Business plan and feasibility analysis
A business plan is the written roadmap of a venture. Feasibility analysis tests whether it works technically, in the market and financially before money is committed.
Contents of a business plan
| Section | What it covers |
|---|---|
| Executive summary | A one- to two-page overview; written last |
| Business description | Idea, mission, legal form, location |
| Market analysis | Industry, target customers, competition, demand estimate |
| Marketing plan | Product, price, place, promotion; sales strategy |
| Operations plan | Production process, technology, capacity, suppliers |
| Management and organisation | Promoters, key staff, structure |
| Financial plan | Cost of project, means of finance, projected profit and loss, cash flow, balance sheet, break-even, ratios |
| Risks and appendices | Risk factors and how they will be handled; supporting documents |
Feasibility analysis
| Feasibility | Key questions | Tools |
|---|---|---|
| Technical | Is the technology proven? Are site, plant capacity, raw materials, power, water and skills available? | Technology study, layout, capacity planning |
| Market (commercial) | Is there enough demand at a viable price? Who are the competitors? | Market survey, demand forecasting, market share estimate |
| Financial | Can it be funded and earn an adequate return? | Cost of project, means of finance, break-even, payback, NPV, IRR, DSCR |
| Economic (social) | Is it good for the nation as a whole? | Social cost-benefit analysis (UNIDO, Little-Mirrlees) |
| Managerial, legal, environmental | Do the promoters have the skills? Can approvals and clearances be obtained? | Promoter profile, legal and environmental checks |
Break-even for a small unit
A unit making steel almirahs has fixed costs of ₹6,00,000 a year. Each almirah sells for ₹5,000 and its variable cost is ₹3,500. Find the break-even units, break-even sales and the profit at 600 units.
- Contribution per unit = ₹5,000 − ₹3,500 = ₹1,500.
- Break-even units = ₹6,00,000 ÷ ₹1,500 = 400 almirahs.
- Break-even sales = 400 × ₹5,000 = ₹20,00,000. Check with the P/V ratio: 1,500 ÷ 5,000 = 30%; ₹6,00,000 ÷ 0.30 = ₹20,00,000.
- Profit at 600 units = 600 × ₹1,500 − ₹6,00,000 = ₹9,00,000 − ₹6,00,000 = ₹3,00,000.
- Margin of safety at 600 units = 600 − 400 = 200 units, or 200 × ₹5,000 = ₹10,00,000 of sales.
Break-even at 400 units (₹20,00,000 of sales); profit of ₹3,00,000 at 600 units.
Debt service coverage ratio (DSCR)
In year 1 a project expects profit after tax of ₹4,00,000, depreciation of ₹1,50,000 and interest on its term loan of ₹1,00,000. The loan instalment due that year is ₹2,00,000. Find the DSCR.
- Cash available for debt service = PAT + depreciation + interest on term loan = ₹4,00,000 + ₹1,50,000 + ₹1,00,000 = ₹6,50,000.
- Debt service due = interest + instalment = ₹1,00,000 + ₹2,00,000 = ₹3,00,000.
- DSCR = ₹6,50,000 ÷ ₹3,00,000 = 2.17 (rounded to two decimals).
- A DSCR above 1 means the project can meet its loan obligations from its own cash; lenders look for a comfortable margin above 1.
DSCR = 2.17 times.
Why the plan matters
- For the entrepreneur: a roadmap and a reality check.
- For banks and investors: the basis for appraising the project; the bank's version is called the project report.
- For managers: a benchmark to compare actual results against.
- Lenders study cash flows closely because loans are repaid from cash, not from accounting profit.
NET asks you to order the sections of a business plan, to match each feasibility type with its question, and to compute break-even or DSCR in one or two steps.
Typical MCQ: “Which part of a business plan comes first but is written last?” The executive summary.
Typical MCQ: “Demand forecasting and a market survey belong to which feasibility study?” Market (commercial) feasibility. Trap: not technical feasibility.
Typical MCQ: “Fixed costs ₹3,00,000; price ₹50; variable cost ₹30 per unit. What is the break-even point?” Contribution = ₹20, so break-even = ₹3,00,000 ÷ ₹20 = 15,000 units.
Feasibility = T-M-F: 'Tech works? Market wants? Finance pays?'