Market analysis and feasibility studies are fundamental tools to evaluate the viability of a business or project. These analyses allow entrepreneurs and companies to make informed decisions about the viability of a business idea and the likelihood of success.
Market analysis involves the collection and analysis of information about the target market of a product or service. This may include information about competition, leads, market trends, and economic factors that may affect business success. Market analysis helps entrepreneurs and businesses better understand customer needs and develop an effective marketing strategy.
On the other hand, feasibility studies involve a detailed assessment of the business’s ability to succeed. This may include an analysis of costs and profits, an assessment of the resources needed to launch the business, and an assessment of potential risks. Feasibility studies can help entrepreneurs and companies determine if their business idea is viable and whether it is likely to succeed in the long run.
In general, market analysis and feasibility studies are essential for any company or project. These analyses can help entrepreneurs and businesses make informed decisions and minimize the risks associated with launching a new product or service. In addition, these analyses can also help entrepreneurs and companies identify new opportunities and develop strategies to take advantage of them.
Cost analysis
Cost analysis is an important tool for any business that wants to maximize its profits and minimize its costs. Involves evaluating all costs associated with producing a product or service, including direct and indirect costs.
Direct costs are those that can be directly attributed to the production of a product or service, such as materials, labor, and manufacturing costs. Indirect costs are those that cannot be directly attributed to the production of a product or service, such as the company’s overhead.
Cost analysis can help companies make informed decisions about pricing and cost management. By analyzing direct and indirect costs, companies can identify areas where costs can be reduced and efficiency improved. In addition, cost analysis can also help companies identify which products or services are most profitable and focus their resources on those areas.
There are different methods for conducting a cost analysis, such as the absorption costing method, the direct costing method, and the activity-based costing ( ABC) method. Each method has its own advantages and disadvantages, and the choice of method will depend on the specific needs of the company.
In short, cost analysis is a fundamental tool for any company that wants to maximize its profits and minimize its costs. By analyzing direct and indirect costs, companies can make informed decisions about pricing, cost management, and resource allocation.
Costing method by absorption
The cost-by-absorption method is an accounting method used to allocate indirect costs of production to the products or services that generate them. This method is based on the idea that indirect costs of production, such as factory overheads, are an integral part of the production process and should be allocated to the products or services being produced.
The absorption costing method uses an indirect cost of production rate to allocate indirect costs to products or services. This rate is calculated by dividing the total indirect costs of production by the cost basis, which can be the number of units produced, direct working hours, or any other measure that is appropriate for the enterprise.
The allocation of indirect costs of production to products or services is done by multiplying the rate of indirect costs of production by the amount of cost base used by each product or service. Direct costs, such as materials and direct labor, are allocated directly to products or services and added to the indirect costs allocated to determine the total cost of production.
It is widely used because it is easy to understand and apply
However, this method may have some limitations, such as the difficulty of determining an accurate indirect cost rate of production and the lack of consideration of changes in demand that may affect indirect costs.
In general, the cost-by-absorption method is an accounting method commonly used to allocate indirect costs of production to the products or services that generate them. This method can be useful for companies that want to determine the total cost of production of their products or services and make informed decisions about pricing and cost management.
An example of the costing by absorption method would be as follows:
Suppose a firm manufactures a product called “Product A” and uses the costing by absorption method to allocate indirect costs of production to each unit of the product. The company has the following indirect costs of production for the period:
Factory rent: $10,000
Factory Supplies: $5,000
Electric power: $3,000
Factory Overhead: $7,000
The company also has the following direct costs for the production of one unit of Product A:
Materials: $20
Direct labor: $10
The company produces 1,000 units of Product A in the period.
To calculate the rate of indirect costs of production, the enterprise will add all indirect costs of production and divide them by a cost basis, which can be the number of units produced or the hours of direct work. Suppose the firm uses the number of units produced as its cost base. The indirect cost rate of production would be:
($10,000 + $5,000 + $3,000 + $7,000) / 1,000 units = $25 per pill/unit
Then, to allocate the indirect costs of production to each unit of Product A, the firm would multiply the rate of indirect costs of production by the number of units produced. The indirect cost of production per unit of Product A would be:
$25 per unit x 1,000 units = $25,000
Therefore, the total cost of production of one unit of Product A would be:
Direct cost + Indirect cost of production = $20 + $10 + $25 = $55
In this example, the cost-by-absorption method helped the firm determine the total cost of production of Product A and make informed decisions about pricing and cost management.
Profit Analysis
Profit analysis, also known as profitability analysis, is a process used to evaluate the profitability of a company or a project. This analysis involves comparing the revenue generated by the company or project with the associated costs to determine if the company or project is profitable.
Profit analysis can be carried out using various methods, such as breakeven analysis, profit margin analysis, and return on investment (ROI) analysis.
Break-even analysis is used to determine the level of sales needed to cover the fixed and variable costs associated with producing and selling a product or service. If sales exceed this level, the company will begin to generate profit.
Profit margin analysis
It is used to determine the percentage of profit obtained from each sale. This analysis involves comparing the revenue generated by a sale with the costs associated with that sale to determine the profit margin. If the profit margin is high, the company can be profitable.
Return on investment (ROI) analysis is used to determine the financial return on an investment. This analysis involves comparing the income generated by an investment with the cost of the investment to determine the ROI. If the ROI is high, the investment is profitable.
Profit analysis is important for making informed financial decisions. Managers and business owners can use this analysis to identify areas of the company that are profitable and areas that need improvement. They can also use this analysis to determine if a project or potential investment is profitable and worth making the investment.
In general, profit analysis is an important process for evaluating the profitability of a company or a project and making informed financial decisions.
An example of profit analysis using breakeven analysis would be as follows:
Suppose a company manufactures a product and has the following costs:
Monthly fixed costs: $10,000
Variable costs per unit: $5
The company sells each unit of the product for $15.
To determine the break-even point, the company will need to calculate how many units of the product must be sold to cover fixed and variable costs.
The equation for the equilibrium point is:
Break-even point in units = Fixed costs / (Sales price per unit – Variable cost per unit)
In this case, the break-even point would be:
10,000 / (15 – 5) = 1,000 units
This means that the company needs to sell 1,000 units of the product to cover all its costs. If the company sells less than 1,000 units, it will incur losses. If the company sells more than 1,000 units, it will generate profit.
For example, if the company sells 1,200 units of the product in a month, its revenue would be:
1,200 units x $15 per pill/unit = $18,000
The costs associated with the production and sale of 1,200 units would be:
Fixed costs: $10,000
Variable costs: 1,200 units x $5 per unit = $6,000
The total cost would be:
$10,000 + $6,000 = $16,000
The company would generate a profit of:
$18,000 – $16,000 = $2,000
This example illustrates how break-even analysis can be used to determine the level of sales needed to cover costs and generate profits.
How the percentage of earnings is calculated
Profit percentage is a financial indicator that measures a company’s performance. It is calculated by dividing net profits by total sales and multiplying by 100 to express the result as a percentage.
The formula for calculating the percentage of profits is:
Percentage of profit = (Net Profit / Total Sales) x 100
For example, if a company has net profits of $100,000 and total sales of $500,000, its percentage of profits would be:
(100,000 / 500,000) x 100 = 20%
This means that the company has generated a profit of 20% on its total sales.
There is no universally recommended profit percentage for all businesses, as this can vary depending on industry, company size, stage of growth, and other factors. However, a healthy profit percentage for a company is generally considered to be one that is sufficient to cover costs and provide adequate returns to shareholders or owners.
The percentage of profits can also be compared to that of similar companies in the same industry to assess relative performance. In some cases, a higher percentage of profits may indicate greater efficiency in cost management and a stronger position in the market.
It is important to note that profit percentage is not the only measure of a company’s profitability and should be considered alongside other financial indicators such as return on investment (ROI), profit margin and cash flow.
Competition information
Competitor information is crucial for any business that wants to compete successfully in its market. Gathering and analyzing competitor information enables companies to better understand their market position, identify opportunities and threats, and develop strategies to compete more effectively.
Some sources of information about competition are:
Industry Analysis
An industry analysis can be conducted to better understand the competitive environment in which the company operates. This may include information about industry structure, market size, trends and opportunities.
Analysis of direct competitors
A detailed analysis of the company’s direct competitors can be performed, including information about its products, prices, marketing strategies, strengths and weaknesses.
Customer Analytics
Information may be collected from customers to better understand their needs and preferences. This may include information about why they choose the company’s competitors and how the company’s products and services compare to those of the competition.
Market research
Market research can be conducted to gain insight into the perception of the company’s brand and products compared to competitors. This may include surveys, focus groups, and secondary data analysis.
Supplier analysis
An analysis of the company’s suppliers can be performed to better understand how they can affect the costs and quality of the company’s products and services compared to competitors.
It is important to remember that information about competition must be used ethically and legally. Companies must avoid illegal practices such as espionage or theft of confidential information from competitors. Instead, legitimate sources of information should be used and integrity and business ethics maintained at all times.
Leads
Potential customers are those people or companies that have a need or desire to buy the products or services offered by a company. Identifying and reaching potential customers is essential to the success of any business, as they are the source of revenue and the foundation of building a loyal customer base.
Below are some strategies for identifying and reaching potential customers:
Market research
Conduct market research to identify the needs and desires of potential customers, and to know their buying habits and preferences. This can help the company tailor its product or service offering to meet the needs of potential customers.
Advertising and promotion
Use advertising and promotion to reach potential customers through different media such as television, radio, newspapers, social networks, among others. Advertising can help increase the visibility of the company and attract new customers.
Content Marketing
Create and distribute relevant and valuable content that attracts potential customers to the company. This can include blogs, videos, infographics, guides, and other resources that provide useful and relevant information to potential customers.
Participation in events and trade fairs
Attend events and trade shows related to the company’s industry to reach new potential customers, network with other professionals and increase brand visibility.
Referral Programs
Establish a referral program to encourage existing customers to recommend the company’s products or services to their friends, family, and colleagues.
It is important to note that identifying and reaching potential customers is an ongoing process and requires constant evaluation and adaptation as market needs and consumer trends change.
Market trends
Market trends are the changes and evolutions in the needs and preferences of consumers, as well as in the economic, technological, political and social conditions that affect a company’s industry. Identifying and understanding market trends is essential for companies to adapt to changes and remain competitive.
Below are some current market trends:
Digitalization: Digital transformation remains a top trend in many markets, with more companies embracing technologies such as artificial intelligence, automation, and cloud to improve their efficiency and deliver better customer experiences.
Sustainability: More and more consumers are concerned about the environmental and social impact of the products and services they consume. Companies are responding to this trend by adopting more sustainable and transparent practices.
Personalization: Consumers are looking for personalized, tailored experiences, and companies are using technologies like machine learning and data analytics to deliver more personalized solutions.
Omnichannel experiences: Consumers expect a seamless and consistent shopping experience across all sales channels, including physical, online and mobile stores. Companies are adopting an omnichannel strategy to meet these expectations.
Changes in the way we work: The pandemic has accelerated the shift towards more flexible and remote work models. Companies are embracing new tools and technologies to enable remote work and improve collaboration and productivity.
It is important for companies to stay up-to-date on market trends and changing consumer expectations in order to adapt and remain competitive. Market research and observation of competitor activities are also essential for understanding market trends.
Economic factors involved in the success of a company
The success of a company depends largely on economic factors. These factors can affect the company’s ability to make a profit, attract and retain customers, and compete in the marketplace. Below are some of the key economic factors that can influence a company’s success:
Economic cycle
The economy goes through cycles of expansion and contraction that can have a direct impact on a company’s success. During periods of recession, businesses may experience a decline in sales and a reduction in investment. During periods of expansion, businesses may experience an increase in sales and investment.
Interest rates
Interest rates can affect investment and spending by consumers and businesses. Higher interest rates can deter businesses and consumers from borrowing for investment and spending, which can negatively affect business growth.
Inflation
Inflation can affect the prices of products and services, as well as production costs. Firms may face an increase in production costs if the prices of raw materials and inputs rise due to inflation.
Competence
Competition in the market can affect a company’s success. The presence of competitors can reduce profit margins and force companies to invest in advertising and promotion to maintain their market share.
Fiscal and monetary policies
Government fiscal and monetary policies can have an impact on a company’s success. Fiscal ones, such as taxes and subsidies, can affect production costs and consumer demand. Monetary ones, such as interest rates and the money supply, can affect investment and spending by businesses and consumers.
It is important for companies to monitor and understand these economic factors in order to make informed decisions about managing their business and long-term planning.
