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CHOOSING A MICRO ENTERPRISE
Facilitating Enterepreneur Decision Making
by Phil Bartle, PhD
Facilitator's Notes
A major factor in entreprise success is the choice of activity
Introduction:
This document for facilitators and trainers accompanies, "Choosing a Micro Enterprise," for participants. Whether you conduct the session yourself, or have hired a specialist in business management whom you have trained and briefed on participatory methods, the main approach here is to challenge each of the participants in becoming aware of the questions and to make the decisions that should lead to each client entrepreneur choosing a business that will be viable (profitable).
In this training, the overall method in this topic is to challenge your clients, participants in the scheme, members of the credit organization that you have set up, to make choices and to be able to justify their choices.
Where this document advises you to "Put this up on the wall," the best method is to prepare a large newsprint (ie from a flip chart) with the list, and tape it up on the wall with masking tape.
This document is not about making general management decisions, as in Management Training, but is about obtaining information and making calculations to determine if an enterprise will be viable (profitable) and therefore worth pursuing.
Use the issues raised in this and the accompanying facilitators'' Notes, to challenge your participants in choosing the most viable micro business they can.
All participants must understand the business they wish to operate. They should be able to know that every business undertaken might not necessarily result in a profit making venture.
People in low-income communities or rural areas are already engaged in income generating activities, so the choice of one enterprise against another has always been profit, based in terms of social or monetary gains.
Post this list up on the wall:
- Farming: growing crops and rearing animals;
- Fishing, hunting, trapping;
- Agro-processing: milling, fish-smoking;
- Farm equipment repair, fabrication;
- Weaving, sewing, dressmaking, tailoring;
- Brick-making, charcoal making;
- Hair-dressing, barbering, beauty salon:
- Food preparation, chop bars, restaurants;
- Carpentry, blacksmith, masonry; or
- Petty trade, marketing.
In developing countries, in the first two categories listed here, the majority of the population is producing non monetary wealth for consumption by the family rather than for sale. The vast majority of agricultural wealth is subsistence production. It is not produced for cash or for barter, and is not available to be used by the economy of the nation as a whole. By the laws of supply and demand, then, there is a deficit of products resulting from initial processing of agricultural products (they are in short supply and their prices are too high).
The sector which is most encouraged in low income countries, because it shows the most promise for sustainable development, is potentially most viable for micro entrepreneurs, and fills the most necessary niche in the economy, is the initial processing of agricultural products.
Many entrepreneurs believe they can only succeed with more money or loans but often the problem can be solved through better management of resources (human, materiel and financial) that are already available.
Considering the following will enable beneficiaries to assess whether the micro enterprise is desirable, viable and environmentally friendly.
- Marketability of goods and services;
- Availability of raw materials, tools and equipment;
- Location of the enterprise;
- Production processes;
- Production costs and benefits;
- Sources of financing; and
- Management.
Product or Service:
We first consider the product or service. This can be a new product or one already being produced or sold.
- Cheaper?
- Higher quality?
- A completely new product?
- On sale more regularly?
- On sale in different quantities? and/or
- Sold in a place where more customers would be?
Marketing:
- What price will be offered for their product?
- Who will buy or who are the customers and where do they live?
- How often and for how long will they buy; will they be prepared to buy every market day, continuously after 3 months?
- Are there any competitors? and
- Where will raw materials come from and at what price?
Looking for answers to the above questions is known as a "market survey" or "market analysis" which must be conducted to determine whether your product or service will sell. Are there any potential competitors and what are their strengths and weaknesses. The market survey is a good way to find out what customers are willing to buy and pay, and can be conducted by: (1) visiting and observing customers in a market; and (2) talking to people who are interested in the product.
Part of the training you offer, then, should be to arrange several such "market survey" visits for the group.
Skills Training:
This is the time to find out if your clients have the skills needed to produce the product or services or if the skills can be learned. Can the members in the group learn how to make the product or provide the service? You need to challenge them on each of the following questions:
- What type of skills are required?
- Do the participants have the physical ability to do the tasks required?
- Is the individual or group interested in learning the needed skills?
- Does someone in the group or in the local community already have the necessary skills and the capacity to teach it to others?
- How long will the training be? and
- What will it cost?
Materials, Tools and Equipment:
Next you need to ask to ask if each member can obtain the raw materials, tools and equipment which will be used in the business. It is especially important that the materials needed can be obtained locally as often as they are needed.
If something like equipment is to be imported, then it must be well known and arrangements for purchase and maintenance are made. To get spare parts from another country can take a long time and may be very expensive. We should try to use tools and equipment locally available and appropriate to the needs of the business.
Identifying a Work Place:
When carrying out a micro enterprise it is important to have a good place to work. Entrepreneurs should find suitable places in which to work.
Put this list up on the wall and discuss each item with the group:
- Workplace or location which is easily accessible;
- Space to work;
- Space to store raw-materials;
- Space to store finished products;
- Adequate security, doors and windows that lock;
- Availability of facilities (eg water, electricity, telephone); and
- A selling place where many customers will come.
The conditions needed depend on the type of business planned. A manually operated rice hulling machine does not need electricity; a vegetable growing business might not need a building.
You and your group should together visit several possible places where their enterprises are to be located, and check which of the conditions listed above are in place.
Selling Place:
Ask your clients if they have place to sell their product (1) in a local area only, (2) elsewhere (ie export); (3) or in both a local and in a wider area. Most businesses find it best to start selling in a local area and later think about expanding outside the community when your business is running well.
Put this list up on the wall:
- At a local weekly market;
- At a town daily market;
- On a roadside where many people pass;
- To a wholesaler
- To a marketing board;
- To an institution (school, hospital, office); and
- In rented commercial premises.
Production:
The main concern is for your clients to discover how the micro enterprise operates from beginning to end, ie how each product is produced, or bought and sold.
Put this list up on the wall:
- What is the production cycle (daily, weekly, bi-weekly, monthly)?
- What quantity is produced (level of production)?
- What do we use in production (raw materials) and are they readily available?
- Who will assist? and
- What special skills do you need and how do you acquire them?
This will help to determine the ways and means as well as the raw materials that will be needed to achieve high output.
Production Costs (Expenses):
All costs related to any micro enterprise must be explored and considered. Even the long term expenses relating to equipment, like annual depreciation, should be worked out so that the full costs are known by the entrepreneurs before venturing into business.
- Identify all the items (inputs) needed to produce or sell;
- Calculate the cost of getting them for the production of a specific quantity:
- Identify Production Inputs: (write this on the board or put on a paper on the wall)
- Raw materials: These are items required to produce a product;
- Equipment: These are the tools, implements and machinery required to produce a product;
- Labour: This is human effort directly involved in the production process. All salaries and wages, including the family plus other expenses on workers should be included in this cost;
- Transport: This consists of the cost of transporting raw materials for production and finished goods to the market or to buyers;
- Other expenses: These are all other costs that cannot be classified with the above and include: utilities like water, fuel, repairs, and interest on loans.
- Calculate the total production cost.
- Total cost of producing or selling will be arrived at by getting total of 1-5 i.e.
- Total cost = 1+2+3+4+5
- Cost per unit = total cost divided by number of units produced.
Production Income (Sales):
- All production costs;
- Labour expenses; and
- Maintenance and replacement costs for tools, equipment and machinery.
When added together, these three are called recurrent expenses. Every year sales must at least be equal to recurrent expenses, or the enterprise will lose money and the business will collapse.
When starting a micro enterprise, there are also start-up costs. These are costs that will have to be met before any product or service is sold. Start-up costs usually include cost of tools, machinery and furniture as well as any goods. It usually takes six months from the time someone starts a business until she is able to make a profit.
To ensure that the money we receive from sales will be enough to cover their costs plus profit, we must consider the following:
What have they to sell?
What is the quantity is to be sold? and
At what price are we selling it?
Put this equation on the board when going though these topics with the participants.
SELLING PRICE = TOTAL COST + PROFIT
Before they do their pricing, remind your clients of the following questions they should be able to answer: (1) Total cost? (2) How much are buyers prepared to pay? (3) Who are their competitors and their prices? (4) What is the level of demand for the product or service? and (5) What is the quality and nature of their product?
What is the "profit" or "margin?" This is the difference between sales revenue and production costs.
Also put this equation on the board:
PROFIT = SELLING PRICE - TOTAL COSTS
The profit margin is usually a percentage of the total cost and may range between 10-100%.
Conclusion: Selecting the Most Suitable Enterprise:
After going through all the above, then your client may decide whether the enterprise is worth the efforts put in.
- Look at the micro enterprise that will make the highest profit.
- Do you think it is a good micro enterprise to embark on?
- If not, look at the micro enterprise that will make second highest profit;
- Finally, make a choice; then
- Check with others so that other groups and individuals in the community are not intending to start the same micro enterprise to avoid competition.
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