How to Make an Economic Feasibility Analysis

Embarking on a new business venture, producing a new product line or expanding into a new market is risky under any economic condition. Conducting an economic feasibility analysis, also called an economic feasibility study or economic viability analysis, is an important step in assessing the costs, benefits, risks and rewards of a new venture. Feasibility studies help businesses plan operations, identify opportunities and pitfalls, and attract investors. A feasibility analysis is not necessarily difficult or expensive, but it must be thorough, factoring in all potential challenges and problems.

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Feasibility analyses survey the economic climate, articulate a business plan and estimate the costs and revenues of planned operations.

Identify and describe the target market for your intended venture or business activity. Describe how the intended customer base would benefit from your product or service. If your planned activity serves a business customer base, identify the industry your targeted customers are in, and who the key players are. For a consumer base, describe the demographic characteristics and shopping behavior of your intended customers.

Assess the competition in your target market. Identify the major competing firms, their products and services, and their respective shares of the market for your intended activity. Doing this will force you to consider how to distinguish your products or services from those of your competitors.

Describe the overall plan for your enterprise or activity. This includes production requirements, facilities, sales and marketing strategy.

Project the revenues of your business activity, based on an assumed share of the target market. You can provide revenue projections for a period of one year or longer. Some analysts suggest providing revenue projections for a three-year period.

As a new entrant into the market, you should keep your projections conservative, estimating only a small market share (usually about 5% to 10%). Using your estimated market share and sale price, estimate your total revenues, breaking them down by month, quarter and year.

Estimate the costs of your business activity, considering fixed and variable costs. Fixed costs are those that remain constant within the time period for which you are projecting revenues. Examples include facilities (such as rental on factory or office space), interest on capital items, and administrative expenses. Account for fixed costs as a single lump sum, as they are the same regardless of the level of sales or services provided.

Variable costs are those that change in response to sales levels. Materials expenses, labor costs, marketing costs and distribution are variable costs. Express these in terms of cost per unit.

Weigh the costs and benefits of your planned activity or enterprise, using your projected revenues and costs as a guide. Also include in your economic feasibility analysis any non-economic factors that could affect the success of your operation, such as environmental impacts and political considerations like government regulations. If the benefits — generally understood as profits — exceed the costs and risks of the planned activity, you can consider the new enterprise a feasible undertaking for your organization.