A financial feasibility analysis is a way to see if a business idea or project can be profitable. It tells us whether the project is going to earn more than its cost. It helps business owners and investors determine whether to proceed or stop. Tools: Financial feasibility analysis employs tools such as cost and revenue projections, break-even points, and financial ratios. It highlights the necessity of financial Feasibility in business planning. To put it simply, this study answers whether a business has the potential to make enough money to recover its cost and make a profit.
In this article, we will discuss each component of financial feasibility analysis in detail. We will also describe its nature, tools, stages, and use cases. You will also discover the financial ratios, cost-benefit analysis in the feasibility study, and the use of this study by startups prior to implementation. Let’s begin!
What Are Financial Ratios?
Financial Ratios help us make sense of a business’ money performance. They indicate how much money is received, how much is spent, and whether the business can pull through.
Financial Feasibility Analysis and Financial Ratios
Financial Ratios are the keys to Financial Feasibility Analysis Capital (what the business spends money on). Those ratios are useful for comparing these previous figures and future estimates. However, if ratios show that the business is weak, the plan is unlikely to succeed. However, the idea might work if the ratios are strong.
Financial ratios fall in the financial type of feasibility analysis, of which you could name many types. These ratios are used to test whether the idea is financially viable in the financial plan for a feasibility study.
Several important financial ratios are:
- Profit Margin: Tells how much of a business’s money it keeps after paying expenses.
- ROI: Indicates whether invested money returns satisfactory profits.
- Liquidity Ratios: Indicate whether the business can pay its bills on time.
- Debt to Equity Ratio: It indicates whether the company has more borrowings or its funds.
However , these ratios indicate whether the company has a healthy future. All of these ratios will prove whether or not a business idea is good and will be shown in an example of the feasibility study.
Decision-Making with Financial Ratios
Consider a business startup venture. The founder would like to own a food truck. They then add profit margin and ROI to the financial feasibility study PDF. The concept is solid if ROI is high and costs are contained.
- Banks also use these ratios to lend. They want to know if they can get paid back. If the debt ratio is excessive, they may refuse.
- Even these ratios help make good planning. That tells the owner to cut costs as the profit margin is so low. The bad liquidity ratio indicates that the owner should continue to keep cash ready.
- Financial ratios are more than number crunching. They are resources for making wise money decisions.
Cost Benefit Analysis in Financial Feasibility Studies
Every business must violate whether the profit reaches the cost. That is the reason that cost-benefit analysis becomes crucial in financial feasibility analysis.
Cost Benefit Analysis in Feasibility Study
The cost-benefit analysis in a feasibility study advises you and compares the overall costs of a project and the complete benefits expected. If benefits exceed costs, you have a good project. If not, then it may not work.
- This analysis is applicable in many forms of feasibility analysis but is mandatory for financial studies. This addresses the burning question: “Will this project earn me more than it costs?”
- Cost-benefit analysis is an eminent aspect of the financial component of a feasibility study. It needs clear numbers. You must write down:
- Total cost to get the project started.
- The duration from which to recoup that money.
- Future earnings are the total profit expected in future years.
Now consider a situation where a person wants to open a coaching centre. The cost of starting up is ₹5 lakh, he discovers. He hopes to make ₹1.5 lakh each year. And in his break-even analysis in the feasibility study, he finds that he will break even in 3.5 years. After that, he pockets all the profit.
Cost Benefit Analysis: Real-World Value
This tool helps people choose from two different plans. Suppose you want to open a shop or have a delivery service. For both ideas, you will do a cost-benefit analysis in the feasibility study. This one is compared to which one gives more profit in less time.
- This way, we avoid any losses. Many projects fail for this very reason which is that they are ignored. They spend too much and make too little. The cost-benefit analysis quantifies this before you invest real money.
- Similarly, when you apply for loans or solicit investors, they expect this analysis. It builds trust. It jumped out like you know what you are doing.
- So that it avoids losses and gets financial support, it is run in every financial feasibility analysis.
Importance of Financial Feasibility
Every business owner should ask themselves before launching a business, “Will this business sustain and be profitable?” And that is why we need to know what financial viability means.
Importance Of Financial Feasibility are as follows:
For example, several small businesses go under in 1-2 years in India. They do because they never considered money planning. This is where financial feasibility analysis comes in. It is good to know if the plan is safe. This paper demonstrates the price, the predicted revenue and the time needed to cover costs.
Good ideas and good business are often conflated. But not all ideas make money. A feasibility study is supposed to have a Financial plan for the money that is going to March Mad.
The same applies to government projects and NGOs. They need to determine, before using public funds, whether the project justifies the outlay.
Enables Better Planning and Loss Prevention
Another benefit of this analysis is improved planning. It shows where the money goes. You may eliminate extra costs and pay attention to good returns. It enhances your complete financial projection in the feasibility study.
- Well, a good study also supplements break-even analysis in the feasibility study. It tells you how much you need to make to cover all your expenses. If this figure is too large, you can adjust your plan.
- The financial part of a feasibility study can also help you prepare for tough times. You recognize the risks, and you plan backups.
It builds trust with stakeholders.
If you have this report handy for a bank or investor, they have more peace of mind. They note that you have prepared well. That builds trust. Your PDF financial feasibility study is your resume. It shows your seriousness.
Students and startup founders have to learn about financial Feasibility. It is not just about money. It’s about thinking smart and planning well.
If you want your plan to grow into a business, then always do this study first.
Process of Financial Feasibility Analysis
A Financial feasibility analysis, which you must do in the following steps when you start a project or business. These steps are designed to help you get a solid plan in place.
A financial feasibility analysis is like making sure there is enough gas in your car before you take it on a road trip. It ensures that you do not get stuck in between.
Step 1: Collect Basic Data
Step one is to get all of the facts. Know what it is, who will buy it, and for how much. This base is somewhat similar to your feasibility study example.
Step 2: List All Costs
Write down all the expenses next. I.e., one-time setup cost and monthly running cost. A few — rent, salary, electricity, raw material etc. In your financial plan for feasibility study, it turns out to be a cost chart.
Step 3: Estimate Revenue
Take a wild guess about how much you can make every month. Be honest. Use market prices and look around at similar companies. It will help you make financial projections for the feasibility study.
Step 4: Perform a Break Even Analysis
Last, calculate the break-even point. This says when your earnings will equal your total cost. Knowing how long it takes to recover your capital investment is one of the many reasons a break-even analysis in a feasibility study is required.
Step 5: Add Financial Ratios
Enter important ratios such as profit margin and ROI. Use this information to assess the quality of your plan. Now, this is where the financial side of a feasibility study receives true value.
Step 6: Weigh Up Costs Versus Benefits
This is a cost-benefit analysis of a feasibility study. Look at how much you spend versus how much you make. Your plan would be good if there were more benefits.
Step 7: Write a Final Report
This will be your report. Please share it with partners, banks or investors. This study will guide you in making better decisions. You’ll save money and save yourself a failure.
Relevance to ACCA Syllabus
In ACCA, financial feasibility analysis is necessary for any investment decision, capital budgeting, and project financing. It covers paper areas FM, SBL, and AFM. For ACCA, students must know how to evaluate a project/investment’s financial viability with NPV, IRR, and payback period.
Financial Feasibility Analysis ACCA Questions
Q1: What is a financial feasibility analysis?
A) Campaigns to onboard them
B) So they work effectively
B) Assess when project finances become viable
D) measure the satisfaction of employees
Ans: a) To evaluate the economic feasibility of a project
Q2: What is the time value of money and how is it associated with the financial feasibility?
A) Payback Period
B) Net Present Value (NPV)
C) Break-even Analysis
D) SWOT Analysis
Ans: B) Net Present Value(NPV)
Q3: what is NPV Acceptance Criteria in Financial Feasibility Study
A) Positive
B) Negative
C) Equal to zero
D) Less than IRR
Ans: A) Positive
Q4: The payback period method suffers from what limitations?
A) It considers time value of money
B) It includes all cash flows
C) It fails to look at cash flows after getting to break-even
D) Good for long run projects
Ans: C) Since it overlooks cashflows post break even
Q5: IRR = The rate of return which:
A) Zero the NPV of a project
B) Increases project risk
C) Maximize shareholders equity
D) Reflects historical cost
Ans: A) NPV of a project is 0
Relevance to US CMA Syllabus
Assuming that you are a CMA aspirant or a CMA, who is currently in India. To begin with, One of the core areas mentioned in the US CMA syllabus is financial feasibility analysis. It uses IRR, NPV and profitability index to help management accountants assess the potential advantage of capital investment and to make data based decisions. This is used by CMAs to direct financial resources to long-term strategies.
Financial Feasibility Analysis CMA Exam Questions
Q1: Which of the following best defines the purpose of calculating Return on Investment (ROI)?
A) Total project cost calculation
B) Analysis of the payback period
D) To determine the return in the investment value
D) To assess working capital
Ans: C) Measure of value generated vs investment
Q2: Which capital budgeting tool ranks projects by value added per dollar invested?
A) Net Present Value
B) Profitability Index
C) Internal Rate of Return
D) Payback Period
Ans: B) Profitability Index
Q3: If a project requires an investment of ₹1,00,000 and generates an annual return of ₹13,000, what is the Return on Investment (ROI)?
A) 10%
B) 11%
C) 12%
D) 13%
Ans: D) 13%
Q4: [Risk-return] What is the financial metric that takes risk and return into account?
A) IRR
B) Cost of capital
C) Capital Expenditure
D) Sensitivity Analysis
Ans: A) IRR
Q5: A financial feasibility study mainly falls under management accounting.
A) Product Quality
B) Customer behaviour
C) Project funding and ROI
D) Employee development
Ans: C) ROI & project financing
Relevance to US CPA Syllabus
It is the basis of decision making in financial feasibility analysis in capital project, investment analysis and budgeting (BEC& FAR sections for US CPA exam). CPAs perform audit, financial reporting and advisory services utilizing these competencies.
Financial Feasibility Feasibility Analysis CPA Questions
Q1: Financial feasibility analysis is partial sensitivity analysis.
A) Increase fixed costs
Option B: Crossover scenarios to validate assumptions
C) Determine historical costs
D) Estimate sunk costs
Ans: B) Test assumptions against multiple conditions
Q2. What isn’t often mentioned when measuring financial viability?
A) Estimating revenue streams
B) Calculating NPV
C) Evaluating IRR
D) Filing tax returns
Ans: D) Filing tax returns
Q3: You mentioned another conversation about electrical NPV on the capital budget? What is that about?
A) Lower risk
B) Higher profitability
C) Higher depreciation
D) Lower project cost
Ans: B) Higher profitability
Q4: Break even point calculation is very important because it tells your business how much sales you need to at least cover its costs.
A) Time taken to earn ROI
B) The break even in sales.
C) Fixed asset depreciation
D) Inventory turnover
Ans:T: B) Total Sales Quantity at breakeven point
Q5: You have stated a new business line in a financially sound declaration?
A) Feasibility report
B) Trial balance
C) Audit opinion
D) Chart of accounts
Ans: A) Feasibility report
Relevance to CFA Syllabus
Corporate Finance: CFA candidates study financial feasibility analysis here. They learn techniques such as capital budgeting, project analysis and risk assessment. CFA, for example, uses net present value, internal rate of return and scenario analysis for investment appraisal.
Financial Feasibility Analysis CFA Questions
Q1: Which of the following approaches to capital budgeting decision-making is LEAST consistent with maximizing shareholder wealth?
A) Accounting Rate of Return
B) Payback Period
C) Net Present Value
D) Internal Rate of Return
Ans: C) Net Present Value
Q2: If IRR of project < cost of capital, then this project should be –
A) Accepted
B) Delayed
C) Re-evaluated
D) Rejected
Ans: D) Rejected
Q3: If a project has an NPV below zero, that simply means that the project is not a good idea.
A) Will break even
B) Is financially feasible
C) Should be undertaken
D) Reduces shareholder value
Ans: D devaluation of share holder value
Q4: A speculator makes capital budgeting decision* has made capital budgeting decision about…*
A) Consider sunk costs
B) Based on historical data
C) Use forward-looking data
D) Ignore inflation
Ans: C) Activity: Address lead indicator not waiting for end result
Q5 : What is financial feasibility?
A) Regression analysis
B) Sensitivity analysis
C) Cost-benefit analysis
D) Vertical analysis
Ans: B) Sensitivity analysis
