Feasibility Study for a Small Business: The Steps and the Key Numbers

What is a feasibility study and when do you need one?

A feasibility study is not an end in itself but a means of reaching an investment decision: do you put your money into this project or not? The UNIDO manual divides the pre-investment phase into three stages: the opportunity study, which identifies the project idea using aggregate estimates; the pre-feasibility study, which assesses the idea preliminarily; and the full feasibility study, on which the decision rests. ^[1]

A small business owner does not need a volume running to hundreds of pages, but does need the same logic: do not sign a lease or buy equipment until you have answered the pre-feasibility questions with reasonable numbers.

What does a feasibility study contain?

The Business Plan Building Guide published by Monsha’at sets out four components of a feasibility study: technical, marketing, legal and administrative, and financial, with the aim of confirming that the project can succeed and make a profit. ^[2] The UNIDO manual, written for industrial projects, has broader chapters, including market and plant capacity, materials and inputs, location, organisation and overhead costs, manpower, implementation scheduling and, finally, financial evaluation. ^[1]

The market study: where does the sales figure come from?

The UNIDO manual ties plant capacity and production cost estimates to the figures derived from the market study. ^[1] In other words, the sales figure must come from the market, not from the profit you hope to make. The most common mistake in small studies is to start from the desired profit and work backwards to the sales that “must” happen.

To estimate sales realistically:

• Observe direct competitors: customer numbers at different times, prices and best-selling products.
• Define your target segment: who will buy, and why from you rather than someone else? Monsha’at’s guide covers this through the four elements of the marketing mix: product, pricing, distribution and promotion. ^[2]
• Ramp up gradually: a new business rarely reaches its expected capacity in the first month.

Which costs must you calculate?

Set-up and operating costs

Monsha’at’s guide distinguishes set-up and initial costs, such as equipment and machinery, from operating, marketing, administrative, human resources, maintenance and licensing costs. ^[2] The US Small Business Administration (SBA) divides them into one-time expenses at start-up and monthly expenses such as salaries, rent and utility bills. ^[3]

Fixed and variable

Fixed costs do not change as production rises or falls, for example rent, salaries, insurance, interest and depreciation. Some costs are semi-variable, such as telephone services and repairs, and it is best to separate their fixed and variable parts. ^[3] This split matters because the break-even point is calculated directly from it.

Working capital

Working capital is the money that funds operations until revenue starts covering expenses. The UNIDO manual customarily estimates it from operating outflows over a cycle of two to four months. ^[1] For uncertain costs, the SBA advises asking suppliers, service providers and mentors what similar businesses pay. ^[3] Licence fees are published by the competent authority in each country and emirate, so take them from that source directly.

Break-even and payback

The break-even point is where total revenue equals total cost, so there is neither profit nor loss. In units it is calculated as follows: ^[3]

Break-even (units) = fixed costs ÷ (unit selling price − unit variable cost)

The difference between price and variable cost is the contribution margin. The SBA suggests adding around 10% to the analysis as a cushion for unpredictable costs. ^[3]

Watch the terminology: Monsha’at’s guide uses the Arabic term for “break-even point” to mean the year in which invested capital is recovered and cumulative profit begins. ^[2] In financial evaluation that concept is the payback period, one of the evaluation tools the UNIDO manual lists alongside break-even analysis, net present value, internal rate of return and sensitivity analysis. ^[1] Calculate both, and keep them distinct in your study.

Hypothetical example: a coffee kiosk

The figures below are illustrative inputs in local currency, before tax or zakat. The calculation is on a cash basis: fixed costs here exclude depreciation of the equipment.

If the market study points to 120 cups a day (3,600 a month), net monthly cash flow = 3,600 × 9 − 23,000 = 9,400, and the set-up costs are recovered in about 13 months (125,000 ÷ 9,400).

Sensitivity analysis: what if the estimates are wrong?

The UNIDO manual recommends testing projections with wide margins of error through sensitivity analysis. ^[1] In the example above, if sales come in 20% lower (96 cups a day, or 2,880 a month), net monthly cash flow falls to 2,880 × 9 − 23,000 = 2,920, and payback stretches to about 43 months.

A one-fifth drop in sales made the payback period more than three times longer. That is the question to answer before you decide: can your funding and your patience survive this scenario? Also test a higher variable cost and a lower price, because a thin contribution margin makes a business highly sensitive to any change.

When should you rethink the project?

• If break-even is close to expected sales, any small setback tips you into loss.
• If the pessimistic scenario uses up working capital before the business settles.
• If the sales figure rests on personal judgement rather than observation or data.

In these cases the answer is not always no; changing the location, scaling down equipment, raising the price or starting with a smaller model and recalculating may be enough.

What do Gulf support bodies ask for?

Requirements differ between countries and between bodies. In Saudi Arabia, Monsha’at’s business plan guide covers the feasibility study as a step that comes before writing the plan. ^[2] In the UAE, the government’s official portal lists federal and local support bodies, including the Khalifa Fund in Abu Dhabi and Dubai SME, which supports GCC nationals, and notes that Dubai SME asks for a copy of the business plan or model canvas when you seek guidance, and that new entrepreneurs applying for funding must show the business is economically viable. ^[4] Check the requirements of the body you will apply to before preparing the study, so it arrives in the format and detail they expect.

Conclusion

A good feasibility study for a small business starts from a sales figure grounded in the market, separates fixed from variable costs, calculates break-even and payback, and then tests the numbers against a pessimistic scenario. If the project survives that scenario with funding for several months, you have a sound basis for the decision.