Business feasibility studies in uncertain times

BEFORE THE CRISIS:
– The global economic environment was experiencing stable growth and relevant factors affecting feasibility studies could normally be predicted.
– Businesses could raise finance easily either from banks, investors or even from their creditors.
During this period of “prosperity”, business feasibility studies have been mostly associated with the launch of new product or service, the start of a new business and the substantial investment in fixed assets. Not much attention was given in assessing the financial performance and viability of existing enterprises.
The preparation of feasibility studies with respect to the assessment of the economic environment was generally considered an easy task due to the stability of the major economic factors. But now the situation has changed drastically.

AFTER THE CRISIS:
– The global economic environment experienced market instability with many businesses still facing declining revenue. The US economy is experiencing an “uneven and modest” recovery. However, risks remain as the Euro crisis is threatening to hamper the world economy.
– Banks are very cautious when asked to provide additional finance.
– Investors are unwilling to take risks and prefer risk- free solutions.
– Creditors are not willing to extend credit lines.
In these precarious times of market instability, business feasibility studies are becoming an essential supportive tool for businesses to stay solvent either when taking internally remedial action to improve cash flows or raising finance or refinancing existing loans. Under these circumstances the preparation of a feasibility study becomes challenging but at the same time an increasingly difficult endeavour for the analyst.
The professional analyst engaged to perform the study must take into consideration economic factors that are internal or external to the business and directly or indirectly affect it when preparing projected financial statements and assessing the market.

FACTORS AFFECTING GROWTH AND PERFORMANCE
Some of the factors that usually affect business operations are the unemployment, inflation, consumer spending, consumer confidence and taxes.
These factors, and probably others depending on each case, ought to be covered in more detail in the SWOT analysis section of feasibility reports. The professional must also analyse how these factors might affect the subject businesses’ customers and suppliers. Too often, such an analysis is overlooked.
When a feasibility study is performed professionally and economic factors are also taken into consideration and analysed carefully, very valuable information could come into light that would help the business take corrective action to improve performance.

THE COST-BENEFIT RELATIONSHIP
Many feasibility studies are not developed in a professional way and do not cover adequately all significant areas. This is mainly due to limitations in scope imposed by business owners and less on the incompetence of the analyst. Business owners sometimes do not take seriously the cost-benefit relationship associated with feasibility studies.
Analysts performing business feasibility studies (internally as management accountants or independent accountants) must consider the following when accepting an engagement:
– Have access to all relevant financial and other information necessary for the engagement;
– Seek support from others when confronted with specialized issues he/she is not familiar with;
– Gather adequate supportive evidence to back the main issues addressed in the report.
The study must be developed in a consistent manner and the assumptions underlying the projections must be clearly stated and the logic behind them explained. Above issues are also often overlooked.

ABSENCE OF REGULATIONS AND GUIDELINES
Even when feasibility studies are prepared by professionals, their content and format differs among them. Forming guidelines at least with regard to the areas to be covered in a feasibility study should be given some thought by professional accounting bodies worldwide in order to enhance both consistency and quality of reports developed by their members.
It will take a few more years before we return to a stable economic environment. In the meantime the business community should be alert and ready to adjust to changes quickly because the world is changing faster than ever before. Business owners should be advised to periodically perform business analysis including feasibility studies, when appropriate, in order to make the necessary improvements at an early stage before the situation gets out of control.
Feasibility studies must be performed in a professional way and take into account all the factors affecting the subject business operations. The professional accounting bodies should consider issuing guidelines and or directions with respect to the content of such studies.