Financial Feasibility Analysis

Will this business earn a reasonable profit? Good question, and one that should be answered before starting a new business or expanding an existing business.

Feasibility analyses do not necessarily have to include all the fine financial detail that is required for business plan financial projections, but must include reasonable estimates about financial expectations.

We can do this analysis for YOUR venture to help clarify
expectations of financial performance.

In the example below, we estimate revenues for 5 years and assume that the cost of goods sold will represent 60% of sales. We then estimate operating expenses for each year. We know what depreciation, interest, and taxes will be from depreciation schedules, loan agreements and tax rates.

The estimated financial results indicate that you will net more than $215K over 5 years, which may be satisfactory.

However, actual results may vary from estimates, and you want to know what will happen when they do. We assume that revenues may fall short by up to 5% per year, or they could exceed your expectations by as much as 10%. The cost of goods sold as a percent of sales will never be less than 60% but could increase by as much as 15%. While we made best guesses on operating expenses, we know they too can vary by as much as 8% either way. Given those variations, what is the financial feasibility of your venture?

To begin to understand, we applied random number multipliers against each variable for each year. The result from our first simulation produced cumulative net income of more than $223K over five years. But that was just one simulation. We then performed a thousand simulations and found that the average cumulative net income over five years was just a little over $160K with a standard deviation of $66K which means, given the assumptions, there is a 68% probability that cumulative net income over five years will be somewhere between $94K and $226K, which may or may not be an acceptable risk for you:

ESTIMATED FINANCIAL RESULTS
	Year 1	Year 2	Year 3	Year 4	Year 5	5 Years
Revenues	$750,000	$800,000	$850,000	$900,000	$950,000	$4,250,000
Cost of Sales	450,000	480,000	510,000	540,000	570,000	2,550,000
Gross Profit	300,000	320,000	340,000	360,000	380,000	1,700,000
Operating Expenses	200,000	215,000	230,000	250,000	265,000	1,160,000
Depreciation Expense	4,916	4,916	4,916	4,916	4,916	24,580
Interest Expense	43,199	40,274	37,059	33,524	29,639	183,695
Income Taxes	18,160	20,934	23,809	25,046	28,156	116,104
Net Income	$33,725	$38,877	$44,216	$46,514	$52,289	$215,621

FIRST SIMULATION
Revenues	$752,505	$841,488	$905,484	$962,969	$987,274	$4,449,721
Cost of Sales	484,189	527,252	510,105	546,143	639,637	2,707,325
Gross Profit	268,316	314,236	395,379	416,826	347,638	1,742,396
Operating Expenses	202,783	227,300	221,719	262,443	276,595	1,190,840
Depreciation Expense	4,916	4,916	4,916	4,916	4,916	24,580
Interest Expense	43,199	40,274	37,059	33,524	29,639	183,695
Income Taxes	6,096	14,611	46,090	40,580	12,771	120,148
Net Income	$11,322	$27,135	$85,595	$75,363	$23,717	$223,133

1000 SIMULATIONS
				Average		$160,251
				Standard Deviation		$66,173

NOW you have the information needed to make the right decision about this business.

Perhaps you are considering a business expansion or a new business idea and are unsure of its financial feasibility. Call us. We have the experience and expertise to assist you.

The Business Plan Store
201 Alderfer Road
Suite 300
Harleysville, PA 19438
Call Us: 215-256-0663

Email: Please Use the Form

Business Plan Writer?

Financial Feasibility Analysis