Learn How to Write a Financial Feasibility Study
A financial feasibility study projects how much start-up capital is needed, sources of capital, returns on investment, and other financial considerations. The study considers how much cash is needed, where it will come from, and how it will be spent. It can focus on one particular project or area, or on a group of projects (such as advertising campaigns).
The study is an assessment of the financial aspects of something. It could be anything, but is most often used to consider a few key points that, if refined correctly, should answer most of the basic questions of anyone who takes a seat at the table.
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. Although many business or sole proprietorships determine their capital requirements individually, larger corporations may use the help of their respective bank or capital firm to pinpoint capital requirements for either a round of funding or business launch.
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.
Depending on the size of your business, you may be able to utilize one of the many Small Business Administration's (SBA) Microloan programs. Using these, you will not need much capital, as the program allows for a much smaller down-payment on their lending partner's loans. These can vary, but are around three-to-twelve percent.
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.
Paying Back Investors
How investors will be paid will vary according to individual investment offers. Read every offer over very carefully —not all investors will 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.