A project feasibility study (abbreviated as feasibility study) is written for projects introducing new technologies, processes and equipment at an already existing, operating enterprise. The feasibility study provides information on the reasons for choosing the proposed technologies and processes and decisions adopted in the project, the results of their implementation and economic calculations of efficiency.
The description of economic efficiency is based on a comparison of the existing and implemented information system, technological processes (basic and design options), analysis of the costs required to perform all operations of the technological process of development and implementation. If a business process does not change the entire processing technology, but only some of its stages, it is necessary to compare the operations of these stages. It is necessary to calculate the costs of developing the project.
Conclusions about economic efficiency are made on the basis of calculated economic indicators.
Calculation of the economic efficiency of the project
Based on the analysis of economic literature, it is necessary to determine a methodology for calculating economic efficiency that can be used to evaluate this project. It is recommended to consider the following points:
1) for calculations, a system of general indicators and private indicators are used, reflecting the industry and functional specifics of the project;
2) for projects that have alternative solutions (bases for comparison), comparative effectiveness is calculated. This requires several options, including: one or more design options. One of them may be the existing option;
3) for projects that have no analogues, absolute efficiency is calculated, which is expressed in savings in the total costs of living and material labor, both in the sphere of production and in the sphere of operation. If absolute efficiency is negative, the project is excluded from further consideration.
Methods for calculating economic efficiency can be grouped into two areas. To the first group includes methods based on calculations of payback period indicators and profitability ratios. Methods second group are based on the use of the net present value (current) value of the project and the internal profitability ratios of projects.
If the project implementation or payback period is, as a first approximation, quite long (from six months or more), discounting should be taken into account in project cost calculations, because The value of money decreases over time, and a ruble spent today is worth more than a ruble returned. This is due to the processes of the global economy, inflation and the general development of the economy, competition and production.
This value is introduced into the calculations by the so-called discount rate.
There are different approaches to determining the discount rate for simple calculations:
take the annual inflation rate in the country or the refinancing rate of the Central Bank as the discount rate.
discount rate – the level of investment return expected by the investor, that is, the basic risk-free rate (for example, a bank deposit) + “risk premium”.
since the investor always has at least two alternatives - either to invest in a bank at interest, or to invest in a more profitable project, the discount rate is taken as the largest of the values of the profitability that the investor will receive (the interest at which money can be placed in the bank , or interest received from investments in another project).
It is possible to accept the annual inflation rate as a rate only in one case - if the enterprise has, as an alternative, the use of free Money: investing in a project or leaving them in current accounts (that is, actually freezing funds).
It is advisable to present the results of the selection and justification of the methodology in tabular form, indicating the calculation formulas.
1) Cost calculation.
Costs can be either one-time (purchase of equipment, hiring specialists, costs of consultations, etc.) or permanent costs associated with the use of the project (operating costs for maintaining equipment, wage fund for workers operating the facility, costs for electricity consumption, etc.).
It is also necessary to take into account the taxes that will arise when creating an investment object (for example, property tax). At the same time, VAT, which is paid when purchasing equipment, raw materials, supplies, will be returned only some time after payments are made, and when calculating discounted cash flows, the amount of VAT paid now will be greater than the same amount of VAT, which will be reimbursed by the state through some time due to the impact of inflation. In calculations of economic efficiency, as a rule, taxes are reflected indirectly, and they must be present in the cash flow budgets for the project.
2) Efficiency from project implementation.
In calculations, economic efficiency can be achieved both due to the additional profit generated and due to the resulting cost savings.
An increase in the efficiency of an enterprise's economic activity as a result of project implementation can manifest itself in various ways. The following components are often considered as possible factors:
qualitative improvement of the processes of preparation and decision-making;
reducing the labor intensity of data processing and use;
saving semi-fixed costs due to the possible reduction of administrative and managerial personnel necessary to ensure the enterprise management process;
reorientation of personnel freed from routine data processing tasks to more intellectual activities (for example, situational modeling of enterprise development options and data analysis);
standardization of business processes in all departments of the enterprise;
optimization of the enterprise's production program;
reducing the turnover time of working capital;
establishing the optimal level of inventories of material resources and volumes of work in progress;
reducing dependence on specific individuals who are “holders” of information or data processing technologies.
The calculation must be carried out in accordance with the chosen method for calculating economic efficiency.
In case of multidirectional effects from the implementation of the project, an individual approach or expert assessment can be used.
EIS can be used as the main static indicator of economic efficiency annual economic effect (economic profit) :
E = E year - P E year – S – E * K, (1)
Where ∆E year– annual savings (profit) caused by EIS, excluding operating costs for EIS, rub./year;
WITH– operating costs for information systems, rub./year;
TO– one-time costs (capital investments) associated with the creation of IP, rub.;
E– rate of return on capital (normative profitability), 1/year;
P– annual reduced costs for EIS, rub./year.
P = C + E * K.
From the point of view of economic content, the value E consists of the rate of return on capital and the rate of entrepreneurial income. Magnitude E in market conditions should not be less than the annual bank interest rate.
So, if the Central Bank of the Russian Federation established, from September 13, 2012, the refinancing rate at 8.25%, the rate of return on capital must be set equal to 8.25%.
Capital costs (K)
Capital expenditure can be defined as any cost incurred in creating, acquiring, expanding or improving an asset for use by a company. The important point is that the benefits from such capital expenditure will flow over a number of accounting periods.
Examples of capital costs are:
purchase of fixed assets
significant improvement of existing fixed assets
purchase for long-term lease.
Capital costs for AIS are one-time in nature. Those of them that are sent to the main means of information processing transfer their cost to products in parts through depreciation charges. They are called capital because they are not lost, but are reproduced.
Capital costs include:
costs for technical support(computer equipment, office equipment, communications equipment, technical means security, etc.);
costs for software, including functional and service;
costs of furnishing premises, including employee workplaces;
costs for the services of hired experts and consultants, etc.
Operating costs carried out synchronously with production. Operating costs comprise the cost of production (goods or services): costs of wages paid to main and auxiliary personnel; costs of operating computer equipment and other technical means; costs of operating premises and maintaining employee workplaces, etc.
These costs include all costs taken into account in accordance with the accepted procedure for calculating the cost of production (without taking into account depreciation charges for renovation). And on early stages development and implementation of new technologies, when there is no specific (reporting and regulatory) information, aggregated calculation methods can be used to calculate the costs of producing services, in particular the method of specific indicators, methods of regression analysis, the method of structural analogy, the aggregate and point method, etc.
If cost calculation, as a rule, is not particularly difficult and is mainly of a purely technical nature, then difficulties may arise when assessing indicators of the economic effect (especially indirect ones). In this regard, to assess individual indicators that make up the overall economic effect, it is often necessary to use the method expert assessments, in which, instead of calculating any of the terms of the indicator, they resort to the opinion of specialists (experts) regarding its optimistic, pessimistic and most probable values.
The methodology for determining economic efficiency based on static indicators comes down to calculating the annual economic effect as the sum of direct and indirect effects.
1. Direct economic effect can be expressed in natural, cost and labor indicators, as well as in their combinations, when the introduction of new information technology: ensures an increase in labor productivity of management staff; allows you to expand the range of products (services) produced; leads to a reduction in costs associated with the production of products and services (materials, technical equipment, production and auxiliary areas, etc.).
In other words, a direct economic effect is the result of any changes in the nature of the implementation of the functional component of the management process, as a rule, directly related to the specifics of the subject area of activity of the management object. At the same time, an increase in labor productivity can be achieved by reducing the volume of operations performed manually or by more quickly processing information using computing tools.
2. Indirect economic effect from the introduction of new information technology is the result of the influence of factors that, as a rule, are not directly related to the specifics of the subject area and are of a general social, ergonomic, environmental and other nature. The influence of these factors on the economic efficiency of the management system is carried out indirectly, and sometimes through a chain of various intermediate (secondary) factors, but always ultimately leads to an increase in the productivity of management personnel, an increase in the attractiveness of the company’s products among potential clients and business partners, etc.
For the purposes of analysis and methodological convenience of calculation, it is advisable to define the annual economic effect as the sum of direct and indirect effects:
∆E year = E kosv + E straight , (2)
Let's consider the calculation direct economic effect, it boils down to this:
the difference in annual present costs based on the base one is determined ( P 0 ) and proposed ( P 1 ) EIS options:
E straight = P 0 - P 1 = WITH salary – ∑С – E * K, (3)
Where WITH salary– reduction of salaries of management personnel during the implementation of EIS;
∑WITH– total operating costs for EIS excluding salaries of management personnel.
If it is not intended to reduce employees’ salaries or fire them when implementing an EIS, then:
WITH salary = C 0 salary - WITH 1 salary =0,
Where WITH 0 salary – wage management personnel in the basic version;
WITH 1 salary– salaries of management personnel in the proposed option.
Let's consider the calculation indirect economic effect.
This calculation involves determining the following components:
E kosv = ΔA+ΔC seb +ΔШ, (4)
Where ∆A– annual increase in revenue from sales of products, other sales or non-sales activities related to EIS; EIS does not directly affect the increase in product output; it helps reduce the risk of document loss and time spent on processing;
∆WITH seb– annual savings on the cost of production of the management object;
∆Sh– reduction of fines and other unplanned losses for the year.
The composition of items for which savings on product costs due to IP are calculated is usually as follows:
C seb = C salary + WITH seo + WITH uh + WITH To + WITH doc , (5)
Where ∆С salary– savings on employee salaries;
∆WITH seo– savings on the maintenance and operation of equipment;
∆WITH uh– saving on electricity for technological purposes;
∆WITH To– savings for business and operational needs (office);
∆WITH doc– reduction of document losses.
The annual economic effect is an absolute measure of efficiency. The system is considered effective if E>0.
Auxiliary indicators of economic efficiency are:
Estimated profitability (ROI):
Payback period:
(7)
The economic justification is the reason that motivates an organization to undertake a specific project. This concept includes consideration of the benefits that the enterprise will receive as a result of the project. Besides, economic justification considers various alternatives, and also analyzes the project from a financial and economic point of view. The latter allows you to assess the investment attractiveness of the project. How to write a business case? An example is in this material.
The essence of the concept
The economic justification is reminiscent of the analysis that we conduct when planning some kind of serious purchase. For example, your own car. Let's assume that we can allocate 35 thousand US dollars from the family budget for this purchase. The first step is to find out which automobile concerns produce cars of the class we are interested in. Then we decide on the main technical characteristics and agree on the final price with the company that sells these products. But that's not all. How to write a business case? An example in the matter of choosing a payment scheme.
At the same time, there may be another situation when the buyer is primarily interested in total amount, which will have to be paid for new car. This is especially true in a situation where the final price is affected by the amount of interest if we are talking about buying on credit. In this case, it is advisable to choose the option that provides the lowest interest rate. Another way is to look for an offer with the lowest monthly payment. Such an acquisition will allow you to stretch out payments for as long as possible. Wherein monthly amount such a payment will not hit your pocket hard. When carrying out a financial and economic feasibility study, attention is paid to similar aspects.
Components of a business case
There are no clear rules for documenting a business case. Its main task, as in the case of a feasibility study of a project, is to determine the material or intangible results of its implementation. Tangible results mean those that can be measured.
Below is a list that gives an idea of those material components that are important in the process of preparing the financial and economic feasibility study of the project. It would be useful to say that not all of them require mandatory documentation. The need to record them on paper depends on the complexity of the project, cost and number of risks for the enterprise.
Material elements of the business case
So, the main tangible components of the business case include savings, cost reduction, the likelihood of generating ancillary income, an increase in the enterprise's market share, customer satisfaction and cash flow assessment. In addition to the material components of the business case, it must also contain intangible components.
Intangible elements of the business case
These may include probable, but not pre-planned, company costs. Among the main intangible elements of the business case are transition costs, operating costs, transformation of business processes, as well as reorganization affecting company employees. In addition, the intangible components of the business case include recurring benefits. How else can you write a business case? Example below.
Other components of the business case
It should be emphasized that along with the benefits and assessment of cash flow in the EO, it is necessary to pay attention to alternative approaches and methods for implementing a specific project in practice. How to write a business case? An example in the following situation.
It is known that there are a large number of manufacturers of different products on the market. However, each of them sets its own price for its own products. What to choose? An option that is a turnkey solution costing $2 million. Or an alternative solution that involves partial purchasing from a third-party manufacturer and, to some extent, using its own resources?
In fact, aspects of precisely this nature often have to be considered when drawing up an economic feasibility study for an enterprise. Any of the proposed options must include the previously listed tangible and intangible components. At the end of the business case, proposals and conclusions must be stated. In addition, you can add additional materials to it.
There is an opinion that a feasibility study is a reduced copy of a business plan containing all its main points and characteristics. In reality this is not the case. Despite the similarity of the two concepts, there are significant differences between them. About what a feasibility study is, the procedure and rules for its preparation, as well as the differences between a feasibility study and a business plan we'll talk in the article.
What is feasibility study?
A feasibility study (TES) is a printed confirmation of the technical viability of the project and the feasibility of its implementation from an economic point of view. In other words, a feasibility study is an idea implemented on paper, the purpose of which is, for example, the creation of a new facility or the modernization of an existing structure.
The main task in developing a feasibility study is to estimate the costs of implementing an investment project, predicting the results, and determining the payback period for investments.
Differences between a feasibility study and a business plan
In some ways, both concepts are identical to each other. The main difference is that the task of a feasibility study is to justify a project already implemented at an enterprise, and a business plan is to justify the existence of the company as a whole. Therefore, when drawing up a feasibility study, the document does not take into account the research of the marketing department, market competition, production technology from start to finish, and the process of selling finished products. That is, a feasibility study is a shorter, but succinct, meaningful document.
When compiling a feasibility study, the following points are taken into account:
- features of the production process;
- basic requirements for equipment, technical equipment of the enterprise, state of communications;
- personnel, costs associated with organizing the work process;
- free price for manufactured products;
- timing of the project;
- economic result;
- environmental component.
The business plan includes four main information blocks:
- marketing research that most fully reflects all the components that are expected to influence the market during the implementation of the project;
- production and technological planning, which reflects all aspects, from production technology, raw material base, to the range of products, cost, timing, quality of goods;
- management section, which describes the procedure for managing the enterprise, draws up a plan for the development of investments, and other parameters with the help of which it is planned to attract labor resources and manage them;
- the financial and economic block contains basic calculations, efficiency ratios, final decision on the feasibility of implementing the project.
There is no marketing block in the feasibility study, but in the production and technological section more attention is paid to the justification of the technology and methods of organizing production.
In other words, if it is not necessary to provide the investor with a description of why the manufactured product will be well purchased at the prices stated by the manufacturer, then a feasibility study can be drawn up.
In what cases is a feasibility study needed: goals and objectives
For economic development Enterprises are constantly undergoing various changes. The essence of a feasibility study is to calculate possible or expected changes. It also reflects the costs that the organization will incur to complete a particular project.
A feasibility study answers the question of whether it is worth investing in a project in a specific amount and helps to assess the situation that will arise at the enterprise after qualitative or quantitative changes are made to its work. When compiling a feasibility study, many different factors are taken into account that can directly or indirectly affect the enterprise and show how much the company’s performance will change.
In a well-drafted document, the effectiveness of the investment will be immediately visible, and it will become clear whether other changes need to be implemented in manufacturing process or personnel management, or lending may be necessary because own and borrowed funds will not be enough.
A feasibility study is compiled when equipping production technologies, purchasing new equipment, selecting and introducing improved technologies.
As a rule, a feasibility study is compiled by an entrepreneur developing a new line of business, independently or with the involvement of a group of experienced specialists. If he is looking for a source of financing, then any investor, before investing money in a project, will request a feasibility study.
Structure and process of preparing a feasibility study
Feasibility study is the most commonly used concept in the business world. There is a certain structure, but it is not mandatory and allows for changes and deviations. It all depends on the category of the project, its features, and the complexity of the proposed changes.
As a rule, this document describes the direction of the company’s activities, the choice of location of the enterprise, the type of goods, and a detailed justification for the cost of products. The main point of the feasibility study is the financial part of the project. The main sources of investment are also indicated here, as well as the procedure and timing of debt repayment.
The feasibility study includes the following sections:
- baseline indicators, information about the direction of business;
- the capabilities that a particular enterprise has at the current moment in time;
- raw materials for production, opportunities further development organizations;
- the costs that the company will have to incur to achieve its goals;
- development plan;
- a list of the organization’s financial goals;
- in the final part, all digital values are calculated, the effectiveness of the implemented project, and the approximate payback period are determined. For this purpose, tables are compiled that reflect the movement of all material assets.
Preparation time
The preparation time is affected by several points:
- detailed description;
- the volume to be developed;
- number of processes considered;
- the quality of the preparedness of the material, the relevance of regulations and other current documents;
- infrastructure readiness.
Thus, to prepare a feasibility study, you will have to spend at least 1 month. The maximum period for preparing a document reaches a year or even more.
Example of a project feasibility study
Options for feasibility studies are different, depending on the problems being considered and put forward for solution:
Option #1
- Current state of the enterprise.
- Indicators of activity, production capacity.
- Technical documentation.
- Labor resources, their condition.
- Operating costs associated with production and management.
- Forecasting the timing of the project.
- Attractiveness of the project from material and economic points of view.
Option No. 2
- Features of the project: goals, methods of implementation.
- Description of the business direction.
- Engineering and technological aspects of the project.
- Financial economic indicators.
- Assessment of the effectiveness and profitability of the project, repayment terms of loans provided.
- Analysis of how susceptible the new product will be to business risks and the constantly changing economic conditions of the country.
- Analysis possible result from attracting external investment.
Option #3
- List of all main points of the feasibility study.
- The conditions under which the project will be implemented (preparation, research, etc.).
- Determining sales channels, calculating the organization’s capabilities, identifying strengths and weaknesses companies in this direction.
- Analyze the activities of competitors, determine your own capabilities.
- Company location, identification possible difficulties associated with it.
- Documentation – engineering project, a list of actions without which the implementation of the project will be impossible.
- Staff.
- Project start date.
- Projected benefits: material and economic.
Example of a loan feasibility study
If you need to get a loan to develop your business, then you can’t do without drawing up a feasibility study. With the help of the document, the borrower will prove to the lender what the funds will be spent on when the money is returned. Typically, a feasibility study for a bank is not very large. Nevertheless, the decision will depend on a well-written justification: whether the borrower will be given a loan or not. An approximate feasibility study for a credit institution looks like this:
- Date of conclusion of the contract.
- Funds available to the organization at the moment.
- Currency fluctuations during the period of the transaction.
- Transaction cost.
- Projected profit from the project.
- Possible costs.
- The amount of tax on projected profits.
- The specific amount of money that will remain with the borrower after all loan and tax obligations have been repaid.
Conclusion
A good example of a feasibility study is a document that briefly and concisely reflects all the aspects of the project being put forward for implementation. After reading the information contained therein, the investor or bank must clearly understand the idea and feasibility of the new direction. The process of implementing the project itself does not need to be described here; all that is required is to attract the attention of the investor.
Feasibility Study (TES)
A feasibility study (TES) is a study of the economic profitability, analysis and calculation of the economic indicators of the investment project being created. The purpose of the project may be the creation of a technical facility or the construction or reconstruction of an existing building.
The main task in drawing up a feasibility study is to assess the costs of an investment project and its results, and analyze the payback period of the project.
It is necessary for the entrepreneur himself to draw up a feasibility study to understand what to expect from the project, and for an investor, a feasibility study of an entrepreneur requesting investment is necessary to understand the payback period for the money invested. The development of a feasibility study can be entrusted to a group of specialists (in complex projects), or it can be compiled independently by an entrepreneur.
What are the main differences between a feasibility study and a business plan?
Typically, a feasibility study is compiled for new projects at an existing enterprise, so blocks such as marketing research, market analysis, description of the enterprise and product are not described in such feasibility studies.
But sometimes a situation arises and additionally the feasibility study provides detailed data on the analysis of technologies and equipment and the reasons for their choice.
Thus, a Feasibility Study (TES) is a shorter and more substantive document than a full-fledged business plan.
Methodology for compiling a feasibility study.
When compiling a feasibility study, the following sequence of thematic parts is allowed: - initial data, information about the market sector, - existing opportunities for the existing business of the enterprise, - sources of raw materials, material factors for business development, - capital costs expected to achieve the goal, - operating costs during the implementation of the project , - production plan, - financial policy and financial component of the project, - general information about the future project. In general, the feasibility study provides a description of the industry in which the enterprise operates, and provides a rationale for the choice of territorial and geographical location of the existing and proposed business, as well as describes the type of products manufactured. Here it is necessary to describe and justify prices for manufactured products. At the same time, the financial part of the feasibility study contains information about sources of financing and debt repayment terms, conditions for the use of borrowed funds. Calculations in a feasibility study consist of tables that present cash flows and balance sheets. This structure of the feasibility study may not be the only correct one and may vary depending on the specific project. Also, it can be expanded for large and complex business projects. What is the difference between a feasibility study (TES) and a business plan?
In modern business and office work, the terms business plan and feasibility study have firmly entered the vocabulary of entrepreneurs and economists, but there is still no clear division of such concepts. The material attempts to highlight the similarities and differences between a business plan and a business feasibility study.
Theorists offer the idea that a feasibility study is the result of a variety of studies, both economic and marketing research. But at the same time, a conclusion is made about the feasibility of the project, and a range of economic, organizational and other proposed solutions for optimizing the production process is determined. At the same time, a feasibility study is often an integral part of a business plan.
At the same time, there is an opinion that a feasibility study, to some extent, is either an abbreviated version of a business plan, or, on the contrary, it is a regular business plan, which is called a feasibility study.
It should be noted that if the procedure for drawing up and the structure of a business plan are clearly spelled out, then when drawing up a feasibility study you can find several different writing options, which differ depending on the problems being considered.
There are the following options for feasibility studies in practice:
Example No. 1
1. the real state of the enterprise; 2. market analysis and assessment of the production capacity of the enterprise; 3. technical documentation; 4. situation with labor resources; 5. organizational and overhead costs of the enterprise; 6. estimation of project duration; 7. analysis of the financial attractiveness and economic feasibility of the project.
Example No. 2
1. the essence of the proposed project, presentation of the basics of the project and the principles of its implementation; 2. a short overview of the market, a presentation of the results of various studies in order to study the demand for new service or goods; 3. technological and engineering aspects of the project: a) description of the production process; b) evidence of the need to purchase new equipment or modernize old equipment; c) comparison of the new product with current quality standards; d) review of the strengths and weaknesses of a new product or service; 4. financial and economic indicators, including: a) expected and necessary investments in the project; b) expected internal and external financial sources; c) production costs; 5. assessment of the effectiveness and payback of the promoted project, guarantee of repayment of external borrowings; 6. susceptibility of the proposed new product or service to existing risks in the markets, as well as resistance to possible risks in the future; 7. general assessment of the effectiveness of possible external borrowing.
Example No. 3
1. summary all the main provisions of the feasibility study; 2. conditions for implementing a new project (who owns the authorship of the project, source material for the project, what preparatory activities and research have already been carried out, etc.); 3. analysis of proposed sales markets, review of the production capabilities of the enterprise, as well as calculation of the peak capabilities of the enterprise and a number of other factors; 4. This section reflects everything related to ensuring production (necessary inventories and production resources), analysis of existing contractors and possible suppliers, analysis of possible costs for various production factors; 5.section is devoted to the territorial location of the enterprise and the costs associated with this position (approximate estimate of where the enterprise will be located, preliminary calculations associated with paying for the rent of a site for production or office space); 6. design and project documentation (assessment of the necessary technologies for the new project, assessment of additional auxiliary facilities, without which production will be impossible; 7. organizational and other additional costs associated with the new project (calculation of additional costs, as well as an outline of the expected structure of the future production); 8. analysis of labor resources for a future project (assessment of the human resources that will be needed to launch a new project). The estimated number of workers and maintenance personnel, the required number of engineering and technical workers are indicated. In addition, it is indicated whether only local workers will be involved , or non-resident (foreign) specialists. The same section indicates the calculated costs of labor, taxes associated with wages and a number of other points; 9. progress schedule for the implementation of the presented project; 10. general assessment of the economic and financial viability of the planned project. Note that many of the examples of feasibility studies given, especially the last example, resemble a detailed business plan. There is a fine line between a feasibility study and a business plan, and this leads to the fact that with a high degree of confidence we can say that if you are required to provide a feasibility study for a project, you can safely draw up a detailed business plan, while leaving unnecessary disputes - theorists of economic science, but it’s better to get down to business.
Methodology for compiling a feasibility study (TES)
2. general description project, input information about the project. Information about studies that have been carried out in advance, an assessment of the necessary investments. 3. Description of the market and production. Assessment of demand and forecast of future sales, description of the enterprise's capacity. 4. Raw materials and resources. Calculation of the required volumes of material resources, forecast and description of the supply of resources to the enterprise, analysis of prices for them. 5. Selecting the location of the enterprise (enterprise facilities). Justification for choosing a location and assessment of the cost of renting a room or site. 6. Project documentation. Description of the production technology for future products, characteristics of the necessary equipment, additional buildings. 7. Organizational structure of the enterprise. Description of the enterprise organization and overhead costs. 8. Labor resources. Assessment of the need for labor resources divided into categories (workers, employees, top managers, executives, etc.). Estimating salary costs. 9. Timing of the project. Project schedule, cost estimates, trench sizes, etc. 10. Economic calculations. Estimation of investment costs, production costs, financial assessment of the project.
The difference between a feasibility study and an Investment Memorandum.
When conducting research in the field of marketing, the task of which was to identify consumer preferences in the market of consulting services, the need for writing investment memorandums and business plans was also identified. In the course of the analysis of surveys, questionnaires, written requests, we can conclude that in modern Russian market business services, there is some uncertainty regarding the definitions and interpretations of a number of related concepts, such as: investment memorandum, feasibility study and business plan. Let us give an explanation of the frequency of the birth of these economic documents. Before the investment memorandum appears, a feasibility study or feasibility study is created - this is the basis for determining the need for financial investments. A feasibility study is a document, usually created by leading financial managers of companies. The purpose of a feasibility study is to determine whether a given financial investment is promising and capable of bringing financial benefits. When creating an investment memorandum, they essentially pursue the same thing, but the investment memorandum is created for investors. Having created a feasibility study, they move on to drawing up a more thorough document, which determines how the newly created product or project will behave in the conditions of the existing market. And also, what impact will existing competitive factors in the market, as well as current and future risks, have on the planned project. This kind of document is called a business plan. While working with a business plan, as a rule, the costs of a commercial structure begin to increase, associated with the need to work in the field of research in the field of marketing. Such studies aim to determine how well the assumptions set out in the feasibility study will correspond to the data that will be obtained during these studies. If these studies lead to the fact that if the data, assumptions and proposals of the feasibility study are confirmed during marketing research, then the project has the right to qualify for funding. Financial calculations later form the basis of the investment memorandum. The birth stage of a new enterprise is extremely important for financial managers. At this stage, the definition and formation of the enterprise’s policy begins, information begins to arrive that gives real information about the possible sides and speeds of development.
What is the difference between an investment memorandum and a feasibility study?.
In the course of assessing the current situation of the enterprise, as well as possible future risks, a document called the “Investment Memorandum” is developed. The main purpose of the investment memorandum is to attract, if necessary, external financing to the existing project.
Most often, an investment memorandum is formed by a consulting company on the basis of a business plan and differs from it in that it includes information of an investment nature. At this stage, the financiers of the enterprise must constantly monitor the state of the market. The purpose of such work is to monitor competing structures, identify new opportunities in existing markets and find possible new niches for development. In this case, the main task comes down to calculating and identifying the stage of development when the enterprise will need financial investments, writing an investment memorandum and attracting strategic investments in its project. And in addition, financial managers must determine and calculate the amount of necessary financial investments into the project. The period when financial managers of an enterprise begin to work out various development scenarios is the initial period when drawing up an investment memorandum. Various scenarios for the development of events are identified. Pessimistic scenario (all possible consequences of insufficient financing and associated profitability indicators and business risks are calculated). An optimistic scenario where it is necessary to reflect economic indicators with sufficient funding.
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There is a common misconception that a feasibility study is nothing more than a condensed version of a business plan with a significantly reduced or missing marketing section. This is actually not true. What then is a feasibility study for a project? An example in this article.
The essence of the term
A feasibility study, or feasibility study, is a printed confirmation of the technical viability of a project and its feasibility from an economic point of view. This formulation seems logically complete and understandable. A feasibility study is an idea reflected on paper.
For clarity, the term “business plan” can also be defined. A business plan is a detailed document containing the following information: who will implement the project and with what tools, in what period of time and in what markets the goods or services will then be presented. At the same time, a feasibility study is a component of a business plan, since the implementation of any project is preceded by its technical and economic assessment. In other words, if a feasibility study is a document that contains a business plan, it is step by step plan on its implementation.
When creating a feasibility study for the construction of an enterprise, it is necessary to take care of its maintenance. This will be the basis of the project. The content of a feasibility study usually includes the following items: name, project goals, basic information about the project, economic justification, additional data and applications. In this case, the economic justification is supported by subparagraphs, namely: the cost of the project, calculation of the expected profit, as well as economic efficiency indices.
The given content of the feasibility study for production is indicative and includes only the main sections. If they are not enough, then you can use other additional ones that will help in the implementation of the project.
Title and goals
The title should be short but informative. In addition, an attractively formulated title of the feasibility study of the project will help to hook the investor. Example - “Center for Precision Instrumentation”. The purpose of the project should also be stated concisely. The main objective of these two parts of the feasibility study sample is to produce good impression and interest the investor. Too much text can discourage you from reading the project.
Basic information. Project cost
A feasibility study of a project, an example of which includes the types of activities of the company, as well as a list of manufactured products, is considered successful. In addition, a description of production capabilities and planned production volumes must be included in the basic information. The section on the cost of implementation should contain a list of works that will be required to complete the project, as well as their cost.
Next, you should indicate the expected amount of income and expenses, provided that the project enterprise will operate at the planned load. Based on this data, profit is calculated. It should be noted here that depreciation deductions should be a separate item. Investors often regard this indicator as one of the sources of profit.
A feasibility study of a project, an example of which includes the main indicators of investment efficiency, is competent. These include the amount of investment, net profit for the year, internal rate of return (IRR), (NPV), payback period of the project and BEP for the year - break-even point.
Additional information and applications
The additional information section should include any materials that will help enhance the impression of the project and highlight its positive and beneficial aspects. In addition, such information should be aimed at revealing the main objectives of the project, as well as emphasizing its economic efficiency and benefits for the investor. Additional Information, moreover, appropriately designed, will add weight and solidity to the project. In addition, these materials will not overload the main points of the feasibility study, as they are presented in a separate section. But at the same time, it should be emphasized that there is no place for unhelpful information here. Any information and data must be of value to the investor.
In conclusion, I would like to remind you that a good and competent example of a feasibility study is a document that is concise and specific. The main idea should be clearly understood from it. A feasibility study does not require detailed description the process of project implementation itself, but is intended only to attract the attention of the investor. But after achieving this goal, you will need a business plan.
