economic viability of a business
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How to determine the economic viability of a business project: key aspects
Embarking on a new business project is an exciting task. However, it would help if you did not let the illusion of this fresh start cloud your criteria when assessing whether this project is profitable or perhaps, on the contrary, it will mean a loss of resources with no return on investment.
Therefore, whenever you consider creating a new company, launching a new line of products or services, or expanding a business into new markets, it is recommended that you carry out an economic feasibility study . This type of detailed analysis that is reflected in a business project is, among other things, one of the strengths of the MBA in Oviedo since the students, being business people, managers, professionals from different areas, as well as potential entrepreneurs, pour all their skills and experience in identifying innovative solutions to launch a business idea beyond meeting the academic requirement.
In this article we review the key aspects that you must take into account when determining the economic viability of a business project.
What do we understand by economic viability?
Economic viability determines the potential of a business project and is the basis on which any business must be built. To assess the viability of any organization, it is necessary to analyze technical, economic and commercial aspects in order to determine the return on investment.
This complete study allows objective and strategic decisions to be made based on the strengths, weaknesses, opportunities and threats associated with the business and its market. On the other hand, the economic feasibility study is an essential requirement to obtain financing and attract investors .
Analyzing the viability of a business project is an exhaustive process that must take into account all the challenges and risks that arise. At the end of the diagnosis you will be apparent if the project is technically possible , if it adapts to the needs of the market and if it will produce future benefits . In short, you will be apparent if it is a feasible project and with prospects of success or not.
Key aspects to determine the economic viability of a business project
We will detail the key elements that you must evaluate to determine if your project is feasible. Remember that each business is unique, with particular characteristics and requirements that must be consider in each individual analysis.
Before launching any project you should thoroughly investigate the market . What is the value proposition you offer? Does your product or service satisfy a real market need? Is there an audience interest in buying what you offer? What purchasing power does the potential client you want to target have? Is there competition in the sector? Is that industry booming or declining?
These types of questions are what you should ask yourself to determine if there is a potential market for the company you want to start. Thus, the market feasibility study must consider:
- Analysis of the industry in which the project will be develop.
- Study of the potential of the present and future market : potential customers and their behavior, market size, sales predictions or growth prospects, among other aspects.
- Competition in the current and future sector.
In this phase, it is also recommended to resort to a SWOT analysis that reviews the strengths, weaknesses, opportunities and threats of the project both internally (company) and externally (market).
Likewise, it is advisable to develop a marketing plan that analyzes the distribution channels in which the product or service is going to be marketed, as well as the communication and promotion strategies that are going to be followed to reach the target audience.
If the market study foresees chances of success, you can continue analyzing the rest of the critical aspects that determine the economic viability of your project.
You are already clear that there is a market for your launch, but do you have the financial capacity to start it up and keep it active? In short, is your project going to be profitable? This is another of the keys that you must contemplate in the viability of a future company.
Through a financial study you will be able to assess the initial investment , calculate the benefit of a company. Identify costs , and determine if you are going to offer your product or service at an optimal value for money .
Perhaps your product is excellent and you have analyzed that there is a market. But if it is expensive to produce, you will have to increase the retail price to cover expenses. In this case, perhaps the public values the price as excessive. Is out of their purchasing power and decides not to consume it. Consequently, the project will fail even though it did have a market.
Therefore, the economic analysis must contemplate a forecast of fixed or variable costs and income. To calculate if the company is able to obtain benefits and offer profitability.
You must also address the financing of the project from your own resources (owners, partners, shareholders…) or from others (loans, grants…). Among the financial indicators that you must work to calculate how long it will take to recover the initial investment ( payback ) are the NPV (Net Present Value) and the IRR (Internal Rate of Return).
Analyzing the technical viability of your company will allow you to assess whether the resources. And infrastructure you have will enable you to start up the project or whether it is feasible for you to acquire new technology.
Among the technical means are the machinery, raw materials. Industrial processes, quality control and technology. But also the human resources that are going to execute the project and, therefore, their training. Keep in mind that the human factor is fundamental when it comes to the success or failure of a project. Training, skills, and experience should all fit into your feasibility study.
Legal and environmental feasibility
All economic activity is protect under a legal framework . For this reason, you should review all the regulations that concern your project before deciding whether to continue. If your project does not comply with the law. It can never be economically viable because it will not receive the protection of the institutions.
Within the legal aspects, it contemplates from taxation to labor regulations, passing through commercial law and accounting . Nor should you overlook the environmental feasibility study by analyzing the current rules on the matter. Each region has specific environmental laws, standards and regulations that need to be considere before launching any business.
Preparing a feasibility study for a business creation project is, without a doubt. A good business practice that all successful businesses have carried out at the beginning. Devoting time and resources to analyzing all the aspects involved in the success of a project. Will help you minimize risks and reduce the chances of failure.