O economic and financial feasibility study is the final part of the planning of a business, in which the viability of the business is measured through financial indicators. The result will depend on the estimated initial investment.
When to do: Um economic and financial feasibility study (EVE or EVET) should be performed whenever a new project is under evaluation. This project can be both the expansion of your business and the opening of the company itself.
Why do: The great benefit of this type of analysis is to be able to see through projections and numbers the real potential for the return of the investment in question and therefore to decide if the premises are interesting and whether the project should go forward or not.
How to: There are several steps to conduct a good economic feasibility study, so let's take a break.
a) Revenue Projection
There is no specific order for completing the data for a feasibility study, but we suggest starting with revenue projection. The projection period varies from project to project according to expected return. That is, if you are going to open a diner, probably a horizon from 3 to 5 years will suffice. Already bigger projects like a construction of a hydroelectric plant, usually have horizons of decades, because the return is of greater term.
At this point, the important thing is to be able to make approximations of the size of the target audience, with conversions premises based on historical or comparative market data. In cases where no option is possible, the reverse calculation must be done starting with the costs already foreseen and the revenue required to obtain an attractive rate of return.
Another important point is to estimate the growth rate of the business over time, since revenue does not start or stay at the same level.
Let's say that your target audience are the residents of the neighborhood. It is known through information and research done by the city hall that the neighborhood in question has 100.000 residents. However, your service is focused only on women and that number drops to 45.000.
Therefore, if the expected client conversion is from 10% per month, you will have an audience of 4.500 clients. If the average ticket (average cost per customer) is R $ 20,00, you can bill up to R $ 90.000,00. If this is the highest possible billing in your business, you probably will not start earning it in the first month and you should project growth from the opening up to that point.
b) Projection of Costs and Investments
Just as the revenues have been projected over time, you should raise the investments needed to start the business and also the operating costs of the business to function normally. This includes in a simplified way:
- Fixed Costs: Those that are recurrent and predictable like rent, salaries, light.
- Variable Costs: Those that vary according to production and sales as commissions, fees.
- Taxes: If the company is not yet open, it is important to see with the accountant what would be the classification of the new enterprise.
What is important in this step is to achieve the most realistic budgets possible in direct contact with suppliers or doing online surveys.
c) Analysis of Indicators
In the previous steps, one may even encounter some problems in the business model and need to re-read the financial assumptions and projections. However, the real benefit of the economic feasibility study are the final indicators:
Net Present Value (NPV): This indicator indicates how much free accumulated cash flow from your total projection would be worth today. To reach this amount, you must discount the cost of capital (also known as discount rate or WACC). This amount should be basically compared to the invested capital to know if the project / company generated more capital than was invested. For example, if you invested R $ 50.000,00 and your VPL for R $ 45.000,00, that investment was not worth it. Although the financial flow was positive over time, economically the result was negative.
Internal Rate of Return (IRR): The IRR indicated the rate of return on investment using the same cumulative free cash flow from the NPV. The difference is that while the NPV offers an absolute and currency indicator, the IRR offers a percentage return view that can be more easily compared to other investments. That is, if your IRR is 0,2% per month and the savings are paying 0,5% per month, the mathematical decision should be to not invest in the project / company and save that money in the bank.
Payback: Paypack indicates the time at which the project already generated the same amount of cash you spent at the beginning of the project. In other words, it is the period (month or year) in which the accumulated free cash flow has stopped being negative to positive. So, you know how many months you will have to wait to have your money invested back. This calculation can be done by deducting or not the cost of capital. Usually, we choose not to discount, because the calculation is simpler and the variation is small in smaller projects.