Bahrain’s Social Insurance – Part 2: How Do We Get Out of This Mess?

In our previous article, we listed the main reasons behind the deficit being faced by Bahrain’s Social Insurance Organization. We are now going to discuss the remedies being discussed by Parliament and the Shura Council to resolve the issue.

In order to put things into perspective, we need to get some figures from the SIO’s latest statistical report which could be found on their website. According to the report, the average age of insured Bahraini males working in the private sector is 34 years old and their average salary is 729BD. The average age of private sector employees going into retirement is 48 years old and their average pension is 638BD. Therefore, in order to make things simple, let’s take the example of Mohammed who is a 34-year-old Bahraini male earning a salary of 729BD. Mohammed already has 7 years of service under his belt and is planning to retire at the age of 48 and is expected to receive a monthly pension of 638BD. He is expected to live until the age of 78 so he will be receiving a monthly pension for a total of 30 years.

Bearing in mind that the SIO receives 18% average salaries as contributions to the retirement plans (12% from the employer and 6% from the employee – 1% from the employee goes to the unemployment fund), how many employees are required to cover Mohammed’s retirement salary?

To answer this question, we simply have to multiply the average salary by the percentage of contributions for 20 years and then divide Mohammed’s monthly pension for 30 years by the resulting figure.

729 x 18% x 12 x 20 = 31,492.800 BD

(30 x 12 x 638) / 31,492.800 = 7.293 employees

So we will need 8 employees to cover the pension that is going to be paid to Mohammed. Accordingly, we should expect the number of contributors to be eight times the number of pensioners in Bahrain. The reality of the matter is however, we have 92,657 registered contributors in Bahrain while there are 30,477 pensioners. This is a ratio of roughly 3:1 rather than the required 8:1.

To solve this dilemma, we should explore all viable options.

Option 1: Increase Pension Contributions

Let’s assume that we decide to increase pension contributions from the current 18%. How much should we increase it by?

Solving for the pension contribution in the previous example, we get the following equation:

(30 x 12 x 638) / (729 x ? x 12 x 20) = 3 employees

The required contribution percentage would be 43.75%!

Taken on its own, this is clearly not a viable option.

Option 2: Reducing the Pension Salary

Parliament and the Shura Council are currently discussing reducing the pension salary by 10%. The proposed schedule for pension salaries according to the number of years in service is tabulated below.

Years of Service Current Pension Salary as a Percentage of Employee Salary Proposed Pension Salary as a Percentage of Employee Salary
20 40 36
25 50 45
30 60 54
35 70 63
40 80 72

 

Now let’s try to calculate the pension that the SIO’s fund will be able to sustain in light of the current challenges.

Solving for the pension salary in the Mohammed’s example results in the following equation:

(30 x 12 x ?) / (729 x 18% x 12 x 20) = 3 employees

Solving for the pension salary we find that it will have to drop from 638BD to 262BD! This is a drop of around 59% whereas the proposed reduction is merely 10%. Clearly, this won’t be enough to cover the deficit if implemented on its own.

Option 3: Increase the Minimum Required Years to Retirement

This option, although clearly not preferred by employees, could have the greatest impact. Not only will we increase contributions, but we will also reduce the years of pension payments. Solving for the increase in number of years generates the following equation:

((30 – ?) x 12 x 638) / (729 x 18% x 12 x (20 + ?)) = 3 employees

The resulting increase in number of years is 11. So instead of allowing Mohammed to retire at the age of 48, he will only be able to retire at the age of 59 – basically eliminating the option of early retirement. This is inline with what the Shura Council and Parliament are discussing however it will undoubtedly increase the unemployment rate in Bahrain since the rate of new retirees is positively correlated to the number of new job vacancies in the market.

 

The Easy Way Out

There is always the option of having the government bridge the gap in deficit, the question that has to be asked is how? The slump in oil prices hit Bahrain hard and the small island kingdom is now facing the very real risk of devaluating its currency as its foreign exchange reserves are currently covering only around one month of goods and services imports.

Sure, there might be a light at the end of the tunnel with the prospects of shale oil over the horizon. However, until that is certain, Bahrain will depend on the soon-to-be introduced VAT in order to meet its financial obligations, develop its infrastructure, and even finance its shale oil refinery. Should the government start diverting VAT revenue towards financing collapsing schemes such as the SIO’s pension fund would exhaust this resource and force us all to forego the many benefits that would have been gained.

Conclusion

Poor funding positions, insufficient contributions, expensive benefits and increasing economic and demographic pressures mean that the current pension scheme is unsustainable. Pension benefits are generous and contributions have been set years ago without actuarial consideration. All of the remedies presented in this brief study are bitter to say the least and would only put a band aid on a gushing wound. The pension fund is in dire need for reform and the government has 3 levers to play with in their path to reform:

  1. Increase contributions
  2. Reduce benefits
  3. Delay benefits

All options are equally difficult to implement without social, political, and financial implications.

In our next article, “Bahrain’s Social Insurance – Part 3: Complete Overhaul”, we will discuss out-of-the-box solutions that have not been discussed by the legislators to resolve the Pension Fund problem.

Written by:
Munther Al-Arayedh, MBA, CPA

Business Continuity Planning (BCP)

So, what is a disaster?

A disaster is an event, often unexpected, that seriously disrupts your usual operations, processes and producers, and can have long term impact on your normal way of life or can affect your business.

 

What is Business Continuity Planning (BCP)?

Business continuity plan (BCP) is the creation and validation of a practical logistical plan for how a business will recover within pre-defined time after a disaster has occurred.

These management disciplines, processes, and techniques provide business continuity for critical business functions under the circumstances and limits set by senior management.

These circumstances and limits include:

    • Defining worst-case scenarios used for business continuity planning.
    • Approving the funding and staffing of the company’s BCP Program.

 

Why Should we do Business Continuity Planning (BCP)?

Business continuity planning is one of the most critical components of any recovery plan. Unfortunately, not every organization develops a business continuity plan.

  • It enhances our ability to avoid:
  • Disruptions to customer delivery
  • Financial losses
  • Regulatory fines
  • Damage to equipment’s

 

The effects of September 11 2001

The disaster that happened in September 11, 2001 demonstrates the high impact, low probability disaster that can happen, a recovery is possible.  Businesses and organizations with continuity plans survived despite the buildings were destroyed and blocks of Manhattan were affected.

The lesson learned that day are:

  • Plans must be updated and tested regularly.
  • You must consider all types of threats.
  • Telecommunication is essential.
  • DR sites for IT Backup should be in different Geo location.
  • Copies of plans should be stored at a secure location.

 

Start Your Business Continuity Planning

Planning for a disaster or terrible event should happen when business is going well, not when disaster strikes. Having a pre-defined, well-documented business continuity plan that clearly communicates how your business will respond during an event can help mitigate risk and is one of the best investments your company can make.

 

Think Your Business Can Withstand a Disaster? Think Again

Twenty-five percent of businesses do not reopen following a major event. It does not take a major disaster to shut down a business. In fact, seemingly minor disruptions compared to widespread natural disasters can often cause significant damage, power failures, broken water pipes, or loss of computer data.

 

Absorption costing vs Variable costing

 

The success of a manufacturing business primarily depends on the way that the products are costed. There are different kinds of costs involved in a manufacturing organization.  Knowledge about the difference between absorption costing and variable costing is essential to do the product costing.

Mainly, the costs can be recognized as variable costs and fixed costs. Absorption costing and variable costing are two different costing methods used by manufacturing business. This difference occurs as absorption costing treats all variable and fixed manufacturing costs as product cost while variable costing treats only the costs that vary with the output as product cost. A business cannot exercise both the approaches at the same time while the two approaches, absorption costing and variable costing, carry their own advantages and disadvantages.

 

Absorption vs Variable

Absorption vs Variable

 

So, what is variable costing?

Variable costing, known also as direct or marginal costing reflects only the direct costs as the product cost. Therefore, the cost of a product consists of direct labour, direct material and the variable overhead. Fixed manufacturing overhead is considered as a periodic cost like the administrative and selling costs and charged against the periodic income.

Variable costing produces a clear picture on how the cost of a product changes in an incremental manner with the change in level of production of a manufacturer. Nevertheless, since this method does not reflect the overall manufacturing costs in costing its products, it minimises the overall cost of the manufacturer.

What is Absorption Costing?

Absorption costing, known also as full costing or traditional costing, calculate both fixed and variable manufacturing costs into the unit cost of a specific product. Thus, the cost of a product under absorption costing consists of direct material, direct labour, variable manufacturing overhead, and a portion of a fixed manufacturing overhead absorbed using a suitable base.

Some people believe that using absorption costing is the most effective method to calculate the cost of a unit because absorption costing takes all the potential costs into consideration in the calculation of per unit cost. Moreover, using this method allows the inventory to carry a portion of the fixed expenses. By showing a highly valued closing inventory, the profits for the period will be improved. Moreover, this can be used as an accounting trick to reflect higher profits for a certain period by moving fixed manufacturing overhead from the income statement to the balance sheet as closing stocks. The similarity between Absorption Costing and Variable Costing is that the purpose of both approaches are the same; to value the cost of a product.

Bahrain’s Social Insurance –  Part 1: How Did We Get into This Mess? 

 

There has been a lot of talk lately regarding the deficit faced by the Social Insurance Organization and the impact that such a deficit will have on the pensions of hard working Bahrainis looking to retire in the near future. Ironically, much of the focus has been directed towards the efficiency of the SIO’s investments and the returns it has received. In a Defined Benefit plan, such as the one provided by the SIO, investments are really aimed towards providing the annual pension salary increases rather than securing the pension salary itself. The bulk of the pension salaries that are paid are financed from the contributions of current employees. Therefore, in the midst of so much hearsay, this article aims to clarify what the issue is and where to go from here in simple language away from all the actuarial jargon. 

It is difficult to pinpoint a single reason for the deficit faced by the SIO as it is basically another example of Murphy’s Law. However, to be fair, the SIO was never designed with sustainability in mind. It is a government backed pension plan with very generous benefits that tread a fine line between pension payments and welfare support. For example, pension payments do not necessarily stop after the pensioner passes away in case he has dependents that are minors, full time students, or unmarried daughters. That said, we can still identify a few reasons why we have reached such a stage of deficit. 

Reason 1: Bahrainis’ Life Expectancy Increased 

Life expectancy is an important variable in any pension plan calculation. It provides an estimate of how long pensions will have to be paid for each pensioner after he retires. Life expectancy for Bahrainis has increased over the past 20 years from 72 to 78. While this might be great news for Bahrainis, it is not so good for the SIO’s pension plan. 

Reason 2: Early Retirement 

Retiring before the normal retirement age (60 years) was an option originally introduced to allow injured employees to retire with reasonable benefits. However, this option has been pursued by many employees who found value in retiring early despite the relatively lower pension that they will be receiving. Moreover, due to the slowdown in the economic conditions following the drop in the prices of oil, many companies found themselves forced to undergo employee downsizing which in turn forced employees into early retirement.  

Reason 3: Naturalization 

As part of their newly acquired rights, naturalized Bahrainis where able to enrol themselves in the SIO’s pension plan with full benefits by paying a fee. In some cases, these naturalized Bahrainis were only a couple of years away from retirement and therefore paid a fee that is nowhere near the contributions that they should have paid and shies in comparison with the benefits that they will be receiving.  

Reason 4: Low Investment Returns 

The main income of any pension plan is the contributions of its participants. Investment returns are secondary and actually aim to bridge the gap generated by inflation over the years. That said, the SIO could have been more creative with its investments and followed the example of Hong Kong where the pension fund acts more like a retail bank. 

Reason 5: High Operational Costs 

It costs 1.2 million dinars a month to keep the SIO operational. This is approximately the contributions received from 9,145 participants. Although this is not a significant figure when compared to the size of the deficit being faced, there is still a lot that can be done to become more efficient. 

Conclusion 

Poor funding positions, insufficient contributions, expensive benefits and increasing economic and demographic pressures mean that the current pension scheme is unsustainable. Pension benefits are generous and contributions have been set years ago without actuarial consideration.  

Next week, we are going to critically review the remedies being discussed by Bahrain’s Parliament and Shura Council. We are also going to propose new options that have not been considered yet. So make sure to check out our next post Bahrain’s Social Insurance – Part 2: How Do We Get Out of This Mess? 

 

Written by:

Munther Al-Arayedh, MBA, CPA
Hamid Abdulla, Associate of the Society of Actuaries 

Marginal Revenue and Marginal Cost

 

  • Marginal Analysis:

Is an exercise that helps a company make decisions to maximize their profits by comparing the additional benefits and the additional costs generated by increasing their output of the same activity.  

  • When Marginal Benefit > Marginal Costs, the company should increase the activity output. 
  • When Marginal Benefit < Marginal Costs, the company should cut down on the output. 

 

  • Marginal Revenue (MR): 

It measures the increase/decrease in revenue for producing and selling one more unit of item. 

  • MR = ΔTR/ΔQ 

Where TR= Total Revenue 

 

  • Marginal Cost (MC): 

It measures the increase/decrease in total cost of producing one more unit of an item.
The formula used to calculate marginal cost is as follow: 

  • MC = ΔTC/ΔQ 

Where TC= Total Cost and Q= Quantity. 

 

  • Profit Maximization (Marginal Profit): 

It occurs when Marginal revenue = Marginal costs. Any points after ‘Profit Maximization’, will cause the prices to rise and gradually diminish the profit (Marginal Loss). 

Note: company should always target to increase its profitsnot its revenue. 

 

  • Marginal Cost (MC) and Average Total Cost (ATC): 
    • Total Cost of production (TC) = Fixed Costs (FC) + Variable Costs (VC). 
    • Average Total Costs (ATC)= Total cost/Q 
      • Average Fixed Costs (AFC)= fixed cost/Q 
      • Average Variable Costs (AVC) = variable cost/Q 

When an increase occurs in relation to Fixed cost, the: 

  1. FC and AFC increases. 
  2. TC and ATC increases. 
  3. VC and AVC will have no effect. 
ATC

ATC

 

 

MC always interconnect with ATC & AVC at their lowest points for the short run. 

 Why companies do these Analysis: 

  • When Marginal Revenue < Marginal cost= the company is over producing so it should decrease the quantity supplied. 
  • When Marginal Revenue > Marginal cost= the company is not producing enough so it should increase the quantity supplied. 

 

 

The Business Model or Canvas

The Business Model or Canvas, as it is also known, is a tool that helps starting a proper business. 

It was developed by the Swiss Alex Osterwalder to facilitate the complete understanding of a business. Thus, the model aims to describe all the elements and phases that make up an enterprise, providing the integration of the organization. 

According to the tool’s creator, the core components of a venture are: customer segments, value proposition, distribution channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure. 

Based on a framework with organized blocks, as shown in the figure below, the Business Model provides the visualization of the main functions of an organization, thus enabling entrepreneurs to reflect on each function of the company to discover what needs to be done in order to win customers and increase the results of the venture. 

By providing a complete view of the organization’s processes, the Business Model enables us to innovate by establishing a unique value proposition for the enterprise. The main benefit of the model is its simplicity and rapid implementation. With a pen, some post-its and a good table, the entrepreneur will be able to work with a creative methodology for business improvement. He should answer the following questions: 

  • What am I going to do? 
    The answer is the value proposition 
  • Who am I going to target? 
    The idea is to define the consumer audience and the best ways to reach them 
  • How will I dothat?  
    The goal is to find out what are the key resources, activities and partners 
  • How much will I spend and how much will I get?
    The purpose is to know what the revenues are and what the cost structure will be to make the business viable 

 

To take advantage of the tool, the entrepreneur needs to know that each of these blocks is related to the others and that the adjustments in each phase can be made at any time, as many times as necessary, so that it is possible to perceive the business as a whole. 

Therefore, this is the way to discover how to differentiate, win customers, reduce costs and earn revenue. 

 

Implementation  

To implement the Business Model, simply follow the nine steps explained below: 

  1. Do you have an idea? 
    No problem if the idea still needs to be developed. The important thing is to insert it into the frame as this will help you visualize it better.
  2. Never write directly in the box
    Using post-itsis more productive because it allows adjustments to be made at any time. 
  3. Start work on any block
    However, the tip is to start with the double value proposition / customer segment, since this combination presents the soul of the company.
  4. Do not be afraid to make mistakes
    Even ifthe idea is not very clear, it is good to practice planning with the Canvas tool, because visualizing the idea helps you to perceive what can be improved. 
  5. Try to complete the right side of the table
    It is best to start by describing the value generation andthen organizing the efficiency of the value proposition on the left side. 
  6. No problem if there are blank points.
    In this case, the entrepreneur can take the time he needs to complete, modify, choose and refine the template.
  7. The model is a roadmap for recording and validating assumptions
    Updating the business model is a way to compete with competitors who are always improving their processes.
  8. The model allows reflections on the course of business
    Constantly working on the board is a way to visualize periodic improvements in the enterprise.
  9. Test the assumptions
    Using the chart serves to record and refine ideas. But before implementing them, it’s good to look for ways to validate with the client if the assumptionsmake sense. Try to make prototypes, demos, proposals and listen to the feedbacks, which always help to define the business model. 

 

How will the Business Model help me to make more profit? 

The entrepreneur must remember that innovation is the key to success. The Canvas Model enables the entrepreneur to introduce strategic innovations that will increase the company’s competitiveness. The Business Model is thus a way of improving the company’s management processes, which necessarily leads to better results, including financial results. 

 

Business Process Reengineering (BPR)

 

We receive a lot of enquiries asking about Business Process Reengineering (BPR), what is it, what is it used for, its benefits, and when or why a company should require such a service. We hope that this article summarizes BPR and its benefits.

Business Process Reengineering has become synonymous with upgrading a company’s IT infrastructure, however, in its essence, the process aims towards increasing efficiency and eliminating losses. Whether a new IT system is implemented or not is a byproduct of the process.

Business Process Reengineering (BPR) is the analysis and redesign of core business processes to achieve substantial improvements in performance, productivity, efficiency and quality. A business process refers to a set of interlinked tasks or activities performed to achieve a specified outcome.

To put it simply, Business Process Reengineering aims to change the way an individual performs a task such that better results are accomplished. The purpose of Business Process Reengineering is to redesign the workflows in order to dramatically improve customer satisfaction levels, achieve higher levels of efficiency and productivity, and eliminate losses in time, effort, and cash.

A company might be compelled to undergo a Business Process Reengineering project for the following reasons:

  • The process the company is using might be outdated.
  • Often, sub-divisions in the organization aim at improving their respective division performance and overlook the resultant effects on the other departments. This might lead to the under-performance of the firm overall.
  • The existing business processes might prove to be lengthy, time-consuming, costly or obsolete, therefore, they are required to be redesigned to match current business requirements.
  • The fast pace of introduction of new technologically advanced solutions nowadays may deem a company’s system outdated and obsolete. This will require a major change in the company’s IT infrastructure triggering the need for a BPR project.

 

Thus, Business Process Reengineering Projects concentrate on obtaining quantum gains in terms of cost, time, output, quality, efficiency and responsiveness towards customers. Also, it emphasizes on simplifying and streamlining business processes by eliminating unnecessary or time-consuming business activities and speeding up the workflow by making use of high-tech systems.

Signs that a company might be required to undergo a BPR project include symptoms such as:

  • Reoccurring conflicts within the organization
  • An extremely high frequency of non-productive meetings
  • Unstructured communication
  • The ability of the competition to perform better using the same resources

 

BPR projects are considered to be an aggressive change in the company’s procedures. It is therefore governed by a set of steps and milestones that have to be reached in order to minimize the risk of unwanted business interruptions. These steps can be summarized as follows:

Step 1: Define objectives and framework

Step 2: Identify customer needs

Step 3: Study the exciting business process

Step 4: Formulate a redesign business plan

Step 5: Implement the redesign plan

 

For more information on Business Process Reengineering (BPR) contact us at any of our offices in Bahrain, Riyadh, Khobar, Dubai, and Oman.

Characteristics of a great logo

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At their essence, logos are made to identify. Using images, icons, marks or symbols, logos identify companies or products in the most basic way, so that when someone views a logo, they can link it with the brand it represents.

Nowadays, with so many logos in existence, it’s not hard to find examples of great or inferior logos in use. What makes the difference? What makes a logo work well? And more importantly, what can your organization do to ensure its logo represents you effectively?

 

Here are the main seven characteristics of a great logo.

A great logo sets itself apart.

In today’s cluttered marketplace, finding a way to stand out amongst the competition can seem challenging, but the idea here is to be different than your competitors. Without a distinct logo design, you may find potential clients and customers having a hard time recognizing your brand, confuse you with another company and most importantly, end up going to a competitor rather than choosing your products or services.

 

A great logo is streamlined.

Because the logo should be easily recognizable, it should be simple – a lightning-fast way for users to notice and remember your brand. A complicated logo will not only be difficult to reproduce and maintain, but it will also fail to engage audience. The logo is the ultimate ‘elevator’ pitch to your potential clients and business partners. You don’t have time to recite your entire business plan in an elevator pitch, and the same concept applies to corporate logo design.

 

A great logo is designed for various applications.

A great logo can be printed in different sizes, across different mediums, and in different applications without losing its power. Graphics must be versatile enough that they can be used in many different mediums. A good logo must work well on the web, on a letterhead, in printed ads and even in videos. What looks great in a site banner might not work on a brochure or vice versa.

 

A great logo considers the industry but also doesn’t need to be obvious.

An effective logo should be appropriate, but that doesn’t mean it has to be as obvious as you might expect. McDonald’s could have gone with a juicy burger next to the name, but instead they took the first initial ‘M’ and created an icon that was both simple and visually pleasing to look at as an asymmetrical element. Whether you follow the example of McDonald’s or its competitor Burger King, who puts a hamburger in the middle of their logo design, your logo needs to be appropriate to your brand.

 

A great logo aims for longevity and is not trendy.

Trends come and go, and when you’re talking about changing a pair of jeans or buying a new dress, that’s fine, but where your brand identity is concerned, longevity is key.

 

A great logo is designed for its intended audience.

As with any business endeavor, understanding your audience is key. Whatever was the targeted industry, the logo needs to be able to connect with the people it is marketing to. The important thing a logo needs to do is to speak to the targeted audience. If you run a children’s toy store, it’s not crucial to have an image of a toy in your logo or to have the word ‘toys’ in there either. What is more important is to use a color scheme or font that is childlike and appeals to kids.

 

A great logo leaves an impression and is unforgettable.

A great logo will remain memorable enough that a person who has only seen the logo once should still be able to recall it enough to describe the logo to someone else. This is not the easiest of qualities to impart, but it is certainly a high ranking one.

 

H.A. Consultancies has been helping clients all over Bahrain, Oman, Saudi Arabia, and the UAE in developing their brand identities and marketing strategies. For help on designing the best logo for your business, feel free to contact us on info@haconsultancies.com or contact any of our offices.

Feasibility Study – Why needed before programming

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The feasibility study is the important step in any software development process. This is because it makes analysis of different aspects like cost required for developing and executing the system, the time required for each phase of the system and so on. If these important factors are not analyzed, then definitely it would have impact on the organization and the development and the system would be a total failure. This step is a very important step in a software development life cycle process.

In the software development life cycle after making an analysis in the system requirement the next step is to make analysis of the software requirement. In other words, feasibility study is also called as software requirement analysis. In this phase development team must make communication with customers and make analysis of their requirement and analyze the system.

By making analysis this way it would be possible to make a report of an identified area of a problem. By making a detailed analysis in this area, a detailed document or report is prepared in this phase which has details like project plan or schedule of the project, the cost estimated for developing and executing the system, target dates for each phase of delivery of system developed and so on. This phase is the basis of software development process; since further steps taken in software development life cycle would be based on the analysis made in this phase therefore, careful analysis must be made in this phase.

Though the feasibility study cannot be focused on a single area, some of the areas or analysis made in feasibility study is given below. But all the steps given below would not be followed by all system developers. The feasibility study varies based on the system that would be developed.

  • Feasibility study is made upon the system being developed to analyze whether the system development process require training of personnel. This help in designing training sessions as required in later stage.
  • Does the system developed have scope for expanding or for switching to new technology later on if needed in ease? In other study is made to find the portability of the system in future.
  • Is the cost of developing the system high or does it meet the budgeted costs? That is a cost benefit analysis is made. In other words, an analysis is made on cost feasibility of the project. This helps in identifying whether the organization would meet the budgeted costs and also helps the organization in making earlier and effective plans for meeting extra costs because of the system development.
  • Analysis is made on what software to use for developing the system. This study and analysis would help to choose the best implementation for system and the organization. This feasibility study includes factors like scalability, how to install, how to develop and so on. This feasibility study in short includes the analysis of technical areas. This analysis helps the efficiency of the system developed to get improved. This is because by choosing the correct technology by making analysis on the needs of system helps in improving the efficiency of the system.
  • The above feasibilities are analysis which helps in development of the system. But the scope of feasibility study does not end with this. Analysis or feasibility study also includes the analysis of maintenance stage. In other words, feasibility study is made to analyze how one would maintain the system during maintenance stage. This helps sin planning for this stage and helps in risk analysis. Also, the analysis helps in making analysis about what training must be given and how and what all documents must be prepared to help users and developers to face maintenance phase.

Advantages of making Feasibility study:

There are many advantages of making feasibility study some of which are summarized below:

  • This study being made as the initial step of software development life cycle has all the analysis part in it which helps in analyzing the system requirements completely.
  • Helps in identifying the risk factors involved in developing and deploying the system
  • The feasibility study helps in planning for risk analysis
  • Feasibility study helps in making cost/benefit analysis which helps the organization and system to run efficiently.
  • Feasibility study helps in making plans for training developers for implementing the system.
  • So, a feasibility study is a report which could be used by the senior or top persons in the organization. This is because based on the report the organization decides about cost estimation, funding and other important decisions which is very essential for an organization to run profitably and for the system to run stable.

Thus, before developing a product or software it is an essential step that one does feasibility study in some or all the areas mentioned which would help in developing and maintaining the software efficiently and effectively within budgeted costs.

 

What is a Feasibility Study?

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What is a Feasibility Study?

A feasibility study is conducted in order to determine the success and minimize the risks related to the project. When it becomes certain that the specific project could be carried out profitably, it is only then it could be implemented. The feasibility study is not merely a project research, but a framework or a plan on how to establish and run business successfully in the long run. A feasibility study contains five essential components including market research, financial research, management research, schedule determination and technical research.

 

The information you gather and present in your feasibility study will help you:

  • Identify all the things you need to have a functional buisness
  • Pinpoint logistical or other business-related problems and solutions
  • Develop marketing strategies to convince a bank or investor that your business is worth considering as an investment
  • Serve as a solid foundation for developing your business plan

 

What is a Business Plan?

If the feasibility study indicates that your business idea is complete, the next step is a business plan.  The business plan continues the analysis at a deeper and more complex level, building on the foundation created by the feasibility study. A business plan gives you an opportunity to find any weaknesses and reveal any hidden problems ahead of time.  It serves two purposes: first, it is an analysis of how well the business will work; and second, it is a written document necessary to obtain a loan.