How to assess the financial feasibility of a new business idea?

You will find a tool to assess the financial feasibility of a new business idea tailored to your project in our list of 200+ financial plans

All our financial plans do include a tool to assess the financial feasibility of a new business idea.

How can you easily assess the financial feasibility of your new business idea?

In this article, we provide a free tool to do so. If you're looking for something more tailored to your specific project, feel free to browse our list of financial plans, customized for over 200 different project types here.

We'll also address the following questions:

How can the projected revenue for a new business be estimated?
What fixed and variable costs should be considered?
What is the break-even point for a small business?
How can the working capital requirement be assessed?
What profit margin should be aimed for to ensure financial viability?
How can the return on investment (ROI) of a project be determined?
Which financial indicators should be regularly monitored to evaluate performance?

Here Are the Steps to Assess the Financial Feasibility of Your Idea

To skip all these steps, you can simply download a financial forecast tailored to your industry.

• 1. Conduct Market Research:

  Analyze the market in your region: identify popular products or services, study the demand for your business idea, and examine local regulations and necessary licenses.

• 2. Gather Specific Data for Your Business:

  Collect data on startup costs, such as initial inventory, equipment, and any necessary renovations. Identify potential competitors, suppliers, and partners, and understand the preferences of your target audience.

• 3. Estimate Initial Startup Costs:

  Calculate the total initial investment required, including rent, equipment, furniture, and initial inventory.

• 4. Project Monthly Operating Expenses:

  Estimate monthly expenses such as rent, utilities, salaries, and other miscellaneous costs.

• 5. Estimate Monthly Revenue:

  Calculate the expected monthly revenue by estimating the average number of customers, average spend per customer, and the number of operating days per month.

• 6. Calculate Monthly Profit:

  Subtract the monthly operating expenses from the monthly revenue to determine the monthly profit.

• 7. Determine the Break-Even Point:

  Calculate the break-even point by dividing the initial startup costs by the monthly profit. This will tell you how many months it will take to cover the initial investment.

• 8. Assess Financial Feasibility:

  Evaluate whether the business idea is financially feasible based on the break-even point and ensure that the projections are realistic and achievable.

An Illustrated Example You Can Adapt

This example is simplified. For a more accurate estimate without manual calculations, use one of our financial forecasts tailored to 200 business projects.

To help you better understand, let's use a made-up example of a new business idea for a small café.

First, estimate the initial startup costs, including rent, equipment, furniture, and initial inventory, which total $50,000.

Next, project monthly operating expenses such as rent ($2,000), utilities ($500), salaries for two employees ($4,000), and other miscellaneous costs ($1,000), summing up to $7,500 per month.

Then, estimate the monthly revenue by calculating the average number of customers per day (100), the average spend per customer ($10), and the number of operating days per month (30), resulting in $30,000 in monthly revenue.

Subtract the monthly operating expenses from the monthly revenue to find the monthly profit: $30,000 - $7,500 = $22,500.

To assess the financial feasibility, calculate the break-even point by dividing the initial startup costs by the monthly profit: $50,000 / $22,500 ≈ 2.22 months. This means the café would need just over two months to cover the initial investment.

Given these calculations, the business idea appears financially feasible, assuming the projections are accurate and the café can attract the estimated number of customers consistently.

What Should Be Included in a Feasibility Analysis?

Here are the key elements that should be included, all of which you will find in our financial forecasts tailored to 200+ different business projects.

Element	Description	Purpose	Considerations
Executive Summary	A brief overview of the project, including objectives, key points, and conclusions.	To provide a snapshot of the feasibility analysis for stakeholders.	Should be concise and compelling.
Market Analysis	An assessment of the market size, trends, competition, and target audience.	To understand the market environment and potential demand.	Requires thorough research and data analysis.
Technical Feasibility	Evaluation of the technical resources and capabilities required for the project.	To determine if the project is technically viable.	Includes technology, equipment, and expertise needed.
Financial Feasibility	Analysis of the financial aspects, including cost estimates, funding, and revenue projections.	To assess the financial viability and profitability of the project.	Should include detailed financial models and sensitivity analysis.
Organizational Feasibility	Assessment of the organizational structure, skills, and resources required.	To ensure the organization has the capacity to execute the project.	Includes staffing, management, and operational plans.
Legal and Regulatory Feasibility	Evaluation of legal and regulatory requirements and constraints.	To identify any legal or regulatory hurdles that could impact the project.	Includes permits, licenses, and compliance issues.
Risk Analysis	Identification and assessment of potential risks and mitigation strategies.	To prepare for and minimize the impact of potential risks.	Should include a risk management plan.
Conclusion and Recommendations	Summary of findings and suggested next steps.	To provide a clear decision-making framework for stakeholders.	Should be based on the analysis and data presented.

Our financial forecasts are comprehensive and will help you secure financing from the bank or investors.

Common Questions You May Have

Reading these articles might also interest you:
- How to evaluate the profitability of a new business idea?
- How to project your business idea's annual revenue?
- A free example of a monthly financial plan

What is the break-even point for my new business idea?

The break-even point is the level of sales at which total revenues equal total costs, resulting in neither profit nor loss.

To calculate it, divide your fixed costs by the difference between the unit selling price and the variable cost per unit.

For example, if your fixed costs are $10,000, your unit selling price is $50, and your variable cost per unit is $30, your break-even point would be 500 units.

How do I determine the initial capital required for my business?

Start by listing all the one-time startup costs, such as equipment, licenses, and initial inventory.

Next, estimate your operating expenses for the first few months, including rent, utilities, and salaries.

Summing these amounts will give you a rough estimate of the initial capital required, which could be anywhere from $10,000 to $100,000 depending on the business type.

What is a reasonable profit margin to expect in my industry?

Profit margins vary widely by industry, but a general benchmark is to aim for a net profit margin of 10% to 20%.

Research industry reports and financial statements of similar businesses to get a more accurate figure.

For example, retail businesses often have lower margins, around 5% to 10%, while software companies can have margins exceeding 20%.

How can I forecast my cash flow effectively?

Begin by projecting your sales and expenses on a monthly basis for at least the first year.

Include all sources of income and all expected outflows, such as rent, salaries, and inventory costs.

Use these projections to create a cash flow statement, which will help you identify potential shortfalls and plan accordingly.

What financial ratios should I monitor to assess feasibility?

Key financial ratios include the current ratio, which measures liquidity, and the debt-to-equity ratio, which assesses leverage.

The current ratio should ideally be above 1.5, indicating that you have more assets than liabilities.

The debt-to-equity ratio should generally be below 2, suggesting a balanced approach to financing your business.

How do I estimate my customer acquisition cost (CAC)?

Customer acquisition cost is calculated by dividing your total marketing and sales expenses by the number of new customers acquired during a specific period.

For example, if you spend $5,000 on marketing in a month and acquire 100 new customers, your CAC would be $50.

Monitoring CAC helps you understand the efficiency of your marketing efforts and adjust strategies as needed.

What is the importance of a sensitivity analysis in financial planning?

Sensitivity analysis helps you understand how different variables impact your business's financial outcomes.

By changing one variable at a time, such as sales volume or cost of goods sold, you can see how sensitive your profits are to these changes.

This analysis is crucial for identifying potential risks and preparing contingency plans.