should conduct the overall feasibility study.

A feasibility study should examine three main areas: 
 

  • market issues
  • technical and organizational requirements
  • financial overview


Market issues:

The primary area that the feasibility study needs to address is potential market opportunities for the cooperative.  If an adequate level of demand does not exist for the product and the NGC does not know how to differentiate its product so that it can compete with established industry players, then the proposed venture should not be pursued. 

Questions that need to be answered in this area of the feasibility study include: 
 

  • What type of industry is the NGC planning to enter?  What are its primary features?
  • What are the possible target markets for the NGC’s product?  What demographic characteristics do they possess?  How large are these markets?  Where are they located?  Is the market expected to grow in the future?
  • Will the NGC be competing in a mature industry or a growth industry?
  • Who are the NGC’s competitors in this market?  How large are these competitors?  How established are they?  How do they price their goods?  How will these competitors react to the entrance of the NGC?
  • How will the NGC differentiate its product from those of its competitors? What are the competitors’ strengths and weaknesses, and how would the NGC compare against them?  How does the NGC plan on gaining market share?
  • What is the projected market share for the NGC?


Data that can help to answer these questions may be found in already-published information or through primary research activities such as market surveys conducted on behalf of the NGC.  Relevant information may be found through various sources such as government statistical publications, trade journals, industry reports, or companies such as Dun & Bradstreet.  The Internet has also opened up new routes to obtaining information.

The answers to market-related questions should help the NGC develop realistic estimates of the projected demand for the NGC’s product for the first several years of operation.  Based on this projected demand, the NGC can determine its anticipated level of business volume, which is needed in order to design the processing facilities.  If the projected business volume is not large enough to justify a processing facility, then the project is not feasible.

Technological and organizational requirements:

This area concerns the internal set-up of the cooperative.  Questions to be answered in this area include: 
 

Plant and equipment issues:
  • What type of equipment and technology will the business need to produce its product?  What are the costs involved?  This includes both the initial purchase and installation costs of the equipment as well as the operational costs of running the equipment.
  • Who are the potential suppliers of this equipment? Where are they located?  What sort of service and warranties do they provide?  How long will it take to acquire the equipment and begin operations?
  • Based on its projected business volume, how much raw product will be required by the NGC?  What are the quality specifications?  Will the NGC have a sufficient membership base that can provide the raw materials? 
  • What are the possible locations for the NGC’s facility?  What size of facility is needed?  What are the costs of the building?  Does the proposed location have adequate access to infrastructures and services such as major highways, railways, and utilities?  Will the NGC build its own facility, or purchase an existing location?
  • Where will the facility be located relative to the NGC’s customers?  Who will be responsible for the transportation of goods between the facility and the market?  What are the transportation costs involved?
Managerial and organizational issues:
  • Is the NGC organizational structure the right one for this business?  How important are delivery contracts and a fixed source of supply to the success of the business?
  • What qualifications are needed to manage these operations?  What are the key staff positions that need to be filled? 
  • What type of experience should management have?  Are there potential candidates available to fill such positions?  What will be the cost factor involved in finding and retaining acceptable candidates?


Financial overview:

Based on the estimates that have been gathered from the preceding sections of the study, the NGC needs to determine its overall financial situation.  Sources and uses of financing should be listed.  Questions such as the following need to be considered: 
 

  • What are the total start-up costs required in order to begin operations?  For instance, what are the capital costs of the land, plant and equipment, and other start-up costs such as legal and accounting costs?
  • What are the operating costs involved?  These include the daily costs involved in running the business, such as wages, rent, utilities, and interest payments on outstanding debt.  These will determine the cash flow requirements of the NGC.
  • Based on the estimated demand, what are the NGC’s revenue projections?  How will the NGC determine its pricing arrangements? 
  • What are the possible sources of financing for the NGC? Who are potential lenders?  What will be their required terms and limitations of borrowing?
  • Based on the estimated revenues and costs, what is the projected profit(loss) of the NGC?  What is the break-even point?


If the results of the feasibility study indicate that the proposed venture is economically viable, then the NGC can begin to develop a business plan.


Business plan

 

The business plan builds on the information that was obtained through the feasibility study, but provides a more detailed and specific blueprint that maps out the NGC’s strategy.  A business plan is similar to operating a company on paper.  It sets out the goals of the NGC and how the NGC intends to reach those goals.

Why write a business plan?

There are two primary purposes of a business plan: 
 

  • External purpose: The business plan helps to obtain financing from potential lenders and members.  Basically, the business plan should provide an answer to the question, “Why should I invest in this business?”  Lenders, such as banks, want to see that the NGC’s organizers have properly analyzed the business opportunity and planned accordingly.  Lenders want to see that the NGC is based on realistic expectations.  Potential members want to see that the organizers of the NGC have carefully thought out the details of the proposed venture.  The business plan becomes the primary selling tool for the NGC.  It should provide an honest and straightforward examination of the business opportunity.
  • Internal purpose: A business plan provides a blueprint for the NGC to follow.  It maps out the activities of the NGC and forces the organizers to evaluate all aspects of the business.  In addition, a business plan can serve as a benchmark against which the NGC can compare its performance, so that it knows when it is veering off course.


The business plan should be written in clear and concise language.  Although there is no set rule, the average length of a business plan tends to be about 30 pages.  An executive summary and table of contents are usually included at the beginning.  Business plans come in many different forms. 

 In general, areas that need to be addressed in the business plan include: 
 

Background information about the NGC

  • When was the NGC formed?  What factors prompted its creation?


Industry description and outlook

  • Include general industry information such as total sales.
  • Describe industry trends, including whether or not the industry is in a growth, maturity, or decline stage.  Is the industry going through a restructuring stage?  Are firms merging or entering into strategic alliances?
  • Are there potential barriers to entry?  Are there any small players in the market, or does there seem to be some minimum efficient scale of operations?  Are there special licensing requirements? Does government regulate the industry?


The product

  • Describe the product that the NGC is planning to sell.  Assess its strengths as well as its weaknesses.
  • What characteristics of the product will give it a competitive advantage over others?
  • Are there any patents, trademark or copyright issues?


Marketing plan

  • Identify the target market.  Describe its demographic characteristics. Where is the market located? How large is the market?
  • Identify the competition.  Include estimates of their respective market shares and financial health, as well as characteristics (such as quality, price, and brand image) that distinguish their products from others.  Assess each competitor’s strengths and weaknesses in comparison to those of the NGC.  What will give the NGC a marketing advantage? Will it be product quality? Price?
  • Describe the distribution system.  Will the NGC sell to wholesalers and/or to retailers? Have relationships been established with wholesalers and other distributors?
  • Describe the pricing policy of the NGC.
  • Describe the sales and marketing activities of the NGC.  Will the NGC have an internal sales force as well as brokers?  What sort of advertising and promotional activities will be used?  Describe the timing of market entry.
  • Estimate sales levels for the first several years.  Also describe the NGC’s targeted level of market share.
  • Remember “the 4 P’s” of marketing: product, price, promotion, and place.  Has this section included all relevant information regarding these aspects?


Management

  • If possible, include an organization chart showing key personnel and their functions
  • Describe the skills and expertise possessed by key management.  Demonstrate why these people are capable of managing the NGC.
  • Describe managerial compensation arrangements.


Operations

  • This section describes how the product will be produced. It includes a description of the physical requirements for the business, including land, buildings, and equipment.  Describe contractual arrangements with engineering and construction firms.
  • Describe the workflow of the NGC: list the procedures that are required to manufacture the product.  What sort of quality control measures will be implemented? How will the NGC manage inventory levels? 
  • Describe the plant site, including available services such as water and waste disposal.  What environmental standards must be met?  What about zoning requirements? 
  • Explain how the NGC chose the location for its facility.  Choosing a facility location can often be a contentious issue when forming a NGC.  Producers as well as communities will lobby the NGC’s organizers to choose a location that meets their individual preferences.  However, the site selection should be based on economic factors that give the NGC the best chance of success.  Factors to consider when choosing a location are its proximity to the NGC’s target market as well as to its members, transportation costs, access to transportation routes, taxes, and the availability and costs of utilities and labor.
  • How will raw materials be procured from the members? What procedures are in place to ensure that members can supply raw products that consistently meet quality specifications? What sort of producer agreement will the members be required to sign?
  • How will other supplies and materials be obtained?
  • Provide an operations schedule that shows a detailed production timeline. 
  • List the number of employees that will be required.


Financing plan

  • This section should identify the (potential) sources and uses of funds
  • Uses of funds include:
    • Start-up costs: The total funds required to begin operations, including the capital costs of purchasing or leasing buildings and equipment.  Be sure to include items involving professional advisory costs (such as items involving lawyers and accountants).
    • Operating costs: The amount of money required to operate the business once it begins operations, including the cost of raw materials and utilities
  • Potential sources of funds include:
    • Members: how much delivery rights shares will be issued, and at what price?
    • Lenders: how much debt will be required?  What will be the repayment, interest, and collateral terms?
    • Non-member investors: Will investment shares be offered to non-members?
  • Include projected financial statements for the first few years, including a cash flow budget. 
  • Include break-even calculations that take into account fixed and variable costs.
  • Indicate the projected returns on investment for the first several years of operation.


Risks

Clearly outline the risks involved with the NGC.  Do not attempt to gloss over the negative aspects of the business. Anticipate problems before they occur.  Include a sensitivity analysis of key risk factors.  For instance, how would the NGC be affected if one of its competitors decided to expand its operations?  What if the cost of raw materials rose significantly due to a poor growing season?

The president of a bank that figured prominently in financing U.S. new generation cooperatives has outlined five major risks that should be addressed by new ventures: 
 

  • Market risk
This is the primary risk to address.  The NGC must determine whether there is a market opportunity for its product.  Market risk involves assessing who your potential customers and competitors are.  One of the problems most often encountered by new ventures is overly optimistic market projections. 
  • Technological risk
The NGC must determine what type of technology it will use and the risks associated with that technology.  Questions to ask include:
    • Are there any new processes on the horizon that may quickly render the cooperative’s technology inefficient?
    • Does the technology require a certain minimum or maximum plant size?
    • What if product specifications need to be changed?  Will the technology allow for this flexibility?
    • Is the brand of equipment chosen by the cooperative well-reputed in the industry, or is it known to have frequent breakdowns?
  • Construction risk
The NGC must consider the risk of construction cost and time overruns.  Construction contract problems is another one of the most often encountered difficulties for new cooperatives. Questions to consider include:
    • Are estimated construction costs reliable? Is the proposed construction timetable reasonable? 
    • Is management capable of evaluating construction bids from contractors and then monitoring performance?
  • Operating risk
Usually, it is safe to assume that the start-up period of a new cooperative will not go as smoothly as planned.  The NGC needs to ensure that it can withstand the early operating period.  Questions to ask include:
    • Are the projected expenses too low? Are the sales price assumptions reasonable?
    • How low can sales prices reach or how high can expenses get before the NGC’s ability to service its debt is impaired?
  • Government policy risk
The NGC must determine which government policies can affect its performance.  For instance, how do government policies affect market prices or operating costs?  The NGC must also consider whether any pertinent government policies are likely to change.

 The NGC’s business plan should address these risks. 
  
 

In addition, the business plan should address the worst case scenario.  How much can the business afford to lose and still remain viable?

Include a timeline for the activities to be undertaken.  A business plan should cover the first 3 to 5 years of operations.

Although it takes a lot of work, proper planning is essential.  In fact, one of the main reasons for business failure is a lack of adequate planning.  Always remember the saying, “The business that fails to plan, plans to fail.”

Professional help is often required to write a sound business plan.  In addition, there are other available resources such as books and Internet sites.  Some sites, such as the government’s Canada Business Service Centres web site, have interactive business planners available to the public. 
 

The business plan serves as an ongoing guide for the NGC.  It can be updated as the company begins operations and new information is gathered.

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