Farm Diversification

A feasibility study is designed to provide an overview of the primary issues related to a business idea. The purpose is to identify any “make or break” issues that would prevent the business idea from being successful in the marketplace. In other words, a feasibility study determines whether the business idea is viable. This knowledge is crucial for any farm business choosing to diversify. Diversification is not a risk-less exercise but completing a feasibility study at the first stage of the planning process can help identify and eliminate the potential risks involved.

A thorough feasibility study provides much of the information necessary for a business plan. It is therefore appropriate to complete a feasibility study prior to carrying out a business plan. For example, a good market analysis is necessary in order to determine the enterprise’s feasibility. This information can then provide the basis for the market section of the business plan.

Since putting together a business plan is a significant investment of time and money, you want to make sure that there are no major hurdles facing your business idea before you make that investment. Identifying such hurdles is the main purpose of a feasibility study.

A feasibility study looks at three major areas:
1. Market issues
2. Operational/technical issues
3. Financial issues

The study should be a “first” look at these issues. For example, a feasibility study should not do in-depth long-term financial projections, but it should do a basic break-even analysis to see how much investment would be required to meet your operating expenses. When preparing each area of the feasibility study there are key questions that should be addressed.

Market Analysis:
Key market questions to answer include:

• What, precisely is the market? The more specific you can be, the better.
• Is the market growing, shrinking, or staying the same?
• Is it worth your while? Is the market you’ve identified big enough to make it worth the time?
• What is the current or projected demand for your proposed products or services? In other words, how many units can you reasonably expect to sell each month?
• What are the target markets for this product or service? What demographic characteristics do these potential customers have in common? How many of them are there? 
• What is the projected supply in your area of the products or services needed for your business?
• What competition exists in this market? Can you establish a market niche which will enable you to compete effectively with others providing this product or service?
• Is the location of your proposed business likely to affect its success? If so, is the identified site the most appropriate one available?

The market analysis should be conducted first because it is critical to the success of the business. If you cannot substantiate through research that adequate demand for your product or service exists, or if you cannot obtain sufficient quantity to meet expected demand, then your business is not feasible.

Key Operational and Technological Issues:
Once market issues have been addressed, it is time to take a look at key operational and technology issues that are relevant to your business. Key operational questions to answer include:

• What business structure is right for your business? Sole trader, Partnership, Limited Company
• What qualifications are needed to manage the business? 
• Who will manage the business?
• What other staffing needs does the business have? How do you expect staffing needs to change over the next 2-3 years?

While you need not know the answers to all the other questions in order for the business to be feasible, they must all be satisfactorily answered before you begin operations. This is a good time to begin the process of identifying appropriate individuals for management and other staff positions, and to think carefully about what qualifications are necessary to manage this business. The cost and availability of technology may be of critical importance to the feasibility of a business, or it may not be an issue at all. For example, a service business, such as a cattery or kennels, will have little equipment and other technology-related issues to address. A manufacturing enterprise, on the other hand, may have a number of complex technology questions to analyse in order to determine whether or not the business is feasible.

Key technological questions to answer include:

• What are the technology needs for the proposed business?
• What other equipment does your proposed business need?
• Where will you obtain this technology and equipment?
• When can you get the necessary equipment?
• How does your ability to obtain this technology and equipment affect your start-up timeline?
• How much will the equipment and technology cost? Keep in mind that technology doesn’t necessarily mean complex machinery; if your business simply needs a personal computer, printer, and fax machine, those are your technological needs.

Naturally, the more complex the technology you need, the more research that will be required to make good decisions about it. Don’t skimp on this research as you may regret it.

Financial Issues:
Once your analyses of marketing, operational and technology issues have been completed, the third step of a feasibility study is to take a look at key financial issues. Answer the following questions as well as you can at this point and identify key issues that will require additional research. Note that some of the questions below - specifically income projections - are directly based on your market analysis (the first step in the feasibility study), in which you estimated the number of units of product or service you could sell. If you didn’t do that part of the feasibility study thoroughly, you won’t be able to do the financial analysis adequately.

• Start-Up Costs: These are the costs incurred in starting up a new business, including “capital goods” such as land, buildings, equipment, etc. The business may have to borrow money from a lending institution to cover these costs.
• Operating Costs: These are the ongoing costs, such as rent, utilities, and wages that are incurred in the everyday operation of a business. The total should include interest and principle payments on any debt for start-up costs.
• Income Projections: How will you price your goods or services? Assess what the estimated monthly income will be.
• Sources of Financing: If your proposed business will need to borrow money from a bank or other lending institution, you may need to research potential lending sources.
• Profitability Analysis: This is the “bottom line” for the proposed business. Given the costs and revenue analyses above, will your business bring in enough revenue to cover operating expenses? Will it break even, lose money or make a profit? Is there anything you can do to improve the bottom line?

An example of the common elements found within a feasibility study are detailed below:
Title Page
One Page Executive Summary
Introduction and Scope of Study
Market Analysis
• General Market Profile
• Local Market Potential
• Target Market
• Competitor Analysis
• Overall Market Feasibility
Customer Survey and Supply Analysis
• Review & Analysis of Survey Results
Operational & Technology Analysis
• Operational Profile
• Technology & Equipment Needs Financial Analysis
• Cashflow & Break Even Analysis
• Sensitivity Analysis
• Financial Summary and Feasibility Assumptions
Overall Feasibility Evaluation
• Summary and Conclusions
• Recommendations

Many people seek professional advice when researching and writing a feasibility study and SAC Consulting has specialists in the field of farm diversification and their details are provided on the right hand side of this page.