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Chapter 8

The organizational and managerial aspects of an investment proposal constitute an area that rarely receives the attention it deserves. The majority of effort is generally dedicated to financial and technical factors, and very little time is spent on defining an appropriate and effective managerial structure. As a result, many small and medium investments - especially those that are owned by groups or communities - fail because of problems of control or management.

Rural communities typically do not have many people with management and business administration experience, and it is risky to assume that these are functions that will solve themselves, or that their definition can be left for the stage of project execution. Below, we discuss the three most important factors determining project organization and management:

a) the ownership structure
b) supervision and oversight
c) daily management

There is also a brief discussion on the use of technical assistance by the management team.

A. Ownership Structure

The first task that is encountered in determining the organizational and managerial model for an investment is the choice of its ownership structure. Typically, there are several available options, including both informal and formal structures. However, the decision depends to a great extent on whether the operation or investment will be carried out by a single person or family or by a group of persons or families.

1. Individual Owners

In the case of an investment made by an individual, or a single family, the principal decision concerns the necessity and usefulness of formalizing the legal status of the activity by registering it as a corporation.

This manual offers no guidelines on legal aspects, mainly due to the number of countries in which it may be utilized. It is therefore the responsibility of the people in charge of the process of formulation and evaluation of the investment to determine what the legal requirements are, as well as the advantages and disadvantages of registering a small business in each specific case.

In broad terms, however, formal registration of a project as a company may bring some of the following benefits:

a) It can facilitate access to formal sources of credit (banks, etc.) as well as government programs that support small enterprises;

b) It will often permit the business to reclaim value added taxes (VAT) on goods and services purchased;

c) It may help employees to access state medical insurance and social welfare programs;

d) It may give the company the right to import certain products (for example, packaging materials and inputs) tax-free, in those cases where the end product is destined for export.

Among the possible disadvantages of registration are:

a) Bureaucratic red tape, which is frequently time consuming and frustrating;
b) The need to maintain a variety of records and documents in order to comply with legal requirements;
c) Responsibility for collecting VAT on sales and remitting it to the fiscal authorities;
d) The possibility of attracting more attention from the tax authorities

2. Multiple Owners

When dealing with an activity that involves a group of persons, or an entire community, further options can be added to those discussed in individual investments (informal and company). The most common alternative is the use of a cooperative structure, although some countries also offer other types of ownership for groups.

It is not recommended that cooperatives be founded for the explicit purpose of managing an investment. A successful cooperative is the result of a series of developments involving a number of community efforts. A process of maturation and learning is required before a cooperative can successfully take on the responsibility for directing and controlling a project of significant size. However, if the community already has an active and well managed coop, this may be the most attractive solution.

Nevertheless, in spite of all their ideals, in many countries cooperatives have had a disappointing history, and most success stories appear to result from the efforts and dedication of a single dynamic individual. If a cooperative structure is considered, therefore, it is necessary to insure that there is a firm commitment on the part of its members to make it function adequately.

Should you instead select the corporate structure for a project that belongs to a group or community, certain key decisions must be made regarding the nature of the corporation, and it is highly recommended that a lawyer be consulted if possible to ensure that the options available are clearly understood.

One possibility is to issue shares to all of the participants, in much the same way that a company on the stock exchange does. At the end of the year, the company will distribute any earnings according to the number and distribution of its shares. In this case, however, the right of the shareholders to sell their shares (and to whom), and the requirement that they actively participate in the project must be established from the very beginning. For example, if a community corporation is used as a marketing channel for products derived from only some villagers, it may be considered important that these participants have the right to increase their shares in comparison to those of non-participants.

B. Supervision and Oversight

Any project or operation that manages significant resources, and represents the interests of more than two persons, requires some form of board or supervisory committee. Obviously, the size and responsibility of such a group depends on the scale of the project.

If a small group of families establishes an operation involving 5 workers, there is no need for a Board of Directors with 12 members that meets every month. However, even a small operation, or one that only performs one task (for example selling the agricultural product of the member families), needs some kind of oversight. If this doesn’t exist, the enterprise runs the risk of misuse of funds or resources by the person or persons that administer it.

In the case of relatively small groups, it is possible that everyone involved can participate in the duties of direction and general follow-up of the activity.

When dealing with larger groups, however, it is necessary to rely instead on the formation of a board or steering committee. Such a Board will require bye-laws, which define matters such as:

a) How many people constitute a committee? We recommend a minimum of 5 and a maximum of 8 or 9 persons b) How much time can each person serve as a member of the board or committee? There may be no limits, but frequently a maximum of two or three years is appropriate.

c) Should the duties of the President, the secretary and the treasurer be defined? This is generally not recommended, except for the smallest of committees.

d) How often should they meet? This could be monthly, quarterly or even every six months, according to the scale of the operation and the complexity of its operations.

e) How frequently should the Board present their report to the other members? It is advisable to do so once a year.

The supervision of the project can be as important regarding what it does not do, as for what it does do. While a Board of Directors or any supervisory committee should play an important role in monitoring the progress of the project and the strategic decision making process, it is not an adequate forum for making managerial decisions (and even less so when supervision is the responsibility of all of the participants). Many projects have been destroyed by boards and supervisory committees that obstruct the manager from fulfilling his responsibilities.

The by-laws of the company, cooperative or group, in addition to defining the structure of the board or supervisory committee should specify the following:

a) Areas of responsibility of the Director’s Committee:

b) Areas normally out of the competence of the Director’s Committee:

It is important that the Board or Steering Committee allow the manager of the operation to manage the activity according to his or her criteria, and not attempt to dictate day-to-day decisions. If the committee lacks confidence in the manager, it must refuse to renew their contract at the end of the agreed term and seek a replacement. By revoking or changing management decisions, they only destroy the manager’s ability to run the project in an efficient manner.

Only when the committee finds (or suspects) the manager guilty of illegal activities, or activities contrary to the previously established and agreed upon guidelines, should there be grounds for a direct intervention in the activities of the operation. Even in this case, it is recommended that the Board or steering committee seek the approval of an extra-ordinary general assembly before acting.

C. Daily Management

Once the structure and the mandate of the supervisory and oversight group have been determined, project management and administration needs should be defined.

The smallest of projects may need no more than one person, responsible for all tasks in both areas. However, it would be a false economy to place all of the responsibility on one person when the project generates significant costs and income.

A common combination for a small project is a general manager backed up by a bookkeeper. This second person may also carry out the duties of secretary. In a larger operation, the following positions may supplement the general manager, according to the types of activities carried out. One of these positions may be the particular responsibility of the general manager:

Nevertheless, only a very large operation could justify filling all of the positions described above. Remember: these positions represent fixed costs. In other words, costs that are paid regardless of the volume of production. Furthermore, although each additional person in management has no direct impact on the volume of production, they do increase the general expenses (telephone, office supplies, office space requirements, etc.) Extreme caution is therefore needed in defining a large managerial structure.

Among the areas covered by the general manager’s mandate and which he/she may delegate to his assistant managers, the following are worth noting:

D. Technical Assistance and Managerial Support

The demands of management and administration of a business or other rural activity are frequently beyond the capabilities and experience of the participants. In order to bolster this area, it may be worth considering three broad levels of external support.

A project might require one or more of the following types of assistance, at least during the first years of its operation.

1. Professional Full-time Managers

This option is recommended when dealing with a fairly complicated operation or which involves technical activities that are very demanding on the participants and for which they have little prior experience. A common example might be a food processing operation, such as cheese or juices, where poor quality can not be tolerated. It is rare that a project, except in the case of the largest, need more than one outside manager

In some cases, it may be that the community or the investors have technical capability, but no administrative abilities, or that the marketing process not always the general manager post that is the position to be filled, an external accountant, plant manager or sales manager being more valuable.

When using an external manager, it is recommended that his or her contract be for a long enough period to allow the business or activity to become established on a firm base. This could be for a minimum of two or three years, with the right of earlier termination, in case the investment fails to meet determined levels of volume, sales or other indicators. In addition, it must be made clear from the outset that the position is not permanent, and that the manager must train one or more assistants from the community or group, who can eventually replace him.

In addition to the right to terminate the contract, it is also suggested that the rewards of the job (salary, benefits) be linked to the performance of the business. For example, a moderate basic salary plus a portion of yearly profits, which will yield a good income if the project performs well.

The cost of an experienced, successful manager can be substantial. It is, therefore, not often feasible to employ one on a small project, where the earnings are insufficient to cover their cost and leave some profits for the owners/participants. Nor should a full-time manager be used for social or environmental investments (which generate little or no income) unless an NGO, international donor or state agency is willing to guarantee financing the position.

2. Management Consulting and Periodical Administration

In cases in which the size or complexity of the operation does not justify contracting full-time experts, serious consideration may be given to using a periodic consulting or advisory service. As a minimum, a small or medium sized investment could benefit in the following areas:

Whether or not the last of these services is available or utilised, it is very useful to have someone who is available by telephone in an emergency, to advise the manager on how to evaluate a problem and suggest where he can find help, if necessary. The ideal solution is that the person who helped in the evaluation of the investment, that is, the person that applied RuralInvest, stay in contact with the investors beyond the formulation stage to give them support in all of the areas they need. This matter is discussed in the following sub-section.

3. Teaching Skills and Training

With the exception of the smallest investments, it is rare for a project not to have at least some need for training. In the previous sub-sections, we analysed some of the areas where it is often necessary to strengthen the skills of project staff, including those working in accounting systems, financial control, marketing and sales, and strategic planning. Also there might be a need for training the technicians in production processes, packaging, quality control and management of inputs or finished goods, among other areas.

It is not necessary to carry out all training prior to project start-up. In some cases it is preferable to focus training initially only on the areas most critical in getting a process started. Such areas as strategic planning or inventory control can be left for a later date.

It is worthwhile remembering, when programming training activities, that some of the persons being trained will not be available later on, whether because of leaving their jobs, illness, or simply vacations. It is therefore strongly recommended that, where finances and scheduling permit, at least two - and preferably three - persons be sent to each training activity that takes place outside of the actual project, to insure the availability of a second person.

As with the case of technical assistance, it is frequently possible to find grant funds to pay, or at least subsidize, the cost of training for the personnel of small scale investments. If the investment proposal is not linked to a support agency with this type of funds, it is worth contacting the Ministries of Agriculture, Rural Development or Economy, in addition to the NGOs active in matters of rural business development, to see if there are grants or other sources of funds available.

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