Determining Financial Feasibility For Your Small Business

So you want to set out on your small business adventure. Where do you start? Do you start by buying supplies or prototypes? Do you start by collecting a list of investors who can kick-start the project?

No!

Your first step should be to make sure your potential business model will be financially feasible. Only once you have determined financial feasibility, you are ready to truly start on your small business journey. Putting the “cart before the horse” and skipping this part may be a large financial pitfall.

What Is Financial Feasibility?

Financial feasibility is an assessment that accountants and outsourced CFOs use to determine the best course of action for a business or potential business. To determine financial feasibility, you will have to weigh all of your options against each other to find the best model for your business. A business model contemplates all the potential incomes and expenses. This process also helps best determine a startup strategy and where efforts should be concentrated.

Accountants start the financial feasibility process by creating spreadsheets that chronicle five factors:

Your financial starting point in terms of financial resources.
The overall cost of each of your options
The financial benefits that could come from each option
Whether the benefits outweigh the costs for each option
The assumptions that the accountant is making as they develop this spreadsheet.

Once they have taken that information and put it into a spreadsheet, your accountant will consult you on the costs and benefits of your options.

At a high level, that is what financial feasibility looks like. You might be wondering how much can assessing financial feasibility help my business? Is assessing financial feasibility necessary for all businesses?

The Importance of Financial Feasibility Analysis

It’s quite simple, really. Financial feasibility analysis is all about determining which model and strategies will be the most profitable for your company. This process is essential because it assesses the profitability of each option throughout the lifetime of that option.

For example, you are trying to determine whether you should start a brick-and-mortar business or an online business. Your financial feasibility analysis can help you make that decision based on other factors you are considering. Your accountant will look at the costs and benefits of setting up an online shop and a brick-and-mortar shop. They can compare marketing costs and can assess how costs will change over time as loans are paid down or marketing campaigns change and brand recognition increases.

At this point, you might be thinking that it would be pretty doable for you to conduct your own financial feasibility analysis for your small business. While that may be true for some very small business ventures, it is usually good to bring a professional accountant on board for financial feasibility analysis. Why? Because professional accountants have the resources and know-how to assess more factors. When doing this sort of analysis, its good to have a professional who has a background in accessing all the areas a certain strategy may impact. There are many factors that an accountant will use to determine the financial feasibility of a project. You will have a more concrete sense of what different options will really look like for your business.

What Are the Most Important Factors to Determine Financial Feasibility?

1. Analyze Debt Capacity

Your accountant will start by looking at your business’s potential debt capacity. A debt capacity is basically a mini-study that is essential in helping determine the future cash flows of a business. Debt capacity will determine how much starting capital your business will have and how far that capital can take your business. Once you have analyzed your debt capacity, you are ready to move on to financial feasibility analysis.

2. Calculate Sales Model Adjustments

Your accountant will take the time to analyze how a potential business or project will impact sales. For instance, maybe you are starting an e-commerce company and want to know the impact of organic versus paid marketing. Or maybe you want to know the benefits of dropshipping versus having inventory on hand. Each of these decisions has several inputs that must be considered.

3. Determine the Project Timeline

An outsourced CFO will help you figure out the timeline for certain strategies you wish to employ. They will help you figure out how your project timeline will relate to your cash flows and current capital on hand. They will look at how much interest your debt will accrue before the project starts to become profitable. For instance, our e-commerce company from before may want to know when their ROAS (return on ad spend) will turn positive. What sort of cash is needed on hand before their paid ads turn into a profitable sales channel.

4. Determine Start-Up Costs

You will need to figure out how much this project or business will cost to get off the ground. Determining costs will not just be a financial calculation, it will also be a series of human resources calculations, where you will determine which human resources you will need and who you will have to bring on to complete the project. Further, an accountant can help you consider the return on investment for certain key start-up costs. For instance, you may determine that spending a lot of money on a website is not worthwhile if it won’t have a significant impact to your top line.

5. Project Negative Cash Flow

You will need to determine the profitability of your project or business at each stage and determine whether there will be any times when your business might experience negative cash flow. Most owners don’t consider that starting a business takes a period of time before profits will be seen. For a typical business, this can be between 1 and 3 years (or as many as 5).

If you can pinpoint those moments where your business will be in danger of being in the red before you start the business, then you might find ways to mitigate those moments or create plans of action in case you end up in the red due to unforeseen circumstances.

6. Reality-Check Revenue Expectations

We all have ambitions for profits, but sometimes those ambitions need a reality-check. This is one of the most difficult steps for a business owner to take in financial feasibility calculations. A professional outsourced CFO can take a moment to step back and perform a reality-check on revenue expectations with an objective eye that few business owners possess.

In each of these steps, you can give your business a leg up by hiring a professional accountant to perform your financial feasibility analysis for you. Although you may have the mathematical skills to work through cost-benefit analysis, it is hard to step far enough away from a project that is virtually your baby.

Other Important Factors to Determine Financial Feasibility

Potential ROI

Understanding the potential return on investment for each aspect of your project can give you a more holistic picture of which aspects of your project you might want to tweak.

Assess Current and Non-Current Liability

You will want to compare your current liabilities with the potential liabilities that you could accrue if you go on with this project.

How Can Krieger Analytics Help Me Assess Financial Feasibility?

At this point, you might be thinking: “This sounds like a lot of steps. I’m not sure I can do it on my own.”

If this is your thought process, don’t worry. You won’t have to do it alone. Krieger Analytics gives businesses the power to assess financial feasibility without investing in a full-time accountant or CFO. We offer remote, part-time accountants and CFOs who will help you make sure that your business is financially feasible. If you are interested in learning more, contact us now.