Before Starting a New Project: What Is a Financial Feasibility Study and What Should SMEs Know?
When an SME business reaches a stable point, the next stage of growth often comes in the form of a "new project," whether it's opening a new branch, purchasing machinery to increase production capacity, or launching a new product. But the biggest challenge is the question: "Will this investment be worthwhile?
Making decisions based on intuition alone can be too risky. This is where a "Financial Feasibility Study" or Financial Feasibility Study plays a crucial role, turning feelings into tangible data.
What is a Financial Feasibility Study?
A Financial Feasibility Study is an in-depth analysis and evaluation of a project to answer whether the planned project is financially "feasible" and "worthwhile" to invest in. Simply put, it is a financial simulation of the entire project from start to finish, providing an overview of the expected returns before a single baht is actually spent.
4 Key Components of a Financial Feasibility Study
The analysis covers 4 important parts that SME business owners need to understand.
1. Investment Cost Estimation
This section involves listing all the costs required to start the project. It's not just about construction or machinery costs, but also includes the initial Working Capital, launch marketing expenses, and various licensing fees. Estimating this part as accurately as possible helps prevent budget overrun problems.
2. Revenue and Expense Projection
We need to forecast the sales and revenue that will be generated throughout the project's life (e.g., 5 years), along with estimating various operating expenses such as raw material costs, employee salaries, and ongoing marketing expenses. This step requires a combination of past accounting data and market research results.
3. Break-Even Analysis
To answer the crucial question, "How much do we need to sell to not make a loss?" Knowing the project's break-even point helps us set the minimum sales target that must be achieved, which is a very important risk indicator.
4. Investment Appraisal
Finally, it's about using financial tools to make a decision, with the main indicators being:
- Payback Period: How many years will it take to recover the entire initial investment? (The shorter, the better)
- Net Present Value (NPV): After discounting the value of money over time, does this project create value (NPV > 0) or destroy value (NPV < 0)?
- Internal Rate of Return (IRR): What is the average annual percentage return of this project? This is used to compare with loan interest rates or returns from other investments.
Why is a Financial Feasibility Study important for SMEs?
- Helps reduce the risk of making wrong investment decisions.
- Serves as a crucial document for presenting to financial institutions to apply for loans.
- Builds confidence for management and shareholders.
- Acts as a roadmap for project implementation and monitoring.
Making a major investment decision is a critical moment for an SME. Having an expert financial advisor to help prepare a reliable Financial Feasibility Study will be the most powerful tool in guiding your business towards stable and sustainable growth.
