Why Hire Financial Feasibility Services?
The primary goal of an economic-financial feasibility study is to assess whether the risk of a given investment is justified by its expected profitability. In other words, it aims to determine if the business under evaluation is a sound investment. Such investments may involve launching a new operation or expanding an existing one.
Although there is no single metric for conducting a feasibility study, some methods are technically superior, yielding more consistent results. The choice among widely accepted approaches depends on the investor's preference and the availability or capacity to generate specific data used in the calculations.
Despite the wealth of studies in this area, many still venture into alternative approaches. Some attempt to project revenue and key operational expenses and, by calculating the difference, determine the outcome. If the monthly result is satisfactory—sufficient to cover personal expenses, repay investment loans, and leave some surplus—the business is considered viable.
Another method, perhaps regrettably the most commonly used, involves a simple subtraction followed by division and multiplication by 100 to express the result as a percentage. Similar to the first approach, revenue and expenses are projected, the difference is calculated, and the result is divided by the total expenses or revenue and converted into a percentage. The decision is then based on comparing this percentage with other investment options.
It is essential to note that neither of these methods accounts for the timing of investments, expenses, or when revenue is received. In other words, they overlook the time value of money. This means they ignore the fact that money accrues value over time. When resources are allocated to one option, the potential returns from alternative uses (known in Economics as the opportunity cost) are forgone.
Considering the time value of money brings us to the formal realm of investment evaluation. Theory and practice show that outcomes are highly sensitive to financial volumes and the timing of cash inflows and outflows. For this reason, these evaluations are conducted with greater rigor. This approach is known as Discounted Cash Flow (DCF) analysis, with key metrics such as Payback Period, Internal Rate of Return (IRR), and Net Present Value (NPV). After calculating these metrics, the analysis can be further enhanced through sensitivity analyses and scenario planning.
Up to this point, we have emphasized the importance of rigorously projecting all financial transactions over time in deterministic models. This already represents a solid technical standard for evaluation. However, an even more advanced approach exists: probabilistic modeling. This method captures risks more effectively and provides more consistent answers since risks are assessed with greater transparency. Developing such evaluations requires expertise in probabilistic distributions, a topic covered in Statistics.
Despite the knowledge required to conduct these studies, some prefer a do-it-yourself approach, believing familiarity with Excel is enough to tackle the problem. While commendable, such efforts are risky without specific expertise in Finance. Common critical errors include using the wrong row to calculate IRR and NPV, applying an inappropriate cost of capital relative to the project risk, confusing real and nominal values, and mishandling calculations for projects without a defined end date. These are just a few examples of severe flaws that can compromise the evaluation and the decision-making process.
Therefore, for anyone considering starting or expanding a business, it is wise to resist the temptation to rely on amateurs for feasibility studies—it is often a case of "penny wise, pound foolish." While it is natural for entrepreneurs to prioritize expenses, this cost should be seen as an investment.
A feasibility study also serves other purposes. For instance, it can help determine the maximum price and deadline conditions for negotiating the purchase of an asset. Examples include acquiring land for real estate development, commercial spaces, or machinery and equipment. Such evaluations can significantly improve negotiations for high-value investments.
Another key application of feasibility studies is in presenting a business opportunity to attract investor partners. Rarely are investors persuaded by mere "great" ideas or polished presentations. Investors speak the language of well-supported numbers, and a thorough feasibility study can make all the difference.
Finally, it is worth highlighting that discussing assumptions with decision-makers in the company is a crucial part of an economic-financial feasibility study. Strategic changes or adjustments often arise from the evaluations conducted in these studies. Additionally, a well-executed feasibility study becomes an integral part of the project's financial planning. It identifies key input variables in the model that pose the greatest risks to outcomes and suggests mitigation measures—a topic for another article.
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