Wade Armstrong

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Feasibility Analysis Steps 5&6: Team and Financials

Posted Sunday April 23, 2006 in Entrepreneurship

The final sections of the feasibility analysis are the simplest to describe but, in some ways, the hardest to execute. These sections, the team assessment and the financial projections require you, even more than do the other sections of the analysis, to follow the first commandment of entrepreneurship: “thou shalt not bullshit thyself.”

The Team Assessment

By this point in your entrepreneurial process, you probably have a team together. Now’s the time to assess the abilities of the team against the requirements of the project. What are the critical tasks to starting the company? To providing the product or service? To selling the product or service? You likely have skills in some of these areas — say, engineering and marketing — but not in others — for instance, sales, supply chain management, or accounting.

Follow that first commandment of entrepreneurship and make a complete list of all critical tasks, then honestly line up your capabilities against those tasks. Determine where gaps exist and call those out. Then look into what kind of a hire you would need to make to fill that gap — how difficult it would be to find a suitable hire or consultant or unpaid adviser, how much they will cost, whether or not you can realistically assess the quality of their work. A gap isn’t bad, no plan to fill a gap is bad.

Financial Projections

Then there’s the money end of things. By now, you understand what it takes to make your product or provide your service, who your competition is, who your customer and/or consumer is — everything from production to sales to logistics to financial management. Financial projections need to contain several key parts:

• Startup costs — what it takes to get things going. These include any costs to get the principals or key hires to quit their jobs, incorporation, insurance, lawyer costs, everything related with getting the business itself (rather than the product or service it produces) off the ground.
• Fixed costs — what you pay every month or every week to keep going. Do these change seasonally or periodically? For instance, it may cost more to rent a booth at a Farmer’s Market on a Saturday than it does on a Wednesday, or if your product is seasonal then the cost of skilled labor to make that product may go up during the periods of highest demand.
• Variable costs — what you pay every month or every week that varies with how much of your product or service you produce. Are the variable costs themselves variable? Do they fluctuate seasonally or as other competitors act within the industry? For instance, the price of gas may go up in the summer, increasing your reimbursements to your sales staff for mileage, or, if your competitor increases output, then the supply of nickel-molybdenum alloy may become tight and prices may go up.
• Revenues — this is the good part! Build at least a basic model of the money coming in. What changes this? Do sales fluctuate? Why? What parts do you control — for instance, sales will increase in March because we will hire a new salesperson — and what parts are under your competition’s control?

Build your cash flow spreadsheet taking all of these into account and explaining clearly how all of the factors go together. This spreadsheet has three goals: to force you to go through the exercise of building the spreadsheet itself, which will highlight any holes remaining in your analysis; to give you an idea of what your profit off of this venture might be; and to tell you how much cash you need. So set up your cash flow spreadsheet to tell you how much money goes in and out for each of the first 36 months, and, below each month’s net cash inflow or outflow, keep track of the cumulative cash outflow or inflow up to and including that month. That number will probably reach a low at some point and then start getting better (if it doesn’t, you’re in trouble). The low, plus some safety factor, is how much you need to borrow or raise to start your business.

Now, just for practice, build a worst-case scenario version of that spreadsheet. And, to keep your spirits up, a best-case scenario as well. Based on your risk tolerance, you’ll now know how little or much money you need to have in your pocket before you start.

And that’s it: your feasibility analysis. So: is your idea feasible or not? What does each section tell you?