Business feasibility study: a step-by-step guide

There are two ways to discover that a business won't survive. One is to set it up, rent the premises, buy the equipment, open the doors and spend six months watching fewer people walk in every week. The other is to spend two afternoons doing the sums beforehand and, if they don't add up, calling it off in time. The second is called a feasibility study, and the method is the same in any city.

What it is (and how it differs from a business plan)

The feasibility study answers a single question: can this business make enough money to sustain itself? It adds up expected income, subtracts expected costs and checks whether the result stacks up. It's a filter, not a plan.

The business plan comes afterwards: it only makes sense to write it once you know the project is viable. The order matters. Plenty of people start with the plan (50 pages of vision, strategy and branding) and only discover the numbers at the end, once they're already in love with the project. The feasibility study comes first, in an afternoon, with three tables.

The 3 numbers that really matter

Forget the complex financial models. There are three numbers that decide whether a business holds up, and you can work them out on a spreadsheet:

1. Break-even point. How many monthly sales you need to cover all your fixed costs. If you need to sell €8,000 a month and the area only supports €5,000, no miracle will save it.
2. Payback. How many months it takes to recover your initial investment. Above 36 months, the risk is high. Below 18, the project flies.
3. IRR (the project's annual return). What percentage return it leaves you each year once up and running. Below 10%, you're better off in an index fund. From 20% upwards, it's worth the risk of opening a business.

If all three numbers stack up, the project is financially viable. If only two do, you need to adjust. If only one stacks up, better to stop.

The 6 steps, in order

1. Define the proposition and the tentative location. What you sell, to whom and where. Without this, the figures mean nothing.
2. Work out the potential demand. How many people of your target profile live or work in the catchment area. Use the data from each country's statistics institutes and the municipal population registers.
3. Map the costs. Initial investment (fit-out, furnishings, licences, stock) and monthly fixed costs (rent, staff, utilities, accountant).
4. Estimate income across three scenarios. Pessimistic, realistic and optimistic. If the pessimistic one covers the fixed costs, the project is alive.
5. Work out the three numbers. Break-even, payback, IRR.
6. Decide. Press ahead, adjust the model or shelve the project. All three are valid decisions.

An illustrative example: a speciality coffee shop

Imagine a coffee shop of around 60 m² in an established central area with above-average income, the kind of neighbourhood you'll find in almost any European city. The figures that follow are hypothetical and only serve to show the method: you'll have to look up the real figures for rent, wages and spending in your own city and sector. Now for the case:

• Initial investment: about €65,000, made up of light fit-out (15,000), machinery and furnishings (25,000), licences and permits (5,000), opening stock (5,000) and a cushion for the first three months (15,000).
• Monthly fixed costs: rent €2,500, staff (one manager and one part-time assistant) €3,800, utilities €600, accountant and other €400. Total: €7,300/month.
• Income, realistic scenario: 90 daytime tickets (€4.5 average) plus 30 afternoon tickets (€8 average) over 26 days = €16,770/month. Variable cost of raw materials at 28%: €4,700. Gross margin: €12,070.
• Monthly result: 12,070 − 7,300 = €4,770 operating margin. Annual: about €57,000.
• Payback: 65,000 / 4,770 ≈ 14 months. Conservatively, with quiet months, about 30 months.
• Estimated IRR: around 22% a year once at cruising speed.

With these example figures, the project would be viable. Change a single variable and the story changes: if the realistic scenario gave a monthly margin of €500 instead of €4,770, the payback would shoot up past 100 months and the IRR would drop below 5%. In that case the conclusion would be clear: don't open. That's exactly what the study saves you from discovering with the premises already rented.

3 mistakes that wreck the study

• Being optimistic about income. The most expensive mistake: slotting in the scenario you're hoping for as if it were the realistic one. Always set the realistic one below what you believe, and work through the pessimistic one too.
• Forgetting the "small" costs. Accountant, software, insurance, maintenance, equipment replacement. On their own they look minor; together they can be €800 a month that weren't on your sheet.
• Not including your own salary. Working for free is not a business model. If the project shows no profit after paying your salary, the business isn't viable: you've bought yourself a badly paid job.

Location is 50% of the study

The study's income depends directly on the location: how many people you reach, what income they have and what competition steals your customers. See how to find the best location before closing the numbers: changing neighbourhood can double the forecast sales with the same concept. It's the biggest lever.