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Greater Knoxville Chapter
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? Will Your Business Succeed ?
Rough Cut Feasibility Study for New Business
Introduction:
In order to establish the feasibility of a business, a complete
business plan, with financial
projections for at least 3 years, needs to be formulated. But
first, do a rough cut which
will establish whether it is worthwhile putting the time, effort and expense
into a full blown
plan.
- Define how much money you wish to earn from
the business per year
- Estimate the percentage of gross margin you
believe your product or service will produce
- Price- Direct Cost = Gross Margin so the
percentage is Gross Margin / Price
- Make a rough estimate of your expected overhead
costs, including principal and interest on debt
- Overhead Costs include are all other costs
that are not Direct Cost
- The earnings model is Earnings = Sales (Gross
Margin %) - Expected Overhead
- Therefore Sales
needed to support earnings (Earnings + Expected Overhead) / Gross Margin %
Using the total required sales, re-examine your estimated overhead
costs to see if they are
sufficient to support the facilities and staff needed to support the sales:
Can you go it alone,
or do you need extra staff to cover extended hours beyond 10 hours/day, 50+
hours/week?
Is the size of the business realistic compared to competition? What is your
estimate of
their sales? How many staff do they employ? What size facility do they have?
Estimate
their costs?
What is your estimate of funding requirements, not just for start-up,
but for several months
of ramp up? Where will you get this money? Do you have collateral? How is your
credit rating?
Can you get a loan?
Now, rework the plan with all the parts. Do you think the results show you can
meet your
desired income with a reasonable sized business that you can afford to finance?
If YES, proceed with a more comprehensive complete business plan to really establish
the business's feasibility. Get help from SCORE.
If NO, either revise your plans or put the idea on hold until you can answer
the questions
more favorably.
Glossary:
Fixed cost: Includes all costs that do not vary with activity. Fixed costs
are the inevitable
costs that must be paid regardless of the level of sales of a service or product.
Overhead is
considered a fixed cost, even though it may vary somewhat according to the amount
of
activity. Any cost that does not vary depending on usage or sales levels, such
as rent,
property tax, insurance, or interest expense.
Variable cost: Also called Direct Costs. Includes all costs that are some
function of activity.
A cost of labor, material and any other cost that change according to the change
in the
volume used.
Total cost. Fixed costs and variable costs make up the total cost. While the
total variable
cost changes with increased usage, the total fixed cost stays the same
Feasibility Forecast Template:
For those with capability in spreadsheets, The Knowlege Institute, http://www.bdki.com/
has provided an excellent spreadsheet at no cost. The Excel spreadsheet (Microsoft
2003 version), Revenue/Unit Feasibility Forecast Model can be downloaded here.
Source: http://www.inc.com/
November 2010 Revised January 2011 by Walter Williams, SCORE Counselor
The material in this publication is based on work supported
by the U.S. Small Business Administration under cooperative agreement
SBAHG-04-S-0001. Any opinions, findings and conclusions or recommendations expressed
in this publication are those of the author
and do not necessarily reflect the views of the U.S. Small Business Administration.
The information contained in this publication
is believed to be accurate and authoritative but is not intended to be relied
on as legal, accounting, tax or other professional advice.
You should consult with a qualified professional advisor to discuss issues unique
to your business.
Copyright 1990. SBA retains an irrevocable, worldwide, nonexclusive,
businessroyalty-free, unlimited license to use this copyrighted material.