If you want to prepare a financial feasibility study scientifically and correctly, then you are in the right place.
In this article, we offer you the right steps to prepare a financial feasibility study for your project, whether a restaurant, coffee shop or any other profitable project.
All project applicants wish to prepare an economic feasibility study to assess the situation and what they are up to.
By the end of this article, you will be able to convert your project idea into a business plan and financial feasibility study. The financial part of your project is essential to your project business plan.
Therefore, understanding the financial statements is essential to managing and controlling the financial matters of your project. To avoid wasting your time on information that is not suitable for you, we offer you an index of what this article will contain:
1- Building the hypotheses of the financial model
2- Forecasting sales and expenses
3- Predict the net capital you need for your project
Building hypotheses for the financial model
The first thing we will discuss in the hypotheses is constructing the expected income statement. Simply it is what will show you whether this project is profitable or will cause you loss.
1- Forecast sales and revenue
This part is considered the most difficult part because it is based on external factors you have no control over. For forecasting sales, there are two methods that you can rely on to achieve this. The first method is quality, and the second method is quality. Each method varies according to your project, from a restaurant to a coffee shop to a shop.
Qualitative methods include personal judgment, financial history and sales figures, sales representatives, sales volume for similar activities, and expert opinions.
This technique suits start-ups and personal jobs, as large corporations rely on price stability and use the other method.
2- Cost of goods sold
The cost of merchandise is the purchase price plus the price of transportation to your warehouse. For example, rent is not included in the cost of goods sold or salaries. The value of the inventory must also be calculated; Goods sold are beginning inventory + purchases – ending inventory = cost of goods sold
3- Anticipate gross profit
Gross profit, in short, is sales minus the cost of goods sold.
4- Anticipate expenses
After determining sales and cost of goods sold, you must determine your expenses; Expenses are usually classified into administrative and general expenses on the one hand and selling and marketing expenses on the other.
5- Calculation of the break-even point
Simply, the tear point refers to the point where expenditures equal expenditures.
Before explaining how to calculate the break-even point, a distinction must be made between fixed and variable costs.
Fixed costs: expenses that do not change with the change in sales volume (salaries, rent).
Variable costs are the expenses that are affected by the volume of sales (cost of goods sold, sales staff commission).
Back to the break-even point, the contribution margin must be determined after subtracting the variable expenses to determine the break-even point, which is the remaining part of the selling price.
So, we will determine the fixed expenses and then divide them by the contribution margin, and the result will be the units that need to be sold to reach the break-even point.
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Building the financial system
In this segment, we will compare the cash and accounts payable according to accounting principles.
Cash basis: It records income and expenses in the books when exchanging cash or cash.
Example: If you sold some products in February for 1000 pounds and received the value of these sales in April.
On a cash basis, these sales are recorded in the financial statements for April, The month in which the cash or cash was received.
While the accrual basis: Revenues and expenses are recorded when the contract is signed and not when the cash is exchanged.
Generally, all accounting principles depend on the accrual principle when preparing financial statements.
How do you determine the appropriate net capital?
Initially, the capital consists of (fixed capital and working capital).
Fixed capital is all the project’s assets, such as equipment and establishment expenses.
Working capital is the stored goods or money needed for financing, and this amount is estimated at 20%.
Working capital is accounts receivable + inventory.
While net capital is accounts receivable + inventory – accounts payable
Introducing the top is the operational nerve of any project. This pertains to the so-called cash transition cycle: the stage of buying and selling goods and then paying for them.
So simply, accounts receivable is the percentage of sales, so if you sell 100,000 annually, you must determine how much you will lend to others.
And accounts payable: It is the percentage of the cost of goods sold because we pay suppliers the purchase price and not the selling price. Example: 50 thousand
The difference between them is that accounts receivable is the amount you sell, and accounts payable is the amount you buy.
Finally, we move on to the stock, a percentage of the merchandise sold. Example: 200 thousand
After determining the ratios of accounts receivable, payable and inventory, the net working capital for this project is 100 thousand accounts receivable + 200 thousand inventory – 50 thousand accounts payable = 250 thousand is the net capital required for the success of your project.
Building project budget
In the beginning, you must know all the details of your project’s expenses and costs. As we mentioned earlier, the expenses are of two types (fixed, such as wages and rent, and variable, such as utilities).
Then you have to collect all these expenses to get your project budget and to determine the net profit from the budget; We subtract total expenses from total revenue.
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Return Calculation
The required return is Risk-Free Return (5.8%) *This number can be obtained from your country’s government records* + Beta (market risk premium).
Example: Suppose the market risk premium is 5%, and for Beta, it means Is my project as risky as the market? Or higher? Or less? If the risk is like the market, then the Beta will be 1, and if it is higher than the market, it will be 1.1 or 1.2, but if it is less than the market, it will be less than.
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