Feasibility Analysis, Part Two

Fortunately, these decisions are purely theoretical, meaning that you can change your choices based on what you discover for yourself. To paraphrase Rommel, you can't become absorbed in your own theories; you must adapt them to the conditions. The Desert Fox was speaking of tank warfare, but the modern economy is a battlefield as savage, if not as bloody, as any other.

There are two things to think about in the next phase of your analysis. What you want the company to look like structurally and where you want to be located. Some businesses require a very rigid structure in order to succeed. Others operate best when people are free to do their own thing. Some businesses can be run from your kitchen table, while others obviously require a specific location. Take the time to analyze who your clients will be, where do they operate, what will they expect from you as an organization? By truthfully answering these questions you can begin to eliminate things that will definitely not work and can continue to hone your ideas about what will.

Get out your calculators and your old math class notes, because the fourth step, financing issues, will require every mathematical skill you've got. For the feasibility analysis, you'll want to plan for costs for the first full year of operation. Your first concern is that year's expenses. Start-up costs, such as buying the space and tools you need, are probably going to be the most daunting and discouraging task of the analysis, but you still must continue to expect the worst. Though you'll probably end up cutting costs somewhere, don't skip buying vital items entirely, though finding lower prices for these items will probably help you immensely. You'll also have to tend to personnel costs for your first year; find out what positions you'll need to hire people to fill and how much you'll need to pay those people for those positions. Similarly, you'll also want to provide money for your own survival. There will also be operating costs, ranging from shipping costs to rent to power and water bills.

There a few figures you'll want to total up at this stage of the analysis. The first is your total fixed costs (TFC), which are expenses that the cost of which won't change. The second is the price of a single unit of what you're selling (P). The third is the variable costs (VC), the cost to you, the business owner, of producing a single unit of your product, whatever it may be. The number of products you need to see for your business will to for itself (the break even point, or BE), can be calculated by dividing your total fixed costs by the number you get after subtracting the price of each unit by the cost to produce each unit, or BE = TFC % P - VC.

If you are at all hesitant or uncomfortable with the number of units that you think you can move annually, go ahead and refigure with more accurate numbers. It's not a big deal to go back at this stage and make a change. The point is to make your predictions realistic so you don't run headlong into failure down the road. You want to move on from this point in the study with a firm idea of what your potential is.