The feasibility study is but one part, although an integral one, in the development process of a business project. Whether this project is the creation of a new cooperative or the expansion of an existing one into a new venture, the project cycle is similar. In "How to Start a Cooperative" by the USDA Cooperative Service, Galen Rapp and Gerald Ely present a 16 step sequence of events recommended for the creation of an agricultural cooperative. The creation of a feasibility study is the seventh of these.

This process has been described in many ways, but for purposes of cooperative development, the components in this cycle can be divided into five basic stages. Figure 1 presents these and figure 2 summarizes activities that occur in each phase of the cycle.

Figure 1: The Project Cycle

Figure 2: The Project Cycle Described

 

IDENTIFICATION: preliminary idea creation, planning, pre-feasibility studies refining ideas.

DELIBERATION: formalization of group, conducting feasibility studies, decision to proceed.

IMPLEMENTATION: securing capital, construction, obtaining permits, hiring management.

EXECUTION: mobilization of manpower, equipment, and materials to carry out the plan.

EVALUATION: determine what worked and did not work, (to plan again).

Differing amounts of time may be required for each stage in the project cycle, dependent on the particulars of the project and the group involved. It typically takes two years, or even more, for a cooperative project to move from the preliminary planning stages to the execution phase.

The project cycle can be thought of as circular (figure 1). Key aspects of this cycle seem to reoccur during the project development process. The information obtained in the evaluation stage of the cycle provides the impetus for the idea pursued in the next round of planning. This cycle is a series of ever improving approximations as to how the project will function. With each cycle, more is known. When this knowledge is evaluated and then applied to the succeeding phase, how to accomplish the project should come into sharper focus. Through this process the outcome of the project is more likely to be positive.

One stage of the project cycle is deliberation. During this time the efforts of the planners are centered on determining whether or not they should proceed with the project. The feasibility study should be conducted during this stage, before the group decides to implement the project or not. In addition, planners need to know what is required for a successful project. The feasibility study serves as an important tool for the group's deliberations.

Why Do Feasibility Studies?

Developing any new business venture is difficult. Taking a project from the initiation of the idea through the operational stage is a complex and time-consuming effort. Most ideas, whether from cooperative or investor-owned businesses, do not develop into business operations. If these ideas make it to the operational stage, the majority of them fail within the first six months. Before a cooperative or, more correctly stated, the potential members of a cooperative, invest in a proposed business project, they must determine if the project can be economically viable and then decide if the advantages to be gained from the investment outweigh the risks involved.

Many cooperative projects are quite expensive to undertake. The projects involve business operations that differ from those of the members individual business. Often, these operations involve risks with which the members are unfamiliar. The feasibility study allows groups developing a business idea to preview potential project outcomes and decide if they want to continue developing the project. Though the cost of conducting a study can seem high, almost always, these costs are relatively minor when compared to the total project cost. A small initial expenditure on a feasibility study by a group can help to protect larger capital investments later.

Feasibility studies are a useful tool, valid for many kinds of projects. Evaluation of a new business venture, both from new groups and established businesses is the most common application, but not their only usage. Studies can help groups determine to expand existing services, build or remodel facilities, change methods of operation, add new products, or even merge with another business. A feasibility study can assist decision-makers whenever they need to decide among alternative potential development opportunities.

A primary function of feasibility studies is to permit planners to state their ideas on paper before implementing them. This can reveal errors in project design before they negatively impact implementation. Applying the lessons gained from a feasibility study can significantly lower the project expenditures.

A major application of the feasibility study is to present the risks and returns associated with the project in a manner that permits the prospective members to evaluate them. There is no "magic number" or correct rate of return, however, that a project needs to obtain before a group decides to undertake a project. The acceptable level of return and appropriate risk rate will vary for each member depending on their personal situation.

Since cooperatives serve the needs and enhance the economic returns of their members, and not outside investors, the appropriate economic rate of return for a cooperative project may not need to be as high as that required by projects undertaken by investor-owned firms. Potential members should evaluate the returns of a cooperative project in conjunction with how it would affect the returns of all of their business operations.

The proposed project usually requires both risk capital from members and debt capital from banks and other financiers to become operational. These potential sources of funds typically require an objective evaluation of the validity of the project concept prior to investing. A feasibility study conducted by someone without a vested interest in the project outcome can provide this assessment.

A feasibility study as an analytical tool used during the project planning process, shows how a business would operate under an explicitly stated set of assumptions. These assumptions include the technology used (the facilities, types of equipment, manufacturing process, etc.) and the financial aspects of the project (capital needs, volume, cost of goods, wages etc.). The feasibility study represents the first time in a project development process that the pieces are put together to see if they perform together to create a feasible concept, both technically and economically The feasibility study also shows the sensitivity of the business to changes in these basic assumptions.

Feasibility studies contain standard technical and financial components, presented in more detail in a later section of this report, but the exact appearance of each study varies. This variation depends on the industry studied, the critical factors for that project, the methods chosen to conduct the feasibility study, and the budget of the study. Emphasis can be placed on various sections of an individual feasibility study depending on the needs and requirements of the group for whom the study was prepared. Since most studies have multiple potential uses, it is critical to design the study so that the material provided will serve the needs of all these.

The feasibility study provides an evaluation of the potential for success for a project. The perceived objectivity of the evaluation is an important factor in the credibility placed on the study by potential investors and financiers. Also, the creation of the study requires a strong grounding in both the financial and technical aspects of the project. For these and other reasons, persons from outside of the membership group or consultants conduct most feasibility studies.

Feasibility studies for a cooperatives are similar to that for any other type of business, with one important exception: member-users are concerned with having the cooperative be successful because that will help make their personal businesses more successful. Hence, feasibility studies must address the impacts of the project on members as well as the cooperative.

What a Feasibility Study is not

The feasibility study is a useful tool for project deliberation; however, like all tools it has its intended purposes along with its limitations. There are several purposes for which a feasibility study cannot or should not be applied.

Feasibility studies are conducted on "real-world" projects. They are not academic or research papers. Simulations or projection models, though useful on some projects, do not replace a feasibility study. The study should not be a "cookie cutter" approach to a project. The study should not merely be a generic source of information. Once completed, a study should permit a group to make better decisions for the strategic issues of their specific project.

A feasibility study is not a business plan. As explained in more detail in Appendix A, a business plan is elaborated later in the project development process than the feasibility study. The main purpose of a business plan is to function as a blueprint for the group’s business operations. The business plan presents the group's intended responses to the critical issues raised in the feasibility study. The feasibility study results forms the basis for developing a business plan.

The purpose of a feasibility study is not to identify new ideas or concepts for a project. These ideas should be clearly identified before a study is initiated. The group need accomplish a number of steps, before feasibility study is instituted. The closer the assumptions lie to the "real-world", the more value feasibility study will hold for the group.

A feasibility study should not be conducted as a forum merely to support a desire that the project will be successful. The study should be an objective evaluation of the project's chance for success. Negative results can be just as useful for decision-makers as positive results.

Financiers may require a feasibility study before providing loans, but this should not be the only purpose of a study. A feasibility study should enhance a banker's ability to evaluate a project; but the primarily goal should be to aid a group's decision-making, not to secure financing.

A feasibility study will not determine whether or not a project should be undertaken. The potential members have to decide if the economic returns justify the risks involved in their continuing the project. The results of the feasibility study assist them in this.

A feasibility study serves as an analytical tool to present the basic assumptions of a project idea, shows how results vary when these assumptions change, and provides guidance as to critical elements of a project. It provides a group with project specific information to assist in making decisions. Groups using feasibility studies should lower the risks in proceeding with a project.

The creation of a feasibility study, though part of the project cycle, contains a process in itself. All studies have four key factors in their creation process. These can be characterized as project definition, group characteristics, group decisions, and feasibility study decisions.

For a cooperative project to be successful, a core group of people must feel the need for solving a problem or taking advantage of an opportunity together. Improving the situation and doing this as a group provides the context for a cooperative business project. This project must be understood, and the group must believe that they can achieve this goal. Often, a few individuals provide the spark for the idea, but group interaction provides the opportunity for them to hone their idea and develop sufficient interest. In addition the group discovers interests in common so that a cooperative can be an effective organization.

The initial ideas of the group must have coalesced into a clearly stated project, before it can undertake a feasibility study. The ideas also must have proceeded to the stage where hoped for goals can be quantified.

Cooperatives work best when there is mutual benefit to working jointly or in situations where individuals acting alone cannot achieve the goal. Members voluntarily choose to join a cooperative, and the organization must be of some potential benefit to them. When a project can be addressed jointly and potential member interest exists, then a cooperative can be the solution.

A study is not needed unless there is a specific "real world" project. This project must be:

a. Defined, understood, described and quantified;

b. Significant, broad and large enough to warrant group action;

c. Capable of a solution from a purely economic and technical point of view;

d. Economically, culturally, and socially fitting for the group.

e. Capable of being considered a reasonable solution by members of the group.

When all these elements exist in a project idea, then a successful cooperative could be achieved. If all of these are not present in the idea, then it needs to be revised before the project proceeds

Group Characteristics

For a project to have a chance of success a group that is large enough to achieve a "critical mass" must be interested. The number that is "large enough" depends on the product, the scope, and the economic resources available. Sufficient support is critical for the development of a cooperative project. This is not merely a matter of counting noses. A smaller number who are truly committed to a project can have a higher chance of success than a larger number who are only partially committed to the project. Before proceeding the project must have support of the group.

While attending organizational meetings, survey results expressing support and willingness to work to develop the project all are means to demonstrate support; financial backing of members is perhaps the best method for expressing its support. One of the tasks of a feasibility study is to determine what number of members or volume of product is required for the project to succeed.

Advisors and consultants are useful aids to group formation. This assistance may come from outsiders; such as extension agents, lenders, etc; who interact closely with the group. They can provide assistance within a specific field such as accountants and lawyers or they can provide assistance with the development process such as USDA cooperative development specialists. These advisors can help the group focus its ideas. They can also help to assure that the ideas of all the members are heard and considered. Another role an advisor can play is helping the group with its own internal organization and planning.

While outside advisors can be useful to the group, they should not drive the process. The project should be developed for the group's benefit. The leadership for the project should come from within the group. The group should make the final decisions on the project's direction. Outsiders, no matter how well intentioned, should not undertake this role.

Group Decisions

Strong leadership is essential for defining the project and deciding if a feasibility study should be conducted. Outside assistance can be useful, but vision and direction for the project should come from the group. Informed leadership with enlightened self-interest and a commitment to group action is needed. Leaders must maintain all parties with creative stress to take the decision to proceed or not with a feasibility study.

Strong leadership is necessary, but in dealing with the project it is important that potential members of a new cooperative business venture, are all aware of the project and feel a strong need for a mutual solution to it. There is danger that one or a few aggressive individuals may short cut the deliberation process and force a premature decision to proceed. One recommended is that the most active members form a steering committee to guide the project development process

Decision-makers should take a simple test that provides a good guideline for the decision-making process. The test consists of only two questions:

1. If I choose an action and my decision proves to wrong, what would be the cost?

2. If I choose to make no decision, what would be the cost?

If the cost of making a wrong decision is relatively small, do not spend much time, money, or effort on the decision making process. On the other hand, if the cost of committing an error could be large, put more emphasis in determining the pros and cons before choosing.

This sounds simple. But, in practice, it is not easy to implement, especially with groups, where each member has their own individual personality and decision-making method. Some may be slower to learn; some may need time to contemplate before taking a decision; others may have aversions to high risk. Still, other members may believe that spend time or money researching a project is a waste. On the other hand, some of the group may want to decide before relevant information has arrived. Balancing these diverse sentiments within a group can prove difficult.

Decision-making often is one of the greatest initial challenges that a group faces in a developing a project. Figure 3 presents some guidelines to assist groups with their decision-making. Applying these can help with creating a system for making decisions. This should permit positive progress in the development of the project.

Figure 3: Guidelines for Group Decisions

1. Unanimous agreement is not required to move forward.
2. Never make a decision to proceed based solely on negative reactions; for example, out of resentment or envy toward middlemen, moneylenders, etc.
3. A few reliable persons are superior to a larger number of doubtful persons.
4. Extravagant promises of what the cooperative can do should be avoided.

1. Expectations should always be based on the economic and social realities faced by the cooperative.
2. Make each decision only once.

Given the difficulty in making decisions; some groups, or some individuals, try to avoid making decisions altogether. This tactic is not recommended. Not making a decision or choosing to postpone a decision are decisions in themselves. There is always more information that can be gathered; however, there is also a cost to taking more time to deliberate. A decision must be made when further investigation costs more than new information is worth.

In the process of doing a feasibility study, there are moments when the group has to make key decisions. Taking the time to think through each of these decisions can increase the value of a feasibility study. These six decisions have a logical flow and are presented in chronological order in Figure 4 below and elaborated in the following section.

Figure 4: Decisions for Feasibility Studies

1. Conduct the feasibility study or not.
2. What assumptions will be used for the study?
3. Who conducts the study?
4. How to review the study.
5. Accept or reject the study once made.
6. Implement the study once accepted.

Often groups proceed directly to the feasibility study and overlook the importance in making this first decision with deliberation. Take the time to determine if a feasibility study is appropriate for the project being undertaken. Moreover, if this decision is conducted thoughtfully, the group will probably have established a procedure for decision-making. Utilizing this procedure, the decisions that the group needs to make later in the development process will probably come easier, and their likelihood of being correct is greater.

Careful consideration of whether or not to undertake a feasibility study will save much time and money; it will also increase the value of a completed feasibility study. No group has unlimited resources. Even though the feasibility study is a critical tool in project development, monies spent on it reduce the amount available for other aspects of project development. Care must be exercised so that the study returns the maximum benefit to the group for the money invested.

Prior to the initiation of a feasibility study, the group needs to sketch out possible design of the project. This can begin with the "back of the envelope" calculations and proceed through a formal pre-feasibility study, for complex projects. The purpose is to begin to accumulate information needed to focus the direction of the project.

In many cases, more than one idea has been suggested as potential projects. Some of these may be impractical, some may appear good on the surface but are not possible when further elaborated, and some may require more explanation. The group should delve into the proposed ideas to extract the elements of each idea that is most advantageous. Typically, the most successful projects are a combination of the best aspects of many different ideas into one clearly defined project. This initial elaboration provides a framework to develop the project. If indications are positive, this framework can be filled-in with a comprehensive feasibility study.

The steering committee and internal decision-makers normally perform this task. Gathering the needed information for this preliminary evaluation takes place with the identification of the idea. The group, and possibly an advisor to the group, works together to obtain this preliminary information. This information can be discussed informally or a formal document may be prepared. Whether a formal pre –feasibility document is prepared or not, the information gathered will be needed later, if the group proceeds with a feasibility study.

Feasibility Study Decisions: 2. What assumptions will be used for the study?

Once the decision to conduct a feasibility study, key project assumptions should be determined before initiating a feasibility study. A study cannot analyze every possible variation of a project. The group must provide study boundaries before a study can proceed. At a minimum, the group should be able to provide general answers to the four questions presented in Figure 5. Examples of the type of information where the group may already have information or need to make assumptions are included under each question.

Figure 5: Assumptions for the Feasibility Study

1. What is the need for project

A. What is the product or service?

What is the essence of the project? (There can be more than one; in this case, each of these should be clearly defined)

B. What is the group's comparative advantage?

What is the market demanding and what do producers do well?

C. How will the project benefit the members?

D. Have the potential members determined the need or is it being promoted by others from outside the group?

2. What is the potential membership base and volume of product for the project?

(normally supported with a member survey)

A. What is the support by: producers, community and potential lenders?

B. What is the number and size of producers who are willing to participate?

C. What volume of product will be included in the project?

D. What future expansion of both membership and volume is possible?

3. What is the volume of sales and who are the potential competitors?

A. What is the size of market area for inputs, outputs, and supply area?

B. Who are the major competitors?

What are their market shares, their facilities, their structure, etc?

C. What are the possible competitive responses?

D. Are there ways that the group can work with any of these potential competitors to accomplish its goals?

4. What are the organizational needs for the project?

A. What are the capital needs and possible sources of this capital?

How much money is needed?

B. What are the budgeting and financial needs of the project?

What are possible sources for financing?

C. What are the legal requirements of the project?

What documents or agreements are needed?

What permits and inspections will the project require?

C. What facilities are needed?

Will the group purchase, build or lease the facilities?

D. What are management requirements?

What skills will the cooperative require of a management team? What will this management cost?

Can producers pay enough to attract good personnel?

Obviously, the group might not know the exact details of all project aspects. Several options may seem possible, and the group must have more information to decide between then. More than one possible structure is not problematic for a project at this stage. However, the group should strive to answer the four questions for each possible project scenario. The feasibility study can be used to assist the group to decide between options or to see economic outcomes from different from different situations. The more focused the project design is before the implementation of a feasibility study, the more likely that the study will serve as a useful tool.

Although in principle it is possible for a group member to conduct the feasibility study, outsiders to the group produce most feasibility studies. Prospective members and financiers see the objective evaluation of a project concept with a feasibility study as an important aspect of the study. This objectivity can provide the group with helpful information that might have been overlooked by those participating directly in the project.

The engagement of a consultant to create the study can be the most important decision in the creation of the study. The group should utilize a good consultant for the project. Figure 6 provides possible criteria for a good consultant. These include the group determining that the consultant is qualified to create the feasibility study for the project. It also involves assuring the consultant fits well with the group. Appendix B presents a sample sheet for quantifying feasibility consultant selection criteria.

Figure 6: Criteria of a Good Feasibility Study Consultant

1. Previous experience conducting feasibility studies.
2. Experience with the industry to be studied.
3. Understand cooperatives.
4. Willingness to listen to the groups’ ideas.
5. Works closely with designated contact members of the group.
6. Accepts reasonable revisions to the submitted study.
7. Accomplishes the study within an agreed upon timeline.
8. Works within the budget designated by the group.
9. Provides clear, useful information at the completion of the study.

Check that the consultant has the proper background to prepare the feasibility study. The group should review samples of the consultant’s work, and speak with others for whom the consultant has prepared feasibility studies before contracting them

If the project is of sufficient size and complexity, it may to hire several consultants to complete various aspects of the feasibility study. Multiple consultants can reduce the dependency of the group on one consultant. It also can permit the group to select experts from several fields. On the other hand, it can complicate the coordination and consistency of the information received.

The consultant preferably would have experience the industry in which the project would take place. Even if the consultant is an expert at the creation of feasibility studies, if they have no knowledge of the specific industry, they will probably not be able to correctly identify the critical factors in that industry. Given business complexity it is almost impossible for one person to have experience in all areas of a business. Often, a team of consultants assembles feasibility studies. For example a Cooperative Service Development Specialist might work jointly with industry specialists to create the feasibility study. Some consulting firms resolve this issue by having feasibility specialists and contracting with industry experts in the creation of a feasibility study.

The consultant should also understand the unique aspects of cooperatives from other business forms. The tax implications and business considerations of cooperatives differ from other businesses. These factors could decrease or increase project risks. The consultant should be familiar with cooperatives to properly evaluate these effects.

The consultant should not have a pre-conceived notion of how the project will function. The feasibility study should not be an "off-the-shelf" document put together from previously created feasibility studies. Rather, the consultant should pay attention to the ideas that the group has developed and craft a unique study for their needs.

The consultant should work closely with designated members from the group and should be receptive to input from these members. Also, the consultant should be prepared to enact technical revisions or to correct errors at the recommendation of these designated members. Part of the feasibility study process involves these revisions.

Revisions should focus on the validity of the assumptions, and the technical design of the study; not with desired results in mind. One key reason for utilizing a consultant is the objectivity they bring to the feasibility study; not to merely provide what the group wants to hear. Consultants have a legal obligation to provide responsible analysis. It is not reasonable to expect a consultant to alter the results merely to conform to member’s previously held beliefs of a project’s viability.

Another consideration when selecting a consultant, is the timeliness of the consultants’ work. Projects are time sensitive. Usually, decisions to proceed await information provided in the feasibility study. The time required to compete the study is an issue. The care and diligence required to create a well-crafted study must be balanced against the desire for speed. If a consultant, no mater how well qualified otherwise, cannot complete a well-designed study in a timeframe that serves the group’s needs, they should not be utilized. On the other hand, the group could consider if the timeline is realistic for the task to be completed. A consultant can only progress as fast as a group makes the required decisions and carries out their responsibilities.

Cost, almost always, is an important factor. The expertise and skills that the consultant offers project must be weighed against their expense. A quicker timeline, could increase the charge of a consultant. At times, preparing a pre-feasibility analysis can decrease the effort required to complete the feasibility study and reduce the cost of this study.

Some public programs such as USDA’s Cooperative Services, Community Development offices, The Small Business Administration, and local business incubator programs provide technical assistance at no or minimal cost to groups creating feasibility studies. Their assistance must be considered in conjunction with all of the group needs.

Another factor to consider when searching for a consultant is their willingness to provide the data used to generate the financial tables and scenarios reported in the feasibility study. It is preferable to obtain this information in a format that the group can easily manipulate, such as an electronic spreadsheet. Though requesting this information can moderately increase the cost of a feasibility study, access to the actual data permits the group to use the information for their later needs with greater flexibility. This data also can reduce the cost in creating the business plan, if the group decided to proceed, or can decrease the effort required for revision, if the group adapts its project ideas from those presented in the study.

Once selected, the group should give the consultant detailed-instructions on the requirements for the study. In the case of a paid consultant, happens through a legally binding contract between the parties. The group should consult legal counsel for assistance with this contract. The contract should state clearly the requirements and role of both the group and the consultant. It should have timelines, delivery dates, and what is to be accomplished before each payment is to be made.

Often, the consultant receives a down payment before the feasibility study has been reviewed and accepted by the group (and possible financiers if appropriate). This gives the group more leverage to encourage timeliness or revisions, if necessary. It is also recommended that the contract designate a third party arbitrator to resolve any disputed items.

The group should discuss with the consultant arrangements for cost overruns, time delays, and revisions. As Murphy’s Laws states "everything costs more and takes longer." There is a mechanical efficiency in almost all processes that can be considered as an optimal rate. Seldom, is this efficiency achieved in reality. It is important for these members of the group to discuss with the consultant which factors and considerations will be designated for these issues. As changes in the feasibility study made after signing the contract can be costly, the group should be clear in what they expect to obtain from the consultant prior to signing the contract.

Selection of the consultant does not end the group's responsibilities. The group should select a qualified member or a small committee that has the role to work closely with the consultant. These members work to assure that the feasibility study presents the ideas that the group. These members track the study at all stages. They work with the consultant reviewing and clarifying ideas during the study development process.

Members with appropriate abilities or backgrounds should be selected. As critical, is the time commitment that the members can provide to working with the consultant. These members represent the interests of the group to the consultant. They are the contact for clarification and additional information that the consultant may require of the group, the project, and the group's goals. They are the representatives of the entire group. As such in their interaction with the consultant, they should reflect the wishes of the entire group and not only their own.

These members should give periodic reports to the group as to the progress of the feasibility study. They also should work with the other group members and advisors to gather the information needed to prepare the feasibility study.

Members or outside financiers will often judge the perceived reliability of the entire study based on its least accurate piece. An otherwise well-conducted feasibility study could be viewed as inaccurate or useless by a simple mathematical mistake or oversimplified assumption. To prevent this, the feasibility study should be carefully reviewed for the validity of assumptions and overall accuracy before presenting it to the entire group.

The study should be examined for clarity in the thoughts it presents. The logic used for the study should be clearly understandable by the members or other potential clients. Assumptions should be explained as to why they are applicable. Questions such as, "is the language appropriate; is the document well organized; or can someone who is not familiar with the project understand the study?" are proper types of questions to pose during the review process.

The feasibility study report presents the results of the study. This report serves as a compilation of project efforts to that date and is an important document for the project. Potential members, financiers, and others use this document to help determine their support for the project. The report should be professional in its organization and its presentation. This report should present the relevant conclusions from the study. In addition the project idea, the study should contain details such as a table of contents, page numbers, and references that make understanding the document easier. A professional and easy to read report, is of greater value to the group. Appendix C provides a sample outline of a feasibility study report

Although the contact members take on the lead role in working with the consultant, other members of the group should review the study carefully before the decision to accept the study is made. Advisors, such as Cooperative Development Specialists or extension agents, can provide an objective review of the study, and be able to give insights on content or assumptions of the study. If the group has hired consultants, this outside review can be especially useful.

Typically, The group refines the report before it is completed. This often involves a series of draft reports presented to the group as the study proceeds. The selected members relay the group’s changes in the study to the consultant. Before the study is completed, to the satisfaction of all parties, it almost always requires revisions to improve its value to the group.

Once the review is complete, the consultant normally makes a final report to present key findings of the feasibility study. This presentation typically explains the recommendations of the study. At this time, the group usually makes the preliminary decision to accept or reject the study.

Often the contact members who have been working with the consultant, and have the most knowledge of the feasibility study, make a recommendation that the group to accept or reject the study. The final decision rests with at least the entire steering committee and in many circumstances, this decision is presented to the entire group for final approval.

The decision to accept or reject should be based on technical quality of the study. Does the study fulfill the work expectations that the group had when contracting with the consultant? Do the ideas presented in the feasibility study differ substantially from those of the members for the project? Does the study contain significant errors? The group should determine if the feasibility study is sufficiently comprehensive to permit them to make informed decisions on whether or not to proceed with the project. If there is not enough information in the feasibility study, the group could decide to revise the study. This decision should not depend on the final results of the study. At times a group’s response may be to blame the messenger for results that do not return a favorable recommendation. This should be avoided. A well-crafted, negative resulting feasibility study can prevent the group from undergoing considerable trouble and expense to learn the same later in the project process. By the same token, a feasibility study with a positive economic return should be scrutinized and not accepted merely because it makes the project seem possible.

Written records of the decision-making process should be made and kept in a safe place. Group members need to be aware of their legal responsibilities for due diligence. In the development of a project, an attorney should be kept appraised and provide legal consultations when appropriate.

Another point of deliberation occurs after the feasibility study has been accepted. The group must decide whether or not to proceed to implement the project. The feasibility study is an important tool to assist this decision, but the group should not ignore other relevant factors in their decision. At this stage, the group can decide to implement, revise or halt the project.

Positive results from a feasibility study do not necessarily imply that the group should proceed to develop the project. Several factors could cause the group to stop or to revise the focus of the project. Figure 7 presents some of these reasons.

Figure 7: Reasons to Not Implement After Positive Feasibility Study Results:

1. The situation faced by the group has worsened since initiating the feasibility study
2. The group chooses another project that it deems more beneficial for its goals
3. The risks required for the project might be greater than the group is willing to accept.
4. Capital, size, capacity, etc requirements are more than the group can accommodate.
5. Outside information shows some of the key study assumptions to be invalid.
6. The study or the consultant is found to lack credibility.

By the same token, negative study results do not necessarily signify that a group should stop developing the project. The group may proceed, with caution, even if the feasibility study results are negative. Of course, a major reason to conduct the feasibility study is to determine if the project could be economically viable. Any decision to continue with a project after a study shows potential negative results should only be undertaken with consideration of the risks involved. Figure 8 presents some possible reasons for a group to consider proceeding with a project even if the feasibility results are negative.

Figure 8: Reasons to Consider Implementing After Negative Study Results:

1. The situation faced by the group improved since initiating the feasibility study.
2. The critical assumptions of the feasibility study are unduly harsh or negative.

1. More persons or volume is included in the project increasing it to viable levels.
2. The group has found a partner to share the cost, risk, capacity, etc.
3. The technical limitations or machinery or design have been resolved.

Under most cases if major changes occur to the project idea as presented in the feasibility study, the group should revise the feasibility study to reflect these evolutions. Or, the group may undertake a new feasibility study reflecting these changes. This permits the group members to make decisions with all applicable information.

There is often an issue of timing in the process. From the moment a feasibility study is initiated to its completion factors can change, both positively and negatively. These can affect the decision to proceed. Also, some groups decide to proceed to develop a business plan while they resolve the issues that resulted in a negative outcome. For example group needs more volume of production to be successful, but feels that it can convince more producers to participate once the project is closer to implementation.

The report prepared from the feasibility study describes the group at a moment in time and defines the project under development. The report presents a series of assumptions on the design of the technical, financial, and operational aspects for the project as a whole and supports them with figures and tables. It includes the pro forma financial statements to project income and expenses.

The appearance of the report will change dependent on the project, the group, and the consultant who prepares the study. The document should describe the efforts that the group has undertaken to the point of the completion of the study and why they wish to undertake the project.

No matter what the appearance, the following questions are ones the feasibility study should answer about the project.

Where is it now?

Where does the group want to go?

Why do they want this?

How will they accomplish this?

What do resources do they need to achieve this?

Who will assist them?

When will this be completed?

How much will this cost?

What are the risks?

There is no required length for a study report. It should be prepared in as simple a manner as possible yet still include the information required to aid the group with decision-making. The primary points should be presented in narrative form referencing the supporting documentation in the appendices. The outline in Appendix C is presented as a sample of how a feasibility study could be designed. Differing industries or projects have differing needs from a feasibility study. The design of each feasibility study should serve the needs of the group or other clients.

Though the appearance of the feasibility study can vary, there are elements that all reports need to contain to be a feasibility study. They should present a "holistic" view of the entire project. Even though exact project details may be undecided when the study is conducted, the potential of the project for success or failure should be included in the study.

Assumptions have to be made to permit the study to be conducted. The closer these assumptions are to reality, the more value the study will have. Overly optimistic assumptions or simplistic assumptions can cause members or investors to discredit the study's results. A feasibility study should always state clearly which items are hard facts and which are assumptions. It should declare the sources for the facts. The assumptions should be supported with the reasons for their validity. This supporting documentation should be included in an appendix to the study.

A feasibility study should present the environment where the project will occur. It will always include a project description, its scope and goals. The description should contain project need and how the group can accomplish the goals. The scope should include the key elements of all aspects of the project. Potential competitive response to the project should be in the study.

Key elements will change depending on the nature of each project. A good rule of thumb to use is that if reasonable changes in a factor could make the project change from successful to unsuccessful it is a key element of the project. Examples of key elements, though by no means all inclusive could be: the technology of production, volume of inputs, the market for goods sold, marketing channel, personnel cost, prices paid, and capital costs.

A feasibility study should vary the possible results with changes in key elements of the project. This controlled variation, called scenario analysis, permits planners to view which project elements are the most susceptible to changes, both positive and negative. Scenario analysis also shows the impact on results of changes in the assumptions. The study should always include the rationale as to the selection of the scenarios. These scenarios typically include one that presents a "worst-case" possibility, as well as more optimistic scenarios. Comparative results from scenarios are often presented in tables.

A feasibility study presents on paper the project design to determine if it is technical possible. It should also show that the desired technologies could work in coordination. In projects with unproven technologies, this can be the most important aspect of a study. In projects with proven technologies, the study can serve to correct design flaws before costly mistakes are implemented.

Possible economic outcomes should be a prominent part of a feasibility study. Variation in these elements should be included in the scenario analysis. Operating costs and net revenues are factors to include for the economic viability of the project. The study should contain pro-forma balance sheets, operating statements, benefit-cost ratios, projected cash flows, and internal rates of return for the project. Typically, these are projected for three years after project initiation.

The study should include possible project risks for potential members and other investors. This could include project technology; potential legal and governmental setbacks; management and labor resources; and time critical affecting the project. Revealing potential project risk is an important function of the feasibility study.

Above all else, the feasibility study should enable members to make constructive, informed decisions on whether they should proceed, revise or abandon the project.

The Feasibility Study - What Bankers Like to See in Them

A cardinal rule in banking is to borrow from a lender who understands your business; or, never to lend money on a business project that you do not understand. For this reason, even though most groups involve their banker early in the process a feasibility study is often done with an eye towards explaining the project to potential financiers. Bankers, as different clients for the feasibility study, can have different requirements for the study than group members. In many cases, the feasibility study is the formal project presentation to a lender. This section summarizes a feasibility study here with the banker in mind.

Many groups work with bankers with whom they already have an established business relationship. This relationship could be with another cooperative project or with their personal business. This can ease the process of obtaining financing for a project. However even when working with a banker, who is familiar with the members, it is important that the banker know and understand the unique aspects of cooperatives.

From the perspective of a banker, or other perspective financier, the feasibility study should contain the essential information contained in Figure 7. This does not mean that a banker or financier is not interested in other aspects of the feasibility study. Each has their own area of interest and concern; however, the following will be needed for most, if not all bankers.

Figure 9: Bankers' Considerations for Feasibility Studies

1. An executive summary -

This should be short, to the point, yet still complete. If the banker cannot read the summary and understand the basics of the project the odds are that project will receive financing. This should contain:

1. Project purpose - What is the project and who is involved?
2. Repayment possibility- Does the study show the ability of the investment to be recovered over a specific time period? Does it give investment (cost) parameters? Can it convince bankers the investment is needed, even if it marginally feasible?
3. Projected Financial Returns- What is the projected financial scale, the revenues, and the operating costs? What is net income?
4. Economic Benefits -What is the return on investment and the internal rate of return of the project?

1. The financial package blueprint-

The banker needs to clearly see what resources the group wants from the bank. The bank will require information to calculate potential project risk and the bank's exposure for any monies loaned to the group. They also want to know the financial commitment to the project from the members. This blueprint should contain the following elements:

1. Characteristics of assets to be financed
2. Expected rate of conversion to cash-liquidity- What is the project's funding potential and what repayment terms will be required?
3. Risk evaluation data- What are internal (yields, costs, etc) and external (inflation, energy, etc) project risks? What if the key assumptions are not perfect? What is the bank's exposure?
4. Evaluating Economic Consequences-Do net reserves cover capital cost? Does the plan keep the project from capital erosion?
5. Financial Forecast- What are the next three years projected cash flows, operating statements, and balance sheets? What are the source and use of funds?
6. Documentation- What rational is used to support the assumptions?

A feasibility study should never be conducted merely to prove that a project is viable, but bankers and investors are potential clients for a study. A study that presents information in a manner so that a banker can understand the project and their role in it, while serving the needs of the members, is desirable. This pre-planning can speed up the time required for a bank to approve financing for a project or even improve the possibility of securing financing. Achieving sufficient project financing play a major role in project success or failure. It can be useful to consult with a banker prior to conducting a feasibility study to determine what factors they desire to see developed in the feasibility study.

Once a feasibility study is completed, it is studied by directors and members and usually by at least one lending institution. The decision to implement occurs after directors and members had voted to go forward if credit is available. Hence, when the final decision is made to implement the project, all the essential parties to the endeavor have said yes. The project is feasible; also there is money to get on with the work.

Several sources offer guidance to groups that decide to continue developing a cooperative project "How to Start a Cooperative" by the USDA Cooperative Service, Galen Rapp and Gerald Ely and "Co-ops 101, and Introduction to Cooperatives" by Donald Frederick also of USDA Rural Business-Cooperative Service are two good references. Advisors outside the group can be useful in assisting with the development process for the project.

It is important to plan ahead, during the development of the project, to avoid problems during the implementation phase. It can seem insurmountable to suggest that a group concentrate on planning when so many current decisions need be made. The implementation stage is a particularly critical stage of project development. Often the members of the group feel overwhelmed and exhausted by this stage in the process A group should not lose sight of the longer-term horizon of the project. Utilizing a implementation plan can assist the group during this tumultuous period. The organizational, legal, and financial matters must be well handled from the very beginning of the project. Appendix D presents a list of issues to consider when implementing a feasibility study. Not all projects require every detail listed in the appendix..

Often, the group appoints special committees to monitor the project progress in specific areas; e.g. committee for finance, for legal, for facilities, for marketing. These committees become the primary means of reporting how the specific aspects of the project are faring. By this means, members are being informed and educated about the subtleties of the project. This helps to assure understanding, support and an esprit de corps as the cooperative develops an understanding from members if there are delays, cost overruns, etc.

If the project requires construction of a sophisticated facility, such as a meatpacking or soybean processing plant, it is very important to include expert a knowledgeable architect, engineering, or management professionals early in the process. Undoubtedly this would be provided for in the feasibility study, the loan agreement, and the contracts for construction.

In many of the New Generation cooperatives management is hired early in the process before the feasibility study has been completed. This can assist the project development; however, it considerably increases the early project development costs. See "Creating Co-op Fever: A Rural Developers Guide to Forming Cooperatives" USDA Rural Business-Cooperative Service; Service Report #54 by William Patrie for information on this cooperative structure

Once the project proceeds to the level of activity, the group hires a manager or project director. This person (or persons) usually makes the day to day decisions for the project. The board or directors should determine the general guidelines of these decisions. The manager of the project should be fully qualified to insure that work meets the specifications, that construction proceeds on schedule and that changes or delays in the work be handled. Obviously, the more expensive and technical the project the more important it is that the manager be highly skilled.

The elected directors or steering committee members must monitor the developments in the project implementation. Using committees or professional managers as suggested above is important, but group leaders must follow the project progress. The project is for the benefit of the group and the board of directors or steering committee represents the entire group They must make the final decisions and set the policy guidelines for the project.

Last Revised: September 5, 2001

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