Canadian Farm Business Advisory Services

Planning and Assessment for Value-Added Enterprises

Elements of a Feasibility Assessment

What is a feasibility assessment?

Starting a value-added enterprise or expanding an existing one can be risky. Risk or uncertainty may relate such factors as doubtful market potential or the high cost of production. To identify and assess these factors and to minimize the risks, a useful tool is a feasibility assessment. This document is a formal process to determine whether a specific value-added proposal has profit potential and is financially sound. It will help you decide whether to proceed with, alter, or drop a particular project or plan of action.

A feasibility assessment for a value-added enterprise differs from a business plan. Although much of the information used in a feasibility assessment will find its way into a business plan, the major difference is that a feasibility assessment is undertaken to research and analyze all possible options for action before a decision on one particular course of action is made. The business plan summarizes the plan of action after a decision has been made. Both documents are important for potential investors and your lending institutions.

The feasibility assessment of a value-added enterprise is a written report that will recommend to either move forward or reject the proposed project. Depending on the particular project, the feasibility assessment may focus on market analysis, operational/technical analysis, or a combination of both. The emphasis will be on whatever factors are the greatest threat to the success of the project. All feasibility assessments must include profitability, break-even and cash-flow analysis, and capital requirements. The level of detail of each of these required elements will depend on the significance of the particular element to the feasibility of the project.

If the decision is to move forward, then elements of the feasibility assessment will be integrated into a comprehensive business plan.

Elements of feasibility assessments

The elements to be contained in a feasibility assessment and in the subsequent business plan for a feasible project are outlined below. You may wish to include additional chapters in your feasibility assessment; however, the chapter headings listed below must at least be addressed and considered. With each chapter heading we have also provided sample content the extent of which you may minimize or maximize accordingly.

• Executive Summary
• Description of the proposed venture
• Market/demand analysis
• Production/technical analysis
• Profitability analysis
• Cost and break-even analysis
• Cash-flow analysis
• Capital requirements
• Management and human-resources assessment
• Assessing the investment
• Recommendations

Chapter headings and Depth of analysis

1. Executive summary

• Summarize the proposed project
• Provide a rationale for conducting the feasibility assessment
• Explain the focus of the assessment
• Provide a profitability analysis
• List the important considerations
• Provide final recommendations

2. Description of the proposed venture

• Provide details about the proposed project, its short and long-term objectives, and its anticipated economic benefits
• Include a clear statement of what the farm or agribusiness wants to do and why
• Explain the focus of the assessment (market or operational aspects or both)

3. Market/demand analysis

• Give detailed estimates of market size/potential
• Identify main customers/target market
• Provide an assessment of competitors
• Include the short and long-term outlook for the current market
• Describe the trends affecting the market
• Identify how the market needs will be served
• Explain any distance from market/transportation considerations (if any)
• Explain the methods of promotion and distribution

4. Production/technical analysis

• Analyze all of the factors involved in processing the product until the time it leaves the farm or business owner's control (factors include the availability of required inputs, assurance of future input supply, minimum facility requirements (land, equipment, storage needs and capacity, buildings), adequate labour supply, and legal constraints on the business)
• Identify environmental and regulatory requirements and their associated risks
• Conduct risk assessment, including insurance considerations

5. Profitability analysis

• Develop assumptions from the market/demand analysis and the production/technical analysis, including eligibility for tax credits (assumptions include sales and price forecasts and costs of operations according to fixed and variable costs)
• Develop pro forma income statements and balance sheets to gauge the future growth potential and assess financial performance (income projections should cover the next one to five years)
• Analyze strengths, weaknesses, opportunities, and threats (SWOT), particularly the implications of economic, social, technological, environmental, policy, or regulatory change

6. Cost and break-even analysis

• Analyze fixed costs (e.g., rent, interest, insurance) and variable costs (e.g., direct labour, fertilizer, fuel)
• Estimate client's break-even level (determine required sales per day, month, or year to be profitable)
• Calculate the break-even production levels and the contribution margin (i.e., sale price minus variable cost)

7. Cash-flow analysis

• Compare cash-flow projections with available funds
• Analyze cash-flow requirements

8. Capital requirements

• Identify capital sources, including long-term debt and operating line of credit, equity (this section highlights the amount of capital required, the financing requirements and under what terms and conditions, security available, and what repayment strategies and exit strategies will be employed if the plan projections do not materialize)

9. Management and human-resources assessment

• Identify the proposed business owners and managers and their roles
• Assess their management capability and experience
• Provide information on professionals assisting the business
• Assess labour-market considerations and constraints

10. Assessing the investment

• Provide an assessment of the risks in the sales and costs forecasts, and thus in the expected income stream
• Assess the value of the income stream relative to the capital investment required (i.e., is the venture economically feasible?)

11. Recommendations

• Consider all information and alternatives to determine the feasibility of the project
• Provide a rationale to substantiate the recommendation on whether to proceed with developing a comprehensive business plan for the proposed project

Preparing the Proposal and Elements of Your Plan >>