What is viability?
Provided by Business Partners Ltd, South Africa's leading investor in SMEs
Once you've decided you have a good business idea and you want to run with it, can you predict whether it will be a success? Well, that's where assessing the viability of the business idea comes in. Find out exactly you go about doing this.
In a commercial context, viability refers to the ability of a business to exist, be profitable and to grow. But how do you establish whether your project or business idea is viable or not?
A viability analysis is an analytical exercise. Using research, experience and business principles, it will determine the probability of the project to sustain itself, grow, meet the objectives of the project and offer the expected returns of the investor.
The outcome of this analysis, may vary depending on who you speak to, and it's only a 'guesstimate'. Make sure you get advice from someone with expertise in your area of business, as well as all the other issues to consider, such as the location of the business, competitors based in the area and the market for your product or service.
Viability through the eyes of the financier
From an investor's 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 includes your ability to apply sound business principles and your technical expertise or tricks of the trade.
The operational viability consists of various components:
- Technical viability refers to the products or service that will be offered. Will the product do what it is suppose to do. For example, if the claim is that 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 chemical, such as causing eye irritation or even blindness?
- Financial viability: What investment amount is required - 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? How will the target market know about the product or service? (Marketing strategy) We refer to the 4P's ofProduct, 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 points to ponder
There are various other needs that must be considered. These include the analysis of staff requirements, the ability to access these resources and the affordability to do so.
The technical viability already mentioned 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.
You can now see that a viability analysis, especially for a new business, is a comprehensive exercise. Very few would-be entrepreneurs have the skills and expertise to cover all these aspects. This is why experts in the field, such as business consultants, may be called in to assist.
There are also 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-reaching consequences and nobody can afford to make obvious mistakes.
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