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Contents:
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.
- 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).
- 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:
- 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?
- 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.
- What raw materials will you always need?
- (a) ______________________________
- (b) ______________________________
- (c) ______________________________
- 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) ______________________________
- 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.
- 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.
- 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.
- What have they to sell?
- What is the quantity is to be sold? and
- At what price are we selling it?
SELLING PRICE = TOTAL COST + PROFIT
- 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.
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.
- 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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Workshop: Choosing Viable Enterprises:
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