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Due Date: 27 July, 2020.
Total Marks: 20
Topic: Start-Ups
Leaning objectives: To make students explain different start-up and feasibility requirements.
Learning Outcome: Students will comprehend specific needs for different startup and its feasibility.
Background:
Mr. Ahmad lost his job as result of layoff due to this Covid 19 pandemic which has affected businesses and economies massively. He is an MBA and has 15 years of management and IT experience in “Nature” which is a chain of hypermarkets, discount department stores, and grocery stores. He is considered a computer geek in his company. He is spending his savings to meet day to day expenses. At the same time he is worried what to do to start earning his bread and butter. He is thinking over many options to start his own business as searching and finding a new job is not an option considering this pandemic and its effects. It will be highly challenging to find a new job even soon after this pandemic. He is confused whether to do online business or follow traditional business model (brick and mortor).
Requirement:
Considering his education, experience and limited finances; suggest him a business idea along with its financial, technical and marketing feasibility. 2+6+6+6 = 20 marks

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Replies to This Discussion

He should do online business

He should do online business because of following  reasons

1 He has not enough finance to setup traditional business

2 Secondly he is computer geek

1 Technical Feasibility:

It covers the following

(A) Identification of critical technical specifications comprising

a) The functional design of the product.

b) Adaptability to the new customer demand.

c) Durability

2. Reliability of performance. Technical Feasibility:

d) Safety

e) Reasonable utility (i.e. acceptable level of obsolescence)

f) Standardization (i.e. elimination of unnecessary variety)

(B) Examination of product quality-cost relationship

In making this investigation, the entrepreneur must understand that there are trade offs between technical excellence and associated cost i.e. a positive relationship exists between technical quality and costs. It is possible through an increase in the technical excellence of a product to that level at which marginal product quality equals marginal cost. This level is reached where slope of product quality and product cost curves are equal.

Quality enhancement should not be carried beyond a particular point because it would cause cost increase and lead to decrease in total market demand (except where the product has a snob value). Thus entrepreneur should avoid unnecessary gold plating when market situation does not justifies it.

(C) Product testing, which includes?

(a) Engineering studies relating to machines, tools, instruments work flow etc.

(b) Product development through blueprint, models, prototypes.

(c) Product testing through laboratory testing and field-testing.

2. Market Feasibility.

The following process may be adopted to assure the market opportunities of a product.

I. Identifying the Market Potential

It involves an estimation of both the current demand of the product and

projection of future market trends. The prospective entrepreneur will do well to identify (a) specific end users, (b) major market segments, and (c) potential volume of purchases within each market segment. Some statistical yardstick may be of quite help in accomplishing this work. To illustrate, a potential manufacturer of helmets may find out the annual production of two wheelers, percentage of helmet users and proportion of demand already met.

II. Estimating Cost-volume Relationship to ascertain how various price levels may affect total sales volume

The price must reflect the value of the product. The entrepreneur may not adopt a uniform price structure to take care of the sensitivity of the buyer to price changes. The cost-volume analysis would also facilitate the determination of appropriate economies of scales i.e. optimum size of enterprise, which has lowest average per unit cost of production and distribution.

III. Sources of Market Information.

Relevant data for market analysis can be gathered from two main sources viz (a) primary sources such as interviews, mailed questionnaire, survey etc and (b) secondary sources like government agencies, trade unions, chambers of commerce etc. Whereas the former is costly, the latter may not meet the requirements of the entrepreneur.

The following kind of data matrix may be quite helpful:

(a) Data relating to general economic trends as revealed by various indicators such as new orders, house activity, inventories consumer spending.

(b) Market data relating to demand pattern, seasonal variation etc.

(c) Pricing data i.e. range of prices for same, complementary and substitute products; base price; discount structure etc.

(d) Channels of distribution both wholesale and retail.

(e) Data relating to competitors.

To obtain this data, the entrepreneur may either conduct his own survey or approach a consultant.

IV. Market Testing

It is an important method of establishing the overall feasibility of a new venture, significant market testing methods include: (a) displaying the product at trade fairs, (b) test marketing to analyze the receptivity of the product, and (c) sample sales. A market test can provide following information.

(a) Likely sales volume and profitability.

(b) Sales volume at different price levels.

(c) Soundness of chosen market strategy.

(d) Unknown weakness that need attention.

The drawbacks of this technique are: delay in implementation, premature exposure to competitors and expensiveness.

Financial Feasibility

It covers the following:

Determination of total financial requirements

It can be done by preparing a financial statement in the following way:

Financial Requirement Statement

Initial Expense                                               period 1                            period 2

Expense in product development

Legal expense

Product testing expenditure

Marketing and technical feasibility Expenditure

Miscellaneous expense

Fixed investments

Building

Equipment and machinery

Patents

Other equipment

Operational expenditure

Material

Wages

Sales promotion, distribution

Rent, interest, insurance, taxes

Contingency

TOTAL

In making the above estimation, provision must be made for cost escalation that is inevitable due to price changes. Besides, appropriate sales forecasts should also be made to have a clear picture of expenditure. The projection could be weekly or monthly.

Financial resources and other costs

Financial resources could be categorized on the basis of periodicity into:

Short term resources: (those payable in a year). Trade credit supplies, short term loans from backs or other lending institutions, sales of account receivable etc. belong to this category.

Term Loans: Intermediate term loans are those available for one to three (sometimes five) years. It includes terms loans from banks, lease finance, financial assistance from institutions etc.

Long-term loans are those from banks, equity capital and investments of earnings. While considering different sources, it is better to consider specific costs as well as advantages and disadvantages of each. It would be appropriate to compute weighted average cost of funds as illustrated below:

          1                                   2                                    3                         4 

Method of finance       Proportion (Assumed)          Cost (Assumed)         Weighted Cost [2X3]

Short term debt                      20                                  7%                            1.4

Intermediate dept                   10                                  8%                            0.8

Long term debt                       20                                  9%                            1.8

Equity                                    20                                  10%                           5%

Weighted Average Cost of                                                                                9                Capital                                                                                                                   

On the basis of average cost of capital, it is possible to ascertain whether there is positive net present value when anticipated cash flow are discounted at average rate of cost of capital.

C) Cash Flow Analysis

If the projected sales associated financial requirements and available financial resources are known, the anticipated cash flow can easily be determined.

Cash Flow (projected)

Cash flow and financial transactions                       period 1                      period 2

1) Cash flow

Initial expense

Fixed investment

Operating expense

Total cash outflow

2) Cash inflow

Cash sales

Account receivables

Total operating inflow

3) Net cash flow (2-1)

4) Desired minimum cash balance

5) Total amount of funds required

[3 (if negative + 4)]

Source of funds

Short term:

Net trade credit

Commercial loans

• Intermediate loans

• Long term loans

• Equity

Total Financing

Anticipated return on investment

Financial feasibility is adjudged on the basis of satisfactory yield on investment. It can be calculated by relating the average earnings expected over a given period to either the total amount of investment or net worth of organization (Return on equity). Both are compared with potential yield from alternative investment opportunities to ascertain the acceptability or otherwise of a new venture.

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