SBA and USDA Required Financial Analysis in a Feasibility Study

There are several parts to an SBA (Small Business Administration) and USDA (United States Department of Agriculture) Compliant Feasibility Study:

Executive Summary: An overview of the business concept, objectives, and key findings of the feasibility study.

Economic Feasibility: Analysis of the economic environment, including industry trends, economic indicators, and the potential impact on the business.

Market Feasibility: Detailed market analysis covering target demographics, market demand, competition, and potential market share. This section demonstrates the business's ability to capture and sustain a customer base.

Technical Feasibility: Evaluation of the technical requirements of the project, including necessary equipment, technology, and operational processes. It assesses whether the business has or can acquire the technical resources needed.

Management Feasibility: Assessment of the management team's qualifications, experience, and ability to execute the business plan effectively. This includes evaluating the adequacy and continuity of management.

Financial Feasibility: Comprehensive financial analysis, including:

Pro Forma Financial Statements: Projected income statements, balance sheets, and cash flow statements over a specified period (often 10 years).

In this post our focus is the Financial Feasibility part of the feasibility study. A comprehensive feasibility study is pivotal in assessing the viability of a proposed business project. It encompasses detailed financial analyses, including:

• Pro forma (10-year) Discounted Cash Flow (DCF) Analysis : Projects future cash flows and discounts them to present value to evaluate profitability.
• Structure of Assets and Liabilities : Examines the organization's financial position by detailing its assets and liabilities.
• Net Assets (Net Worth) : Calculates the difference between total assets and liabilities, indicating the company's equity value.
• Financial Sustainability Analysis : Assesses the organization's capacity to maintain operations and meet financial obligations over time.
• Key Financial Ratios : Analyzes ratios related to liquidity, profitability, and solvency to gauge financial health.
• Working Capital and Liquidity Analysis : Evaluates short-term financial stability and the ability to cover immediate liabilities.
• Financial Performance Overview : Summarizes historical and projected financial results to assess performance trends.
• Profitability Ratios : Measures the company's ability to generate profit relative to revenue, assets, or equity.
• Business Activity (Turnover) Ratios : Assesses the efficiency in using assets to generate revenue.
• Labor Productivity : Evaluates output per labor unit, reflecting operational efficiency.
• Key Ratios Summary : Provides a consolidated view of critical financial metrics.
• Rating of Financial Position and Performance : Offers an overall assessment of financial health and operational success.
• Bankruptcy Test : Analyzes the risk of insolvency using established models.
• Final Rating of Financial Condition : Combines various analyses to present an overall financial viability score.

Feasibility Study Consultant In contrast, a cheap and fast incomplete feasibility study often lacks depth, potentially omitting critical analyses such as DCF, comprehensive ratio assessments, or detailed financial performance overviews. This superficial approach can lead to an inadequate understanding of the project's viability and associated risks.

Loan underwriters play a crucial role in evaluating the risk associated with lending and rely heavily on detailed feasibility studies to make informed decisions. A comprehensive study provides them with:

• In-depth Financial Insights : Detailed analyses allow underwriters to assess the project's potential return on investment and financial stability.
• Risk Identification : Thorough studies highlight potential risks and mitigation strategies, aiding in accurate risk assessment.
• Credibility and Reliability : Comprehensive documentation demonstrates the project's preparedness and the management team's competence.

Conversely, an incomplete feasibility study may raise red flags due to:

• Insufficient Data : Lack of detailed financial projections and analyses hampers the underwriter's ability to assess viability.
• Unidentified Risks : Omitting critical assessments can lead to unforeseen challenges, increasing the lender's risk exposure.
• Questionable Credibility : A superficial study may suggest a lack of due diligence, reducing confidence in the project's success.

Therefore, underwriters are more likely to favor projects backed by comprehensive feasibility studies, as they provide a solid foundation for evaluating financial viability and risk, facilitating informed lending decisions.

Donald Safranek, MSc

President, Wert-Berater, Inc. — independent feasibility study consultants since 1998. 4,000+ engagements completed across all 50 states and internationally, evaluating $41.2 billion in project value for SBA, USDA, EB-5, conventional, and institutional financing decisions. Fiduciary duty runs to the lender and agency in every engagement.

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