Carrying out a Feasibility Study
Practical Action
Setting the price of the product
The correct price is important to
be able to enter the market and to
sell the product at a profit. There
are two approaches:
What is the breakeven point?
This is the production level at which the total costs
will equal the total income if everything produced is
sold. The breakeven point is calculated as follows:
a. Base the price on production
costs and set it to ensure that
income exceeds the total
Fixed costs
=
Revenue – Variable costs
Production level at
breakeven point
costs
b. Take into account
competitor’s prices and set
the price of the new product
at or below the price of
similar products. Don’t forget to include the profit expected by the wholesaler or
retailer.
IV. Financial planning
If the gross profit indicates that the proposed business venture is likely to be successful,
you still need to carry out a cash-flow analysis:
1. Compile a table (see example) showing
sales incomes and expenses on a
Cash-flow plan
monthly basis for the first year. Work out Cash beginning of the
when you have to spend money for
month
equipment, raw materials and employees Cash in from sales
and when you can expect to be paid for Any other cash in
your deliveries.
TOTAL CASH IN
2. Calculate the monthly profit or loss by
subtracting the expenses from the
income. This will show when there are
Cash out for staff costs
Cash out for operation
costs
profitable months or when a loss is
Any other cash out
expected and further loans are needed. TOTAL CASH OUT
3. Prepare a similar table for the next two Cash at end of month
years, taking into account increases in
price, changes in sales and the action of competitors.
Jan Feb Mar
The production level should be above the ‘breakeven point’ for the business to be
profitable. If this is not the case, you should examine the data to see if production costs
can be reduced. If not, you should forget the idea and start again with a different
product.
It is important to carry out a cash-flow analysis to
ensure that the cash you plan to put into the
business will be enough to meet your needs on a
continuing basis.
• Will you spend all your available cash
before you are earning any revenue?
• Will you be able to pay your bills?
• Will you be able to buy raw materials
and ingredients?
If not, you are likely to have problems, even if
your earlier calculations have shown that the
business will be profitable.
5