Module 2: Micro-enterprise planning and assessment
Topic 2: Business plan preparation and assessment
Annex 1. Visual Aid: 2-1 Net cash income
Annex 1. Visual Aid: 2-2 Production type of enterprise key elements production aspect
Annex 1. Visual Aid: 2-3 Production type of enterprise key elements marketing aspect
Annex 1. Visual Aid: 2-4 Service type of enterprise marketing aspects
Annex 1. Visual Aid: 2-5 Key elements of a business plan
Annex 2. Case: 2-1 Assessing the viability of Ms. Zhang's starch processing enterprise
Introduction
Module 2 addresses the first initial stage of micro-enterprise development. This module focuses on preparation of good business plans and assessment/evaluation of micro-enterprise projects within the context of both business viability as well as the project spirit of self-reliance.
Output Objectives
At the end of module 2, participants will be able to:
1. Apply, analyze and explain the basic financial indicators in business planning for micro-enterprises.
2. Prepare and assess business plans together with the micro-entrepreneur.
3. Advise women micro-entrepreneurs and women's groups in preparation and assessment of business plans and loan applications.
4. Advise the project Governing Body regarding approval of applications for project loans.
Background and Rationale
The goal of the entrepreneur in starting a business is to make a profit. Before starting the business, the entrepreneur needs to be convinced that her goal is achievable. She needs to know what the risks are' and she needs to know whether she can finance and manage the business. In order to assess whether the entrepreneur can achieve her goal, it is necessary to have a thorough understanding of the basic financial indicators.
Through reviewing a case. participants will acquire the knowledge, skills and attitude in applying and analyzing the basic financial indicators.
Output Objectives
At the end of the topic, participants will be able to:
1. Analyze and explain the basic financial indicators in assessment of a business plan
2. Know and analyze the major risk factors of a business.
3. Review loan applications.
Materials
Newsprint, adhesive tape, thick felt tip pens.
Time : 15 minutes
Steps:
1. Facilitator says that in Module I we have identified the causes of success or failure of micro-enterprises as well as the common weaknesses and constraints of micro-entrepreneurs. The conclusion was that at the early stages of participation in the women's group, the women entrepreneurs need our assistance in both the planning and implementation stage of the enterprise. In this module we will focus on the planning stage.
2. Facilitator asks several participants "What is planning"? Through discussion the group arrives at the following definition:
Planning is thinking through, and then working out in detail, what you intend to do in a future period of time and how you expect to get there.
Facilitator compares business planning to planning a trip, you ask yourself where you want to go. then how you will get there. Then you plan in detail how much money you need, what you want to do and who you wish to take on your journey, etc. It is not until you are quite sure that you can get where you want to go that you start to buy tickets and pack your suitcase. In business planning it is the same. You first plan what kind of business you want, then you plan in detail how you can realize it and how you will operate it. It is only until you are quite sure that you can be successful do you start to borrow money or buy goods.
2. In module I we have defined business as "any venture which involves production of goods and/or services to obtain profit". Our goal, or where we want to go is to make a profit or income. In planning the business we must estimate as accurately as possible how we will run the business, what we need to buy, what we need to do, etc. and finally we have to decide whether we are satisfied with the expected result in terms of profit/income.
3. In this topic we will study a case in order to become familiar with the basic financial indicators in assessment of the viability of a micro-enterprise and loan applications. We will also analyze the risks involved in starting an enterprise.
Time : 1.5 hour
Steps:
1. Facilitator starts the activity by saying that before starting a business the woman entrepreneur will be concerned whether she can make profit or not. To determine this, we must know the income, sales and costs involved.
2. Facilitator then explains that the first thing the entrepreneur will think of is the required capital to be able to start the first production cycle. She writes on the black board that this includes:
a. capital for acquisition of fixed assets, such as land, buildings, facilities, equipment, etc.
b. working capital
Facilitator explains that the latter shall be used for the production costs required for the first production cycle.
3. Facilitator proceeds by explaining that production costs are the costs incurred each time the output volume is produced. She explains that these are variable costs as these costs change with the output volume produced. Fixed assets are not bought for each production cycle, therefore the costs of fixed assets are not included in production costs.
4. Facilitator then asks participants to mention items that are included in the production costs. Facilitator lists the three components below on the blackboard and categorizes the participants' examples. Facilitator then explains further using the important points below. Facilitator tells that for trading enterprises, production costs refer to the cost of goods sold.
Important Points
· Production costs include all costs that have to be made each time the estimated output volume is produced. These costs can be categorized as follows:
Materials: these are the costs we have to make to purchase the materials that are consumed in producing the estimated output volume, e.g. raw materials, chemicals, fertilizer, seeds, feed stuff, etc. The costs of durable materials, such as buildings, tools, equipment are not included here.
Paid labor: this is the costs of hiring external labor force or for paying family members to do certain tasks. Unpaid labor costs are not included. Usually micro-entrepreneurs do not pay salaries to themselves and therefore no costs are included here.
Cost of use of facilities: these are the costs like rent or fees paid to use land or facilities like drying facilities, storage, etc. This includes also any other costs directly related to the use of facilities/ equipment, such as energy, water, maintenance, etc.
5. Facilitator then explains that total income is gross sales plus other income.
6. Facilitator then proceeds by writing on the blackboard that Gross Profit is total Income minus Production Costs. She reminds participants that costs of fixed assets are not included in this computation. Furthermore, she explains that Gross Profit determines whether production costs can be recovered from the total income that the business generates.
7. Facilitator then explains that: Net Cash Income is Gross Profit minus other Expenses. She asks participants to give examples of other possible expenses. She then explains that these include expenses incurred in selling, delivery or general administration. Examples of other expenses are transportation, cost of sacks for grain delivery, tax etc.
8. Facilitator continues and explains that: Net Cash Income is what remains from the income after deducting all costs and expenses of the enterprise. This is what the woman entrepreneur will be concerned about since it will show her whether she has cash left for the next production cycle. If she has no other source of financing (ed. she cannot avail of succeeding loan or she has no additional savings), the net cash income becomes her source of working capital for the next cycle.
Visual Aid 2-1 Net Cash Income |
9. Facilitator then reviews Visual Aid 2-l with the complete formula for computation of gross profit and net cash income.
10. Facilitator asks participants to do task l of Case 2-1 (Computation of Net Cash
Income). Participants are asked to do the tasks individually. Give 15 minutes.
Case 2-1 Assessing the Viability of Ms. Zhang's Starch Processing Enterprise |
Case 2-1 Ms. Zhang's Starch Processing Enterprise Task 1 |
11. Ask two participants to write their outputs on newsprint.
12. First focus on Total Income. Review the outputs of the two participants, asking the other participants to comment or add their views. Emphasize/add the important points mentioned in Case 2- l, Output Task I, Total Income.
Case 2-1 Ms. Zhang's Starch Processing Enterprise Output Task 1 Total Income |
13. Discuss the questions raised by the participants and then move on to Production Costs. Review the outputs of the participants, asking others to comment. Emphasize/ add the important points mentioned in Case 2-1, Output Task 1, Production Costs.
Case 2-1 Ms. Zhang's Starch Processing Enterprise Output Task 1 Production Costs |
14. After discussing the outputs, the Gross Profit and Net Cash Income can be computed.
Case 2-1 Ms. Zhang's Starch Enterprise Output Task 1 Net Cash Income |
15. Facilitator reviews the major [earnings in this activity, emphasizing the important points below.
Important Points
· Production Costs include all costs that have to be made each time the output volume of the enterprise is produced, such as for materials that are consumed, cost of the use of facilities and the costs of hired labor. Acquisition costs of fixed assets are not included.
· Other expenses are those incurred in selling, delivery and general administration.
· Positive Gross Profit means the entrepreneur can recover all production costs from the total income of the enterprise. A negative (dross Profit would either mean:
a. inefficient production
b. the price of the product is low
c. the price of inputs is high
· Positive Net Cash Income means that the entrepreneur has recovered all the production costs and other expenses from her total income from the enterprise. It also means that she has reserve funds either for payment of loans and interest, or for use as working capital for the next cycle. Note that this is under the assumption that the sales in the computation are the cash sales only. Sales on credit are not included. If sales on credit were included, we would have to deduct the sales on credit from the Net Cash Income for the above statement to be true.
Time: 1 hour
Steps:
1. Facilitator reminds participants that in the previous activity we only considered the costs and expenses that are directly related to the production. There are however other costs involved in a business: the costs of fixed assets and interest on loans. These costs should also be generated by the business. Facilitator writes on the blackboard that Net Profit is Net Cash Income minus Depreciation minus Interest on loans.
2. Facilitator asks participants to say in their own words what depreciation is and then explains that depreciation is the amount of money the enterprise should generate to be able to replace the fixed assets on time. For example, Ms. Zhang's grinder which she bought at 600 rmb will have to be replaced after 10 years. So, each year from Ms. Zhang's Net Cash Income we need to deduct 60 rmb (600 rmb investment/ 10 years ) for depreciation of the grinder. If her business cannot generate enough to buy a new one, she cannot continue her enterprise.
3. Participants are asked to do task 2 of case 2-1 individually. Give 10 minutes.
Case 2-1 Ms. Zhang's Starch Processing Enterprise Task 2 Net Profit |
4. Facilitator asks a participant to write her computation on the newsprint. Ask whether others have different outcomes.
5. After participants are clear about the way of computing, ash to discuss the following questions in sub-groups (20 minutes). Ask the sub-groups to write their conclusions on newsprint.
Questions
1. What is your conclusion on the profitability of Ms. Zhang's enterprise?
2. What can the entrepreneur do with the profit?
3. What will happen to an enterprise if the Net Profit is negative?
6. Ask the sub-groups to report and write their important insights on newsprint. For the answer on Question 1, show the percentage return on investment and on own capital as given in the output of Case 2-1. If there are disagreements, make participants try to convince each other in an organized manner. Add significant statements of participants to the newsprints. Clarify unsolved issues and add other points.
Important note: Discussion in sub-groups is essential! Generally, participants tend to be focused on the computations. Facilitator needs to redirect the attention to what the outcome of the computations means for the business. Field workers need to be skillful in explaining this to the entrepreneur, hence it is important to give participants time to reflect and to formulate their interpretation of the outcome.
Case 2-1 Ms. Zhang's Starch Processing Enterprise Output Task 2 Net Profit |
7. Summarize the learnings, emphasizing the important points below.
Important Points
· Depreciation:
Depreciation is the minimum amount of money that the enterprise should generate to be able to replace the fixed assets in time. If the enterprise can not generate this amount, the net profit is negative. It means that in the long term the business can not continue, unless money from other sources is added to it. Such a business of course can not be considered viable.
· The net profit reflects the entrepreneur's return on her labor, management and capital investments. A negative or zero net profit means that the entrepreneur does not get any return on her labor, management and capital investments.
· The entrepreneur can utilize profits in several ways:
- investment in expansion or improvement of her enterprise
- investment in new enterprises
- savings (ea. for child education, future investments, old age security)
- consumption
· In the long run reinvestment is the best way for utilizing profits, since it leads to further increase in income in the future. On the short term utilization of profits for consumption may be equally important however, ea. to improve nutrition or health care, to be able to pay the school tuition, etc.
Time: 45 minutes
Steps:
1. Facilitator introduces this activity by saying that in computing Gross Profit, participants raised many questions regarding the completeness and the validity of the data we used in the computations. We realized that many factors have to be taken into consideration and that there are external factors, such as the weather or market prices, that can affect the profitability of the business. Since we can never be completely certain about our projections, it is important that the entrepreneur knows what the major risk factors and their implications are.
2. Facilitator asks the participants to do the Task 3 of the Case individually (15 minutes).
Case 2-1 Ms. Zhang's Starch Processing Enterprise Task 3 Risk Analysis |
3. The facilitator puts the Table format in Output Task 3 on newsprint and asks participants to give the outcome of their computations. Participants probably do not have problems in computing anymore, but it is important to check whether all have the same outcome. In case there are differences, the complete computation should be presented on the blackboard.
Case 2-1 Ms. Zhang's Starch Processing Enterprise Output Task 3 Risk Analysis |
4. The facilitator discusses the alternative situations one by one using the important points in Output Task 3. She emphasizes the fact that what looks like a small change ( 10-20 % different from our estimates) can make a substantial difference for the income.
5. The facilitator summarizes areas of learning of this activity using the important points below.
Important Points
· Small deviations in the estimated volumes and prices in the business plan can have a big effect on the profitability of the business. It is therefore important that we try to estimate as accurately as possible. But even if we do so, we can never be completely certain about what happens in the future. There will always be a certain risk. The entrepreneur needs to be aware of the major risk factors and amount of their implication. This will help her to pay attention to those factors which are under her control and when the results are lower than her projection due to external factors, it will not undermine her self-confidence.
· The following basic factors are most critical for micro-enterprises:
- sales price of products
- price of raw materials
- quality of products
- efficiency of production (ratio between output and input volume)
- costs of fixed assets
Time: 1 hour
Steps:
1. The Facilitator introduces this activity by saying that when profitability and income are considered high enough, we can start planning the financing of the investment in detail. The Cash Flow of the enterprise is one of the factors that needs to be considered.
2. The Facilitator presents the Cash Record which is attached to Task 4 of Case 2-1 .
Case 2-1 Ms. Zhang's Starch Processing Enterprise Task 4 Cash Flow |
3. The Facilitator asks the participants to carry out task 4 individually. Give 15 minutes.
4. The Facilitator asks one participant to write her output on newsprint, and asks others to comment.
Case 2-1 Ms. Zhang's Starch Processing Enterprise Output Task 4 Cash Flow |
5. When participants are clear about how to use the form, the Facilitator asks whether Ms. Zhang can repay her loan in January as planned. The answer is no (see Output task 4): Ms. Zhang is short by 254 rmb and would not be able to continue the production as she has no working capital left.
6. Facilitator then asks what decision Ms. Zhang and the group should take about the loan application. Allow discussion among participants about changing the conditions of the loan (e.g. longer period in installments, other sources of cash for loan payment, profit of business is high, net cash income can be increased by enlarging production volume after each cycle, etc.). Facilitator wraps up these discussions by saying that the assessment of this case is that in its present form the business plan is profitable, but the financial plan is not feasible. The Cash Flow projection shows this.
7. Facilitator then summarizes the areas of learning in this activity and the topic, emphasizing the important points below.
Important Points
· In assessment of the viability of an enterprise Gross Profit, Net Cash Income and Net Profit are key elements.
· Accuracy in the computation of Gross Profit is crucial in business planning, since it affects all other computations and indicators. Field workers can not be expected to be knowledgable on all types of enterprises, and may need to call on experts to ensure complete and reliable data for estimating cost and income factors, such as input and output volumes, quality, prices, etc.
· Risk Analysis is an integral part of business planning. The entrepreneur needs to know what the major risk factors are, how big the risks are, so that she can decide whether the risk is acceptable to her. It will also help her not to get discouraged when the results are lower than projected in the business plan.
· Enterprises with a negative or low profitability are not sustainable. Project officers always be advised against such enterprises.
· The Cash Flow Projection is important to determine whether the entrepreneur has sufficient working capital for the production costs and other expenses for the next production cycle and whether she will be able to pay her loan and interest at a given date.
Background and Rationale
Field workers need the skills to prepare and assess business plans for micro-en/reprises to be able to (a) assist the women entrepreneurs in planning for their micro-enterprises; (b) assist women's groups in credit management and in preparation of application for a project loan; (c) pre-assess loan applications before final approval by the Governing Body.
In this topic, participants will work together with women entrepreneurs in preparation and assessment of business plans.
Output Objectives
At the end of the topic, participants will be able to:
1. Use the tools for business planning for each type of business.
2. Prepare a business plan together with the micro-entrepreneur.
3. Explain and assess business plans for each type of business.
Time : 6 hours
Steps :
1. Facilitator starts by saying that from the previous topic we have learned to assess business plans based on financial indicators. But in Module 1 (in the Case of Lin's Cabbage Garden) we have seen that there are actually four business aspects which effect the success or failure of a business. Facilitator asks participants to mention all four:
· Production Aspects
· Marketing Aspects
· Management (organization) Aspects
· Financial Aspects
Proper planning of the first three aspects is very important, because this will determine the financial outcome of the business.
2. Facilitator then explains further that for each type of business we will tackle what critical information which are needed in planning of a micro-enterprise.
3. Production type of enterprise
3.1 Facilitator asks participants which of the four aspects should be planned first in the production type of project. Participants will agree that this is the production aspect.
3.2 Facilitator then asks participants what the most critical information is that we need in planning for the production aspect. Facilitator synthesizes by using Visual Aid 22.
Visual Aid 2-2 Production Type of Enterprise Key Elements Production Aspect |
3.3 Facilitator then asks participants to mention the most crucial information needed in planning for the next aspect: marketing. She explains further that the key question is whether the product can be sold or not. Facilitator uses Visual Aid 2-3 in explaining the critical elements of the marketing plan.
Visual Aid 2-3 Production Type of Enterprise Key Elements Marketing Aspect |
3.4 Facilitator then proceeds with the financial aspect. She reminds participants of Topic 1 of this Module (Ms. Zhang's starch processing case) and asks the participants what they think should be included here. Facilitator clarifies the inclusion of the following in the projection:
· Net Cash Income, Net Profit (Income Statement)
· Risk Analysis on price and volume changes
· Investment Plan
4. Processing type of micro-enterprise
4.1 Facilitator starts by asking the participants which of the four aspects should be considered first in planning for the processing type of micro-enterprise. Participants will agree that this is the production aspect.
Visual Aid 2-2 Processing Type of Enterprise Key Elements Production Aspect |
4.2 Facilitator asks participants what they think is the critical information required in planning the production aspect in the processing type of enterprise. She refers to Visual Aid 2-1 and asks if there are differences. Facilitator points out that the differences are:
· Land is usually not critical in processing projects
· Information on the production process is critical. This involve the steps required in processing the product.
Facilitator furthermore adds that after listing all the raw materials, labor requirements, etc. the entrepreneur can start computing the production costs per unit. Facilitator illustrates the fact that unit production costs is the total production costs divided by the production volume. She points out that the unit production cost is needed for the next aspect: marketing.
4.3 Facilitator proceeds with the marketing aspect. She shows Visual Aid 2-3 and asks participants for differences between the processing and production type of business.
Visual Aid 2-3 Production Type of Enterprise Key Elements Marketing Aspect |
4.4 Facilitator points out that in these two types of micro-enterprise, if there are definite buyers, the critical elements are the same. However, in case there are no definite buyers, eg a bakery enterprise which has the village as its target market, the marketing aspect will include the following:
a. First, determine the demand
What is the estimated number of people who may buy your product? What quantity? What frequency? Are there existing competitors selling the same product? Are the estimates reasonable?
b. Second, determine the price
First check the unit production cost. The selling price should be higher than the unit production cost. Second, in setting the price consider the existing competitors and how to attract more buyers.
c. Third, determine the strategy to attract buyers
What will the entrepreneur emphasize? Examples: good quality, low price, fast delivery?
d. Fourth, determine the estimated sales volume
Are there demand seasonalities in demand? Determine sales volume at peak, normal and low demand periods. Estimate sales volume for the appropriate period (e.g. one month, one year).
e. Fifth, determine how to distribute/deliver the product
Where will she sell, ea. through sales outlets or directly? What are the costs involved in delivery and selling?
4.5 Facilitator then proceeds to the financial aspect and asks participants which financial projections are needed. These are the following:
· Gross Profit, Net Cash Income and Net Profit (Income Statement)
· Risk Analysis on price and volume changes
· Cash Flow
· Investment Plan
5. Trading type of micro-enterprise
5.1 Facilitator starts by asking participants what they think is the first critical aspect in the trading type of enterprise. Participants will agree that it is the marketing aspect.
5.2 Facilitator explains further that trading basically is buying and selling of the same commodity or good. The entrepreneur may buy in wholesale and sell in retail. She proceeds by explaining the two basic principles in trade:
· Buy at low price, sell at high price.
· The faster the turn-over, the better.
5.3 Facilitator proceeds with the practical steps in planning the marketing aspects of trading projects.
a. First, determine what to sell (inventory listing)
The entrepreneur first considers which goods will sell well in the community. Then she projects how fast a certain quantity (bought in whole sale) of each of the goods can be sold (turn-over rate). Then she lists this information and the purchase price in the following way:
Goods |
Quantity |
Unit Purchase Price |
Total cost |
Turn-over Rate |
Cigarettes |
5 cartons |
50 rmb |
250 rmb |
5 days |
Beverages |
1 box |
48 rmb |
48 rmb |
6 days |
Total |
298 rmb |
b. Second. determine the price
The entrepreneur then decides on the margin, (difference between unit selling price and unit buying price). In setting the price, she considers the price of competitors and whether this price is attractive to buyers. She also needs to consider the costs of other expenses in buying and selling the goods (e.g. transportation, tax), and the costs of the use of the facilities (e.g. rent, power).
c. Third determine the estimated sales
What will be the total sales income in a certain period, ea. one month? For each item the sales is determined as the unit selling price times the estimated quantity sold in the period (determined in the inventory listing under a. ). If seasonalities are anticipated' these must be reflected in the sales projection for the whole year.
d. Fourth, determine the selling strategy
Considering other competitors how will the entrepreneur attract more customers? What will the entrepreneur emphasize'? Examples: good quality, low price, suitable location.
5.3 Facilitator then proceeds with the financial aspects. She asks what the participants think are the critical indicators. The conclusion will be:
· Gross Profit, Net Cash Income, Net Profit (Income Statement)
· Risk Analysis of prices and sales volume
· Cash Flow
· Investment Plan
6. Service type of micro-enterprise
6.1 Facilitator asks participants whether they agree that in the service type of micro-enterprise the first critical aspect is also marketing. Facilitator explains the marketing aspects using Visual Aid 2-4.
Visual Aid 2-4 Service Type of Enterprise Key, Elements Marketing Aspect |
6.2 Facilitator proceeds with the production aspect and explains that it involves determining: raw materials or supplies needed labor requirements facilities and equipment needed costs of the above items
6.3 For the financial aspects, facilitator explains the fact that these will include:
· Gross Profit, Net Cash Income, Net Profit (Income Statement)
· Risk Analysis of prices and volume
· Cash Flow
· Investment Plan
7. Organization and Management
7.1 Facilitator explains that in all four types of micro-enterprise planning of the organizational aspects is very important. Proper organization and management is needed to realize the projections made for the other three aspects.
7.2 Facilitator asks participants who the managers of micro-enterprises are in the WPD project and why. Facilitator synthesizes by saying that the WPD project encourages micro-enterprise development by women with the goal to improve their self-reliance and status (Module 1, Topic I, Activity 3). Through engaging in micro-enterprise women learn technical and business skills; learn to take decisions and risks, obtain own income. All of these contribute to more self-confidence and self-reliance.
7.3 Facilitator then continues by saying that women either run micro-enterprises individually with usually some support of household members (household-based enterprise), or they undertake a micro-enterprise with a small group of women (group enterprise). We will discuss the critical information in planning for these two types of enterprises.
Management of household-based micro-enterprise
Important considerations for the woman entrepreneur in planning the organization and management of her enterprise are:
· Do I have the necessary skills to manage the enterprise (e.g. record keeping, income computation, production and marketing skills)?
· Can I acquire the skills which I do not have and how (e.g. training, help from group members, others)?
· Who among household members will be involved in the enterprise? What will be their tasks?
Management of group enterprise
Important considerations for women who plan to start a micro-enterprise together are:
· Who among the group are to be involved? What will be the roles and tasks for each?
· Who will perform the following key roles of: manager, accountant and cashier?
· Do the members have the skills required for the assigned tasks? If not, how will it be solved?
· How will financial control be instituted? e.g. how often will they meet, how often will there be reporting on the financial status, how will they keep and disburse funds, etc.?
8. Facilitator ends the activity with a summary of what has been discussed using Visual Aid 2-5.
Visual Aid 2-5 Key Elements of a Business Plan |
Time: 1 hour
Steps:
1. Facilitator introduces this activity by saying that in this topic participants will have a chance to apply their knowledge and skills which they have learned so far. Some women micro-entrepreneurs have been invited to come to the workshop, and they all have a plan to invest in the expansion of their existing business or to start a new enterprise. Two participants will work together with one entrepreneur and make a complete business plan in half a day. Afterwards the business plan will be presented and discussed by the whole group.
2. Facilitator hands out Worksheet 1 and the Business Plan Forms for each type of business. She tells the participants that we will use these tools in business planning with our guests.
3. Facilitator explains further that there are two interrelated components which make an enterprise viable, The first one is the entrepreneur herself (strengths and weaknesses in attitude and skills), the second is the micro-enterprise's economic viability.
To assess the economic viability of an enterprise we use the business plan form. This is a tool for organizing the data relevant to the four aspects of business (marketing, production, management and financial) and to make calculations.
To assess both components (entrepreneur and enterprise) we use Worksheet 1. After making the Business Plan field worker and entrepreneur review the questions in this worksheet to formulate the conclusions and recommendations. The field worker can use this:
· to make recommendations to township and county Governing Body on loan application and required assistance (e.g. training, technical assistance, etc.)
· in monitoring the implementation of the project
The entrepreneur gets a copy of both the Business Plan and Worksheet 1 for future reference.
4. The facilitator explains further that the tasks for the practicum are:
a. Make a comprehensive business plan together with the entrepreneur by completing the Business Plan Form and Worksheet 1.
b. In the process, educate the entrepreneur in business planning by explaining questions, computations and interpretation of the results.
5. The participants are then given some time to review the forms.
Business Plan Form 1: Production Enterprise |
Business Plan Form 2: Processing Enterprise |
Business Plan Form 3: Trading Enterprise |
Business Plan Form 4: Service Enterprise |
Worksheet 1 Business Viability Assessment |
Time: 7 hours
Steps:
1. The Facilitator welcomes the women entrepreneurs and asks the participants and entrepreneurs to introduce themselves.
2. Facilitator introduces the activity, by saying that this workshop is for Field Workers to learn how to assist micro-entrepreneurs and that one of the areas of assistance is in Business Planning. Facilitator thanks the women entrepreneurs for their cooperation and encourages them to ask whatever questions they have. We hope this activity will be useful for the entrepreneur in developing their Business Plan.
3. Facilitator makes a list on newsprint with the name of the entrepreneurs and the type of business and adds two names of participants to each entrepreneur. These three people will work together in making the Business Plan. The women entrepreneurs are given Worksheet 1 and the Business Plan form for her particular type of business.
4. Give the groups 3 hours to complete the Business Plan form and Worksheet 1. Ask to write the projected income statement (from Business Plan) and the conclusions and recommendation (Worksheet 1) on newsprint.
5. Facilitators go from group to group to see whether there are any questions. Facilitators should pay special attention to participation of the woman entrepreneur in the discussions and redirect participant's focus if necessary.
6. When participants are ready, Facilitator starts with the review of the Business Plans. If there are more than 15 participants in the workshop, split up into two groups in such a way that in both groups each type of business (production, processing, trade, service) is represented.
7. Put the two newsprints of the first type of business on the wall.
8. Ask for a presentation of the conclusions and recommendations and invite other groups to comment and give suggestions.
Important note: Micro-entrepreneurs often do not know the risks involved in starting a business. Some tend to be too afraid of taking the risk and others tend to be too optimistic. Facilitator should therefore raise critical questions in assessment of the Business Plan, so that the entrepreneur gets a realistic insight in the risks involved and the critical aspects she has to pay attention to once she starts implementing her project. This will help her to make the right decision.
Sample Questions for Review of Business Plan
For Production Type Enterprises | |
Production: |
- is the projected harvest reasonable? |
- is the quantity and price of crucial inputs, such as seeds, fertilizer, labor reasonable? | |
- in animal raising, what is the mortality rate? | |
- are estimates of amount and price of feed, medicines correct? | |
Marketing: |
How sure is it that the buyer will really buy the quantity at the time and price that she projected? |
Financial: |
Project net profit for worst scenarios, ea. harvest 60 % of estimate, price 25 % lower? |
For Processing Type Enterprises | |
Production: |
- is the output volume reasonable? |
- is the quantity and price of inputs reasonable? | |
- can the quality be assured? | |
Marketing: |
How sure is she that she can sell the projected volume at the projected time and price? |
Financial: |
Project net profit for worst scenario, e.g. lower sales price or volume, higher price raw materials. |
For Trading Type Enterprises | |
Marketing: |
Are the projections on inventory turn-over reasonable? |
Financial: |
Project net profit for the worst scenario, e.g. sales 50 % of estimate. |
For Service Type Enterprises | |
Marketing: |
What is the basis for assumptions on demand, attractiveness of her business? Is the demand seasonal? |
Financial: |
Project net profit for the worst scenario, e.g. half of the estimated demand. |
9. Facilitator summarizes and moves on to the next enterpreneur to present their Business Plan.
10. After reviewing all Business Plans, Facilitator asks the women entrepreneurs whether the activity has been useful to them. Ask them to give specific examples of what they have learned.
11. Facilitator ends the day by thanking the women entrepreneurs and participants.
Total Income
Sales
Other Income
Less:
Production Costs
Materials
Labor
Use of facilities
Gross Profit
Less:
Other Expenses
Transportation
Administration
Tax
Other costs of selling and delivery
Net Cash Income
Key Questions |
Criticical Information |
1. What will be produced? |
· Product |
· Quality Specifications | |
· Estimated Volume | |
2. What are the requirements in producing the item? |
Land (suitable for the crop, how many mu?) |
· Raw Materials (seeds, feed, etc.) | |
· Technological requirements (skills, training needed?) | |
· Labor | |
· Tools, equipment, facilities | |
· Costs of each of the requirements | |
3. When are you going to produce? |
· Production schedule and activities |
· How many cycles per year? | |
4. Where will you produce? |
· Far from source of raw materials? |
· Far from buyers? | |
· Cost implication of location? |
Key Questions |
Criticical Information |
1. To whom will you sell? |
· Who are the identified buyers and whet volume, whet qualify requirement, how frequent, written contract? |
· Are there alternative buyers? | |
2. At what price? |
· Price per quality |
· Risk of price change | |
· Total expected sales income | |
3. How to deliver? |
· Mode of delivery |
· Costs involved |
Key Questions |
Criticical Information |
Where will you sell? |
Is the location convenient to customers? |
Is there demand for the service? |
Competitors assessment: |
· why do people go or not go there? | |
· are there too many competitors already? | |
How will you sell? |
Service strategy: |
· what will be your service/ product? | |
· what will be your speciality? | |
· what will make you more attractive than competitors? | |
At what price will you sell? |
Pricing |
· Is the price acceptable to the customer? | |
Is the price competitive? | |
Sales | |
· Are there seasonalities in the demand? | |
· What is the estimated sales income? |
Business Aspect |
Type of Enterprise | |||
Production |
Processing |
Trading |
Service | |
Production Aspect |
Product description (quality) |
|||
Production volume |
||||
Production requirements |
||||
Costs of production |
||||
Production cycle |
||||
Schedule |
Process |
|||
Marketing Aspect |
Buyer description |
Inventory |
Location | |
Risk analysis (price change) |
Margin |
Demand | ||
Alternative buyers |
||||
Demand |
Competitors | |||
Competitors |
Demand seasonalities | |||
Pricing |
Estimated Sales | |||
Estimated Sales |
||||
Financial Aspect |
Investment Plan, Gross Profit, Net Cash Income, Net Profit, Cash Flow | |||
Organization Aspect |
Household based enterprise: |
· financial control and records skills | ||
· task household members | ||||
Group enterprise: |
· clarity role and tasks members | |||
· financial control | ||||
· skills | ||||
Ms. Zhang wants to start her own micro-enterprise. She thinks about processing potatoes into starch. In September she wants to buy an electric grinder at 600 rmb; three basins at 50 rmb each; and three sieves at 30 rmb each. In October she plans to buy 500 jin of potatoes at 0.4 rmb per jin. After processing she will sell the starch within the same month. In November and December she plans to do the same.
Since she only needs the grinder for one week a month, she agreed to rent her grinder to her neighbour, who will pay 50 rmb rent at the end of each month.
Ms. Zhang's fixed assets can be used for 10 years, except for the sieves, they need to be replaced every 3 years.
Ms. Zhang has only 350 rmb in savings of her own, and needs to borrow 800 rmb from the women's group to be able to realize her plan. She will borrow et I September and plans to repay the full amount on January 1. The duration of the loan is then 4 months. The group charges 2 % interest per month.
To improve the quality of the starch' Ms. Zhang will use a chemical. To process the 500 jin of potatoes 0.5 jin of the chemical will be enough. but this chemical is only sold by the jin, at 30 rmb/jin, so she has to buy I jin in September.
Ms. Zhang thinks she can produce a total of 150 jin of starch out of 500 jin of potatoes. She will sell this to the local vermicelli factory. The factory's price depends on the quality. Ms. Zhang thinks she can sell 80 jin of the highest quality at a price of 3 rmb/jin; 40 jin of medium quality at 2 rmb/jin and 30 jin of low quality. which sells at 1 rmb/jin. Each time she sells, a total of 80 rmb of other expenses, such as for transportation are made.
Ms. Zhang invited you to come and review her preliminary business plan with her. She wants to know whether this is a good business and wants your advice on how to proceed.
Task I
Net Cash Income
Task 1: Net Cash Income
1. Compute the Net Cash Income for Ms. Zhang's enterprise.
2. List questions you have regarding:
a. verification of the above data
b. additional information you need to compute and assess more accurately
Output Task 1
Total Income
Per cycle |
Sept.-Dec | ||
Sales: |
|||
high quality starch: |
|||
80 jin x 3 rmb/jin |
240 rmb |
720 rmb | |
medium quality starch: |
|||
40 jin x 2 rmb/jin |
80 rmb |
240 rmb | |
low quality starch: |
|||
30 jin x 1 rmb/jin |
30 rmb |
90 rmb | |
Sub-total |
350 rmb |
1050 rmb | |
Rent from neighbour |
50 rmb |
50 rmb | |
Total Income |
400 rmb |
1200 rmb | |
Output Task 1
Production Costs
Production Costs (recurring costs for each production cycle):
Per cycle |
Sept.-Dec. | |
500 jin potatoes x 0.4 rmb/jin |
200 rmb |
600 rmb |
0.5 jin chemical x 30 rmb/jin |
15 rmb |
45 rmb |
Total Production Costs |
215 rmb |
645 rmb |
Examples of Questions
· the grinder uses electricity, what are the estimated costs?
· the processing requires water, what are the estimated costs?
· will she have to pay any labor costs?
Important Points
· Production costs include all costs that have to be made each time the estimated output volume is produced. These costs can be categorized as follows:
Materials: these are the costs we have to make to purchase the materials that are consumed to produce the estimated amount of product, e.g. raw materials, chemicals, fertilizer, seeds, feed stuff, etc. Investments in- durable materials, such as buildings, tools, equipment are not included here. In the next activity we will see how to treat the costs of this kind of materials.
Paid labor: this is the costs of hiring external labor force or for paying family members to do certain tasks. Unpaid labor costs are not included. Usually micro-entrepreneurs do not pay salaries to themselves and therefore no such costs are included here.
· Cost of use of facilities: these are the costs like rent or fees paid to use land or facilities like drying facilities, storage, etc. It also includes any other costs directly related to the use of facilities or equipment, production, such as energy, water, regular maintenance of equipment, etc.
· Note that although Ms. Zhang has to buy I jin of chemical, we only count half a jin as production costs. This is because production costs are the costs that have to be made each time the planned volume is produced, which is the costs of half a jin.
Output Task 1
Net Cash Income
Per cycle |
Sept.-Dec. | |
Sales: |
||
high quality starch: |
240 rmb |
720 rmb |
medium quality starch: |
80 rmb |
240 rmb |
low quality starch: |
30 rmb |
90 rmb |
Other Income (Rent) |
50 rmb |
150 rmb |
Total Income |
400 rmb |
1200 rmb |
Production Costs: |
215 rmb |
645 rmb |
Gross Profit |
185 rmb |
555 rmb |
Other expenses |
80 rmb |
240 rmb |
Net Cash Income |
105 rmb |
315 rmb |
Important Points
· A positive Net Cash Income means that the entrepreneur has recovered all the production costs and other expenses from her total income of the enterprise. It also means she has reserve funds for use as working capital in the next business cycle or for payment of loans and interest.
· A positive Gross Profit means that all production costs are recovered from the income of the enterprise. A negative or low Gross Profit would either mean:
- inefficient production (ratio outputs/inputs too low)
- low price for the product
- high prices for inputs
Task 2
Net Profit
Task 2: Net Profit
1. Compute the Net Profit of Ms. Zhang's enterprise.
2. Say in your own words what depreciation is. Why should we consider depreciation in assessing the viability of an enterprise?
3. What will happen to an enterprise if the Net Profit is negative?
4. What can the entrepreneur do with profits?
5. What is your conclusion on the profitability of Ms. Zhang's enterprise (very good, good, so so, low, too low) ?
Output Part 2
Net Profit
Net Profit is Net Cash Income minus Depreciation minus Interest.
Per month |
Sept.-Dec. | ||
Net Cash Income |
105 rmb |
315 rmb | |
Depreciation: |
|||
Fixed Assets of 10 life years: |
|||
Grinder |
600 rmb |
||
Basins |
150 rmb |
||
Total |
750 rmb |
||
Depreciation per year: 75 rmb |
|||
Depreciation in 1 month: |
6 rmb |
||
Depreciation in 4 months: 24 rmb |
|||
Fixed Assets of 3 life years: |
|||
Sieves |
90 rmb |
||
Depreciation per year: |
30 rmb |
||
Depreciation in 1 month: |
2.5 rmb |
||
Depreciation in 4 months: |
10 rmb |
||
Total Depreciation |
8.5 rmb |
34 rmb | |
Interest |
|||
800 rmb, 2 %/month |
16 rmb |
64 rmb | |
Net profit |
80.50 rmb |
217 rmb | |
% return on invested capital |
7 % |
19 % | |
(1150 rmb) |
(57 %/year) | ||
% return on own capital |
23 % |
62 % | |
(3 50 rmb) |
( 186 %/year) | ||
Important Points
· Depreciation: Fixed assets can be used in more than one production cycle, but sooner or later these need to be replaced. Depreciation is the minimum amount of money which the enterprise should generate at each production cycle to be able to replace the fixed assets in time.
· The Net Profit reflects the entrepreneur's return on her labor' management and invested capital. A negative or zero Net Profit means that the entrepreneur does not get any return on her labor and capital investments.
· A negative net profit means that in the long term the business can not continue, unless money from other sources is added to it. Such a business of course can not be considered viable.
· The entrepreneur can utilize profits in several ways:
- investment in expansion or improvement of her enterprise
- investment in new enterprises
- savings (e.g. for child education, future investments, old age security)
- consumption
· For long term reinvestment it is the best to utilize profits, since it leads to further increase in income in the future. Utilization of profits for short term, consumption may be equally important however, ea. to improve nutrition or health care, to be able to pay the school tuition, etc. Utilization for luxury goods of course should be discouraged.
· Ms. Zhang's net profit can be considered good. The net return on the total invested capital (1150 rmb) is 57 % per year (note: this is under the assumption that she produces all year round). This means that in just two years, she can already generate the required capital investment without the need to borrow. The net return on her own capital (350 rmb) is very high. At 186 % net return a year it means she is able to almost double her original capital in one year.
Task 3
Risk Analysis
Task 3: Risk Analysis
Compute Gross Profit and Net Profit for each of the following situations:
a. Sales price for each quality of starch is 0.3 rmb/jin lower
b. Price for 1 jin potatoes is 0.1/jin higher
c. The amount of starch per quality category is different: 60 jin of high, 50 jin of medium and 40 jin of low quality is produced (on average a lower quality).
d. 500 jin of potatoes produces not 150 jin of starch, but only 120 jin, of which 64 jin high quality, 32 jin medium quality, 24 jin low quality (total amount lower than in original plan, but proportion per quality category the same).
e. The price for the grinder is not 600 rmb, but 1000 rmb.
Output Task 3
Risk Analysis
PLAN |
A |
B |
C |
D |
E | |
Total Income |
400 |
355 |
400 |
370 |
330 |
400 |
Production Costs |
215 |
215 |
265 |
215 |
215 |
215 |
Gross Income |
185 |
140 |
135 |
155 |
115 |
185 |
Net Profit |
80.5 |
35.5 |
30.5 |
50.5 |
10.5 |
77.2 |
Important Points
· The outcome shows that we have to be very careful in our computations. What looks as though there is little deviation from our estimates can mean the difference between profit and loss.
The entrepreneur should be aware of which factors are most critical before starting the business, so that she is clear about the risks are and for which factors she needs to pay more attention to.
· The following basic factors that we reviewed in this Case are most critical for all enterprises:
- sales price of products: market fluctuations of 10 % are not unusual (a)
- price of raw materials: market fluctuations of 10-20 % are not unusual of the
- quality of product: inexperience in the type of production and/or factors such as the weather or the quality of the raw materials easily can change the average quality of the products by 10 % (c)
- production efficiency (ratio between output volume to input): inexperience in the type of production and/or factors such as the weather or the quality of the raw materials easily can affect the output volume by 20% (d)
· When inquiring about the price of equipment, usually only the price of the machine is mentioned. Additional costs, such as installation costs, adjustments needed in buildings, etc. often are forgotten. Especially in processing/manufacturing enterprises these costs can be substantial and hence affect the income from the business.(e)
Task 4
Cash Flow
Task 4: Cash Flow
1. Fill in the attached Cash Record to project the cash situation of the business between September and January.
2. Can Ms. Zhang repay her loan with interest in January, as she has planned?
3. What decision should Ms. Zhang and the group make about her application?
Cash Record
Month |
Cash In |
Cash Out |
Balance | ||
Item |
Amount |
Item |
Amount |
||
September |
|||||
October |
|||||
November |
|||||
December |
|||||
January |
|||||
February |
|||||
Output Task 4
Cash Flow
Cash Record
Month |
Cash In |
Cash Out |
Balance | ||
Item |
Amount |
Item |
Amount |
||
September |
Savings |
350 |
Grinder |
600 |
|
Loan |
800 |
Basins |
150 |
||
Sieves |
90 |
||||
Chemical (1 jin) |
30 |
||||
Total |
1150 |
Total |
870 |
280 | |
October |
Potatoes (500 jin) |
200 |
80 | ||
Sales |
350 |
Expenses |
80 |
350 | |
Rent |
50 |
400 | |||
November |
Potatoes (500 jin) |
200 |
200 | ||
Sales |
350 |
Expenses |
80 |
470 | |
Rent |
50 |
520 | |||
December |
Chemical (1 jin) |
30 |
490 | ||
Potatoes (500 jin) |
200 |
290 | |||
Sales |
350 |
Expenses |
80 |
560 | |
Rent |
50 |
610 | |||
January |
Loan |
800 |
(190) | ||
Interest |
64 |
(254) | |||
Important Points
· The Cash Flow Projection will determine whether the entrepreneur will be able to pay the loan or not at the time the loan matures. In this case Ms. Zhang by the end of December only has 610 rmb cash balance. This means she will not be able to pay the loan and interest (total 864 rmb) in full. She is short of 254 rmb. It also means that she cannot continue the business as she has nothing left for the next production cycle.
· For the business to continue, the ending cash balance should be sufficient to cover the production costs and other expenses for the next production cycle.
· We learn from this case that although a business can generate a positive net profit this is not a guarantee that a loan can be repaid. It is necessary to make a cash flow projection to check this.
· Rural households often have different sources of cash income. Perhaps Ms. Zhang's household has received a large amount of cash after harvest, most of which is not needed until spring. In that case Ms. Zhang could "borrow" from the household to repay the loan in January. since by March she will have enough cash from her starch processing enterprise. Another possibility would be to pay the loan in installments during a longer period of time. It is up to Ms. Zhang and the group to decide whether it is acceptable that the benefits of her business will not show in cash until after half a year of production.
