Choosing a Viable Business; Participants' Notes
Choosing a Micro Enterprise
 by
Phil Bartle, PhD

Participants' Notes
Notes for entrepreneurs in training; how to choose a business

Introduction:

 This document is about obtaining information and making calculations
 to determine
 if your micro enterprise will be viable (profitable) and therefore
 worth pursuing.

 Every business undertaken might not necessarily result in a profit
 making venture. How do you choose one that is? You have many choices
 about what business will be profitable. Use the tips in this
 document in choosing a viable business.

 Here is a selection of possible businesses:

 . 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, blacksmithing, masonry; or
 . Petty trade, marketing.

 In developing countries, most people fish and farm for their own
 consumption. This does not contribute to the national market
 economy. In contrast, there are not enough products made from
 initial processing of agricultural products (they are in short
 supply and their prices are too high). While you can choose from
 among all of the list on the left, we recommend that you most
 consider initial processing of agricultural products (like making
 oil out of seeds). This is most likely to sustain a good income for
 you, and contributes most to the growth of your national economy.

 Petty trade, in contrast, is easy to get into, but contributes
 little to the national economy (no new value is added by production;
 petty trade merely distributes things already manufactured).

 Whatever the level and size of your enterprise,
 you always need to analyse the following:

 . 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:

 What is your proposed product or service? This can be a new
 product or one already being produced or sold. What are the reasons
 why you have decided to choose that as a business? Can you make a
 profit from it? Have you seriously considered the alternatives? Can
 you defend your decision?. Consider whether your
 product or service will be: 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?
 The Facilitator may ask you to defend your choice in a meeting of
 the group.

Marketing:

 To find possible customers (how much they want and at what price),
 we must find answers to the following questions:

 What price will people offer for your 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?

 To find out what customers are willing to buy and pay, you can
 visit and observe customers in a market, and talk to people who are
 interested in your product. Are there any potential competitors and
 what are their strengths and weaknesses. See Marketing.

Skills Training:

 Do you have the skills needed to produce the product or produce
 the services. If not, can you learn them? Can you learn how to make
 the product or provide the service?

 You need to know:

 . What type of skills are required?
 . Do you have the physical ability to do the tasks required?
 . Are you interested in learning the needed skills?
 . Does someone in the group or a person in the
   local community already have the necessary skills
   and does s/he have the capacity to teach it to others?
 . How long will the training be? and
 . What will it cost?

Materials, Tools and Equipment:

 Can you 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 within the locality 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.

 Answer the following questions:

 What raw materials will you always need?

 (a) ______________________________
 (b) ______________________________
 (c) ______________________________
 Examples:
 If we make furniture, we will always timber and nails.
 If we make farm tools, we will need iron and charcoal.

 What tools will be needed for purchase sometimes?
 (a) _______________________________
 (b) _______________________________
 (c) _______________________________
 Examples:
 If we make furniture, we need hammer and planer.
 If we repair bicycles, we need spanner and air pump.

Identifying a Work Place:

 When carrying out an income generating activity it is important
 to have a good place to work. Entrepreneurs should find suitable
 places in which to work.

 To carry out a micro enterprise, there are minimum conditions
 needed:

 . 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 huller machine does not need electricity; a
 vegetable growing business might not need a building. Visit (with
 other members of your group) possible places where your enterprise
 is to be located and check whether conditions listed above are in
 place.

Selling Place:

 Can you find a suitable place to sell from? You may want to sell
 the product: In a local area only; Elsewhere (eg export); 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.

 Here are some possible places to sell. You may think of others also.

 . 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:

 Your main concern is to find out how your micro enterprise will
 operate from beginning to end,
 ie how each product is produced, or bought and sold.

 You need to know the following:

 . What is the production cycle (daily, weekly, bi-weekly, monthly)?
 . What quantity is produced (level of production)?
 . What is used in production (raw materials) and are they readily
   available?
 . Who will assist you? 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:

 . 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):

 It is important to remember that money we get from selling the
 product or service must pay for three things:

 . 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 our costs plus profit,
 we must consider the following:

 . What have we to sell?
 . What is the quantity is to be sold? and
 . At what price are we selling it?

 SELLING PRICE = TOTAL COST + PROFIT

 Before pricing, be mindful of the following:

 Total cost;
 How much buyers are prepared to pay;
 Who are your competitors and their prices;
 Level of demand for the product or service; and
 Quality and nature of your product.

 What is the "profit" or "margin?" This is the difference between
 sales revenue and production costs.

 PROFIT = SELLING PRICE - TOTAL COSTS

 The profit margin is usually a percentage of the total cost and may
 range between 10-100%.

Selecting the Most Suitable Enterprise:

 After going through all the above, then you may decide whether the
 enterprise is worth the efforts put in.

 Among the available alternatives, you should be able to choose the
 best enterprise:

 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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Updated: 2003 April 22