What is Viability?

Starting a business 

Viability: what does it mean? In a commercial context, viability refers to the ability of a business to exist, be profitable and to grow. How do you establish whether a project is viable or not?

The end result will be a subjective one and may differ from one opinion to the next. A viability analysis is an analytical exercise and using research, experience and business principles, decide on the probability of the project to sustain itself, grow, meet the objectives of the project and offer the expected returns of the investor.

From a financier or investors point of view, there are two main viability categories: the business or operational viability and the entrepreneurial viability. The latter refers to the entrepreneur and his ability to run the business successfully. This include the business skills (ability to ably sound business principles) and the doing skills (technical know how or also referred to as knowing the “tricks of the trade”).

The operational viability constitute of various components:

• Technical viability: this refers to the products or service that will be offered. Will the product work, in other words, will it do what it is suppose to do. So if the claim is that the device (eg. a pool chemical) will clean the pool within one hour, will it? Was the product tested? Will it last? Is the material durable, toxic or are there apparent dangers in using the device such as causing eye irritation or even blindness?
• Financial viability: What investment amount is required? What is the cost of the product, the margin and the expense structure? At what levels (both in rand value and in volumes such as number of units) will the project break even and when? How much profit will be made or what is the expected loss after a period of time? What gearing can the business afford and can access to finance be gained? What returns will the project offer? The entrepreneur will use costing exercises, sensitivity analysis, cash flow forecasts and income statements as tools to answer some of these questions.
• Market viability: What is the size of the market? What percentage of the target market needs to be captured to achieve expected turnover levels? Will the product or service sell? Why will they buy it? Part of this project is the marketing drive: How will the target market know about the product or service? (Marketing strategy) We refer to the 4P's of Product, Price, Promotion and Place.
• Legal viability: This refers to contracts and agreements such as leases buy and sell agreements, franchise agreements and statutory conformation such as registration for VAT, as employer, for income tax purposes and UIF. The legal requirements also come into the fray such as complying with acts such as section 34 of the Insolvency Act when you take over a business.
• Other issues: An issue not covered in the above, but is also of utmost importance include the following: the analysis of the staff requirements, the ability to access these resources and the affordability to do so. The technical viability mentioned above can also include the issue of manufacturing processes. It is a study of the plant required to operate successfully, the factory layout, the location of the factory, the costs associated to the plant, waste factors and the availability or electricity requirements.

It is clear from the above that a viability analysis, especially for a new business, is a comprehensive exercise. Very few new entrants to the business world do have the skills and expertise to cover all these aspects. It is for this reason that experts in the field, such as business consultants, be called in to assist. There are many useful internet sites available to assist in the process. The bottom line is, if in doubt call and professional. Investing in a business has far reach consequences and nobody can afford to make obvious mistakes.