A feasibility study is an analysis of an idea or proposal to decide if it is worth pursuing. The study examines the practical and financial viability of the proposed venture.
The term comes from the word “feasible,” which, according to Merriam Webster, means “capable of being done or carried out.” It can also mean “capable of being used or dealt with successfully.”
A feasibility study, therefore, addresses the question: “Is this idea doable and viable?”
Business people use feasibility studies to decide if proposed ventures or projects are likely to yield profit. They may also wish to examine the risks that might arise.
Organizations typically carry out feasibility studies when large amounts of money are at stake.
Feasibility study or business plan?
Business plans and feasibility studies share some elements but they address different questions.
A feasibility study focuses on the viability of a single idea or proposal. The business plan focuses on the whole firm: its strategies, goals, and financial forecasts.
According to Investopedia.com, a feasibility study should aim to:
- Understand all aspects of the idea, concept, or project.
- Unearth potential problems that might arise during implementation.
- Consider all relevant points and recommend whether the idea is worth pursuing.
Example: The new hospital wing
The board of Metropolis General Hospital are considering building a new wing. They have asked Jim Daniels, a board member, to present a feasibility study of the idea at the next board meeting.
Jim has hired a management consultant to help him and his team carry out the study. First, they flesh out the proposal. They then assess the labor and material costs.
In addition, the board has asked that Jim and his team seek the views of all their stakeholders. The stakeholders of a hospital will include patients, medical and nonmedical staff, visitors, and owners. The local community, investors, sponsors, and fundraisers are also stakeholders.
The board will be interested to know, for instance, whether the local community will support the project. Another important issue is how disruptive it might be for patients and staff.
Jim and his team itemize and discuss all the pros and cons. They weigh them against each other.
They then draw up their conclusions and recommendations. These will have a big influence on the board’s decision on whether to go ahead with the project.
Why do a feasibility study?
In a 2009 online article, Mary Holz-Clause and Don Hofstrand of Iowa State University in the United States argue that feasibility studies constitute good business practice.
“If you examine successful businesses,” they write, “you will find that they did not go into a new business venture without first thoroughly examining all of the issues and assessing the probability of business success.”
According to the authors, a good feasibility study:
- Clarifies the project and alternatives.
- Narrows the potential options.
- Uncovers opportunities that arise during the investigation.
- Identifies potential reasons not to go ahead.
- Raises chances of success through early identification of barriers.
- Feeds decision-making with quality information.
- Offers proof of thorough investigation.
- Helps to secure backing from lenders and investors.
“The feasibility study,” they conclude, “is a critical step in the business assessment process. If properly conducted, it may be the best investment you ever made.”