Products & Services Project Identification And Feasibility Studies o Techno Economic Feasibility Reporto Organizational Structure Reviewo Socio-Economic Studieso SWOT Analysis Project Development Services Project Execution Services Project Monitoring And Evaluation Market Research And Survey Services Financial And Insurance Consultants New Items

Project Identification And Feasibility StudiesTechno Economic Feasibility Report

Our professionals gauge the feasibility of the project on the technical and economic

front for our esteemed clients. They asses every limitation vis-a-vis technology and the

economic benefits it can provide our clients with in order to guide them in the right

direction. The assessment or the analysis is primarily done on the basis of the industrial

standards and organizational structure of the clients.Organizational Structure Review

We have a team of consultants in our team who can successfully review the

organizational structure before inception of a new project. Our review eliminates the

need of extra workforce that our clients would have employed for working on these

assignments. We can comprehensively augment the structure and match the new

requirements to provide our clients with immaculately accurate reviewSocio-Economic Studies

Before incepting a project, it is important to know the impact it will have on the economy

and society as a whole. Our company has a team of professionals who can successfully

gauge the social-economic impact of the project in a particular area. We have

maintained a huge and impressive database which allows us to correctly execute our

task.

SWOT Analysis

Our professionals have hands on experience in conducting accurate SWOT analysis

which enables our clients to be well prepared for the project. SWOT analysis we

conduct includes the political, economic, legal, social, environmental and cultural

influences the project might churn out. The experience and expertise of our

professionals enables them to conduct the analysis as per the industrial standards and

to come up with accurate results.

PROJECT IDENTIFICATION OBJECTIVES To know the importance of conceiving a good of project idea To ascertain the different sources from which a project idea can be generated To identify the steps involved in project identification and selection PROJECT IDENTIFICATION SCOUTING AND SCREENING OF PROJECT IDEAS An entrepreneur has an infinitely wide choice with respect to his project in different dimensions such as product/service, market, technology, equipment, scale of production, time phasing and location. Hence, the identification of investment opportunities (projects) calls for understanding he environment in which one operates, sensitivity to emerging investments possibilities, imaginative analysis of a variety of factors and also chance luck. This chapter is concerned with scouting and screening of project ideas, steps in the project identification process and also consideration involved in identifying the new projects by an existing company. PROJECT IDEAS It is the first and foremost task of an entrepreneur to find out suitable business which is feasible and promising and which merit further examination and appraisal. Therefore, he has to first search for a sound of workable business idea and give a practical shape to his idea. While doing so, the entrepreneur has to tackle the various problems from time to time to achiever the ultimate success. Since the good project ideas are elusive, a variety of sources should be trapped to stimulate the generation of project ideas. SOURCES OF PROJECT IDEAS • Project ideas could originate fro the various sources viz., • Success story of a friend/relatives • Experience of others in manufacture/scale of product • Examining the inputs and outputs of industries

28. • Plan outlays and government guidelines • Suggestions of financial institutions and developmental agencies • Investigation of local materials and resources • Economic and social trend of the economy • New technological developments • Project profiles and industrial potential

surveys • Visits to trade fairs • Unfulfilled psychological needs • Possibility of reviving sick units The various sources from which the project idea can be generated are explained below: Analysis the performance of existing industries A study of existing industries in terms of their profitability and capacity utilization is helpful. The analysis of profitability and break even level of various industries indicates promising investment opportunities. Opportunities which are profitable and relatively risk free. An examination of capacity utilization of various industries provides information about the potential for further investment. Such a study becomes more useful if it is regionwise, particularly for products which have high transportation costs. Examine the inputs and outputs of industries An analysis of the inputs required for various industries may throw up project ideas. Opportunities exist when (I) materials purchased parts, or supplies are presently being procured from different sources with attendant time lag and transportation costs and (ii) several firms produce internally some components/parts which can be supplied at a lower cost by a single manufactures who can enjoy economies of scale. A study of the output structure of existing industries may reveal opportunities for further processing of output or even processing of waste Examine imports and exports An analysis of import statistics for a period of fie to seven years is helpful in understanding the trend of imports of various goods and the potential for import substitution. Indigenous manufacture of goods currently imported is advantages for several reasons:

29. It improves the balances of payments situations It provides market for supporting industries and services It generates employment Likewise, an examination of export statistics is useful in learning about the exports possibilities of various products. Plan outlays and government guidelines The governments plays a very important role in out economy. Its proposed outlay in different sector provides useful pointers toward investment opportunities. They indicate the potential demand for goods and service required by different sectors. Suggestions of financial institutions and developmental agencies: In a bid to promote development of industries in their respective states, state financial corporations state industrial development corporations and other developmental bodies conduct studies, prepare feasibility reports and offer suggestions to potential entrepreneur. The suggestions of these bodies are helpful in identifying promising projects. Investigate local materials and resources A search for project ideas may begin with an investigation into local resources and skills, various ways of adding value to locally available materials may be examined. Similarly, the skills of local artisans may suggest products thay may be profitably produced and marketed. Analysing economic and social trends A study of economic and social trends is helpful in projecting demand for various goods and services. Changing economic conditions provide new business opportunities. A great awareness of the value of time is dawning on the public. Hence the demand for time saving products like prepared food items, ovens and powered vehicles has been increasing. Another change that we are witnessing is that the desire for leisure and recreational activities has been increasing. This has caused and growth in the market for recreational products and services Explore the possibility of reviving sick units Industrial sickness is rampant in the country. There are over 20,000 units which have been characterized as sick. These units are either closed or face the prospect of closure. A significant proportion of sick units, however, can be nursed back to health by sound management, infusion of further capital and provision of complementary inputs. Hence there is a fairly food scope for investment in this

30. area. Such investments typically have a shorter gestation period because one does not have to begin from scratch. Indeed, in many cases marginal efforts would suffice to revive such units. Identify unfulfilled psychological needs For well established, multi brand product groups like bathing soaps, detergents, cosmetics and tooth pastes, the question to be asked is not whether there is an opportunity to manufacture something to satisfy an actual physical need but whether there are certain psychological needs of consumers which are presently unfulfilled. To find whether such an opportunity exists, the technique of spectrum analysis may be followed. This analysis is done somewhat as follows. (i) Important factors influencing brand choice are identified

(ii) respect of the factors identified in step (iii) gaps which exist in relation to consumer psychological needs are identified. Visit to trade fairs Attending the National and International trade fairs provides an excellent opportunity to know about new products and new development. The above said sources of project ideas may be generated by the Government agencies, credit institutions, non-governmental organizations and also by public. The Governments has largest resources and have the necessary information to generate project ideas and it plays a predominant role in this sphere. The government has the required facilities and manpower to conduct detailed studies which may lead to making investment decisions. Banks and other financial institutions are actively involved in sharing the social responsibility of achieving the national objectives of economic development. The co-operatives and non-governmental organizations as well s individual entrepreneurs are now actively participated in identification of projects. The awareness of involving the people or the beneficiaries in project identification is now increasing fast. Since the local people have the first hand knowledge of the potentials and problems of the area to which they belong, more realistic project identification has become possible with their involvement. It needs no emphasis the project ideas would be generated in better manner both in the qualitative as well as quantitative terms when the knowledge and ideas of the Gove. Functionaries, people, the financial institutions and other experts are pooled together. PURPOSE AND NEED FOR PROJECT IDENTIFICATION The entire economic management planning is based on two fundamental assumptions. i.e. a) limited means and b) unlimited ends. A planner has to select few important needs to cut it into size of his/her means. This may be treated as

31. fixing the priority is called identification of project. It helps in elimination process. Identification and selection of a project is a scientific process. This process is based on certain essential conditions. It may differ from project to project. The essential conditions which should be taken into consideration for identification and selection of production projects are as follows: Project should be in conformity with the economic needs of the area. It should take into account the depriving factors which might have adverse impact. The input-output ratio should be optimum. The purpose of the project is to increase the production and employment of the area. Thus, the above said conditions will differ due to resources availability, use pattern and other relevant conditions of the area. Besides that, project should also consider certain national priorities. STEPS IN PROJECT IDENTIFICATION Project ideas are like other ideas which don’t take concrete shape immediately. There are several stages of making propositions their considerations and scrutiny for their soundness. An idea is first born, it is under incubation for sometime and subsequently is begins to take some definite shape. The project ideas to develop take almost the same course. This project identification may be broadly divided into four stages, viz., A. Conceptual stage – where project ideas are generated B. Screening stages – at which unviable ideas are eliminated. C. Identification stage – at which viable projects are selected D. Pre-feasibility state – at which pre-feasibility studies are taking up. Conceptual stage A number of project ideas may be generated either by those officials or non- officials and entrepreneurs individually or collectively who are conversant with the area. In this context, one has to examine the potentialities of development and the problems, needs and aspirations of the people of the concerned area.

32. Screening stage In the second stage project ideas generated above are screened n a preliminary exercise to weed out the bad or unviable ides. All project ideas would not pass the screening test. Some project ideas may be imaginary to warrant any serious consideration. The third & fourth stages may be called as investment opportunity study. This study is necessarily preliminary and the broad one and has a limited objective of providing planners with a choice of projects from which they can make a selection. Pre feasibility study and these can be differentiated opportunity study and a detailed feasibility study and these can be differentiated mainly on the basis of information required for respective stages. SCREENING PROJECT IDEAS After gathering the project ides from the various sources as aforesaid, it is essential to eliminate

ideas which prima facie are not promising. This process f eliminating the irrelevant and unviable ideas is called screening of project ideas. It can be done with the help of testing the following conditions of the propositions. a.) Compatibility with the promoter b.) Consistency with governmental priorities c.) Availability of inputs d.) Adequacy of market e.) Reasonableness of cost f.) Acceptability of risk level etc. The project idea must be compatible wit interest personality and resources of the entrepreneur. It should be accessible to him and also it offers him the prospects of rapid growth and high return on invested capital. The project idea must satisfy or go along with the governmental priorities, National goals and governmental regulatory framework. e.g. No Contrary environmental effects to governmental regulations Easily accommodation foreign exchange requirements No difficulty in obtaining license.

33. The resources and inputs required for the project must be reasonably assured. This feature of the project can be assessed with the help of determining the following points relating to a project. • Capital requirement within manageable limit • Obtaining technical know-how • Availability of raw materials at a reasonable cost • Obtaining power supply Identifying the adequacy of market is the key factor to select, the viable project idea. To judge the adequacy of market the following factors have to be examined. • Total present domestic market • Competitors and their market shares • Export market • Quality price profile of the product. • Sale and distribution system • Projected increase in consumption • Barriers to the entry of new units • Economic social and demographic trends favourable to increased consumption • Patent protection Reasonableness of cost is another factor to screen the project ideas. The cost structure of the proposed project must enable it to realize and acceptable profit with a competitive price. The following cost factors must be carefully considered to design a viable cost structure. Cost of material inputs, labour costs, factory overheads. General administration expenses, selling and distribution costs. Service costs, economics of scale etc. Acceptability of risk level is another factor which helps to screen the project ideas and hence determine the desirability of a project.

34. METHODOLOGY FOR PROJECT IDENTIFICATION To make a viable project it should be linked with the actual circumstances prevailing in the area. Without knowing the basic information relating to socio- economic conditions of the area, it is difficult to draw a suitable project for the area. Development needs and potentials vary from area to area. For specific area, before drawing a project, local condition and other relevant factors must be taken into consideration. Most of the project fails because they were not based on local problems. Assumptions based on macro level information may fail to watch at micro level. Survey is a technique to unearth the hidden information which are vital to identify the basic requisites of project i.e , need, resource and priorities. It also helps in making right choice between different alternatives. Secondly it presents lot of information to be used as bench mark information which will help at the later stage for evaluation of the project. PROJECT IDENTIFICATION FOR AN EXISTING COMPANY Existing companies essentially large scale company form of organizations are continuously developing various projects for their developmental purposes. While doing so, the existing company has to make a more intensive analysis of its resources and environment and conceive of projects on the basis of its existing activities. An existing company which seeks to identify new project opportunities should undertake a “SWOT” analysis, It is an acronym law of strengths and weakness and opportunities and threats. This analysis evaluate all these four characteristics of existing company. A brief summary of the points required for SWOT analysis is given below: Availability of internal financial reasons for new projects after taking into account the need for replacement expenditure, increase in working capital, repayments of borrowings and dividend payments. Capability of raising external financial resources Availability of production facilities Technological capabilities of the company Availability of different sources of raw materials and its utilization Availibility of infrastructural facilities Cost structure and profit margins of the company Distribution network of the company

35. Market share of the company Capability of top management of the company State of industrial relations in the company Impact of corporate laws on the growth of the company especially (MRTP ACT) etc., Likely changes in the governmental policies Possibility of evolving new technology and its impact on the cost structure of the company Existence and severity of competition Changes in the customers preferences, tests etc., By considering the above said information keenly the SWOT analysis helps to provide the basis for the corporate strategy to be followed and indicate the major areas of thrust. These may include expansion of the capacity of existing product range, vertical integration, diversification in related areas and mergers. CONCLUSION Thus this lesson has explained to you the significance and mode of conceiving good project idea. It also explains to you the various sources from which the project ideas can be generated and how one should select the project ides. SELF ASSESSMENT QUESTIONS 1. What factors would you take into account for identifying promising investment opportunities? 2. What is SWOT analysis and how it can be done? 3. Explain the process of project identification

36. LESSON – 3 PROJECT FORMULATION OBJECTIVES To impart the need for project formulation To describe the project formulation process To know the criteria to be followed in project formulation INTRODUCTION Project formulation is an investigating process which precedes investment decision. The purpose is to present relevant facts before the decision-makers to enable them to decide as to whether to go ahead signal should be given for the project or not. Formulation of projects involves scientific procedure. The task of any formidable project is too many. It has to present several information subjective and objective in nature. It explains the objectives, goals and justification for the acceptance of the project. The major task of the project is to assess the financial, technical and managerial involvement and its justification considering the resource constraint. The project formulation stage involves the identification of investment options by the enterprise. Project formulation is designed to bring the project sponsoring authority and the agencies from whom it has to gent concurrence, support etc., on one wavelength. Project formulation by providing a scientifically developed procedure for developing the contend as well as the format of the investment proportions, seek to streamline the process of appraisal of project at government and the aiding agencies level. So, the project formulation is a process involving the joint effort of a team of experts including the economists, the financial analysis and specialists in various fields. A well formulated project provides a medium which out across scientific, social and positional prejudices and provides a common meeting ground for all those who have a contribution to make successful implementation of a project. STAGES IN PROJECT FORMULATION The different stages in the project formulation process are briefly describes as follows;

37. A. Feasibility analysis B. Techno-economic analysis C. Project design and network analysis D. Input analysis E. Financial analysis F. Social cost-benefit analysis G. Project appraisal FEASIBILITY ANALYSIS Feasibility analysis is the first stages in the process of project development. The purpose of the analysis is to examine the desirability of investing in pre-investment studies. For this purpose it is essential to examine project idea in the light of the available internal (inputs, resources & outputs) and external constraints (environment). When a project idea is taken up for developmental three situations can arise. The project may appear to be feasible, project may turn out to be not feasible or the available data may not e adequate for arriving at reasonable decision regarding further investment. In the last mentioned case, investment in pre-investment studies will obviously have to be adequate for arriving at reasonable decision regarding further investment. In the last mentioned case, investment in pre-investment studies will obviously have to e deferred till such time s adequate date regarding the project feasibility is available. The project sponsoring body will therefore have to invest in collection additional data and refer the investment decision for the time being. In the second situation when the project is found to e not feasible, further investment in the project idea is completely ruled out. In the third situation, when the project idea is found to be feasible, the decision-makers can proceed to invest further resources in pre- investment studies and design development. TECHNO-

ECONOMIC ANALYSIS Techno-economic analysis is primarily concerned with the identification of project demand potential and the selection of the optimal technology which can be used to achieve the project objectives. The analysis provides necessary material on which the project design can be based. It also indicates whether the economy is in position to absorb the output of the project or not. PROJECT DESIGN AND NETWORK ANALYSIS Project design is the heart of the project entity. It defines the individual activities which go into the corpus of the project and their inter-relationship with each other. It identifies the flow of events, which must take place before a project can start yielding the results for which it has been set up. The inter-relationship

38. between various constituent activities of a project in most conveniently expressed in the form of a network diagram. Project design and network analysis are concerned primarily with the development of the detailed work plans of the project and its time profile, and the presentation of this plan is form of a detailed network drawing. Project design and network analysis make available to the project formulation team a clear picture of the work elements of the project and also their sequential relationship. This presentation the way for detailed identification and quantification of the project inputs, an essential step in the development of the financial and cost-benefit profile of the project. INPUT ANALYSIS The objective is to identify and quantify the project inputs and to assess the feasibility of a sustained supply of these inputs all through the effective life span of the project. Resources are consumed in project constituent activities. The best method of identifying the project constituent activities. The best method of identifying the project inputs is therefore to identify these activities determine the resources which each activity will consume individual requirements. Input analysis uses the network plans for developing the input characteristics of the project. If thereafter proceeds to evaluated the availability of the inputs both in quantitative as well as qualitative terms. Resources require for a successful implementation of a project include not only the material inputs but also human resources which are necessary both for the setting up of the project as also its successful normalization run. Resources requirements estimates form the basis of costs estimates of the project and are, therefore, essential for developing the financial profile and cost-benefit profile of the project. FINANCIAL ANALYSIS The objectives of financial analysis is to develop the project from the financial angle and to identify these characteristics. Financial analysis concerns itself with the estimation of the project costs, estimation of project funds requirements, It also involves appraisal of the financial characteristics of the project so as to establish the relative merits and demerits of the project as compared to other investment opportunities. Financial analysis reduces investment proposition in diverse fields of human activity to one common scale, thereby simplifying the project is developing project financial forecasts. COST BENEFIT ANALYSIS In judging the overall worthiness of the project, the effect of the project on society as a whole is very essential. While financial analysis evaluates a project from the profitability point of view, social cost benefit analysis views it from the point of view of national viability. The cost-benefit analysis however takes into account not only the direct costs and benefits which will accrue to the project implementing body but also total costs which all entities connected with the

39. project will have to bear and the benefits which well be enjoyed by all such entities. The idea here is to evaluate the project in terms of absolute costs and benefits rather than in terms apparent costs and benefits. PRE-INVESTMENT APPRAISAL Pre investment appraisal is the process of consolidating the results of feasibility analysis, the techno-economic analysis, the design and network analysis, the input analysis, the financial analysis and the cost benefit analysis, so as to give the investment proposition a final and formal shape, It naturally involves selection of appraisal format, the material which should go into pre- investment report and the form of presentation of various conclusions. The sun total of the pre-investment appraisal is to present the project idea in a form in which the project sponsoring body, the project implementing body and the outside agencies can take investment decision regarding the proposals. CRITERIA TO BE FOLLOWED The main criteria in the project formulation process are: Forecasting – understanding and precisely identifying the objectives/needs/goals

(regional/state/national/international) of the unit/society/economy/on a sustained basis. Setting up priorities and choosing the goals that are more urgent Searching for alternations and carrying out feasibility studies to pick up projects that appear most beneficial and desirable. Carrying out detailed studies of the project so selected Estimation the needed resources (human and physical) and finding the yearly cost and benefit of project Arranging funds – both approval and allocation. The successful implementation of any project depends upon the timely availability of the required resource as per projections. Preparing of time schedule for all hobs so that the physical and financial targets of the projects are passed appropriately Distributing the works to various departments or agencies having the appropriate technical expertise

40. Execution and controlling the project. This requires frequent reviewing, updating and constant action to restore the operation to its planned characteristics. Evaluating the performance of each project to ensure the worth of good or service for each rupee to be spent. CONCLUSION Thus the process of project formulation involves a stage by stage development of the project idea into an investment proposition. The conclusion down at the end of each stage forms the basis of development of the ensuing stage. These conclusions also provide necessary materials for re-checking of the initial premises from which a beginning was made. There must be forward and backward look at the completion of every stage. So the project formulation team has to be ready to revise its opinions and conclusions in the light of further evidence. SELF ASSESSMENT QUESTIONS 1. What do you mean by project formulation? Explain the several aspects of project formulation. 2. What are the different phases of project formulation? 3. Explain the criterion to be adopted while formulating a project. 4. “Formulation of projects involves scientific procedure” elucidate. ***************

41. LESSON – 4 FEASIBILITY STUDY AND PREPARATION OF FEASIBILITY REPORT OBJECTIVES 1. To explain the nature and significance of feasibility study. 2. To know the components of feasibility study in a detailed manner. 3. To import knowledge of preparing feasibility report and how it can be checked. INTRODUCTION A feasibility report is an investment proposal base on certain information and factual data appraising the project. This type of feasibility study may be required by the financing institutions, project sponsor, project owner. The feasibility report enables the project holder to know the inputs required and if rightly prepared confirms to the convictions that he is proceeding in the right direction. In other words, a project needs to be fully defined in order to provide terms of reference for the management of the project. A project can be considered to have been fully established when the following conditions are fulfilled. The technical configuration of the project has been fully defined. The performance requirement for the various technical system and the key equipment have been specified. Cost estimate for the project is frozen. Techno-economic viability of the project has been examined, appraised and approved. An overall schedule for implementation of the project has been drawn-up. The feasibility report is prepared during the definition phase of a project. It lies in between project formulation stage and appraisal and sanction stage. It is prepared to present an in-depths techno-commercial analysis carried out on the project idea for consideration of the financial institutions and other authorities empowered to take the investment decision.

42. NATURE OR PROJECT FEASIBILITY ANALYSIS In the broadest sense, every rational decision t make new investment is proceeded by an investigation of the feasibility of the project, whether or not this carried out in a formal manner. The larger the project and greater the investment, the more formalized the investigation. Assurance is needed that the market exists or can be developed, that raw materials can be obtained, that sufficient labour supply is available, that local services vital to the project are at hand, and that the overall costs for plant equipment, labour and raw material input will be of a certain order. Most importantly it must be determined that income will exceed costs by a margin sufficient to make the project financially attractive. When the project is small, the study format may be quite informal, perhaps there will be no formal study at all and little accumulation of actual data. Nevertheless, the feasibility calculations will

have to be computed and evaluated, even if an informal manner before the ultimate step of actual investment is taken. NEED FOR FEASIBILITY STUDIES A company is incorporated for the purpose of setting up a project. The promoters obviously have, to start with, some broad idea about the proposed industrial activity. They make mental picture as to how the idea, when translated into reality would result in a profitable project, given the demand supply pattern, probable cost of production etc. It is quite likely that the originators get attracted by the favorable aspects of the project known to them, while they may have overlooked the dark side of the picture, which can only be revealed by a detailed objective study. Too many projects have floundered, at considerable loss to the investors and indeed to the national economy through waste of scarce resources, because the investment decisions were taken without objective and in depth techno-economic feasibility studies. The need for such careful studies is further underscored on two counts: In modern times, business operations are complex, requiring carefully prepared plans. The shareholders, creditors, term leaders etc., insist on as complete an analysis of the scheme as possible without their co-operation, it would not be possible to translate the ide into action. This feasibility study helps the promoter to make the investment decisions correctly and to obtain funds without much difficulties. It allows the promoters to anticipate the problems likely to be encountered in the execution of the project and phases them in a better position to answer the queries that may be raised by the financial institutions and others who would have to be involved in the project.

43. COMPLEMENTS OF FEASIBILITY STUDY Project feasibility study comprises of market analysis, technical analysis, financial analysis, and social profitability analysis. The analysis is mainly interested only in the commercial profitability and thus examining only the market, technical and financial aspects of the project. But, generally the gamut of feasibility of a project covers the following areas: • Commercial and economic feasibility • Technical feasibility • Financial feasibility • Managerial feasibility • Social feasibility or acceptability These areas are briefly described below: COMMERCIAL AND ECONOMIC FEASIBILITY The economic feasibility aspect of a project relates to the earning capacity of the project. Earnings of the project depends on the volume of sales. If taken into consideration the following important indicators. Present demand of the goods produced through the project. i.e. market facility (or) getting a feel of the market. Future demand: a projection may be made about the future demand. The period normally depend upon the scale of investment. Determining the extent of supply to meet the expected demand and arriving at the gap. Deciding in what way the project under consideration will have a reasonable chance to share the market. Anticipated rate of return on investment. If it is positive the project justifies the economic norm in the relationship between cost and demand. Future demand can be estimated after failing into consideration the potentialities of the export market the charges in the income and prices, the multiples use of the product, the probable expansion of industries and the growth of new industries. The share of the proposed project n the market could be identified by considering the factors affecting the supply position such as competitive position of the unit, existing and potential competitors, the extent of

44. capacity utilization, unit cost advantages and disadvantages, structural changes and technological innovations bringing substitute into the market. The commercial feasibility of a project involves a study of the proposed arrangements for the purchase of raw materials and sale of finished products etc. This study comprises the following two aspects. Arriving at the physical requirement of production input such as raw materials, power, labour etc., at various level of output and converting them into cost. In other words, deciding costing pattern. Matching costs with revenues with a view to estimating the profitability of the project and the break-even point. The possibility ultimately decides whether the project will be a feasible proposition. The technical analysis of a project feasibility study serves to establish whether or to the project is technically feasible ant it also provides a basis for cost estimating. TECHNICAL FEASIBILITY The examination of this aspect requires a thorough assessment of the various requirements of the actual production process and includes a detailed estimate of the goods and services needed for

the project. So, the feasibility report should give a description of the project in terms of technology to be used, requirement of equipment, labour and other inputs. Location of the project should be given special attention n relevance to technical feasibility. Another important feature of technical feasibility relates the types of technology to be adopted for the project. The exercise of technical feasibility is not done in isolation. The scheme has also to be viewed from economic considerations; otherwise, it may not be a practical proportion however sound technically it may be. The promoter of the project can approach the problem of preparation of technical feasibility studies in the following order: Undertaking a preliminary study of technical requirements to have a quick evaluation. If preliminary investigation indicate favourable prospects working out further details of the project. The exercise begins with engineering and technical specifications and covers the requirements of the proposed project as to quality, quantity and specification type of components of plant & machinery, accessories, raw materials, labour fuel, power, water, effluent disposal transportation etc. Thus, the technical feasibility analysis is an attempt to study the project basically from a technician’s angle. The main aspects to be considered under this

45. study are: technology of the project, size of the plant, location of the project, pollution caused by the project production capacity of the project, strength of the project. Emergency or stand-by facilities required by the project sophistication such as automation, mechanical handling etc. required collaboration agreements, production inputs and implementation of the project. FINANCIAL FEASIBILITY The main objectives of this feasibility study is to assess the financial viability of the project. Here, the main emphasis is in the preparation of financial statement, so that the project can be evaluated in terms of various measures of commercial profitability and the magnitude of financing required can be determined. The decision about the financial feasibility of project should be arrived at based on the following consideration: For existing companies, audited financial statements such as balance sheets, income statements and cash flow statements. For projects that involve new companies, statement of total projects cost, initial capital requirements, and flow relative to the projective time table. Financial projections for future time periods, including income statements, cash flows and balance sheets. Supporting schedule for financial projections stating assumptions used as to collection period of sales, inventory levels, payment period of purchases and expenses and elements of production cost, selling administrative and financial expenses. Financial analysis showing return on investment return on equity, break- even volume and price analysis. If necessary sensibility analysis to identify items that have a large impact on profitability or possibly a risk analysis. MANAGERIAL FEASIBILITY The success or failure of a project largely depends upon the ability of the project holder to manager the project. Project is a bundle of activities and each activity has its own role. For the success of a project, a project holder has to co- ordinate all the activities in such a way that the additive impact of different inputs can produce the desired result. The ability to manage and organize all such inter related activities come within the concept of management. If the person in-charge of the project, has the ability, has the ability to manage all such activities, the desired result can be anticipated.

46. There are three ways to measure the managerial efficiency: a. Hereby skill b. Skill acquired through training c. Skill acquired course of work SOCIAL FEASIBILITY A project may cross all the above barriers mentioned above an found very suitable but is will lose its entire creditability, if it has no social acceptance. Though the social customs, conventions such as caste community, regional influence etc. are creating hindrance for development of a project should avoid all such social conflicts which will stand on the successful implementation of the project, (e.g.) Considering the interests of the general public; projects which offer large employment potential, which channelise the income from less developed areas will stimulate small industries. In a nut shell, the feasibility report should highlight on these five testing stones before it can be declared as complete and only after judging through these indicators a project can be declared as viable and can be submitted for finance or any other assistance from any institutions. FORMAT OF FEASIBILITY REPORT The sketch of feasibility report of the project covers the following 1. Introduction 2. Summary and Recommendations 3. Project Capacity, Chemistry of the product,

specifications, properties, application and uses. 4. Market potential 5. Process and know-how 6. Plant and machinery 7. Location of the unit 8. Plot plan and building 9. Raw materials availability 10. Utilities, requirements

47. 11. Effluents treatment 12. Personel requirement 13. Capital cost 14. Working capital 15. Mode of finance 16. Manufacturing cost 17. Financial analysis 18. Implementation schedule CHECK FOR FEASIBILITY REPORT The following key elements must be presented in the feasibility report, Examination of public policy with respect to the industry project Broad specification of outputs and alternative techniques of production Listing and description of alternative locations Preliminary estimates of sales revenue, capital costs and operating costs of different alternatives Preliminary analysis of profitability for different alternatives Marketing analysis Specification of product pattern and product prices Listing of major equipment by type, size and cost Listing of auxiliary equipment and process know-how Specification of site and completion of necessary investigation Listing of buildings, structures and yard facilities by type size and cost Specification of supply sources connection costs and other costs and other costs for transportation services, water supply and power Preparation of layout Specification of skill-wise labour requirements and labour costs. Estimation of working capital requirement Phasing of activities, and expenditure during construction Analysis of profitability Determination of measures of combating environmental problems State the preparedness to implement the project rapidly

48. CONCLUSION Thus, this chapter narrates the very purpose of a feasibility report in a lucid manner, covering components of feasibility reports, principal feature of project feasibility study and also checklist for feasibility study. It helps in defining and analyzing the alternative approaches to production processes and outcomes. It focuses attention on the material inputs and various other techno-economic variables. It describes the optimization process, justifies the assumptions and hypothesis set thereby selection the better alternative solutions and defines tre clear boundaries of a project viability. SELF ASSESSMENT QUESTIONS 1. What do you mean by feasibility study? Explain its significance in project formulation? 2. Explain the different components of feasibility study 3. Suggest a suitable outline of feasibility report for setting up a small scale industry. 4. How a technical feasibility of a project can be ascertained? 5. Analyse the significance of managerial competence and commercial viability of project in the feasibility study. 6. What the elements to be covered in the feasibility report?

49. LESSON – 6 PROJECT REPORT OBJECTIVES 1. To know the need for preparing a project report 2. To explain the content of an ideal project report INTRODUCTION A project at the outset must bear a logical appearance, which it can get only after the feasibility test. Project report is a document, which clearly narrates the various aspects f project in a prescribed form. Project report preparation is a post investment decision exercise. It involves the preparation of detailed specifications and designs for the project premises, detailed design of the process or other equipment and time schedules for the implementation of the project. Hence, the detailed project report is the work plan for the implementation of the a project once an investment decision is arrived at. A project report is meant to provide the necessary information, which may be required for the purpose of processing and assessing the proposal for getting the financial assistance from the financial institutions. This is essentially prepared in order to provide a complete information with proximate values of the project and presented to the financial institution for appraisal. A project report prepared with utmost care care would not only give a clear idea to the banker but also it relives the entrepreneur from the normal objections and formal queries of the banker. In a developing economy like India, where the development banking is vigorous, an entrepreneur gets a lot of published materials with data relating to various feasibilities and promotional institutions engaged in entrepreneurship development produce good literature covering various aspects of producing a project or products in the country. The Director General of Technical Development (DGTD), National Small Industries Corporations (NSIC) are some of the pioneer institutions providing variety of information for small scale enterprises to manufacture. They are guidelines for

industries indication those items, in which good scope exists for manufacturing. With these available information, an entrepreneur has to do the following for starting an industrial unit: To decide the types and level of industrial production. To compare the requirements of funds with his personal availability of finance.

50. To prepare a nice project report containing all relevant information. Many of the institutions like SISI, State Financial Institutions also help in preparation of project report and later on recommend they to the banks. Besides these institutions, several commercial banks help the entrepreneurs to get a good project report. Components of Project Report The following are the important headings under which the complete information on relevant aspects should be included for a small scale industry’s project report. General information Rationale Project description Market potential Capital expenditure and sources of finance Assessment of working capital requirements Other financial factors Government and other statutory approvals Economic and social variables 1. GENERAL INFORMATION The following aspects should be given in the stage, which are of general nature: Name and address of the entrepreneur The qualifications, experience and other capabilities of the entrepreneur. If it is a partnership firs, these information of other members should also be given. A small reference of analysis of industry to which the project belongs e.g. past performance, present status, the way of organization, the problems etc. The organizational structure of the enterprise The utility of the product and the range of products to be manufactured

51. 2. RATIONALE As mentioned earlier a project may have several objectives subsidiary to the prime objective of making profit. As a first step in project evaluation, it is essential that one looks at the broad rationale of the project proposal to ensure that the project is appropriate and justified. As an example, one could say that modernization or pollution control may be fully justified on grounds of survival and environmental protection even if, in the short-term the project expenditure may adversely affect the financial criteria of project evaluation. On the other hand, a project which would improve the earnings per share or the debt service cover or the production efficiency may not necessarily be justified if all this is to be achieved at the expense of national interest or public interest. 3. PROJECT DESCRIPTION A brief description of the project covering the following aspects should be given in the project report. SITE: Location (Town, Complete address) whether owned or leasehold land whether the site is approved industrial area? Is it suitable for the product under review. 4. INPUT FACTORS Raw materials: What are the sources of raw materials? Are they locally available? Whether imported raw material is also required? If so, whether license has been obtained? Is it suitable to get quality raw materials continuously at reasonable prices? The availability, quality critically and quality compatibility of the raw material with the technology as well as the plant and machinery are important factors to be clearly understood while evaluating a project especially those in hi- tech area. This element is also intimately linked to many other elements in a project and can force necessary changes in them to ensure the viability of the project. As a simple example, one can easily surmise that a raw material with a high volume to weight ratio will indicate the plant is located near the source of raw material. e.g. Cement, power (coal based). On the other hand, if the values added in such a case is very high, then it may be possible or even necessary to locate the plant away from the source or raw materials. Textiles, power (gas based of oil based), processed foods like snack foods, ice creams are some the pertinent examples. The characteristics of the raw materials are multivariate and not just on the volume weight ratio. It is imperative therefore that this elements gets a careful

52. consideration while assessing a project. The market, the management, and the utility needs of the projects also influence the locational decisions. Labour: What is the type of labour required? Whether skilled or unskilled? Are they available in that area? If not, what arrangement have been made to recruit and train the labour in various skills? Power:

Inadequate supply and high cost of electricity is a major problem now-a- days. So, the project report should contain the information regarding the power requirements, the load sanctioned, stability of supply of power and the price at different consumption level. Fuel & water: Whether the fuel systems like coal, coke, oil or gas are required and if yes, then state their availability position. Similarly water is an important factor. The source and the quality of water should be clearly stated. Waste discharge: Most of the plants product waste material or emissions that may result in many health problems to the public. The emissions and discharges may be various types like (a) gaseous )smoke, fumes, dust etc.) by physical (noise, hear, vibration etc.) or (c) liquid or solid discharged through pumps and sewers. Hence, it should be clearly stated that the arrangements made from these things. COMMUNICATION AND TRANSPORT FACILITIES A vialability of communication facilities like telephone, telex and post and telegraph department, should be stated in the report. Similarly, transport is a basic necessity for industries. Raw materials as well as finished products has to reach destination only through a good transport systems available. So, the various transport facilities available in that should be clearly stated. Similarly availability of facilities like machine shops, welding shops and electrical repair shops etc., should also be stated. List of machinery & Equipments: A complete list of items of machinery and other equipments indication their type, size and cost should be stated. Source of supply of capital equipment and the construction services should also be given. The source of plant and machinery as also the specification for the same can often make or break a project. It is, therefore, equally important to evaluate the plant and machinery which is to be installed at the project. The reputation of the supplier and references to place where such/similar plant and machinery are installed is a good starting point while assessing this element. Capacity & Technology: The installed and licensed should be stated and the number of shifts likely to follow should be stated. Similarly, is the technology

53. upto date and appropriate? Which other units are using the same technology and with what results? How the required know-how is proposed to be arranged.? The level of technology in terms of its “state of art” or obsolescence, adaptability to the local conditions, maintenance and repairability, sophistication in management and control are elements which have a significant impact on the quality and quantity of production that is envisaged in the project. It is thus necessary to have a clear understanding about the technology which is to be utilized in the project. It is pertinent to note that there are no hard and fast rules but “appropriateness” and “relevance” are the two key operative words while assessing a technology proposed for the project. It is ridiculous to propose a highly sophisticated, push button control technology in a place where electricity supply follows its own rules or where a simpler technology is better understood and more manageable. Equally, it would be disastrous to recommend an obsolete technology on account of its durability or time tested proof of performance when everyone else is fast discarding it. This technology elements is linked to ever other element in the project proposal and these linkages also need to be looked into as an essential step in assessing the technology. One of the technologies available may necessitate creation of large capacity not necessarily advisable given the current raw material supply or the market size for the product. For example, a capacity of 100 tps. But if raw material proposed is “agricltral waste” a whole lot of new considerations starting from collection and storage or raw materials come into play necessitation appropriate changes in the plant size and even perhaps the technology. Similar situations can arise in linkages of technology to management, availability of utilities, and cost of the project. Quality control: What is the system arranged for to check the quality of products on continuous basis? The quality marks like ISI, Agmark will enhance the values of the product as well as confidence among the consumers. If it is desired to get quality markings, the fact should be included in the project report. 5. Market Potential Estimation of demand & supply Facts regarding

the anticipated demand for product and the level of supply, should be clearly stated. An estimate of manufacturing and administrative expenses together with the price expected along with the margin of profit should be stated.

54. Marketing strategy: What is the strategy adopted for marketing the product should be stated. Whether the products are to be supplied to the reputed sellers directly or distributors? Is there any possibility of getting a contract from the reputed concerns should also be stated in this project report. Similarly whether after sales service has been arranged and how to fill the gap of demand if there is fluctuations in the sales seasonal demand arrangements made for warehousing the products. 6. Capital expenditure and sources of finance Cost of the project : Since each project is profit motivate it is important that cost of the project is carefully assessed and evaluated. One of the most important factors in this assessment is the level of accuracy in the cost estimates, which in addition to proper data collections also depends upon the approach and the attitude of the evaluator himself. Some evaluators tend to see all cost estimates as “too high” leading to unnecessary under estimation of the project cost and consequent problems in project implementation and even project viability. On the other hand some evaluators tend to provide “cushions” at all levels of cost estimates which may erode the viability of the project on paper leading to wrong decision on the issue of project selection and implementation. As estimate regarding this various capital inputs required by the industry should be given. Those capital items include the following: 1. Land & Building 2. Plant and machinery 3. Preliminary expense 4. Miscellaneous assets 5. Price escalation 6. Working capital limit Means of financing: Having established the cost of a project as justified and reasonable, it is necessary to evolve the means of financing the project. It should be acceptable within the framework of the financial system and sufficiently attractive/or safe enough for the investor lender to come forward and extend the necessary assistance. During the last decade, financial scenario in India has undergone substantive, qualitative as well as quantitative change almost amounting to a metamorphosis. As a result the project prosperity has a fairly wide range of means of finance available to him to choose from. Instead of a standard debt-equity ratio of 2:1, the promoter taking up 50% to 75% of the equity, the balance being offered to the public and the financial institutions and banks

55. picking up the tap for the debt component. The promoter can now think of a variety of instruments like equity cumulative convertible preference shares fully or partly or non-convertible debenture, as means of financing and also many other sources of funds like mutual funds, venture financing and also many other sources of funds like mutual finds, venture finance and lease finance. A clear understanding of the various elements and the various institutions operating in the financial system would help to assess the appropriateness of the means of finance. The cost of raising and servicing funds, and other terms and conditions accompanying funds, as all these have a direct impact on the viability of the project. At this juncture, it is worthwhile nothing that the project evaluation should also pay due attention to the ethics of fund raising especially if the means of finance involves premium carrying instruments. 7. ASSESSMENT OF WORKING CAPITAL REQUIREMENTS Many industries fail due to improper estimate of working capital requirements. It is very crucial to an entrepreneur. The unit could function only if the working capital limit is maintained properly. So, the working capital requirements should be very carefully calculated and stated in the project report. 8. OTHER FINANCIAL ASPECTS It should be found out that the product taken up for production is profitable. For this, profit & Loss an estimated on should be prepared, which shows sales revenue, cost of production and other costs and profit. Similarly a projected balance sheet and cash flow statement should be prepared to indicate financial position and financial requirements. There should be always availability of funds for the smooth functioning of the unit. Next the break-even analysis must be given break-even point is that level of production sales

where the industrial enterprise shall make no profit no loss. This break even analysis facilitates knowing the gestation period and the likely moratorium required for repayment of loan. The return from a project is a very essence of evaluation an project especially as the prime motive for setting up a project is its profitability. The project return is to be assessed in terms of cost of production realizable selling price, financial charges, depreciation taxes and host of other financial and non- financial variables. 9. GOVERNMENT AND OTHER STATUTORY APPROVALS The project is not put up in a vacuum but in the real world which is subject not only to procedural requirements but also to policy guidelines and stipulations. These requirements, guidelines and stipulation could begin with the very permission to establish a project and go across various economic statutes of a country governing several aspects, not merely as an element of feasibility or

56. otherwise of setting up the project but as part of the plan extending over the economic life of the project. 10. ECONOMIC AND SOCIAL VARIABLES Among other things, what will be the abatement costs to control pollution and treating for the effluents and emissions, should be stated. Added to this, whether the project derives home some social benefits like the following: • It promotes an increases the potential in that area • It promotes and encourages smaller units (tiny sector) to grow • It effects overall development of that area ECONOMIC AND NATIONAL SIGNIFICANCE OF THE PROJECT Many projects have an economic and/or national significance especially if they are in the area of hi-tech, import substitution, export orientation, defence and/or involve substantive outflow of foreign currency either for technology know-how or for raw materials. It is necessary to evaluate the economic and the national significance of a project is to be made acceptable in the prevalent economic scenario. SOCIAL AND ENVIRONMENTAL CONSIDERATION While setting up a project, issues not necessarily connected with the financial profitability of the project but to the environment and society as a whole have become important in mire than one case. These issue relate to environmental pollution and safety as also different segments of the society coming in contact with the activities of the project. Two models of project report are given at the end of this lesson. Project Report Vs. Feasibility Report The detailed project report differs from feasibility report in the following manner: Objective: Feasibility report’s aim is to serve the top management in arriving at feasible and viable project alternatives. Detailed Project Report’s focus is to communicate formally about the project sponsor’s decision on a specific project to the government departments and financial institution for seeking their approvals and funding. Scope of information Management: The interests of the management can be met by collecting relevant information in vital areas of technical, economic

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Building & Design > Housing for Older Canadians > Responding to the Market > Project Feasibility Analysis, Step by Step 

Project Feasibility Analysis, Step by Step

This section describes how to determine if there is sufficient demand from the chosen target market to support the proposed development, the factors to consider when selecting a site, how to evaluate the competition and how to assess the financial feasibility of the proposed undertaking. This information is needed for project planning and design (see Volume   3:   Planning the Project and Volume   4: Designing the Project ) and can be used to secure construction or mortgage financing.

Project feasibility analysis is a multi-step exercise. As the analysis progresses, the developer or sponsor will gradually acquire more information that will help determine whether or not to proceed further.27 The following four  activities may be performed sequentially, although more often than not, they are done simultaneously:

1. market analysis;

2. site selection and analysis;

3. competitive market analysis; and

4. financial feasibility analysis.

Market Analysis

The qualitative and quantitative data gathered through market analysis serves to identity any untapped market opportunities, refine the target market, confirm the features that will most likely attract the target market, and develop a market strategy.28 These and other reasons for conducting a market analysis are shown in table 1.

Table 1: Reasons for Conducting a Market Analysis

Reason Key Considerations

To define the market What is the market area for the project?

What is the size of the target market segment?

What are the financial resources (income and assets) of the potential residents?

To estimate the marketability of the project

Is the location appropriate for a seniors-oriented development?

What is the impact of current and prospective competitors?

What are the real estate trends for the area?

Does the neighbourhood possess the amenities required by the prospective residents?

Table 1: Reasons for Conducting a Market Analysis

Reason Key Considerations

To create the product What are the market preferences relating to design features; unit types and sizes; pricing; and financial, tenure and management structures?

What amenities will prospective residents require to be offered in the project?

To identify and assess the need for personal, health and medical services

What form of personal care services will prospective residents require?

What form of health and/or medical care services will prospective residents require?

How extensive are the personal, health and medical care needs of the prospective residents?

How can services best be delivered?

To substantiate the project What degree of quantitative evidence will satisfy partners, investors, lenders and regulatory authorities?

To assist with marketing efforts

What marketing strategy or theme will assist to reach the target market?

Many large, well-established development companies conduct market analysis both before and after site selection. Market analysis before site selection can help identify gaps in a given market area that could present future development opportunities. Market analysis after site selection focuses on refining the target market, finalizing the project concept and securing financing. For most developers and sponsors, however, market analysis takes place before a site has been selected, as the initial process of defining the target market and completing the market analysis will ultimately drive the choice of a particular site.

Market Area Definition

The first step is to define the geographic market area that will form the basis of the investigation. Defining the market area is important, because it carves out the survey area for testing the project’s marketability and the focus of marketing efforts. Misjudging this territory will undermine the usefulness of marketing activities. As well, it can result in competitive and financial analysis that is unreasonably optimistic by, for example, omitting competing projects or overestimating the rate of take-up in the local market.

The market for a housing project aimed at an older population will have a relatively narrow geographic draw. The draw widens if the project is linked to a club, cultural group or other distinct body representing a well-defined, less geographically limited community, or if amenities such as recreational facilities associated with active adult housing have their own separate appeal.

The study usually starts with an analysis of data at the level of the census agglomeration (CA), census metropolitan area (CMA) or municipality in which the project is to be located. Ultimately, however, the study will narrow to a much smaller submarket consisting of one or two neighbourhoods. In most cases, the immediate area surrounding the site will supply most of the residents for the project. The primary market area is usually the area from which approximately 70 per cent of the residents will come. It is generally expressed as a radius from the prospective development site. The following ranges can serve as a useful guide:

1. 1.5 to 4.5 kilometres in a central urban community;

2. 8 to 16 kilometres in an urban area;

3. 10 to 15 kilometres in a suburban location;

4. 15 to 25 kilometres within a census metropolitan area;

5. 30 to 40 kilometres in a rural or semi-rural area;

6. 65 to 120 kilometres in a regional centre surrounded by sparsely populated rural areas; and

7. 150 kilometres or more in very small, remote communities.

A radius estimate may, however, be an oversimplification. Areas of a city or town are distinguished by natural boundaries, different socio-economic neighbourhoods, varied demographics, elements of psychological identity, such as municipal boundaries, and ease of travel from one area to another. These must be taken into account when determining the natural market area for the project. Therefore, municipal boundaries, postal code areas, and Statistics Canada census subdivisions are also important to consider, as these are the geographic areas from which socio-economic and demographic data will be most readily available.

Surveying prospective residents to see if a location is within their moving range would help to fine-tune the market area. The pattern of answers would identify the likely primary market area for a given site.

Quantitative Research

Once the boundaries of the primary and secondary market areas have been estimated, the size (in terms of number of potential clients), living arrangements and other characteristics of the target market residing within these areas needs to be assessed.

Before collecting and analyzing any statistical data on the market areas, it is important to identify the variables relevant to the analysis. Population size, age and income distribution will obviously be important, but so too will educational attainment and social characteristics such as marital status, language, and ethnicity. Statistics on household composition and the number of dwelling units in the market area, as well as tenure (rental or ownership) and dwelling types (such as single-detached housing, townhouses, bungalows) will also prove helpful in projecting demand. Perhaps less obvious, but no less important, is data on mobility and labour force composition. This will help to identify if the area is attracting immigrants and growing, or losing population as employment wanes.

Two of the best sources of market information for quantitative research are Statistics Canada (www.statcan.gc.ca) and CMHC (www.cmhc.ca). Statistics Canada publishes detailed information on Canada’s population, resources, economy, society and culture, collected every five years through the Census and the National Household Survey. CMHC collects and publishes an extensive array of housing market information, and has an Affordable Housing Centre staffed by a team of experts on affordable housing who work with the private, public and non-profit sectors to help develop affordable housing, including that targeted to seniors. Data is also available from local health authorities, municipalities and private research firm. These publications, tools and resources contain information that developers and sponsors will find invaluable when planning and conducting their quantitative research activities. If boundaries of the market area for a project do not correspond directly to established Statistics Canada boundaries for data collection purposes, municipal planning offices, economic development authorities or local chambers of commerce may be able to help fine-tune data to more closely align with the market area for the project. Consulting with them about household data and population projections could also prove useful for gaining a fuller appreciation of local trends.

Each of the variables needs to be carefully analyzed to accurately establish the profile of the primary market area relative to the target market for the proposed undertaking. When analyzing the data, the following factors should be taken into consideration:

Population data should refer to households, not individuals, since it is households who move. Where information is available only on a population basis, divide the population figure by the average number of people per household. For households headed by seniors, the average number of persons per household will generally be lower than that for all households.

Analyze data for the previous 10 to 15 years to establish past trends and as a basis for projecting future trends. Data should be divided into age cohorts so that market segments can be clearly differentiated.

Data on income should be divided into segments. When assessing ability to pay, the typical approach is to assume that housing costs should be below 30 per cent of gross household income. Affordability problems could exist when a household is paying 30 per cent or more of household income on shelter costs including rent, utilities and taxes.29 However, the percentage of household income spent on housing can be much higher when health care and support costs are included in the cost. Older Canadians typically draw upon their capital to pay for living costs and expenses during their retirement years.

Do not assume that older homebuyers will use all the proceeds of the sale of their current homes on their new homes. Although the statistical data presented in Volume 1 indicate that many older Canadian homeowners do not carry a mortgage, the full value of the current property should not be included when calculating the equity available for a new project that requires an upfront investment.

Qualitative Research

The data collected through the quantitative research can be used to form hypotheses. To test these hypotheses and better define what the statistics indicate, developers and sponsors should conduct qualitative research as well. This may involve a review of the literature and studies as well as interviews, surveys and other forms of consumer market research. In all instances, only members of the target market should be questioned. With the emergence of social media as an increasingly popular form of mass communication, developers and sponsors should also be on the lookout for innovative opportunities. The recent experience of a Toronto condominium developer is instructive in this regard: the site office for the project — which was originally targeted to a mix of potential end users — was equipped with iPads. Visitors were encouraged to use these devices to learn about the project and then send e-mails to friends who shared their interests. As a result, the developer was able to fine-tune his marketing methods to respond accordingly.

The primary objectives of qualitative research are to better understand the needs and preferences of the prospective target market, to assess their willingness and ability to pay for the proposed accommodation and support services, and to gauge their interest in the proposed product.

Qualitative research can also help identify the push and pull factors that might motivate people to leave their current home for a new development. These can be difficult to ascertain accurately through quantitative research alone.

Table 2 presents the primary techniques of consumer market research and the manner in which they are best employed.

Alone or in combination, these techniques can produce insights, which, coupled with quantitative analysis, can help developers and sponsors customize the final product to suit the expectations of the market and attract the targeted residents. These qualitative techniques also offer opportunities for interaction with potential customers, thereby publicizing the project, while getting useful feedback from the target market on refining the development. Among the preferences that developers and sponsors can probe through qualitative research are the following:

maintenance-free lifestyle and freedom to travel;

use of space and esthetic design;

need for accessible, universally designed projects;

recreation and amenities available on or near the site;

financial security and investment value;

physical security from crime;

wish to relocate closer to family;

access to medical resources, health care and other service offerings;

arrangements for medical emergencies; and

opportunities for social interaction.

Table 2: Techniques of Consumer Market Research

Reason Key Considerations

Surveys Designed for a large number of respondents

Sample size needs to be large enough to accurately reflect

Table 2: Techniques of Consumer Market Research

Reason Key Considerations

views of target market

Should be short and easy to complete

Participants can be recruited through open houses, public meetings, newsletters, websites, and newsletters organized and prepared by the project sponsor

Mail questionnaires

Should be no longer than two pages, accompanied by a cover letter and self-addressed, postage-paid return envelope

Anonymity should be assured

Questions should help to define the target market and shape the product

Telephone questionnaires

Quicker but more expensive than mail questionnaires

Higher response rate than mail questionnaires

Questions must be simply and directly worded

Respondents cannot respond to visual information

Personal interviews

High response rate and excellent quality of responses

Interviewers can present visual information

Allow for in-depth probing for information

Allow for more complex, open-ended questions

Can be costly and time-consuming to administer

Discussion groups

Used to gather impressions from members of the target market

Usually informal

Can help draw out concerns and priorities

Can be costly and time-consuming to administer

Focus groups More structured and directed than discussion groups

Should be led by experienced professionals

Generally consist of 8 to 15 participants representing a cross-section of the target market

Can allow for in-depth probing of people’s preferences, and reasons and motives for moving

Participants are often paid for their participation

Can be costly and time-consuming to administer

Data Analysis

Analyzing the data involves combining the numbers and comparing them to see what they reveal about the preferences of subcategories within the target population. Cross-tabulation, which involves comparing data on the target market according to different attributes, and distilling the findings into categories are the two main tasks that need to take place during the analysis stage. For example, it would be useful to know whether single women are more inclined to favour a particular service than single men, or that higherincome households seek a particular amenity in greater proportion than lower-income households.

The analysis should confirm if there is sufficient need and demand among the chosen target market in the primary market area to warrant further investigation, including more focused analysis of the prospective development site, the surrounding competition and

the financial feasibility of the proposal. Each of these matters is discussed at greater length in the sections below.

Site Selection and Analysis

The process described above assumes that the developer or sponsor does not yet own a parcel of land and is, instead, exploring alternative sites located in neighbourhoods with population characteristics that match the chosen target market profile and proposed development concept. If the market analysis suggests sufficient demand to support a feasible project, the next step is to explore in detail the viability of the proposed development site.

When selecting a site, the preferences, needs and demands of the target market must be carefully balanced against the realities of cost and other site-specific conditions and constraints. These include location, proximity to services and amenities, and the character of the surrounding neighbourhood. Developers and sponsors also need to consider whether neighbourhood residents will support the project or express opposition, an issue discussed in more detail in Volume   3: Planning the Project .

Unfortunately, the best-located sites and those that offer the greatest development opportunity are often priced to reflect their preferential status in the marketplace. Hence, narrowing the search down to a particular site requires a number of trade-offs.

Price

The price of land depends on relative supply, location and neighbourhood, size and shape, accessibility and visibility, site conditions, zoning and environmental status, and development potential with respect to legal constraints and utilities.30 In the parlance of the development industry, land is generally priced to reflect what is believed to be its highest and best use; that is, the use that maximizes the value of the property. In practical terms, this means a site that could accommodate a very large, dense or exclusive form of development will be priced to reflect such development potential.

When deciding if the price of a parcel of land is appropriate, developers and sponsors need to consider the target market’s income range and willingness to pay a premium for access to nearby services and amenities. More costly sites may be justifiable for projects that target those with very high incomes. Sites in remote locations may be more affordable but are unlikely to offer the range of services and amenities available in more central neighbourhoods.

Land costs affect both demand and ongoing operating costs. Developers and housing providers considering sites located in more remote locations may be able to secure land at a reasonable price but could subsequently find they are unable to cost-effectively deliver the services and amenities that their target market needs and wants.

Government funding or other forms of public sector financial assistance may be available to help offset the cost of site acquisition for housing targeted to low-income seniors. At a local level, developers and sponsors could qualify for assistance from the municipality, including feasibility study grants or fee waivers, if the site is located in an area targeted for redevelopment or revitalization. Even if financial assistance is not available, sponsors should still consult with public sector stakeholders, as this could result in leads on surplus public lands that may be available for purchase or area landowners who may be anxious to sell or partner in a new development.

Location and Neighbourhood

Location and neighbourhood define the site’s access to amenities, services and the target market. The location and neighbourhood can also be a symbol. Some neighbourhoods convey a status or a particular socioeconomic standing, as well as a lifestyle. For example, rural locations and suburban neighbourhoods may appeal to those seeking privacy, leisure and tranquility. To others, however, they may be perceived as isolated. While rural locations may better accommodate certain recreational facilities, such as golf courses or marinas, they can present challenges to those with mobility restrictions.

The key to choosing the right location and neighbourhood, therefore, lies in clearly understanding the needs, wants and demands of the target market and how these relate to the current and evolving character of the surrounding community. Questions which need to be answered include: Is the demographic make-up of the neighbourhood appropriate for a development that houses an older population? Are there current or future developments planned that might not be compatible with the proposed project? How will the local residents respond to the proposed project? Is there a concentration of pre-seniors or seniors who might be in the market for “aging in place” in their current neighbourhood?

Although situations can vary, the following location and neighbourhood selection considerations apply generally to the seniors’ market:

neighbourhoods with diverse populations, housing types, and community services and facilities will more likely address the varied demands of the older market;

proximity to public transit and easy access to nearby community services and facilities can substantially increase the convenience and independence of residents; and

attractive, visually stimulating environments, enriched by pleasant physical features are likely to have a positive effect on residents’ day-to-day quality of life.

Proximity to Services and Amenities

For older Canadians, the ability to participate in community activities, engage with friends and family, and safely attend to daily shopping and other needs is vitally important to maintaining their independence and quality of life. Services and amenities, including public transit, should, therefore, be close by or easily accessible.

No matter how large the development, it is unlikely to offer all the services and amenities that a typical resident might desire. Developers and sponsors should, therefore, identify the locally available services and amenities that will fulfill most of the target market’s needs and expectations. Table 3 lists some of the services and amenities that seniors want. Developers and housing providers planning projects in rural or remote areas will need to consider how their clients will access these services, particularly if they no longer drive or have family in the immediate vicinity.

Table 3: Complementary Services and Facilities31

Services and amenities that ideally should be located no more than half a kilometre from the proposed project site include:

supermarkets or grocery stores

other shopping and consumer service destinations such as dry cleaners, drug stores, coffee shops or restaurants

banks and a post office

a public transit stop

hairdressers and barbers

seniors’ social clubs

recreation or community centres

Services and facilities that ideally should be located no more than one and a half kilometres from proposed project site include:

medical, dental and other health service providers

places of worship

libraries

shopping centres

financial services firms such as accountants and tax advisors

travel agencies

parks and green spaces

theatres and other cultural venues

Zoning, Servicing and Site Conditions

The highest and best use that can be made of a particular parcel of land is often tied to its zoning, servicing and site conditions. Sites that may be ideally located relative to the target market could yield little development potential if the zoning precludes housing or the site requires extensive environmental remediation before any construction may occur.

Zoning determines, among other things, the use, building size and density of development permitted on a particular parcel, as well as the amount of parking required for a given use. While many seniors-oriented housing developments are subjected to reduced parking standards, the need to accommodate parking is often a challenge, particularly in built-up urban areas. Sites for which the appropriate zoning is not in place should not be dismissed, as it is possible to apply to the local planning authority for a zoning change. However, this can be a long and costly process.

Servicing generally refers to the utilities (such as water, sewer, electricity, gas, cable, telephone) and infrastructure (such as roads, sidewalks) that connect to a parcel of land. Most urban and suburban sites have access to municipal services and infrastructure already in place. However, constraints, such as limited wastewater treatment capacity, could limit the density of development. Developers and sponsors are therefore advised to consult with municipal engineering departments to ensure there is sufficient capacity for the proposed undertaking before closing on the land purchase.

Projects planned for remote and rural sites may not have ready access to existing municipal utilities or infrastructure. In such instances, the developer or sponsor may be required by the local engineering authority to pay the cost of extending the services to the property. This could be an exceedingly costly proposition, especially if no other projects are planned for the area that could share the upfront servicing expenses.

Site conditions can either facilitate development or make it more costly and difficult. Topography (the slope or hilliness of a site) can influence the amount of soil that needs to be moved around, brought in or removed from the property prior to development. Flat terrain is easier to build on, requires little cut and fill, and rarely requires the installation of costly retaining walls, ramps, stairs or other support structures. However, gradual slopes can help with drainage and provide for interesting views. Since seniors in the older age cohorts may rely on walkers and mobility aides, developers and housing providers should look for sites that allow for barrier-free accessibility throughout the entire parcel. If slopes do exist, their grade should generally be kept to less than 5 per cent, which is appropriate for pedestrian movement.

Developers and sponsors must also assess the environmental status of the property. Throughout Canada, thousands of vacant parcels of land offer easy access to services and amenities typically sought after by seniors. Many are in older neighbourhoods in which the socio-economic profiles of the surrounding residents may be a perfect match with the chosen target market. However, because of past industrial, manufacturing or commercial uses, a site may have become contaminated and cannot readily be built upon without first completing extensive environmental remediation.

Typically referred to as a brownfield, such a site can sometimes be acquired at very low cost and offer excellent opportunities for redevelopment, provided the risks and anticipated cleanup costs have been properly assessed. To do so, developers and sponsors should engage the services of a qualified environmental consultant to complete an environmental site assessment. Such assessments will determine whether a site has had a use that could pose an environmental risk. If so, more detailed investigation will generally be recommended to confirm if any contaminants remain.

As the brownfield redevelopment sector matures, the process for gaining approvals related to site cleanup is becoming more straightforward, although requirements vary considerably across the country. Also, many municipalities encourage brownfield development by offering financial assistance for the necessary studies. This is particularly helpful where the market is not strong enough to balance the costs of remediation. However, it is becoming increasingly common for municipal planning authorities and financial institutions to require housing providers to undertake environmental site assessments, regardless of whether the site is contaminated or not. The cost of such studies should therefore be factored into construction budgets.

Other site conditions that should be considered when assessing a potential development site include the following:

soil properties, particularly if the project is planned for an area with unstable slopes or areas characterized by sandy or clay soil;

vegetation and wildlife, especially if a site is located in a rural or remote area that is known to contain threatened or endangered species or environmentally sensitive landscapes;

existing structures that may need to be demolished prior to development; and

legal constraints, such as utility easements and covenants on the land which place restrictions on the amount of the land that can be built out.

Size and Shape

The ideal size and shape of a site will vary according to local market conditions, proposed building design and minimum density required to achieve efficiency of operation. If demand in the market area is modest, as can be the case in remote communities, a developer or sponsor may not require a particularly large site.

On the other hand, larger sites can sometimes be more appropriate in remote communities in which access to local contractors and maintenance personnel can be difficult. By eliminating the need for an elevator and locating all accommodation and services on one floor, a developer or sponsor can avoid not only the upfront capital costs but also the ongoing maintenance expenses. This can be significant, as many maintenance contractors apply premiums to service contracts for projects located in geographically isolated areas.

In general, design options and opportunities for efficiencies increase with the size of the site. Very narrow sites, for example, may preclude back-to-back units, which can increase efficiency and reduce building costs. A site that is very deep may require a loop road that ties into two municipal streets or a turnaround for fire trucks.32 Hence, when assessing sites, efficiency of design should remain a paramount consideration.

Scale and efficiency of operation is particularly important for retirement homes and long-term care facilities that employ large numbers of staff. Without a minimum number of units, a project will not generate sufficient cash flow to support the required maintenance and programming staff.

The optimal size of a project is generally a function of three variables, namely: cost to develop, ability to efficiently provide services, and a sustainable occupancy level.

Potential Development Partners

A beginning developer or a housing provider new to the seniors’ market may consider partnering with another organization. Partnering can allow for the pooling of resources and the combining of skills and experience. For site analysis and selection, it is not uncommon for two or more partners to combine resources to acquire, service and develop a large piece of land. Upon completion, each partner then retains ownership of a particular parcel, in either freehold or condominium tenure. Given the upfront fixed costs that may go into site servicing alone, it can make good financial sense to partner with another organization to help lower the initial capital costs.

Partnerships can also be formed with organizations that may already own land upon which a seniors’ housing project could later be developed. Many faith groups, for example, own large parcels of land and have aging members, some of whom will eventually require retirement and long-term care accommodation. A developer or sponsor contemplating a new project could consider partnering with such a group, which provides the land in return for guaranteed accommodation for members of the congregation. In this case, as in all good partnerships, a benefit would accrue to both partners; one acquires land, the other acquires safe, appropriate accommodation.

Other types of partnership arrangements could also be explored. In each case, however, the goal remains the same: to identify situations in which each party realizes a greater net benefit by partnering than it would achieve by operating alone.

Municipal Fees and Charges

Most municipalities and other approval agencies levy fees, such as building permits and development charges, on new development, including residential and institutional accommodation. Generally, these fees offset the cost of reviewing development applications, or providing services such as library services and policing to the future residents of the subject site. Some municipalities and approval agencies will waive, rebate or provide grants for some or all of these fees to encourage development in target growth areas, such as their downtowns. When these waivers, rebates and grants result in upfront cost savings, developers and sponsors should consider sites that fall within these defined areas. However, as with all site selection decisions, the needs, wants and demands of the target market should remain paramount.

Competitive Market Analysis

Analyzing the competition’s market positioning provides insights into local market preferences and can help to identify unmet needs. It involves studying the profile of older people living in other seniors’ developments in the market area and noting whether the housing is appropriate to their needs with respect to financial, social, recreation, service and lifestyle factors. Properly analyzing the competition is a time-consuming process, but it is essential.

Essential to a comprehensive description of the market and to identifying gaps in the market is a macro-level understanding of the socio-demographic characteristics of the population aged 55 and over in the market area. This is achieved through the market analysis process described above. Once you have gained a statistical picture of the relevant population in the market area, develop a list of all existing seniors’ housing projects in or near the primary market area that represent potential choices for residents in the neighbourhood. The competing projects should be recorded by:

municipal address;

sponsorship;

year of opening;

building condition;

number and type of units;

tenure;

costs (rental rates or purchase price);

services and amenity offerings; and

type of project (independent, assisted living or supportive housing).

This data can generally be obtained through brochures, websites and other promotional materials. The insights gained will assist with future product positioning. For example, information on the number of projects in the area and the year in which they opened will help indicate how familiar the market is with different housing forms targeted to older residents. Information on the number and type of units will help to confirm if supply meets or exceeds demand. Data on tenure, cost, and service and amenity offerings will indicate which market segments are currently being served and which are not.

The next step is to focus on a narrower range of projects for more in-depth examination. Three to five projects serving the same target market should be examined in detail with respect to:

unit sizes;

vacancy rates;

waiting lists;

building features and attributes;

service offerings and activities (basic and optional upgrades);

pricing and rate structure;

optional service take-up;

resident demographics and socio-economic profile;

marketing and promotional activities; and

position in the seniors’ housing industry spectrum (for example, assisted living or supportive housing).

This information will reveal which market is being served, the level of demand and the primary market for each project. Research on

the history of competitors’ projects will disclose whether changes have been made over time and why, thereby helping to identify evolving market preferences and gaps. Problems encountered by these projects, indicated by high vacancy rates, may also serve as a lesson in design features, marketing image and unit mix.

Identifying projects that have not yet opened but are well into the planning and development phase is another critical task. Another developer or sponsor may be in the midst of an active marketing and promotional campaign for a new project about to open in the same market area. Find out when the project is scheduled to open, the unit profile, the pricing strategy and other project attributes. Some of this information may be gleaned from municipal and provincial government sources or industry associations, especially for projects that receive operating subsidies. Other information on new and pending completion can often be obtained from local market housing analysts, planning and development consultants, and real estate agents. Information about projects that are still at the concept stage may be available through informal networks.

Information on current and planned projects can generally be obtained from municipal planning authorities, local developer or builder associations, trade associations and seniors’ associations, as well as by word-of-mouth in the neighbourhood.

The information on current and planned projects targeting the same primary market and market segment and offering similar services and amenities should be analyzed for:

the number of households within target age and income profile of the proposed project currently residing in competing projects;

average vacancy and turnover rates within these projects; and

the number of other units that will be in operation and drawing from the same market segment as the proposed project when it opens.

Comparing these numbers with the data collected through the earlier market analysis will identify the size of the market (the total number of qualified households) for the project.

Throughout the analysis, use the following assumptions to ensure that risks are conservatively estimated:

People who already live in one form of housing in the seniors’ housing industry spectrum, such as assisted living accommodation, will not generally move to the same form of housing offered by another assisted living provider and should, therefore, be subtracted from the pool of prospective residents.

Residents living in a different form of housing in the seniors’ housing industry spectrum may be attracted to the proposed development, provided their current accommodation represents an earlier stage along the spectrum. For example, residents of assisted living accommodation are unlikely to move back into a newly constructed independent living or active lifestyle development, but those in mainstream housing may be attracted to independent living accommodation aimed at the seniors’ market.

All competing projects in the planning and development stages that are not yet completed will be occupied first, at a market rate of 95-per-cent occupancy, so that the pool of qualified households will be further reduced.

Turnover in existing projects will be replaced by the prospective market pool at the current turnover rate, estimated at 10 per cent.

For the last two calculations, assume between 70 per cent and 80 per cent of residents will come from the primary market area, and the rest from elsewhere.

Financial Feasibility Analysis

Financial feasibility analysis uses information from each of the previous steps to evaluate whether a project can be delivered within a price range the target market can afford over the period of time it will take to plan, develop, construct and fully occupy the building or sell off all of the units. This can be determined only by a detailed comparison of costs and revenues using a tool known as a financial pro forma.

Costs

It is important to differentiate between the hard costs and soft costs, and among fixed, variable and discretionary costs.

Hard costs are directly attributable to the construction and finishing process and include labour, materials, appliances, furniture and equipment. They may also include the purchase price of the land and the value of any external improvements made to the property, such as site servicing and landscaping.

Soft costs are those incurred in the planning and design of the project and include architectural and engineering fees, legal fees, permit fees, environmental assessments, and advertising and promotion expenses.

Fixed costs are those that do not depend on the number of units constructed. The costs associated with a real estate appraisal or the completion of a Phase 1 Environmental Site Assessment would be considered fixed costs, since they would be the same regardless of the number of units proposed.

Variable costs change based on the overall scale of development. Development charges would be an example of a variable soft cost, as the total fee payable to the municipality is usually based on the number of units constructed.

Discretionary costs can be decreased, eliminated or postponed without affecting the accomplishment of essential objectives, especially in the short term. An important example in residential development is the cost of advertising and marketing.

One of the most difficult decisions faced by most beginning developers and sponsors is deciding on the optimal size of a project, the correct mix of units, the range of services and amenities to offer and the size of the marketing budget. No less challenging is determining what impact these decisions will have on construction costs, personnel costs and other operating expenses.

In most cases, developers or housing providers create high and low scenarios to establish a range of costs and to help project future expenditures over the first two or three years of operation. In all cases, cost estimates should be as detailed as possible and properly account for inflation and escalation, which can occur over time and as the project is occupied.

Revenues

The revenue sources associated with most seniors’ projects are limited and include entrance fees, selling prices and rents; service fees; and non-operating revenues, such as interest income and bequests. The size of the project, the rate at which it is occupied or the units sold (known as the absorption rate) and market demand all affect revenues. Developers and housing providers should prepare several revenue scenarios to cover both optimistic and pessimistic market predictions over the first few years of the project.

Financial Pro Forma

In real estate, a pro forma is used to assemble all relevant financial information about a project. It is separated into a capital budget and an operating budget.

The capital budget conveys the primary sources and uses of the funds that go into planning, designing and constructing a project.

The uses of the funds in a capital budget are expressed as costs and the sources of funds are referred to as capital.

There are many different ways to raise the capital to finance a real estate development; however, the two common forms are equity and debt. In practical terms, equity refers to the amount of funds developers or sponsors contribute to the project themselves. This could take the form of cash or, if land is already owned, the value of the property contributed to the project. However, developers and housing providers who do not have sufficient liquid funds to cover all costs secure financing to cover the difference between the total cost of the project and the amount of equity that has been invested. For more information on financing see Arranging Financing in Volume   3: Planning the Project .33

The operating budget (also called the operating cash flow statement) conveys the expenses and revenues associated with the operation of a rental project or the sale of the units to owners. Rental projects, such as retirement homes, incur expenses for utilities, staff salaries and other costs, and generate income through rents and other fees collected from the tenants. Income is calculated by subtracting the cost of operating the project from the revenues collected through rents and the provision of services.

For ownership projects, the process is more or less the same, although instead of a series of ongoing expenses and revenues, the expenses are incurred during the construction period and sales phase, and the revenues are incurred as a single lump-sum payment at closing. The key components of a typical operating budget are illustrated in table 4.

Table 4: Key Components of Typical Operating Budget/Operating Cash Flow Statement

Operating revenue

Total annual revenue expected from rents. Depending on the project, the rent may be set by the provincial government.

+ Funding Additional funding received. Most long-term care projects, for example, receive funding from the provincial government or local health authority.

– Operating expenses

Costs incurred to receive rent from the property, such as utilities, insurance, property taxes, maintenance and repairs, or capital reserves.

– Debt service The annual total of payments necessary to pay off the mortgage.

= Net operating income

Income the project produces after expenses are paid (the “bottom line”). An income analysis approach will exclude debt service costs from operating expenses; however, in some cases operating expenses include debt service.

Feasibility Ratios

The operating cash flow statement will reveal if a proposal will generate a net income, but not if it will be profitable. To understand the feasibility of a proposed real estate project, it is necessary to consider key feasibility ratios, for example the return on investment, the return on equity and the debt coverage ratio, as shown in table 5.34

Table 5: Feasibility Ratios

Return on Investment (ROI)

Used to evaluate the investor’s gain from an investment. This ratio must be used with caution in the beginning, since most of the initial investment of the project may be held by the mortgage lender.

Net Operating Income /Total Cost of Project

Return on Equity (ROE)

A tool to evaluate the investor’s gain from a real estate transaction.

Net Operating Income /Equity

Debt Coverage Ratio (DCR)

The lender’s primary tool for evaluating the project. It represents the amount of annual cash flow available to meet annual interest and principal payments on debt. The minimum DCR required varies according to prevailing local economic and real estate market conditions.

Net Operating Income /Debt Service

Different scenarios, assuming different rates of occupancy, can be used to test the financial viability of the proposed development concept under varying market conditions. Adjustments may be needed to ensure that the proposed undertaking provides a healthy

return on investment or return on equity. The following questions can help in amending the operating cash flow statement if the initial project concept is found to be unfeasible:

What compromises, in terms of unit mix, unit sizes, design features, amenities and services, will reduce costs?

What impact would these compromises have on demand?

What services and amenities must be available on opening day, and what can be phased in later?

Could the project be developed in two stages?

These issues are made slightly more complex by the nature of the product and the characteristics of the market. A well-prepared project feasibility analysis can help answer many of these questions. However, the final determination will always be a judgment call. The better the research, the more likely it is that the risk will have been accurately assessed.

Lender Expectations

Financial feasibility analysis can generate useful information not only for the developer or sponsor of a proposed undertaking but also for financial institutions, which expect to see detailed financial pro forma statements on a project proposal before they offer a construction loan, a take-out mortgage, or mortgage insurance. They want assurances that a project will generate sufficient cash flow to cover annual interest and principal payments on the debt, both during the immediate rental or sales period and over the life of the loan. Lenders and mortgage insurers will also be concerned with risk and measures taken to reduce risk. For more information on financing, see Arranging Financing in Volume 3: Planning the Project.

Risk Analysis

Developers and sponsors of seniors’ housing projects can calculate the risk of their proposed undertakings by understanding the factors that affect demand and the rate at which units are sold or occupied. While some of these factors will be within their control, others will not.

Although it is possible to estimate the size of a target population on the basis of age, income and other variables, it is harder to estimate how many will actually move. The best approach is to err on the side of caution.

Older people present particular challenges as prospective consumers of new housing, since many are already well housed and can continue to live comfortably where they are. Any decision to move will generally be made over an extended period, especially by those in the younger age cohorts. Older cohorts may have more reason to move, particularly if their current residences no longer suit their needs. Nonetheless, many will stay put. The reluctance to move can stem from resistance to change, fear of what such a move signals, and lack of knowledge about the range of housing and service options available, as well as the comfort and familiarity of their current home and neighbourhood.

To help reduce the imprecision associated with calculating demand, it is essential to know the benchmarks or the rate of sale or occupancy for comparable projects in the same primary market areas, as well as the target market’s preferences in design, housing types, services and amenities. Finally, a strong and consistent marketing plan and an effective advertising campaign can influence the occupancy rate for a new project proposal.

Market Saturation and Penetration Rates

The market saturation rate is the degree to which the total market is being served by existing and proposed projects. The higher the market saturation rate, the harder it will be to attract clients to a new development. Market penetration refers to the level of unit sales or leases expected of a particular housing project in a given market as a proportion of the relevant market population.

To estimate the size of the potential market, developers and sponsors should first create several scenarios, ranging from pessimistic to optimistic, using the factors shown in table 6.

Table 6: Hypothetical Development Scenarios

Factors Scenarios

Pessimistic Medium Optimistic

Market area Small Medium Large

Age Range Narrow Medium Wide

Income Range Narrow Medium Wide

The most pessimistic estimate of the potential market for the development sees the primary market area confined to the smallest area and selects the narrowest age and income bands as the target group. In housing that includes support services, such as assisted living or long-term care, this could mean the oldest age cohort and the highest income bracket.

The next step combines — using established industry formulas — the ranges from table 6 with the findings of the competitive market analysis. This process produces a series of ratios that define the rate of market saturation and the rate of market penetration that can be compared to standard industry norms. In this step, it is necessary to calculate the draw of new supply and the draw of new development from the market area.

An illustration of an evaluation of market saturation and penetration rates for a hypothetical housing development offering support services to higher-income older adults can be found in table 7.

Traditionally, a 5-per-cent saturation rate has been accepted as a measure of a stable market, although many communities have proven to be oversupplied or undersupplied with that amount of housing available. Benchmark saturation rates from communities across Canada that have stable markets indicate a wide range in sustainable saturation rates, ranging from 3 per cent to as high as 12 per cent. Most have rates well below 7 per cent, and most take considerable time to achieve and sustain a 5-per-cent saturation rate.37

Because market penetration rates vary widely from one area to another, no standard norms can be applied across the board. However, for sophisticated urban markets, whose residents understand and appreciate diverse forms of housing being offered, or where a narrowly targeted market is selected, the penetration rate can be higher. In the past, a low penetration rate might have been considered reasonable and safe. Today, however, projects may require much higher penetration rates in order to adapt to better educated markets.

Absorption Rate

The absorption rate is the rate at which the units in a project will be leased or sold, usually expressed as a number of units leased or sold per month. This rate is affected by factors under the housing provider’s control, such as the marketing plan and the attractiveness of the project, as well as less controllable factors, such as the market’s familiarity with housing for seniors, the number of competitors, the number of vacant units on the market and the ease with which prospective residents can sell their current homes. Dividing the total number of units by the number of units that are expected to be leased or sold per month yields the number of months it will take before the project is filled. “Filled” does not mean that 100 per cent of the units have been taken up; a project is generally considered filled when 93 per cent to 95 per cent of the total number of units are occupied or sold. If potential customers are less sure of the product and the market offers more choice, then decision making and, by extension, absorption, will likely take longer.

The absorption rate determines the timing of projected revenues from the rental or sale of the units and the amount of debt that will need to be serviced during the initial rental or sales period. It therefore directly affects the financial feasibility of the project. As with penetration rates, absorption rates will vary significantly from one community to another. Very importantly, absorption rates are generally lower and absorption periods are longer for seniors rental housing than for conventional rental housing. Existing research suggests that seniors make many more visits to view units in seniors housing projects before deciding to buy or to lease such a unit than do other prospective renters or condominium buyers.38 Absorption can also fluctuate during different times of the year and at different stages of the real estate market cycle.

Table 7: Illustration of Market Saturation and Penetration Rates Evaluation

1. Calculation of target market number

Factors Scenarios

Pessimistic Medium Optimistic

Market area 8 km 15 km 30 km

Age 80 years + 75 years + 70 years +

Income $35,000+ $30,000+ $25,000+

Number of Households

1,000 4,000 15,000

2. Calculation of competition and subject development draw (number of units)

Existing units 200

Projected turnover in next 2 years (10% of 200, per year)

40

New projects (units in all planned projects excluding the subject development)

+80

Total new supply (total of turnover units in existing supply and units in planned projects excluding the subject development)

=120

Draw of new supply from market area (80% of total new supply)

120 x 80%= 96

Subject development(assumed number of units in proposed development)

80

Draw of subject development from market area (80% of subject development)

80 x 80%= 64

3. Calculation of market saturation rate and market penetration rate

Market saturation rate (without subject development)

Total existing (less turnover) and draw of new supply from market area / total age- and income-qualified households within the market area

Market saturation rate (with subject development)

Total existing (less turnover) and draw of new supply from market area + draw of subject development units from market area / total age- and income-qualified households within the market area

Market penetration rate Draw of subject development units from market area / (total age- and income-qualified households within the market area) - (total existing (less turnover) and draw of new supply from market area)

Calculation Result

Pessimistic scenario

Market saturation rate (without subject development)

(160+96)/1,000 25.6%

Market saturation (with subject development)

(160+96+64)/1,000 32.0%

Market penetration rate 64/(1,000-[160+96]) 8.6%

Medium scenario

Market saturation rate (without subject development)

(160+96)/4,000 6.4%

Market saturation (with subject development)

(160+96+64)/4,000 8.0%

Market penetration rate 64/(4,000-[160+96]) 1.7%

Optimistic scenario

Market saturation rate (without subject development)

(160+96)/15,000 1.7%

Market saturation (with subject development)

(160+96+64)/15,000 2.1%

Market penetration rate 64/(15,000-[160+96]) 0.4%

4. Assessment of risk for different market saturation rates

Saturation Rate Degree of Risk

Less than 5% Relatively low

5 to 10% Moderate

10 to 15% Relatively high

Over 15% Speculative

Subject development (assumed number of units in proposed development)

80

Draw of subject development from market area (80% of subject development)

80 x 80%= 64

Industry standards can help housing providers estimate the expected absorption rate for a new project offering, but these standards should be tested against absorption rates of similar, existing seniors projects in and around the primary market area. Differences may be due to the timing of the project launch, the penetration rate in the market and variations in product offerings. In the absence of any industry standards, a conservative estimate would be to assume approximately 24 months for full leasing. Factors that can affect penetration and absorption rates are listed in table 8.

Table 8: Factors Affecting Penetration and Absorption Rates

Residents from outside

The attractiveness of the development to residents from beyond the primary market area affects penetration and absorption

Influence of children

Older Canadians often move be to closer to their families, and children often provide financial assistance, elevating certain households into an income-qualifying category

Affiliation The credibility and the reputation of the sponsor and affiliation with community organizations can influence the market range, the timing of decisions and the ability to overcome the draw of unaffiliated competitors

Varying absorption rate

The absorption rate varies over time, being slightly accelerated after the opening and slowing down during the holidays, summers and winters

More attractive or better situated units will go first; others will take longer to fill

Turnover in project

Turnover in new projects begins before full occupancy has been reached; this fact needs to be incorporated into occupancy projections and cash flow calculations

27 Peiser, Richard B andD.C.: ULI and Dearborn Financial Publishing Inc.

31 Canada Mortgage and Housing Corporation (2008). Research Highlight (Socio-Economic series 08-014): Community Indicators for an Aging Population.

32 Peiser, Richard B and Schwanke, Dean (1992). Professional Real Estate Development: The ULI Guide to the Bus.

33 There exists. (2008). Construction Funding: The Process of Real Estate Development, Appraisal, and Finance; Nachem, I. (2007). The Complete Guide to Financing Real Estate Developments; Miles, M. et al (2007). Real Estate Development: Principles and Process;

Peiser, R./Freij, A. (2003). Professional Real Estate Development: The ULI Guide to the Business.

34 This is not a comprehensive list of feasibility ratios, and there are many other ratios that can be useful in assessing the feasibility of a project. For a detailed discussion with case studies,see Peiser, R./Freij, A. (2003): Professional Real Estate Development: The ULI Guid.

Idea Identi!cation and Feasibility Analysis Many a great business starts with an idea that is relentlessly pursued by a dogged entrepreneur. While this process isn’t unknown in the !eld of social enterprise, there are many reasons for being cautious about the idea you pursue. It is not a matter of just some sorts of sectors being better than others. Indeed, many di"erent business ideas have been embodied in social enterprises. Enp has provided grants for successful development for the following common business ideas: t Two landscaping businesses t A packaging and assembly services operation t Arts, entertainment, and recreation services, such as festival ticketing services and performance and event production and planning t Construction site preparation or, more speci!cally, demolition, reclamation, land-clearing, and materials recovery services t Professional development training workshops t Food and accommodation services, including co"ee shops and a restaurant that also conducts catering and food service contracting t Health services, including a home health care business serving seniors t Professional and technical services, including translation and interpretation enterprises, a communication and general management consulting !rm, and website evaluation and testing services t Real estate services, including property management services, conference facility and rental o#ce space t Retail/wholesale trade, including o#ce supplies and equipment and health and personal care stores (hearing and communication aids) t Manufacturing, including food products, transportation equipment, and wood and giftware products t Information and cultural industries, including production and distribution of information and cultural products such as videos and interactive games So there are really a host of di"erent possible businesses. The real issue is how you go about the idea selection process. That is what this chapter is all about. Know what to expect Deciding on an enterprise idea to implement as your non-pro!t business can be a time-consuming and sometimes frustrating process. Over the period of months while ideas are brought up and tested, participants may feel challenged, either because their ideas aren’t considered among the best, or because some of the best ideas are found to be more burdensome than seems practical. This feeling is natural, and can be part of a healthy transition in the way that an organization thinks through a problem. In fact, for most organizations, the selection process is a good introduction to the process of identifying, analyzing, and resolving other business or organizational problems. This chapter provides a structured process that you can use to identify and screen potential business opportunities. It outlines how you can complete the following steps: 1. Preparation 2. Generating ideas 3. Quick screening 4. Second screening of ideas 5. Feasibility study 6. Business plan summary You can use these steps to assess and prioritize the potential opportunities. But keep in mind that there are many possible approaches to generating ideas and to deciding which ones to pursue. You don’t have to use this particular approach. What is important is that you have a systematic approach to the enterprise selection process that your key stakeholders agree to. This will ensure that you don’t waste your resources taking on a business that won’t work for you, and helps you focus implementation once you have committed to developing a particular idea. The value of a structured process There are good reasons for being methodical. Following a structured process of

enterprise selection can help you to: t Develop commercial products and services that will meet the needs of members, clients, and customers. t Possibly develop an enterprise idea from the activities in which you are currently engaged. t Enhance the organization’s ability to get funding (grant, venture philanthropy, and/or investment funding). t Support the organization’s approach to being more entrepreneurial. t Develop businesslike approaches to gaining support from the corporate sector or other stakeholders. t Decrease the risk of failure. “Should non-pro!ts enter the business world? As a non-pro!t who successfully operates businesses we have to say yes, but only if the business opportunity: 5 Fits with your mission, vision and values. 5 Fits with your strategic plan. 5 Doesn’t pose risks to your reputation. 5 Provides a social return on investment with minimal risks.” - Leslie Tamagi, VRRISeveral bene!ts of this process may not be self-evident. A proper enterprise selection process can help build your organization’s ability to proactively respond to a changing environment. It can also help you manage these business activities and the associated organizational changes required within the context of your organization’s values, mission, strategic and business plans, and structure. The approach you eventually take to creating product or service ideas depends on a range of factors, including your organization’s state of readiness and the availability of resources. It may also involve di"erent combinations of board, sta" members, volunteers, and stakeholders in teams that are diverse in terms of their relationship to the agency, their role in daily operations, and their level of expertise in business planning. Steps in the process To repeat, the steps involved in generating ideas and assessing them for their usefulness are as follows: 1. Preparation. This includes the process of reviewing the mission and objectives as identi!ed in the previous chapter, assessing your organizational strengths, understanding your potential market, and building support and enthusiasm for the business development process. Develop a rough set of criteria (e.g., compatibility to mission or perhaps low need for capital or whatever) for the ideas you will be seeking. 2. Generate ideas. Create a long list of enterprise ideas through a brainstorming process that involves agency clients, sta", and other stakeholders. 3. Idea screening. Edit your long list of enterprise ideas by comparing each idea to your evaluation criteria, determining how closely they !t the criteria. 4. Feasibility study. Research one or two of the most promising ideas. Ultimately, the feasibility study will enable your organization to decide whether or not to invest further time and resources in that particular business idea. 5. Business plan summary. Summarize the key elements of the business idea. This document will form the basis for your business plan and allow for preliminary promotion of the idea to potential supporters and investors. Now, let’s discuss each of these steps in detail. 1. Preparation Before generating or screening ideas, take the opportunity to assess your organization and its market. You may have already started or completed these actions as you assessed and improved your organization’s state of readiness. Build commitment and support for the process Going through an idea generation and screening process will be a major e"ort. Assumptions are going to be challenged. People’s pet ideas may be rejected. Your organization’s comfort zone may be pushed. Before jumping in, take the time to develop your key stakeholders’ commitment and support to the process. Jointly develop a process for proceeding. This gives you an opportunity to address potential challenges before they become roadblocks. Review mission and objectives We have stressed this repeatedly, because it is so essential. In Chapter 3, you addressed the task of clearly identifying the vision and social objectives for your enterprise because upfront goal setting is critical to social enterprise start-up. The desired outcomes of a social enterprise are multi-faceted and involve a combination, a blending, of !nancial returns and social impact. Understanding

these desired outcomes and the relative priorities will o"er you some of the criteria by which you will be selecting the ideas to explore. For example, when considering !nancial goals, de!ne what “large” and “small” pro!t actually means to your organization. Not all social enterprises generate a pro!t. You will want to consider reliable grants as a part of the income stream for the business if you are not relying solely on earned income to support the enterprise. Do leading-edge networking and research Using the Internet, interviews with experts, interviews with potential or existing customers, and press reports, !nd out who the innovators are and what the innovations are, worldwide, that a"ect your clients and industry. Don’t restrict your search to a narrow de!nition of your industry - look for parallels in other sectors. For example, if you want to create training jobs for people with disabilities, look also at programs creating jobs for the homeless. If you’re interested in restaurants, look also at other service concepts that may give you insights on the restaurant service. The point of this research is to inspire and motivate, and to understand trends. Perhaps you will want to revisit the section on common social enterprise ideas at the start of the chapter. Assess your organization’s strengths and weaknesses Yes, you may have done this at an earlier stage, but you need to do it With roots in a faraway place, ‘Haween’ comes from the Somali word for women, and the business employs new Canadians who have participated in training programs and social support through a sister organization. Haween is anything but strictly business; it brings a unique collective cultural attitude to how it regards its people and their skills. “Anybody who wants to start a social enterprise should consult with people in the !eld in which they want to start their business. You have to research and understand your !eld very well.” -Haween Enterprisesin the context of looking at business ideas. At this point, try to be as expansive as possible. True, how your organization creates value includes providing employment and creating products, but think also about the other forms of value that your organization creates - the values of your social or environmental mission. This is a good time to re$ect on the community impacts of your work: for example, the strengthened families, healthy children, and more sustainable communities that result from your mission-related work. Assess your potential customers’ needs Understanding your current customers is the most important step towards developing a strong idea. Before you start brainstorming, talk to your current and potential customers. Try to understand and see things from their point of view. Rather than simply designing a business that !ts your needs, see what you can do that will address their unmet needs. 2. Generate ideas This step will help you to transform the information and inspiration you have gathered in the preparation step into a number of speci!c enterprise ideas to meet your mission and objectives. Generating ideas starts with a brainstorming process. Brainstorming is an individual or group process for generating alternative ideas or solutions on a speci!c topic. Good brainstorming focuses on the quantity and creativity of ideas. Concentrating on the quality of ideas is much less important than fostering the sheer quantity. After ideas are generated, they may be grouped, evaluated, and prioritized for subsequent research or consideration. Here’s how you do it: t Bring together a group of stakeholders, including your board, sta", and potential customers. t Review the results of the preparation step and make sure everyone understands the subject of the brainstorming exercise. Collect as many enterprise ideas as possible that are relevant to your desired social and !nancial outcomes. Some questions which may stimulate ideas include: » What is your organization already good at? » Who bene!ts, or could bene!t, from the services you provide? » How does your organization create value today? » What is going on in the market? » What are competitors doing? » What are your current and potential customers’ biggest needs?NICS School of Decorative Painting. NICS is a social enterprise

operated by the Niagara International Children’s Society, now based in Toronto. How they got started… Le Buca!n. We conducted a survey of the neighbourhood and found that there was a need in that area for a community service. People in the community identi!ed three service needs: a place to socialize, a place where they had access to the Internet, and a safe laundromat. So we decided to create three businesses in one and that decision was de!nitely grounded in the needs of the people in the neighbourhood. You have to respond to the needs of your constituency; you can’t create new needs but really focus on your community’s needs. For us, it needed to be a project that !ts with a low-income community. We had to !nd a type of enterprise that would be easy for low-income people to work in. Many Nations. A strong desire to bring about change and to protect the future of aboriginal people led to the inception of Many Nations Bene!t Cooperative, a member-run !nancial services organization tailored to meet the needs of aboriginal communities. Many Nations came into being as a result of dedicated leadership and a strong vision. The vision began almost 20 years ago in Onion Lake, Saskatchewan, when that First Nation exercised its right to self-determination by taking direct control of their education system. The Director of Education for Onion Lake at that time, Joe Carter, believed that, “There had to be a way to provide aboriginal organizations and their employees with a"ordable and culturally appropriate group bene!ts, including pensions.” The solution was to create a pension plan that speci!cally addressed the needs of First Nations employees. This was an innovative idea and was soon adopted. The e"orts of an inspired network of leaders and business professionals resulted in the creation of Many Nations Bene!t Co-operative. Joe Carter became the !rst Chairperson and continues to be actively involved in that role. Live Local Alberta. The Good Food Box evolved out of a discussion about how to meet the food security needs of low-income Edmontonians. The social enterprise now “facilitates the growth and distribution of locally grown and processed food by creating an on-line purchasing portal that matches suppliers of local, healthy food with people and institutions that wish to purchase local product”. Lessons? The development path isn’t linear – it’s more like a spiral. If you stick with it, you build on previous ideas and research and come out of it with a concept you hadn’t dreamed of – and one that’s more likely to succeed in the long term. NICS School of Decorative Painting. NICS had been providing professional training to painters, specializing in decorative painting, for several years when it landed a contract to train social service recipients and social housing tenants. It became apparent to the Executive Director that it would be a challenge for many of the trainees to obtain traditional unionized positions once they graduated because their personal circumstances – many were single mothers - prevented them from working the normal 7 am to 7 pm shifts expected in the industry. NICS started its own social enterprise to Sources of business ideas When you’re brainstorming or researching to !nd business ideas, use this list to help you. Most organizations can think of possibilities in each of these categories: t 1SPEVDUT BOE TFSWJDFTUIBU EJSFDUMZ GVMöMM ZPVS NJTTJPOEarned income can often be generated directly from the value created by your core work. t &YJTUJOH QSPEVDU PSTFSWJDF PòFSFE JO B OFX HFPHSBQIJD TFHNFOUWhat you do could be valuable outside your neighbourhood, whether it’s o"ered directly by your organization or under license through another organization. t &YJTUJOH QSPEVDU PSTFSWJDF PòFSFE UP B OFX DVTUPNFSTFHNFOUWhat you do might have value for other types of customers. Many successful businesses have been created by o"ering a modi!ed version of a social service to a full-fee client (such as corporate counselling programs). t /FX QSPEVDU PSTFSWJDF MFWFSBHJOH TUBò SFTPVSDFTWhat skills do your sta" have that could create something new? t /FX QSPEVDU PSTFSWJDF MFWFSBHJOH DMJFOU SFTPVSDFT Your clients

have value as a customer group. You have access to your customers. What else might they need from you or a partner? t /FX QSPEVDU PSTFSWJDF MFWFSBHJOH SFBM FTUBUFIBSE BTTFUTYour excess capacity or infrastructure can become a business. t /FX QSPEVDU PSTFSWJDF MFWFSBHJOH JOUFMMFDUVBM QSPQFSUZTPGU BTTFUTIf you have spent money developing a way to serve your clients, other non-pro!ts or companies may be willing to buy your knowledge through a consulting service or under license. t /FX QSPEVDU PSTFSWJDF PòFSFE UP B OFX HFPHSBQIJD PS DVTUPNFS TFHNFOUGrowing an enterprise with both a new product/service o"ering and a new customer base is not recommended because the potential risk involved with doing any new activity is multiplied. To reduce risk, focus on either providing a known product to a new customer base or o"ering a new product or service to a group of customer where there is mutual understanding and awareness. 6OSFMBUFE CVTJOFTT Businesses unrelated to your on-going operations aren’t usually a good choice because of potential legal and tax di#culties as well as lack of familiarity with the !eld, but it’s possible that you simply have a great business idea in its own right. When you pursue something for which o"er $exible work shifts, and got o" to a roaring start in 2009, with painting contracts worth more than $200,000, nearly 50 people trained, a third of whom found jobs.you bring little to the table besides an idea, consider joining with a knowledgeable partner to reduce your risk. 3. Idea screening As a result of the brainstorming process, you will probably have far more business ideas than you can realistically analyze in depth. It doesn’t make sense to do studies and write business plans on ideas that are in the end likely to be passed over. Generally speaking, you will, in this step, pare down the number of ideas to be more fully explored. Initially, from the meeting in which you brainstormed, you probably need to take a look at all the ideas and pare them down to perhaps !ve for further screening. In a later context. these !ve should be pared down to two possibilities, at the most. This section describes how you can approach the screening and sifting process. We suggest here that one way to reduce the number of ideas is by roughly assessing the market potential of the idea and its likelihood of success. For this purpose, it is useful to think of success in two dimensions: t The strength of the idea: Does this concept have market potential and a business model? Will it advance your mission either by generating lots of revenue or by strengthening your service delivery? t The !t with the organization: Can your organization implement this idea successfully in the current market? Thinking about these two dimensions, chart each enterprise idea using the matrix below. Enterprise ideas that go in the upper-right quadrant have a high potential for success. If the idea ends up in the lower-left quadrant, do not pursue it.Using a scorecard to assess initial potential Use a simple scorecard for your selection criteria to judge strength and !t. You can rate the idea against the series of criteria presented below, simply using your and your colleagues’ best judgment to justify each rating. STRENGTH OF IDEA Use the following ratings: 0 = Poor 1 = Somewhat Good 2 = Good 3 = Very Good 1. Does the enterprise provide a strong !nancial impact? 0 1 2 3 2. Does the enterprise provide a strong social impact? 0 1 2 3 3. Can the product be clearly de!ned? How developed is the idea? 0 1 2 3 4. Does the product address a signi!cant customer problem? Are they willing to pay? 0 1 2 3 5. Does your organization have a competitive advantage? 0 1 2 3 6. Is it likely that this product will be pro!table? 0 1 2 3 7. How much investment/start-up costs are required? What is the pay-back period for the initial investment? 0 1 2 3 8. Do you have relationships with out target customers? 0 1 2 3 9. How di#cult is it to enter the market? 0 1 2 3 10.How big is the market? Is it growing? 0 1 2 3 FIT WITH ORGANIZATION 11. Is anyone enthusiastic about the idea? 0 1 2 3 12.Does the product !t with the organizational values, mission, and culture? 0 1 2 3 13.Does the enterprise

employ one of the organization’s particular strengths? 0 1 2 3 14. Would the enterprise create a lot of undue strain on the organization? 0 1 2 3 15.Do you have the skills to run this business? 0 1 2 3 16. Are skill gaps easy to !ll with existing working conditions and salaries? 0 1 2 3 17. What are the operational keys to success in this industry? Do you have them? 0 1 2 3 18. Will the traditional enterprise model need to be modi!ed to !t our social criteria? How will this a"ect the success of the business? 0 1 2 3 19.How much risk is there in the idea? 0 1 2 3 20.How easy is it to address the risks? 0 1 2 3 Strength Of Idea Score: Fit With Organization Score: As indicated in the chart, add up your scores for questions 1 to 10. This is your strength of idea score. And add up your scores for questions 11 to 20. This is your !t with organization score. t A score above 25 on both the organization and !nancial sides means that you have a strong idea. You will be justi!ed to go on to the next steps of assessing the idea. t If you score high on the strength of idea but not on the !t with organization, it may be di#cult for you to gain the resources or support required even though it is generally a good concept. Consider something else !rst, or get help to address organizational barriers. t If you scored high on the !t with organization side but not on the strength of idea side, this likely isn’t a good social enterprise idea. You may nevertheless want to consider whether it still has enough value as a charitable program. However, if you don’t think you can readily raise money to make it happen, you should not go further with it. t If you scored below 25 on both strength of idea and !t with organization, go back to the drawing board and consider additional ideas. 4. Feasibility study In the idea screening step, your objective was to eliminate the ideas that were either not a strong !t for your organization or did not provide a signi!cant business or social impact. Now the formal feasibility study can test the key assumptions that determine whether this enterprise actually would have a good chance to succeed. The study is an opportunity to re!ne and explain the concept, and to test market reaction. Generally speaking you will want to: consult potential customers and funders, and evaluate competitors; and do some preliminary market research, such as a focus group or survey, to gain con!dence in the value of the concept. Organizations do their feasibility studies in various ways. You may wish to apply for funding to hire a consultant to conduct the study, or you may have someone in your organization who can do it. You can choose to do a feasibility study on one idea (usually the idea that scored the highest on the assessment scorecard), or you can decide to do a feasibility study on two or more ideas. That depends on your resources. It would be reasonable to spend the equivalent of three to six full-time person days preparing a single feasibility study. Sample criteria for developing a feasibility study The feasibility analysis is focused on understanding whether the organization could make the enterprise work. This involves considering four key criteria: 5 Strategic Alignment – Will the enterprise further your mission? 5 Market Opportunity – Will customers purchase your product? 5 Operational Capabilities – Can you make it happen? 5 Financial Potential – Can you achieve your pro!tability goals? You can use the detailed examination of these four criteria, using the questions outlined below. While it isn’t necessary to answer every question de!nitively, don’t avoid a question just because the answer is di#cult to research or will detract from your excitement about the idea. Try to provide concrete evidence for each answer. 4USBUFHJD "MJHONFOU t How appropriate is this product to your organization? t Does it !t with your organization’s values/vision/mission/strengths/ skills/resources? t How di#cult will it be to promote, produce, or deliver? t What organizational structure would be best to move your enterprise forward? t What skills will be needed on your board of directors and at the sta" level?t Who will manage your enterprise? .BSLFU 0QQPSUVOJUZ t Who is your customer(s)? What are their demographic characteristics? t What will your customer be buying (the product or service and its

key elements)? t What is the customer need you would address? t How, when, and where will they buy it? t Which customer/market segments will you target? t How large is the market (i.e., how many potential customers)? t How often do customers purchase? What is the average value of each purchase? t Is it a mature or immature market? Is there growth potential? t What are the market trends? t Has the market demonstrated support for your product? t Which market niche would your product !ll? How would you di"erentiate yourself in the market? (Remember that customers will ultimately base their purchasing decision on quality, price, and experience, and not on charitable grounds. If you’re counting on goodwill to sell your product or service, you’re planning a fundraiser, not a business!) t Who are your competitors? What are their strengths and weaknesses? t How does your product or service di"er from what is already o"ered (e.g. price, quality, service)? t What is your competitive advantage? t Who might become your competitors in the near future? t Is there room for another provider in the market? 0QFSBUJPOBM $BQBCJMJUJFT t How long will it take to produce or procure the product? t Which suppliers will you use? How much will they charge? t How would you make this actually happen? t What would have to change to facilitate success? t Will you need a new facility? t What additional management/sta" are required? What will be the cost? Do they require training? t How would you inform your market of your presence? t What are your plans for distribution? t Who are your external partners? t What product testing is required? t What are the key steps forward? General milestones? Timing? t What could go wrong? t What would be the impact if it did go wrong? t What can you do to prevent it? t At what points could losses be cut? 'JOBODJBM 1PUFOUJBM t What are your potential start-up costs, including technology, sta", materials, equipment, marketing, and planning? t What will your operating costs be? t Approximately what price might you charge? How would the price be determined? t What is your sense of a potential pro!t for a sale? t Do you anticipate cash $ow issues, including seasonal demand or high initial costs? t How much working capital is required? t What might your sales assumptions be in the !rst few years? Numbers? Growth? t How long will it be until the enterprise breaks even? t What are the key drivers of pro!tability? Can the enterprises operate at this level? t Are there any potential sources of !nancial and human support for the di"erent stages of development? Sources of Information Each of the feasibility study questions may require you to use a range of information sources to !nd satisfactory answers. Potential sources of information include: t Interviews with potential customers, social enterprise operators, suppliers, existing sta" and clients, industry associations, or funders. t Visiting similar enterprises to understand how the business works, key success factors, potential pitfalls, sta#ng requirements, and cost drivers. t Industry magazines, reports, and business directories. t Internet research to determine competitive businesses, pricing, and value propositions. t Site visits. Consider whether the business will be located at your current site or if another location is required. If your business is retailoriented, take a look around your neighbourhood. This will give you a sense of the potential customers and their buying patters. Which competitors are nearby? What are they doing right or wrong? t If you already have a relationship with the target market, the records of complaints, service requests, or anecdotal feedback from employees who deal with customers most frequently may be a goldmine of information.t An accountant, lawyer, !nancial institution representative, or business consultant. t Small business advisory centres Is it feasible? Deciding whether or not to move forward Having prepared your feasibility study, you should be able to make the important decision whether or not to move forward on the idea. While you and others may be very excited about your idea’s potential, you should prepare yourself for being able to walk away. Keep

in mind that: t Pursuing this idea will still require a tremendous additional investment of sta" and !nancial resources as you’re at a very early stage in the process. t Moving forward with this business idea will require involving a broader constituency. You will need to build a business reputation with existing and new clients and with funders and possible investors. t Making the idea a reality will require convincing many other individuals and groups. And that requires that you stay true to your mission and build a credible business case at the same time. If your sta" and board decide to continue to develop the business idea, think about at what points in the future you can back out of the process. This is necessary (and healthy) because as you move forward with your business plan, you may uncover some unexpected information that Blue Lake Forest Education Society (BLFES) is a nonpro!t, charitable organization that focuses on providing education opportunities to children and youth through experiential learning programs. The Blue Lake Forest Education Society The feasibility study that Blue Lake conducted played a major role in the development of the project we are currently working on. I have always thought that one of the greatest strengths as a Society is Blue Lake’s ability to plan and carefully analyze a situation before moving forward. However, going through the process of the feasibility study forced us as an organization to ask questions that we would not normally think of. The social enterprise that we were considering was constructing a lodge and training centre to facilitate forest and environment education programs as well as job training programs. When not being used for these purposes it would be rented out to private user groups to generate some extra revenue for the Society. We thought we had a pretty good idea of what we wanted in terms of the size and location of the building and we thought that our next step would be to round up the funding and proceed. After receiving some funding from Enterprising Nonpro!ts and the Kootenay Woodlot Education Society to complete a feasibility study we thought that it would be wise to put things on hold until after we had completed the feasibility study. Honestly I didn’t think that too much would change, but that the study would help to con!rm what we already thought would be the best route to go. I was wrong. We carefully looked at the social, environmental and economic factors associated with this construction project and I started discussing makes it important for you not to move forward. For example, the cost of materials may skyrocket, or a well-!nanced competitor may start to provide the same product or service at a lower cost. In addition, public policy can make or break a social enterprise. If legislation or funding programs change, your business may become unpro!table, even before you start. As you plan the implementation phases of your business, the go/no-go decision points will become clear. For example, if you require a large amount of capital, your planning group may develop a limited time frame in which to raise that capital. After that time period, your group may assess your progress and decide whether or not your time will be wasted by continuing to work to raise capital. Other points at which to consider a “go/no go” decision could be: t before design of the facility begins; t before construction begins; t before a supplier or partners are con!rmed; t before stock or equipment is purchased; or t before sta" are hired. Alternatively, you may be able to pilot your business by producing small batches of a product or providing services on a time-limited basis. You will want to evaluate these pilots closely to ensure that it is bene!cial (or even pro!table) to continue. It is a di#cult decision to walk away from a business idea that seemed strong. However, doing so will ultimately allow you to apply your time and energy in another direction that will bene!t from the work you put into your !rst idea and from the lessons you learned. You have to be prepared to drop your !rst idea and consider another. If you and your organization’s decision makers decide to move forward with the business idea, create a summary of

your feasibility study. This will enable you to have early conversations with potential clients, markets, and investors. This document, called an executive summary business case, is described in the next section. It will help you test the waters at the same time as it serves as the starting point for a full plans and ideas with a diverse group of people who used the Blue Lake Centre or worked at the Blue Lake Centre, all of whom were outside of the “executive” group. Through this process I was able to discover what the Society’s actual needs were for this facility and not just what the Board of Directors and Managers thought they were. What we ended up with was a design that would accommodate current and future needs of the Society. When compared to our initial plan the new plan had major design changes, was in a completely di"erent location on site, and !t better with the lay of the land. -Jody McInnesbusiness plan (discussed in Chapter 5). 5. Business plan summary The purpose of the executive summary business case is to quickly generate interest in your idea. It’s an introduction and doesn’t need to be comprehensive, but it must be compelling. Your goal is to help your reader grasp the unique value of what you are trying to do. A good business case shows how you are di"erent and why you will succeed. It is a step in the sales process. You can use this document to sell the concept to potential investors. These might include a board whose members could invest time and energy, or the venture philanthropists and !nancial institutions who could invest money to help you to develop a business plan or conduct a pilot study. It is also a useful test of business feasibility. (If you can’t make a compelling case for the idea in this format, it may not be such a strong idea after all). In no more than two pages, brie$y present your business case. Include the following: t The problem. Brie$y demonstrate the problem you address. t The solution (your program or business idea). A short and compelling description of why you can solve the problem better than anyone else. Potentially include the business model, strategy, why you’re more competitive than others, people who would make it work, sustainability/pro!tability, and exit strategy. t The “ask.” From the perspective of the funder/investor, state speci!cally what you want (!nancial help and the expertise or other resources needed from any partnership). t The social return on investment. Brie$y describe how society will bene!t from this investment. If possible, quantify this. t The !nancial return on investment. For venture capital/!nancial investors, include the !nancial return on their investment. t Your organization. Describe the role, e"ectiveness, and desirability of your organization as a partner with the funder/investor (stated in terms of your organization’s !nancial viability/cash $ow, managerial capabilities, and successes, with funding such as donations and grants from others re-stated as investments in your organization). Criteria investors may use to assess an idea The following includes some of the criteria that interested investors may use to assess an idea. Always try to describe your idea in these terms. Investors use these criteria because they work. A strong !t with these criteria is a good indicator that an idea will be successful (as well as get you the funding). Of course, these are the same sorts of criteria for a sound business that you yourself have considered all along.Financial criteria Social criteria Good business idea Is this a good business idea? Is there a signi!cant customer base for the products or services to be produced? Can they be sold at a high enough margin to make a pro!t? Is there a competitive advantage? Good service idea Is this a product or service that’s really needed in the community? Would it result in signi!cant improvement in the life of enough people? Can it be provided at a cost that makes sense? Does this approach to solving the problem o"er some competitive advantage over other ways of doing it? Right strategy Is there a good strategy to achieve business success, !nancial return on investment? In the strategy, are the !nancial assumptions in the business plan credible and include a reasonable exit strategy? Right strategy Is there

a good strategy in place to achieve a signi!cant social impact? Has a good business plan been developed to implement a sustainable strategy? People to make it work Are the people in the business the ones who can make it successful? People to make it work Are the people running the organization capable of making this successful? Conclusion Now that you have a clear idea of the likely pitfalls of this enterprise and have developed a document that sets out the potential bene!ts, you are ready to move ahead on your idea. With your executive summary business case, you will be able to generate interest in your enterprise idea. The next step is developing a full-$edged business plan. That document will help to generate commitments for real partnerships and capital for start-up and operating costs. It will also help your organization to mitigate the risks associated with this work. Chapter 5 will describe the business plan process in detail.