Feasibility Analysis

The emerging picture of the size and scope of the cooperative now permits the adviser and the steering committee to develop basic operating assumptions. Together, they consider facilities needed, operating costs, capitalization, and financial requirements.

An important part of the feasibility analysis is to review the sensitivity of the business to changes in volume or operating costs. For example, what impact will a 25-percent decrease in product sales, perhaps due to adverse weather, have on profitability? Other key factors might include wage rates, operating efficiencies, interest rates, etc.

The adviser determines operating efficiencies, estimates labor needs, develops service and payment schedules, and gathers other cost data. The steering committee will have to contract with an engineering firm or equipment dealer, for instance, to obtain specialized data on facilities, equipment, and labor costs.

Facilities needed may include land, buildings, and equipment. The committee bases estimates on the expected business volume by the probable members, plus some allowance for future expansion. The cost of buying or leasing existing facilities and equipment should be investigated. Professionals and skilled technicians should be consulted to determine the need for new facilities and assess the value of any existing facilities being considered.

Operating costs include employee salaries, utilities, taxes, depreciation, interest, and costs of office and other supplies. The adviser, with help of the committee, determines what items to include and their probable cost, based on operating assumptions. If the operating revenues for the projected volume of business show little or no margins over estimated costs, the committee should project the volume needed to produce acceptable margins. In most businesses, per-unit operating costs tend to decline as the volume increases.

A cooperative’s lowest possible operating costs occur when its members furnish it with the maximum amount of business it can handle.

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