Whether you’ve been considering opening your own business for years or you’ve suddenly been inspired by a new or improved product or service, getting from the idea stage to building a thriving business takes a lot of steps. However, one step, a business feasibility study, can be key to your small business growth.
In this overview, you’ll learn why conducting a feasibility study for your potential business is one of the most important factors for new business success. You’ll also find a simple plan that can help you take on your own feasibility study so that you can move forward with confidence.
What is a business feasibility study?
A feasibility study is an important step between coming up with a great idea and creating a spot-on business plan. It’s where you assess several key factors that are necessary to launch and grow a profitable business by:
- Determining market demand
- Identifying gaps in your knowledge or resources
- How to fill those gaps before you launch
This helps you identify potential significant challenges before you take on the risks of launching, managing, and growing a business, and find ways to reduce or eliminate them. The information you gather will also help you develop a stronger business plan. And, if your feasibility study shows that your idea, as it stands, may not be feasible, then you can either pivot your idea to make it work or let it go before investing your time and money.
It’s also a good idea to use your local Small Business Development Center (SBDC) and SCORE teams for help. They provide many services, at no cost to you, including guidance for your feasibility study, and your business plan and projections.
Why is it important to do a business feasibility study?
Before you get your study underway, keep this in mind: While you want your business feasibility study to be useful, informative, and as accurate as possible, don’t get hung up on perfection. The most important thing is to learn as much as you can up front so that you can make better-informed decisions as you move forward.
Performing a feasibility study, even informally, has many benefits. To begin with, a business feasibility study can help you:
- Brainstorm new ideas or approaches that can save you time, money, and stress down the line.
- Identify and reduce, or even eliminate, some of the risks that come with starting a business.
- Create a framework that can attract early investors or expertise.
In addition, a business feasibility study will result in invaluable insight that you can use to develop a strong business plan and financial projections – and those can help you secure much-needed financing to launch and grow.
What are the key components of a business feasibility study and how to address them?
Just as every small business is different, every feasibility study will vary, but there are some key areas that you should research before you begin drafting your business plan.
As you work on these for your own business, you’ll identify others that are relevant, too, and should be included.
1. Customer demand
No matter how great your products or services are, if there isn’t a viable market and demand for them, it’s hard to create a profitable business.
One of the most effective ways of gauging demand is by asking potential customers directly, so determine who your target market is and ask them about their interest in your potential business. Leverage community or industry connections, social media, and other channels to gauge interest and be sure to go beyond your friends-and-family network.
2. Competitive analysis
It’s also important to analyze the competition. You should understand what other businesses sell or provide, how they price it, and how they attract your target customers and great employees. With this information, you can identify and leverage what you’ll be offering, how it’s different than existing competitors, and how you’ll be better positioned to serve your target audience.
3. Organizational structure
Identify and address key organizational issues, such as the types of staff roles that are essential to your business, and whether you have the expertise and experience needed, or if you have to bring on key staff to make it work. You’ll also need to identify and address any legal or regulatory requirements, such as whether special licenses are needed to operate your type of business.
4. Financial viability
While you’ll work on creating financial projections as part of your business plan development, before you get to that point, you need to determine if your business idea is financially viable. To do this, you’ll need to research startup costs, as well as ongoing operational expenses.
Fortunately, there’s a wealth of information available online that can help, from blogs and videos outlining what you need to start for a huge range of types of businesses. AI can also help you figure out things like the types of equipment, inventory, vendors, tech, and staffing that you’ll need, including some things that you may not have considered yet.
Overall, you’ll want to get a good understanding of:
- Your startup costs and ongoing operational expenses.
- Potential revenue streams and sales projections.
- A break-even analysis, where your revenue equals your expenses – and anything above that would be profit.
- Other key financials, such as a realistic return-on-investment for yourself and other investors.
You can further hone this information as you develop your business plan and projections, but this early feasibility step can help you determine if your idea is financially viable.
5. Technical needs
Every business today must have basic technology in place. For your feasibility study, you should look at more comprehensive needs. If your idea is to develop a new app, for example, you’ll either need the knowledge of how to do that yourself, or you’ll need to know how to use AI to create it, or you’ll need IT staff. Understanding this now will help you determine your business’s path forward.
6. Manufacturing requirements
If your business idea is for a new product that will need to be manufactured, before you can launch, you need prototypes and, potentially, patents. You’ll also need either a third-party manufacturer or your own manufacturing facility. The direction you take will be dependent upon your previous experience in manufacturing or your industry.
7. Vendor and supplier feasibility
If your business idea is dependent on getting supplies or finished goods from a third-party source, you’ll need to do some research to see if there is enough availability to meet your needs at prices that work for your business model.
How does a business feasibility study work? An example
Here’s an example to demonstrate this process:
Let’s say that you want to develop a line of dog toys specifically for aging dogs who may not have many teeth left (making typical tug toys difficult) and who may not hear or see well, either.
On the surface, it sounds like a great idea with a potentially large market, but you don’t know anything about designing dog toys that will appeal to elderly dogs. By conducting a feasibility study, you can find viable ways to address challenges and form the basis of a strong plan.
Here’s how you would follow the 7 simple steps:
- You ask local pet-supply stores and dog-grooming salons to collect simple surveys from your target customers. The results show that there is, indeed, strong interest in this type of toy, solidifying your belief that customer demand exists. You consult with local veterinarians and other specialists who can advise on the special considerations that would make these toys appealing and safe for senior dogs.
- You research existing pet-supply stores and see what dog toys they’re offering and at what prices. As a result, you find that your tug toy should cost between $5-$20.
- Organizationally speaking, you believe that to launch and in the early stages, you’ll outsource legal, accounting, and marketing help, while focusing on sales and product development yourself.
- With your organizational needs included, you include the standard startup costs and outsourced costs into your financial feasibility research.
- You’ll need an inventory-management system, bookkeeping software, and a suite of office and e-commerce programs, but you won’t need any additional technical staff.
- You work with your local SCORE team to engage a retired industrial designer who can help you develop prototype designs. With prototype designs in hand, you research third-party manufacturers because it’s not feasible to build your own manufacturing facility. After receiving estimates from several within the US and abroad, you determine that a US-based manufacturer is the right move.
- You need to make some modifications to your prototypes and packaging to adjust for higher per-unit costs, but after working through this with your designer and a manufacturer, the information shows it’s still financially feasible. Due to safety and quality concerns and as a result of your feasibility study, you’ll source materials yourself, in consultation with your expert team, and those materials will then be supplied to the third-party manufacturer.
Based on your business feasibility study, you believe that your idea can become a viable business. You can then move forward in your work with the SBDC and SCORE to develop your business plan and financial projections, as well as to secure the financing you need.
When you’re ready, Pursuit has the funding to support your goals
When your business feasibility study is complete and you’ve got a solid plan and projections in-hand, explore Pursuit’s loans for small businesses.
As a leading small business lender serving businesses across New York, New Jersey, Pennsylvania, Connecticut, Illinois, and Delaware, we offer loans and a line of credit from $10,000 to $5.5 million for working capital, commercial real estate, equipment, and much more. We also provide information and resources that can help you create a path to success.
Contact us today to learn more.