47docentdevpt 2(1).pdf

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SECTION 2: ENTERPRISE DEVELOPMENT

Introduction

Enterprise development is a process of creating, improving and expanding businessoperations in order to make a profit. It aims at identifying, developing and promotingbusiness initiatives that generate income and thus make them profitable. In farming for

example, in order to intensify production and attain commercialization, the followingkey processes are necessary:

Involving farmers in participatory planning in order to identify potentiallyprofitable enterprises

Identification of major constraints to the production of the identified enterprises Prioritization of enterprises in order to achieve specialization Contracting the necessary advisory services and accessing the necessary

technical information Provision of technologies that alleviate production constraints thus enhancing

productivity.

Farmers have a range of enterprises to choose from and these include: crops,livestock, fish farming, apiary, piggery, agro-processing, input and produce trade.Other possible service enterprises include: farm equipment repairs, food preparation,crop protection and animal treatment. This section therefore covers key aspects ofenterprise selection, profitability analysis, business planning, management and recordkeeping.


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Figure 6: Farmers have a wide rage of enterprises to choose from. This can include cropproduction, animal production, input trade, produce trade and processing.

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Session 1: Introduction to Enterprises

Learning objective: By end of this session participants will be able to:1. Define an enterprise.2. List key productive resources for any business development3. Explore the common agriculture related businesses run by different

people/groups within their village.

4. Describe farming as a business and its management.

Time: 3 hrs

Method: Field visit, brainstorming, group discussions, presentations in plenary.

Training Materials: Flip Chart Paper, Marker Pens, Masking Tape, Note books andpens

Procedure1. Introduce the session and learning objectives

2. Ask participants to brainstorm on the definition of an enterprise or business.Note the responses on a flip chart paper and by consensus agree on a commondefinition.

3. In 3 working groups, participants identify the main enterprises/businesses thatare run by individuals and groups in their localities (e.g. coffee growing, goatrearing, produce trade, milling etc.). They also explore new promisingenterprises such as vanilla, citrus, apples etc.

4. In working groups still, participants identify the key resources for two enterprises(crop and livestock enterprise) such as land, labour, cash and managerial skillsetc.

5. The working groups present their findings in plenary and under the guidance of

the facilitator the most common enterprises and requisite resources areidentified.

6. Inform participants about a field visit to a farm and a market in the neighborhood.(Note to the facilitator: Make prior arrangements for the field visit. Contactand brief the two people to be visited).

7. Divide the participants into 2 working groups. One group visits a nearby farmer,while the other visits the trader for 11/2 hours.

Checklist for the field visit

Discussions points with the farmer Main enterprises on the farm Key inputs used Main products from each enterprise

How the products are marketed. How the enterprises were selected

Discussions points with the trader Main commodities being sold Sources of commodities Key inputs

How the business started Day-to-day management of the shop


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Planning of the enterprises Day-to-day management of the enterprises Types of records kept.

Types of records kept.

8. On returning to the training venue, each group discusses its findings and writesthem on a flip chart paper.

9. Invite each group to present its findings to the plenary for discussions.

10. Guide the groups to compare main enterprises, resources, records kept, dayto-day management, similarities and differences of the two enterprises, lessonslearnt.

11. From the findings in no. 9 above, participants redefine what constitutes anenterprise/business.

12. Wrap up the session by explaining farming as a business and how it should bemanaged in a profitable manner

What is an enterprise?

An enterprise is defined as an economic activity that produces goods (commodities) or services for sale to earnincome. It is driven by a profit motive. The profits earned are usually reinvested in order to expand the business.All enterprises utilize the key productive resources namely land, labour, capital and managerial skills to producethe desired product or service.

Most common enterprises in rural areas

The most common economic activities in rural areas include crop and livestock farming. Unfortunately the scaleof production is very low and the products realized are used mainly for home consumption with only minimalquantities being sold to meet cash needs for household basics such as soap, clothing, medical expenses etc.Other enterprises that have emerged over time include: Agro-processing (milling, fish smoking, juice extractionetc), food preparation, produce trade, farm input supply, apiary, piggery and non-agricultural activities such asweaving, tailoring, pottery, crafts, blacksmithing, carpentry, brick making and charcoal burning. High value cropssuch as vanilla, apples, citrus are also being adopted.

Farming as a business

Most rural people are already engaged in farming but the scale at which they operate makes them believe thatthey are not in the business of farming. However, farming is actually a business and should be run and managedlike any other business. It is a business because it utilizes the key factors of production namely: land, labour(family and hired), capital (cash, tools, implements, seed, agro-chemicals etc.), the farmers management skillsand time. Through their small-scale endeavours, rural farmers produce commodities (crops, livestock and theirbye-products), which are consumed at home and the rest sold to earn income.

Rural farmers therefore need to ensure that they must only increase their scale of operation but must ensure thattheir enterprises are carefully selected, planned and properly managed in order to increase productivity. Theyshould select a narrow range of enterprises in order to attain specialization and they should seek the necessary

advisory and technical services. More importantly they should opt for improved technologies (improvedseed/animal breeds and labour saving equipment) in order to alleviate production constraints and increaseproductivity. Efforts should be made to regularly seek out marketing information in order to know the potentialbuyers, their location, quantities demanded, quality requirements and the prices offered for each commodity.Existing and potential competitors who are producing the same products should also be known. Only when thishas been achieved will rural farmers realize meaningful benefits from their farming activities.

Learning points: Enterprises

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Session 2: Group Enterprises

Learning objectives: By the end of the session participants will be able to:1. Identify the different group enterprises in their localities2. Identify advantages and disadvantages of running enterprises as a group3. Describe factors that lead to successful management of group enterprises

Time: 2 hrs 30 mins

Methods: Brainstorming, field visit, group discussions and presentations in plenary

Training Materials: Flip Chart Paper, Marker Pens, Masking Tape, Exercise Books,Pens

Procedure1. Introduce the session and learning objectives2. In small working groups, participants discuss the following questions:

What are the enterprises in their group?

How were the enterprises selected? How are the enterprises managed on day-to-day basis? What are the advantages and disadvantages of running group

enterprises? Suggest ways of minimizing the disadvantages


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3. Invite groups to make presentations for discussion in plenary. (Note to thefacilitator: The following may be suggested: Advantages such as poolingresources, sharing knowledge and skills, easing the work burden, betterbargaining power, better access to advisory services, support fromgovernment and NGOs. Likewise disadvantages such as slow decisionmaking, lack of group land, mistrust, unequal participation by members,conflicts maybe mentioned)

4. Inform the participants about a field visit they are going to undertake to shareexperience of managing an enterprise as a group (Prior arrangements shouldhave been made by the facilitator with the group to be visited)

5. Take the participants for the field visit. In an interactive discussion with the hostgroup members discuss the following: How the enterprise was initiated What criteria were used to select it How enterprise activities were planned How the enterprise is run on the day-to-day basis The key products and how they are promoted/marketed. They should also note the records kept

Explore the advantages and disadvantages of operating enterprises as agroup

6. On returning from the field visit, participants review their findings and lessonslearnt with a view of making informed decisions in selecting, planning andmanaging enterprises as a group

7. Wrap up the session by emphasizing the advantages and disadvantages ofrunning group enterprises. Also point out that an enterprise can be managed asa group on the same piece of land or individually managed. However, whenindividually managed, members come together for services (training, credit,inputs, sharing experience e.t.c.) and marketing.


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Learning points: Group Enterprises

What are group enterprises?

Group enterprises like individually run enterprises are economic activities run by groups for purposes of earningincome for members and are also driven by a profit motive. However, there are enterprises that are better run atindividual level (e.g. perennial crops, livestock etc), but in general there are many advantages of runningenterprises in groups.

Why group enterprises?

It becomes easier for members to share labour, knowledge, skills, experiences and produce on a largerscale.

By pooling resources and bulking products, group members gain better negotiating powers when buyinginputs (bulk purchases) and selling group products (collective marketing).

It is easier to access advisory services, technical advice, market information and markets By working in groups members can ensure quality of their products by monitoring each other to follow the set

standards It minimises operational costs such as labour, transport, licenses, market dues etc There are more possibilities for joint processing and adding value as groups can easily acquire the

necessary processing equipment/machinery by pulling resources or getting loans.

Constraints and challenges

Mutual trust among members, dedicated and trusted leadership Some enterprises such as perennial crops and livestock are difficult to run as a group. Perennial crops

require permanent land, which, groups often do not have while management of livestock requires full timeattention, which members cannot adequately share out

Some members may not actively participate in the group enterprise activities thus overburdening the others.

Key success factors

The enterprise must be carefully chosen based on set of criteria agreed by all members The business should be properly planned and managed Roles and responsibilities of managing the enterprise clearly assigned among members. Able trustworthy and transparent leadership Clear channels of communication with the leadership established. Maintaining proper records. There must be deliberate efforts to promote and market the group products. Efforts at collective marketing with other groups and adding value to products through processing Identification of competitors and ways of out-competing them.


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Session 3: Enterprise selection

Learning Objective: By the end of this session, participants will be able to:1. Explain key criteria for selecting viable enterprise2. Apply the criteria for selecting their own enterprises.3. Prioritize potential enterprises using participatory ranking tools.

Time: 2 hrs 30 mins

Methods: Brainstorming, group discussions, presentations in plenary.

Training materials: Flip Chart Paper, Marker Paper, Masking Tape, Notebooks andPens

Procedure1. Introduce the session and explain the learning objectives.2. In an interactive presentation, describe the different criteria for selecting an

enterprise with examples, and agree on the most important.

(Note to the facilitator: ensure all participants have clearly understood theselection criteria)

3. Assign weights to the criteria based on the following: Perceived profitability Availability of market for enterprise product(s) Availability of resources required by the enterprise Start-up costs Existence of knowledge and skills among members to run the enterprise Access to advisory services and improved technologies Risks associated with the enterprise Compatibility with existing farming system, culture and norms in the area

(Note to facilitator: This will be location specific, but in all cases the issues ofprofitability and availability of market must be weighted highest).

4. Explain the matrices (to be used in enterprise selection) with examples5. In groups, participants: List the common enterprises in their localities (e.g. maize, poultry, produce trade

and input retail trade). Also explore options for new enterprises such as vanilla, citrus,apples etc.

Rank the enterprises using the agreed criteria as explained in no.2, fill the matrixtable and select at least six priority enterprises

Analyze the impact of the selected enterprises in relation to cross cutting issuessuch as gender, poverty, environment, disadvantaged groups e.g. elderly

people, disabled people and people infected with HIV/AIDS


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Types of Enterprises

There is a range of enterprises that individual or groups can choose from as outlined in the previous section.However, there are clearly two distinct types of enterprises. One type focuses on producing products or commoditiesfor direct consumption, sale or processing. This includes most agricultural production, processing and value addingactivities (e.g. Cash/food crops, livestock, poultry etc). The other type produces services, which are not directlyconsumed but assist individuals in performing day-to-day activities (e.g. Agricultural input trade, produce trade etc).

Common enterprises in the farming sector

The most common enterprises in the agricultural sector are listed in the table below. A majority of the rural farmersare mainly engaged in crop and livestock production. However, the potentially more profitable enterprises fall in thecategory of agro-processing and provision of services. These enterprises however have high start-up costs, requirespecialized skills, often require improved technologies and require specialized marketing skills thus tend todiscourage small-scale farmers.

Crops Livestock Bye-products Agro-processing ServicesCoffee Cattle Milk Flour milling Input supplyBananas Goats Eggs Fruit canning Produce trade

Beans Sheep Hides/skins Tannery Equipment repairGround nuts Pigs Honey Oil extraction Pests/disease controlUpland rice PoultrySorghum Fish farmingMaize ApiaryCitrus RabbitsVanilla

6. Invite groups to present in plenary for discussions and agree on at least the 3most promising options

7. Wrap up the session by emphasizing the importance of proper selection forprofitability. Inform participants that in the next session the selectedenterprises will be subjected to a profitability analysis

Note to facilitator: It is important that all participants fully participate in the

selection process and they should try to be as objective as possible. Forcompletely new enterprises, as much information should be availed to farmers aspossible before the selection process. This enables farmers not to only considerthose enterprises known to them, but assists them to open up to new ones

Learning points: Enterprise Selection

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Considerations in selecting enterprises

For any enterprise to succeed it needs proper choice/selection and prioritization based on specified criteria. Some of thekey questions to ask include:1. Are basic resources (e.g. land, labour, capital) readily available? If not where/how will they be got?2. What are the start-up costs? Do members have enough resources to meet these costs?3. Do individuals/members have the knowledge and skills to run the enterprise?

4. Are there reliable sources of technical information and advisory services?5. Is market and accompanying marketing information available?6. What is the size of the market and the quality requirements?7. Does the enterprise entail high risks such as vulnerability to weather changes, pests/diseases or perishability?8. Is the enterprise profitable? Are costs of production low? What output or yields are expected? What market prices

are expected?9. Does the enterprise address cross cutting issues of gender, poverty and environmental conservation?10. Is the enterprise compatible with the current farming system and the culture/norms of the local community?

Practical steps in selecting and prioritizing enterprises

1. Make a list of all the enterprises in the village (including potential new enterprises)

2. Use pair wise ranking to narrow the range of enterprise ideas to 5-6 as shown in the hypotheticalexample below:

Maize Beans Sorghum Cassava G/nuts S/potatoes Cowpeas Millet Tally

Maize MZ S MZ GN MZ MZ MZ 5

Beans S C GN SP CP M 0

Sorghum S GN S S S 6

Cassava GN C C C 4

G/nuts GN GN GN 7

S/potatoes CP SP 1

Cowpeas CP 3

Millet 1

(In this case g/nuts, sorghum, maize, cassava and cowpeas are the 5 most promising enterprise ideas)

3. Set criteria for screening and further selection and give weights to each criterion say from 1-6, the most importantcriteria getting the higher weighting e.g. profitability has weight 6, market has weight 5, advisory services has weight4, etc. (Note that these criteria are usually location specific and communities may weight them differently. Othercriteria such as compatibility with the farming system, culture and norms may also be considered. Howeverprofitability and marketability must always be considered and assigned the highest weights).

4. Participants guided by the facilitator reflect well on each enterprise based on the weighted criteria and accordinglydecide which enterprises score highest.

5. Tally the votes against the respective boxes as shown in the table below6. Multiply the tallies for each enterprise by the criterion weight7. Add the scores for all the criteria for each enterprise to get the total score8. Rank the enterprises by total scores. The highest score ranks no. 1 as shown in the example below:

Risks Use of local

resources

Knowledge

and skills

Advisory

services

Market ProfitabilityEnterprise

Tally Weight Tally Weight Tally Weight Tally Weight Tally Weight Tally Weight

Score Rank

G/nuts // 1 // 2 / 3 // 4 /// 5 /// 6 50 2

Sorghum /// 1 // 2 // 3 / 4 / 5 // 6 34 5

Maize / 1 /// 2 /// 3 / 4 / 5 // 6 47 3

Cassava / 1 // 2 // 3 /// 4 /// 5 /// 6 56 1

Cowpeas // 1 // 2 // 3 // 4 // 5 // 6 42 4

Based on the above example, it can be seen that out of the five enterprise ideas, cassava, G/nuts, and maize are themost promising enterprises and need to be further subjected to profitability and risk analysis in order to zero on one ortwo priority enterprises. It should be noted that an enterprise which scores highest in the pair wise ranking may notnecessarily perform best in the prioritization process as is the case in this hypothetical example .

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Session 4: Profitability Analysis of Enterprises

Learning objective: By the end of this session, participants will be able to:1. Define and explain profitability analysis and its importance2. Carry out profitability and risk analysis of the selected enterprises and select to one or two

priority enterprises

Time: 3 hrs

Methods: Brainstorming, presentations and discussions in plenary.

Training Materials: Flip Chart Paper, Marker Pens, Masking Tape, Role Play Scripts, NoteBooks and Pens

Procedure1. Introduce the session and learning objectives

2. Give an interactive presentation on the key aspects and process of profitability analysiswith emphasis on the inputs that go into production of various enterprises, their costs,expected outputs/yields, market prices, marketing costs and expected returns. Thefacilitator continues with the explanation of the aspects of risk analysis, which involvessubjecting the expected gross margins to shocks arising from changes in costs ofproduction, output/yields and market prices. (Note to facilitator: Give examples onprofitability of crop and livestock enterprises in order to help participants internalizethe process).

2. In groups, participants carry out an exercise on profitability and risk analysis ofenterprises prioritized in session three no. 4. Each group should work with at least twoenterprises following the procedure given in no.2 above.

3. Invite groups to make presentation to the plenary for discussion. (Note to facilitator:Ensure that the calculations are done correctly and steps followed).

4. Depending on the results of the profitability and risk analysis in no. 3 above, thefacilitator guides the participants to select at least three most profitable and less riskyenterprises to continue with.

5. Wrap up by emphasizing the importance of profitability analysis.

Learning points: Profitability Analysis of Enterprises

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Exercise on Profitability Analysis of a crop enterprise (Sorghum)

Egangainos Youth Group in Asuret Sub County, Soroti District identified Epuripur sorghum as one of the promising enterprisesin their area. They have decided to open up 1 acre of the crop in the 1 st rains of 2004. The group plans to hire land at a rate oShs. 15,000/acre. The other key inputs include: Oxen hire for ploughing at a rate of Shs. 15,000/acre; Improved seed, which costs

Shs. 2000/kg; hired labour which is paid at Shs. 1,500/man day; gunny bags, which cost Shs. 500 each; promotion of the groupproducts over the local FM station will cost Shs. 5,000; hire of transport to the market will cost Shs. 10,000 and market dues wilcost Shs. 3000. The group expects a sorghum yield of 1,000kgs/ acre and the market price is projected at Shs. 300/kg. The groupis however conscious that the weather pattern in their area changed and is no longer predictable. They therefore consider twofuture scenarios as follows:Scenario 1:The sorghum crop is hit by a severe drought at flowering and the group only realizes 700 kg/acre as compared to the anticipate1,000 kg/acre. However because the drought will affect a number of producers, the market price will rise to shs.400/kg.Scenario 2:The season is favourable and the group realizes a higher yield of 1,200 kg/acre. However due to high sorghum production in most

parts of the district, prices slumped to only Shs. 200/kg.Note: In either case the costs of production are assumed to remain unchanged.

Assignment

1. List all the key inputs and activities required for the sorghum enterprise and their costs2. Using the estimated yields/ outputs, compute the expected income or revenue (Yield/output x market price)3. Compute the expected gross margin (Income expenditure/costs)4. Carry out a risk analysis under scenarios 1&2 for each of the enterprises5. Accordingly advice the group whether or not to proceed with the enterprise

Exercise on gross margin and risk analysis for a poultry enterprise (Layers)

Kweterana Poultry group in Bwanswa Sub County, Kibaale District has embarked on a poultry enterprise. They want to start with100 layers, as market for eggs is readily available in the area. They have constructed a poultry unit using locally available materiaand it cost Shs. 120,000. Furnishing the house with feeders, water troughs, and litter will cost Shs. 40,000. Day-old chicks aresold at Shs. 1,500 each. Treatment/Vaccination will cost on average Shs. 1,000 per bird. Feeding, which constitutes the mainexpenditure item will cost shs. 15,000 per bird over the 18 months period. The group will also incur other direct labour costs,water, lighting and other incidentals to a tune of Shs. 500,000. Due to high standards of management, the group hopes to loseonly 10 birds. It is expected that each hen will lay at least 280 eggs and eggs will be sold at farm-gate price of Shs. 2700 per tra(30 eggs). The group will also sell 90 off-layers at Shs 4,000 each after the production cycle. However there is uncertainty overthe future of the enterprise and the group foresees the following scenarios:Scenario 1:There are frequent out breaks of Newcastle disease in the village and since farmers hardly ever vaccinate their local birds, thegroups expect to lose 30% of the birds during such outbreaks. However, the supply of eggs under such situations rapidly declinesand the group will be able to get a higher farm-gate price of shs.3,000 per tray of eggs.Scenario 2:Poultry has been selected as one of the priority enterprises in Bwanswa Sub County and a number of groups have taken up

poultry production. It is envisaged that there will be an excess supply of eggs and the farm-gate price of eggs is likely to drop to

only shs. 2,400 per tray.(Note: In either case the costs of production are assumed to remain unchanged).

Assignment1. List all the key inputs and activities required by the poultry enterprise and costs2. Using the estimated outputs (eggs and sale of off-layers), compute the expected income or revenue.3. Compute the expected gross margin4. Carry out a risk analysis under scenarios 1&2 for each of the enterprises

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Profitability Analysis for Sorghum Enterprise

Table 5: Gross Margin Analysis for 1 acre of Epuripur Sorghum

Input/ Activity Quantity Unit cost Total costs

Hire garden 1 acre 15,000 15,000

Bush clearing 1 acre 5,000 5,000

Ploughing (x2) 1 acre 15,000 30,000

Seed 4 kg/acre 2,000 8,000Planting 1 acre 5,000 5,000

Weeding (x2) 10 man-days/ acre 1,500 30,000

Harvesting 10 man-days/acre 1,500 15,000

Transporting home 2 ox-days 3,000 6,000

Drying/threshing 3 man-days x 5 days 1,000 15,000

Gunny bags 10 500 5,000

Product promotion - - 5,000

Transport to market 10 bags 500 5,000

Market dues 15 bags 200 3,000

Total costs 152,000

Total returns = Area x yield x market price = 1 acre x 1,000 Kgs x 300 =Shs 300,000

Gross margin = Total returns less Total cost = Shs.300,000 Shs 152,000 = Shs 148,000

At this stage of analysis the enterprise looks quite profitable and ideally the group would have no reservations ontaking on the enterprise. However when subjected to a risk analysis, the situation may not look as promising as isshown in the analysis below.

Table 6: Risk analysis for Sorghum

Scenario 1:A decrease in yield to 700 Kg/ha and a rise in market price to Shs. 400/Kg

Parameter Product Quantity Market price (Shs) Total (Shs)

Expected revenue Sorghum 1 acre x 700 kg/acre 400 280,000

Total costs (Remain unchanged) 152,000

Gross margin = Total revenue Total costs 128,000

Scenario 2: An increase in yield to 1,200 Kg/ha and a fall in price to shs.200/kg


Expected revenue Sorghum 1 acre x 1,200/ha 200 240,000

Total costs (Remain unchanged) 152,000


It can be seen that under scenario 1 above that a decrease in yield accompanied by a rise in price will notsignificantly affect the profitability of the enterprise. However, under scenario 2 a fall in market price will drasticallyreduce the profitability of the enterprise even though the yields increased. However, in both cases, the grossmargins remain positive and quite substantial. The group would be advised to go ahead with the enterprise butneed to take more care about the many competing groups growing the same crop. The above example also showsthat a fall in market price has far reaching effect on gross margin than the fall in yields.

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Profitability Analysis on Poultry (layers) Enterprise

Table 7: Gross Margin Analysis for 100 layers

Input/Activity Quantity Unit cost Total cost

Poultry house Local materials (assorted) - 120,000

Feeders, waterers, litter - - 40,000

Day-old chicks 100 birds 1,500 150,000

Vet drugs/treatment 100 birds 1,000 100,000

Feed (chick, growers and layersfull meal)

100 birds 15,000 1,500,000

Incidentals (wages, water, lightingetc).

- - 300,000

Total Costs 2,210,000

Eggs: 90 layers x 280 eggs x Shs. 90/egg 2,268,000Expected Returns

Off-layers90 x Shs. 4,000 each 360,000

Total Returns 2,628,000

Gross Margin = Total Returns Total Costs = 2,628,000 - 2,210,000 418,000

The enterprise looks very promisingand the group would have little reservations in going ahead with the enterprise.However, risk analysis under two scenarios below shows that the enterprise is quite risky for the group.

Table 8: Risk Analysis for layers

Scenario 1:(Disease out break leading to 30% loss in birds, but rise of price of egg to Shs.100


Eggs 70 birds x 280 eggs per laying cycle 100 1,960,000Expected revenue

Off-layers 70 4,000 280,000

Total revenue 2,240,000

Total costs (Remain unchanged) 2,210,000


Scenario 2: Too many poultry farmers, excess supply of eggs leading to price fall to Shs. 80

Parameter Product Quantity Market price Total

Eggs 90 birds x 280 eggs per layingcycle

80 2,016,000Expected revenue

Off-layers 90 4,000 360,000

Total revenue 2,376,000

Total costs (Remain unchanged) 2,210,000


It can be clearly seen that both disease out breaks and over supply of eggs easily render this otherwise promisingenterprise unprofitable. In the first scenario the loss of birds cannot even be compensated by the increase in priceof eggs. Disease control is therefore the most critical factor for the group if it intends to pursue this enterprise. In thesecond scenario a decrease in the price of eggs similarly reduces the profitability of the enterprise. So if the groupintends to pursue this enterprise it must take note of competitors. Otherwise it is advisable for the group to drop this

enterprise and opt for alternative enterprises or intensify on disease control.


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Profitability analysis: This is a process through which the enterprise, which is finally selected, is tested not only forviability, but profitability as well. A typical profitability analysis includes two closely linked steps. The first stepinvolves the gross margin analysis while the second step is the risk or sensitivity analysis. Gross margin analysismatches the costs (production and marketing) against the expected benefits or returns from the enterprise. Risk orsensitivity analysis on the other hand is aimed at finding out how changes in the three key determinants of grossmargin affect the overall profitability of the enterprise namely:

Changes in costs of productionChanges in output or yieldsChanges in market pricesAny sharp rise in costs of production will render the enterprise less or even unprofitable while a sudden fall inoutput/yields and market prices too will reduce the profitability of the enterprise. This is common with rain-fedagricultural related enterprises, which are frequently subject to vagaries such as drought, water logging, pest anddiseases and poor access to productivity enhancing technologies. All groups should therefore endeavor to carry outboth gross margin analysis and risk analysis.

Gross margin analysis

The key steps in carrying out gross margin analysis include the following:

List and quantify all inputs that are required to run the enterprise. This will include: Land, labour(group/hired), hand tools, implements, seed, structures, agro-chemicals, advisory/technicalservices, wages, processing equipment, promotion/advertising costs and actual marketing costs.

Establish the unit cost(price) of each input Estimate the total costs of production for the enterprise by multiplying the total quantity of inputs

by the cost price of each input. Estimate the total output or yield of the enterprise. Establish the projected market price for the end product (this information could be obtained from a market

survey or sources of marketing information) Compute expected returns by multiplying output/yield by the market price per unit of output. Subtract projected total costs from expected returns to get the gross margin i.e.

Gross margin = Expected Total Returns Estimated Total costs

The Gross margin must be positive to a reasonable margin for the enterprise to be profitable.(Note that it is always better to use average yields and prices in determining expected returns, as currentmarket prices are often misleading)

Risk /sensitivity analysis

Risk analysis looks at scenarios involving changes in costs of production, yields and market prices and howthey affect the profitability of the enterprise. The key steps include: Compute changes in projected gross margins arising from specified increases in the costs of production,

usually 5% -10%. Similarly compute changes in gross margins due to 5% -10% fall in yields/ output. Do the same with a fall in market prices

Determine the % change at which each key determinant of profitability (or combination of) leads to zero ornegative gross margin. If is less than 5% then this enterprise should be considered risky and should be carefully reviewed.

It is important to note that although the group can cut on costs of production and/or increase output by use ofproductivity enhancing technologies, this can hardly influence market prices. Market price is therefore in most casesthe most critical factor determining the overall profitability of the enterprise.

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Session 5: Preparing a Business Plan

Learning Objective: By the end of the session, participants will be able to:1. Define a business plan2. Explain the importance of business planning

3. List and explain the key components of a business plan4. Prepare business plans for their enterprises

Time: 3 hrs

Methods: Group discussions, presentations in plenary, practical exercises

Training Materials: Flip Chart Paper, Marker Pens, Masking Tape, Manila Cards, Scripts of theexercises

Procedure

1. Introduce the session and learning objectives2. Participants brainstorm and define a business plan and its importance. Using participantscontributions, agree on a working definition of a business plan and its importance

3. Explain the key aspects of business planning which include the following: Defining the business Activities Deciding scale of the business Inputs required Quantities required Cost estimation (fixed and operational costs) Sources of funding Assigning of roles and responsibilities Setting of rules and regulations Day-to-day management Record keeping/ financial accounts Marketing.

4. In groups, participants critically analyze two selected enterprises in session 4 and come upwith a business plan. Focus should be on the key aspects of business planning discussedin no.3 above.

5. Invite groups to make the presentation to the plenary for discussions. The facilitatorguides the discussion ensuring that the key elements of a business plan are all included.

6. Wrap up the session by emphasizing the importance of making a business plan as a guideto a successful business /enterprise.

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Learning points: Preparing a Business Plan

What is business planning?

Business planning involves setting objectives, defining the scale/size of the business, preparing and organizingall resources (human and material), which are required to run the business. It ensures that time and otherresources are optimally utilized and costs are minimized. For small individual/group enterprises 5 key steps haveto be undertaken in the planning process and these include:

Deciding on the scale or size of the business Computing start-up and operating costs Mobilizing resources to start the business Assigning roles and responsibilities among members Agreeing on rules and regulations governing the running of the business Writing out a simple work plan Getting started

Computing start-up and operating costs

The group needs to know the costs to be met before anything can be produced (fixed costs). These may include:cost of land, buildings and cost of initial inputs. A group intending to start a poultry enterprise for example willhave to construct a poultry house, it has to purchase feed/ water troughs. Once the group has established thefixed costs, the group also needs to compute the running or operating costs (variable costs). For a poultryenterprise these will include: costs of feed, vaccines, kerosene for lighting, veterinary drugs, labour, transport tothe market and market dues. As with any business the group must ensure that cost estimates are realistic andkept to a minimum.

Figure 8: A group enterprise must be properly planned for it to succeed and all members viewsmust be accommodated

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Assigning roles and responsibilities

At the time of choosing the business, group will have established whether or not it has the skills needed to runthe business. At this stage the group decide exactly what role each group member has to play in running thegroup business. The group also needs to identify which member will have responsibility for coordinating each set

of activities (coordinators). This also applies to individuals. Main areas of responsibility in small group businessesinclude: Input supply to be coordinated by supply coordinator Production/processing to be coordinated by production coordinator Accessing advisory services to be coordinated by the group advisor Record keeping/treasurer to be coordinated by accountant Marketing/sales to be coordinated by marketing coordinator General management to be coordinated by business manager

Apart from identifying the coordinators, the group also needs to assign individual members to the respectiveteams. Usually 1-2 members are assigned to work under each of the coordinators. Roles should be assigned tomembers who are knowledgeable, preferably with experience for the tasks assigned to them. However it is

important to note that the main purpose of assigning roles and responsibilities is to ensure that all groupmembers actively participate in the various enterprise operations. Like leadership, coordinating positions shouldbe regularly rotated so that all members get opportunity to practice different roles . This ensures that knowledge isbroadly shared and capacity built among all members and not focused on just one or two individuals. It alsoensures that if a coordinator is sick or leaves the group, other members are able to step in and ably performhis/her duties.

Figure 9: Clearly assigned roles will lead to easy management of the group enterprise


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Agreeing on rules and regulations

It is often difficult to get members to devote equal time and contributions to the group business. It istherefore often necessary to make rules and regulations guiding the group business. In particular therules/regulations should guide the following:

What new members must contribute in order to join the group business What benefits members will receive in case they wish to leave the group How much time each member should devote to the group activities How profits will be shared How losses (if any) will be shared How much of the profits will be reinvested in the business How arguments or conflicts will be resolved

It is however, important to note that only when rules are enforced, will they be of any use to the group.Some form of disciplinary measures need to be imposed on offenders while well performing membersshould be rewarded.

Deciding on the scale or size of the business

The size of the business is primarily determined by number of potential customers who will buy the product

(size of the market) and the individual/groups ability to meet the required start-up costs (fixed capital) andmanagement. A simple market survey before starting the enterprise is recommended. Such a surveyshould address the following issues:

How many potential customers exist? What are the product demand levels and their stability throughout the year? Are the resources sufficient to meet start-up costs? Are there competitors or other f irms making similar products? What is the possibility for future expansion?

However, the rule of the thumb is that it is usually better to start small and subsequently grow

Drawing up the work plan

It is important that the individual/group draws up a work plan before commencing business. The work planshould specify the key activities to be implemented, where they will be carried out, when they will becarried out, who will be responsible for each set of activities, the key resources required and theexpected outputs for each activity. This will not only lead to timely operations, but will also easesupervision and monitoring of enterprise activities. Once the group has developed a work plan it ought toensure that it sticks to it and alter it only when it is absolutely necessary.

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Figure 10: A simple work plan for Umoja Bean Enterprise Group, Bwanswa Sub County, Kibaale District.

Getting started

Once the group/individual decide on the scale of the business, start up operations have to be organized, some ofwhich may be implemented at the same time hence a need for coordination. Key operations may include:

Securing funds for the business. e.g. Individual/members contributions, group savings, loan e.t.c. It is

however, recommended that most financing for operations comes from individual or group fund. In case of a group enterprise, enough land should be secured, as lack of group land is usually the main

constraint to running group enterprises. The group can rely on the good will of one of its members, but itwould be better off hiring land and or outright purchase of its own land.

Finding premises in which the business will operate. The premises can either be owned or hired by theindividual/group depending on finances available

Getting equipment and supplies that are needed to kick-start the business. The equipment depends on thetype of enterprise e.g. a poultry enterprise requires the following: litter, feed and water troughs, lamps, feedand vet drugs, while a crop enterprise will require seed, agro-chemicals etc.

Preparations for selling include identifying a location for selling the products, which, could be a market stall, aroadside kiosk or a retail shop. Preparation for marketing also includes advertising the product on signpostsor billboard, radio and newspapers. This is always the most neglected aspect of enterprise development and

needs to be addressed at the planning stage. The sub-committee on marketing should try to link up withsources of marketing information and as much as possible try to promote the group products.


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An example of a business plan for a group bean enterprise

All groups should endeavor to prepare a simple business plan for their enterprises. A typical business plan shouldindicate the group name, its location, type of enterprise, the overall business objective, specific objectives, estimatedstart up costs, sources of funding, scale of enterprise, members roles/responsibilities, rules/regulations and asimplified work plan. This will ease management and monitoring of the business. An example of a simple businessplan is given here below.

Group Name: Umoja

Location: Kikoota Parish Olio S/county Soroti.. District

Group Enterprise: Beans..

Overall objective: To maximize the groups income through commercial production of beans

Specific Objectives

To maximize yield through use of improved bean varieties

To minimize costs through use of group labour

To get premium prices by selling high quality beans during off-season

Estimated start up costs: Shs. 250,000

Sources of Funding

Members contributions, Shs. 150,000

Group Fund, Shs. 100,000

Scale of enterpriseStart with 2 acres during 1st rains of 2004 and expand to 4 acres in the 2nd rains.

Members Roles and Responsibilities

4 working committees under the leadership of a coordinator Purchases committee (3 members)

Production committee (4 members)

Finance committee (Treasurer and 3 members)

Marketing committee (3 members)

Rules and regulations

All members to pay contribution of Shs. 10,000 each

All members to work on group garden at least once a week

A fine of Shs. 1,500 for absenting from group work

All members to carry out monthly monitoring visits

Work planActivity When Where Responsible person Resources Expected output

Ploughing February 04 Group plot Production coordinator Oxen, plough Ploughed field

Seed purchases February 04 UNFFE stores Purchases coordinator Cash, seed Seed purchased

Planting March 04 Group plot All members Group labour Crop planted

Weeding May 04 Group plot All members Group labour Crop weeded

Harvesting June 04 Group plot All members Group labour Crop harvested

Drying and threshing June 04 Chairmans home All members Hired labour Clean crop

Sorting and bagging July 04 Chairmans home Marketing coordinator Hired labour High quality beans

Marketing September 04 Soroti town Marketing coordinator Transport High income

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Session 6: Managing the Enterprise

Learning Objectives: By the end of this session, participants will be able to:1. Define enterprise management and its importance2. Describe key management functions

Time: 3 hrs

Methods: Brainstorming, role play, discussions, presentations in plenary

Training Materials: Flip Chart Paper, Marker Pens, Masking Tapes, Script of Role Play, NoteBooks, Pens

Procedure1. Introduce the session and the learning objectives2. In a brainstorming session, participants define management and explain its importance.

Harmonise and agree on the definition and the importance.3. The facilitator discusses the key management functions4. The facilitator introduces two role-plays to be acted in two groups. One on Kihumuro Fish

Farming enterprise, the other on AWAFA Groundnut enterprise and requests volunteersto participate. (Note to the facilitator: Encourage all participants especially women toparticipate)

4. The facilitator goes through the role plays with the volunteers; The volunteers assignthemselves the various roles, rehearse and act to the rest of the participants.

5. After the role plays, guide participants to discuss and document lessons learnt onmanagement of group enterprises

6. Wrap up the session by emphasizing that proper management of resources (human, financial,land) with proper record keeping are some of the most important management functions inbusiness.

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Role play: Kihumiro Fish Farming Enterprise

After successfully making their business plan, the Kihumiro group embarks on their fish farming enterprise. Atthe last planning meeting, it was agreed that all the members would participate in digging the ponds. Fiveworking committees each under a coordinator were identified. The first committee under the supply coordinatorwould be responsible for identifying and purchasing of all the inputs required such as hand tools, improved fishfry and nets. The second committee under the production coordinator would be responsible for day-to-day

maintenance of the ponds and feeding the fish. The third committee led by the advisor would be responsible forlinking the group to service providers for the necessary technical information. The fourth committee under theaccountant will be responsible for day-to-day management with specific emphasis on record keeping,maintaining business accounts and group finances. The fifth committee led by the marketing coordinator will beresponsible for accessing marketing information, promoting of the group products and carrying out actuamarketing. They will also be responsible for equitable sharing of the benefits of the group business. It wasagreed that all members would actively participate in monthly planning meetings and in monitoring progress othe project.

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Role play: AWAFA Upland Rice Enterprise

AWAFA group in Kasilo County, Soroti district has embarked on an Upland rice enterprise. They have identifiea high demand for SUPERICA 2, one of the high yielding improved varieties of Upland Rice. At the last planningmeeting, four working committees each under a coordinator were identified. The whole group under guidancefrom the production coordinator would be responsible for the key production activities notably; opening up oland, ploughing, planting, weeding pest/disease control, harvesting, drying/threshing and storage. The firstcommittee under the supply coordinator would be responsible for sourcing and purchase the improved seed,which, is currently in short supply. It will also be responsible for purchase o other inputs such as hand tools an

implements. The second committee led by the advisor would be responsible for linking the group to serviceproviders and other sources of technical information. The third committee under the accountant will beresponsible for day-to-day management with specific emphasis on recording keeping, maintaining businessaccounts and handling group finances. The fourth committee led by the marketing coordinator will beresponsible for accessing marketing information, promoting of the group products and carrying out actuamarketing. They will also be responsible for equitable sharing of the benefits of the group business. It was alsoagreed that all members under the leadership of the chairperson, would actively participate in monthly planningmeetings and in monitoring progress of the project.


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Learning points: Managing the Enterprises

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What is management?

Management is making best use of the human, financial and material resources in order to

achieve business objectives. The key business objectives usually include: efficient use of productive resources,

minimizing costs and above all maximizing profits. In order to maximize profits, one must aim at producing at low costs, increasing output

or yields through use of productivity enhancing technologies such as improved cropvarieties, improved livestock breeds and labour saving techniques, selling at high marketprices by producing during off-season; storing and selling when supply is low and/orthrough adding value/processing.

In groups, members themselves assume the management functions by allocating businessroles and responsibilities among members. If roles and responsibilities are not clearlydefined or if some members show reluctance in performing their assigned tasks the groupbusiness is unlikely to succeed. The roles include among others: sourcing and purchasing

inputs, production/processing, accounts/record keeping, promotion/marketing and overallsupervision/management

Proper management of funds and assets together with proper record keeping are some ofthe most important management functions in business and should be assigned to literate,dedicated and trustworthy persons.

Assigning of managerial functions

Input supply to be coordinated by supply coordinator Production/processing to be coordinated by production coordinator Accessing advisory services/technical information to be coordinated by the advisor Record keeping/accounts to be coordinated by the treasurer

Marketing/sales to be coordinated by marketing coordinator General management to be coordinated by business manager or chairperson

The purpose of assigning roles and responsibilities is to ensure that all members actively participate in thebusiness operations. Coordinators in particular ought to realize that their roles are to coordinate and workwith other members, but not to give orders to others. Like all leadership roles the coordinating positionsshould be regularly rotated.

Figure 12: Properly planned and managed upland rice enterprise by AWAFA womens group in Olio subcount , Soroti District


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Session 7: Financial Records

Learning objective: By the end of the session, participants will be able to:1. Define financial records2. Describe the importance of keeping financial records

3. Prepare key financial records

Time: 2 hrs 30 mins

Methods: Brainstorming, practical exercises, plenary presentations and discussions

Procedure1. Introduce session and learning objectives2. Through brainstorming, participants define and discuss the importance and the

different financial records kept. The facilitator records the responses on a flip chartpaper.

3. The facilitator basing on the contributions from participants explains the types ofbusiness records kept with practical examples on how to make them.4. In groups, participants study the case study on successful Awoja Tomato project and

discuss the various records kept, prepare a balance sheet, a profit and loss accountand a cash flow statement.

5. The groups record their deliberations on flipchart paper and present to the plenary.The presentations are discussed and under the guidance of the facilitator, necessarymodifications are made.

6. Wrap up the session by clarifying issues not clearly understood by the participants.Point out that, financial record keeping, including maintenance of accounts, is usually poor inmost businesses and is considered difficult and time consuming. One must therefore decidewhich records to keep (not too many) and who would be responsible. In addition, basic

accounts (balance sheets, profit/loss accounts and cash flow statements) must always bepresented in simplified form.

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Case study: Successful Awoja Tomato Project

Five members of Awoja Youth Group in Soroti District decided to embark on tomato production. They were able toproduce tomatoes all year around because of the readily available water at Awoja River. There was also ready marketfor tomatoes in Soroti town 5 Km away. After carrying out a feasibility study, they found out that tomato production was

profitable. According to their business plan, they required capital of Shs. 100,000, to start with. Each of themcontributed Shs. 20,000 and this money was banked in their account in Stanbic Bank, Soroti. During their planningmeeting it was decided that the money be used as follows: Hire land (Shs.10, 000), tomato seeds (Shs.5, 000), Handtools (Shs15, 000), Sprayer/chemicals (Shs.40, 000), hiring a market stall (Shs. 5,000), transport to market (Shs.5, 000)

and reserve at bank (Shs.20, 000). Land was hired in January, while tomato seeds and hand tools were bought inFebruary. The sprayer/chemical were bought in March. The stall was rented in June, and likewise, transport expenseswere incurred in June. By the end of the marketing season, the group had harvested 60 Kg of tomatoes and sold it at a

price of Shs. 2, 500 per kg, realising a total of Shs. 150,000 from their sales. Shs. 50,000 was shared out equallyamong members and the rest was banked in the group account in preparation for the next season.

Assignment

Identify which business records the group needed to keep

Prepare a simplified balance sheet

Prepare a simplified profit and loss accounts and

A cash flow statement for the group business


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Learning points: Enterprise Financial Records

Financial record keeping is writing down in a chronological order all transactions involving money cominginto and money going out of the group business. Money mainly comes into the business through memberscontributions, group fund, loans and the sale of group products. Money goes out of the business throughpurchases of inputs such as seed, hand tools/implements, payment for labour etc. A group can only

determine the profitability of the enterprise through accurate record keeping. To determine the profitability,the group therefore needs to know exactly how much money went into production and what was realizedthrough sales of group products.

Purpose of financial records They provide a history of what has happened in the group business Aid in management decisions Provide figures for planning and budgeting Show the profitability of the business Show the financial standing (ownings and owings of the business) Are useful for taxation purposes

Key financial records

The cashbookGood record keeping requires that all transactions be recorded in an orderly manner. There must be writtenproof of transactions in form of receipts of purchases and copies of receipts issued to its customers. Acashbook gives a summary of the money, which came into the group business, and money that went out ofthe business. A simple cashbook can be made from an ordinary exercise book. The money that came in isrecorded on the left hand side while money that went out is recorded on the right hand side. For a farmersgroup the main sources of income will include: Members contributions, group fund, grants from NGOs andloans from lending institutions such as MFIs and banks. The main expenditure items include: Seedpurchases, hand tools, implements, hired labour, transport etc.

Money In (+) Money Out (-)From which source the money came What money was spent on

Income from sales

Group savings

Loan

Grants from NGOs

etc.

Seed

Hand tools

Implements

Hired labour

Transport costs

etc.

A cashbook should show the dates money was received or given out, the source of the money and theamounts. Entries usually cover a period of one month at which totals and balances are made as shown intable 9 below. Total money in less total money out of the business gives the balance of funds in the groupbusiness. Information from the cashbook is essential for writing other records such as the balance sheet andprofit and loss accounts.

Table 9: Cash Book

Date Money In Amount Date Money Out Amount

Total Total

Balance

[Total money in] [Total money out] = [Balance]

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The Balance Sheet The balance sheet shows where the funds for the business came from and how it has been used. This money could be from own contributions, from the group fund and/or a loan from the bank or other lenders

such as NGOs or micro-finance institutions. The money is normally spent on purchase of inputs; pay labour, meet transport costs and/or banked. It is called a balance sheet because all money collected must equal to the money used plus any that is at hand

or in the bank. The balance sheet for the example earlier given (Awoja Tomato Enterprise) would look like in table 10 below:

Table 10: Balance sheet for Awoja Tomato Enterprise

The money came from: The money was used like this:

Akol 20,000 Hire land 10,000

Opio 20,000 Tomato seeds 5,000

Edwaru 20,000 Hand tools 15,000

Emudong 20,000 Sprayer/ chemicals 40,000

Ameru 20,000 Hiring stall 5,000

Transport costs 5,000

Bank Account 20,000

Total 100,000 Total 100,000

Profit and Loss Accounts Profit and loss accounts are used to determine the profitability of the enterprise. It matches the expenses against income in order to establish whether the business made a profit or a loss. In a profit and loss account, one should be able to work out the following:

- What it cost to produce the product- The key ingredients of costs namely; fixed costs and operational costs- How much they got from selling their product- Key components of returns e.g. size of enterprise, output or yield and market price per unit of

product Once these parameters are clearly understood then one should be able to compute the profits.

The profit and loss account for Awoja Tomato enterprise would look like table 11 below:

able 11: Profit and loss account for Awoja Tomato Enterprise

oduction Sales of ve

T

Cost of pr getablesHire land 10,000 Tomato sales 150,000

Tomato seeds 5,000

Hand tools 15,000

Sprayer/chemicals 40,000

Hiring stall 5,000

Bus transport 5,000

Total 80,000 150,000

The difference between the total sales and the total costs of production show whether the group made a profit or a loss.this case the tomato enterprise made a profit of Shs. 70,000.

The s:

s (3-6 months)

nants

In

calculations should be made at the end of a production cycle as follow At the end of the cropping season for annual crop At the end of the laying cycle for poultry (1 year) At the end of the lactation period for dairy cows (1 year) After the sale of stock such as steers, pigs, broilers and small rumi At the end of the financial year (June/Dec) for service enterprises

Profit - 70,000


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Cash flow Statement

A cash flow statement shows when money flows into the business (inflows) and when money flows out of thebusiness (outflows).

It helps one keep track of daily cash transactions (cash in and cash out) and also helps ensure that thereis always enough cash to meet current and future expenses.

It provides opportunity to verify all cash transactions and helps confirm the cash at hand any time. It assists one make informed decisions. For example, where the net inflow is negative one either has to seek

additional funds from the reserve; request for members contributions; borrow from the bank or Micro FinanceInstitutions (MFIs).

A simplified cash flow statement for Awoja Tomato Enterprise would look like table10 below.

Table 12: A monthly cash flow statement for Awoja Tomato enterprise

Period Jan Feb March April May June

Expenses

Land hire - 10,000

Seed - 5, 000

Hand tools - 15,000

Sprayer/chemicals - 40,000

Hire stall - 5,000Transport - 5,000

Income

Tomato sales + 150,000

Total - 10,000 - 20,000 - 40,000 - - +140,000

Net cash flow (Inflow Outflow) = Shs. 70,000

(Note that if correct entries are made in the cash flow statement, then the net cash flow should be equal to the profitobtained in the profit/loss accounts)

The key questions that would deepen the members understanding of financial records would include: How does the group interpret these records? Of the original Shs. 100,000 collected from members, how was it used? How much was left ? What were the total costs of production? What income did the group realize? Did the group enterprise make a profit? In which months did money flow out of the business? In which months did money flow into the business? Do these 3 records give a complete picture of the group enterprise? If not what additional information might the group need in future?

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