Start and Improve your Business - Sustainable Sanitation and Water

Dieter Gagel

Start and Improve your Business The all-in-one business manual for start-ups and entrepreneurs in developing countries: Business idea generation, Market research, Equipment supply, Accounting and Cost calculation, Business planning, Management, Financing, Marketing, Import-Export, International trade and Tendering

Germany 2008

Business Development Services (BDS) Forum www.bds-forum.net

Production and publishing: Books on Demand GmBH, Norderstedt, www.bod.de

Original available on: ISBN 978-3-8370-5916-8

Business Development Services in Development Cooperation

www.bds-forum.net

Toolkit

Start and Improve your Business

Business idea - Market research - Equipment supply - Accounting

Business planning - Management - Financing - Marketing

Export promotion - Trade fairs - Tenders

Dieter Gagel Heidelberg, Germany 2008

Bibliographische Information der Deutschen National bibliothek Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliographie; detaillierte bibilographische Daten sind im Internet über http://dnb.d-nb.de abrufbar. Bibliographic Information of the German National Li brary The German National Library registers this publication in the German National Bibliography; detailled bibliographic data are available on http://dnb.d-nb.de.

Impressum

© 2008 Dieter Gagel, author Freelance consultant [email protected] Production and publishing: Books on Demand GmBH, Norderstedt

ISBN 978-3-8370-5916-8

Table of Contents Index

Introduction: The four steps of business implementation............................................................... 1

Phase 1: Business idea generation ........................................................................................... 3 • Screening of a viable business idea ................................................................................... 4 • Assessment of entrepreneurial characteristics ................................................................... 5 • Selection of one best idea.................................................................................................. 6 • SWOT analysis of the best idea ......................................................................................... 8 • Formulation of the final business idea .............................................................................. 11

Phase 2: Information seeking stage ........................................................................................ 13

• Market research ............................................................................................................... 14 o Market analysis format......................................................................................... 15 o Marketing plan guiding questions......................................................................... 16 o Check list for consumer analysis.......................................................................... 17 o Strategies in relation to competition ..................................................................... 18 o Field study: simplified market research format ..................................................... 20

• Supply market analysis .................................................................................................... 24 o Needs assessment .............................................................................................. 24 o Supply conditions................................................................................................. 25

• Infrastructure analysis ...................................................................................................... 26

• Business management issues.......................................................................................... 26

• Financial analysis and loan requirements......................................................................... 28

• Legal issues..................................................................................................................... 32 o Laws and regulations ........................................................................................... 33 o Legal forms of business organisation................................................................... 33 o Business registration............................................................................................ 36 o Taxation procedures ............................................................................................ 39 o Check your legal responsibilities .......................................................................... 41

• Business support institutions ........................................................................................... 42

• Final check list for information seeking............................................................................. 44

Phase 3: Starting up your business ........................................................................................ 49 • Make an action plan......................................................................................................... 50

o Exercise............................................................................................................... 51

• Business planning............................................................................................................ 52 o Overview on aspects of business planning .......................................................... 53 o Business plan format for start-ups........................................................................ 55 o Business plan for micro and small enterprises ..................................................... 67 o Business plan for medium size enterprises .......................................................... 77

• Basic bookkeeping and accounting .................................................................................. 96 o Simple cash book format ..................................................................................... 96 o Cash book and bank records with accounts....................................................... 101 o Monthly and annual sales and costs overview ................................................... 106 o Electronic cashbook and bank records on Excel basis....................................... 109 o Electronic monthly and annual sales and costs overview o Accounting formats ............................................................................................ 113

� Receipt; standard bill; sales on credit; supply on credit; stock card ........ 113 o Professional accounting..................................................................................... 117

• Cost calculation ........................................................................................................... 118

o Cost components............................................................................................... 118 o Cash flow statement .......................................................................................... 125 o Balance sheet .................................................................................................... 127 o Break even point................................................................................................ 128 o Profit and loss statement ................................................................................... 131

• Financing ....................................................................................................................... 132 o Constraints of access to finance ........................................................................ 132 o Financial records ............................................................................................... 134 o Cash flow........................................................................................................... 135 o Personal qualification......................................................................................... 135 o Costs and investments....................................................................................... 136 o Sources of finance ............................................................................................. 136 o Guide for business consultants on how to facilitate access to finance................ 138 o Loan application procedure and credit assessment............................................ 138 o Categories of financial institutions...................................................................... 142

• Administrative procedures.............................................................................................. 144 • Infrastructure (location, building, transport facilities)....................................................... 145 • Suppliers........................................................................................................................ 145 • Business management................................................................................................... 146

• Marketing strategies - the "4P Approach": Product, Price, Place, Promotion .................. 147 o Product development ......................................................................................... 148 o Managing prices ................................................................................................ 150 o Strategic location .............................................................................................. 152 o Promotion .......................................................................................................... 153

Phase 4: Follow up and improve your business ................................................................... 155

• Improve your marketing activities ................................................................................... 156 o Product development ........................................................................................ 157 o Standards and quality ........................................................................................ 160 o Participation on tenders ..................................................................................... 178 o International trade promotion ............................................................................. 191

� Exporting................................................................................................ 191 � E-commerce in Internet .......................................................................... 207 � Trade fairs and exhibitions ..................................................................... 209

• Evaluating sales and cost structure................................................................................ 216 o Check your accounting system .......................................................................... 216 o Data management ............................................................................................. 218

• Staff management.......................................................................................................... 219 • Stock management ........................................................................................................ 219 • Maintenance .................................................................................................................. 220 • Financing ....................................................................................................................... 221 • Check list: Summary of the follow-up phase................................................................... 222

Reformulation of your initial project idea (exercise) ............................................................. 223 Annexes

• Extended market research format • Standard loan application format • Export- and action-oriented workshop on submission to e-market places

and website publishing for export-oriented entrepreneurs • Business portals and learning platforms in Internet

1

The four steps of business implementation This manual has been prepared to encourage start-ups to create their own businesses as well as small business owners to improve their business thereby curbing the problem of unemployment and facilitate better conditions for new job seekers as well as self-employment.

The manual has four major parts.

• Part 1 provides business start-ups with the skill to generate possible business ideas and select the one that is viable. In order to do that, business start-ups will be guided through logical steps as provided in the toolkit. In the process of searching for 'one viable business idea', one should think creatively and properly scan the internal and external environments that may positively or negatively affect the establishment of a new business enterprise. Stiff market competition, market saturation, limited technical and managerial skills, limited access to financial services, raw materials, tools/equipment/technology and work premises are some of the critical issues that need the attention of business start-ups.

Phase 1: Business idea generation

Phase 4: Follow up andimprove your business

Phase 2: Information seekingPhase 3: Starting

up your Business

Steps of Business Implementation

Brainstorming

Screening of ideas

Selection of the best idea

SWOT analysis (Strengths-Weaknesses-Opportunities-Threats)

Final decision

Data managing

Product development and diversification

Marketing and promotion

Staff management

Stock management

Maintenance of equip-ment and infrastructure

Financing

Market segments

Supply markets

Infrastructures

Business management

Financing

Legislation

Business support institutions

Business planning

Financing

Administrative procedures

Infrastructure

Supply of equipment and raw materials

Product development

Business management and accounting

Marketing

• Part 2 shows the necessary fields of intervention for the information seeking stage: Market and supply analysis, infrastructures and business management, financing and legislation.

• Part 3 links the business start-up phase with issues of business planning, financing, administrative procedures, supply, production and sales.

• Part 4 is about follow up and improvement of your business with specific emphasis on product development and diversification, marketing and international trade promotion, maintenance, stock and data management.

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1. Components of business idea generation

A sound business idea generation is fundamental for your business future - one mistake will have a negative effect on your whole business activity. Take time and discuss your ideas and findings with friends and experts.

1. Screening of viable business ideas

2. Selection of one best business idea

4. Final decision

3. SWOT analysis of the best idea

Phase 1:Business Idea Generation

Personal skills and characteristics

Brainstorming of business ideas

Selection of 3 business ideas

Screening of 3 business ideas

Presentation of the best idea

Market aspects

Supply aspects

Infrastructure aspects

Management aspects

Financial aspects

Social and political environment

Strengths to be capitalized

Weaknesses to be eliminated

Opportunities to make of

Threats to avoid

4

Phase 1: Business idea generation

1.1 Screening of a viable business idea

The identification and analysis of a business idea needs to go through various steps: Before going deeper into business idea generation task, you need to test your entrepreneurial capabilities in terms of your personal characteristics, situations and skills. The second stage adds quality to the first stage by adjoining different parameters related to economic judgements (market, skills, technology/equipment, raw material, availability of solvent demand and situations of competitors).

• Screening and selection of viable business ideas in volves: o Analysis of personal skills o Brainstorming and selection of 3 business ideas

• Selection of one best business idea involves: o Screening of 3 business ideas: with analysing advantages and

disadvantages o Presentation of the best idea

• SWOT analysis of the best business idea o Strengths to be capitalized, Weaknesses to be eliminated o Opportunities to make use of, Threats to avoid

• Final decision is based on: o Analyses of market, supply and infrastructure aspects o Analyses of management and financial aspects o Analyses of social and political environment

The next step in establishing a new business is to select at least five to ten business ideas through a brainstorming process. You need to identify your project ideas, which seem feasible and profitable from your individual point of view. It helps you make a first selection of business ideas and is like pouring all these ideas into a filtering funnel :

Brainstorming

First stage 10 business ideas at screening your convenience

Second stage 1-3 business ideas screening after discussi on with partners

Third stage 1 best business idea final screening after thorough analysis

5

Checklist: Assessment of entrepreneurial characteri stics

Characteristics Strength Weakness

1. Skills :

� Practical abilities needed to produce the product, e.g. to start a wood work business you need to be able to measure, cut, nail parts together

� Business management skills Marketing, costing, record keeping

� Knowledge of your line of business Market, competitors, suppliers

2. Personal characteristics and situations :

� Commitment Willingness to put your business before almost everything else, willingness to work long hours in the business and willingness to risk your own money in the business

� Motivation Are you keen enough to try your own business? Do you want to be your own boss? Do you want to have your own business not because you are unemployed?)

� Taking risk (i.e. readiness to take moderate risks that may not be avoided)

� Making decisions (i.e. in your own business you are required to make important decisions yourself instead of passing them to someone else.)

� Family situation (i.e. good if your family supports your business idea.)

3. Financial situation Do you have personal funds to put into the business? Or are there other reliable sources?

Total number of strengths and weaknesses ------- -------

More details are available at: www.start-your-business.net/identify.html

Checklist: Factors to strengthen yourself

• Seek help from others (friends, family, other business people);

• Attend short training courses to strengthen areas where you are weak (e.g. training in entrepreneurship, record keeping and business management);

• Observe successful business people;

• Refer to documents on business creation.

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1.2 Selection of one best business idea

The second stage adds quality to the first stage by adjoining different parameters related to economic judgements (market, skills, technology/equipment, raw material, availability of solvent demand, situations of competitors). After the above-mentioned parameters are evaluated and rated, new business start-ups can go into a finer crosschecking of the key variables (Critical Success Factors) affecting the success or failure of the project idea.

Use the following parameters to come up with one best business idea. For easier decision making, it is possible to score each of the parameters as follows:

Checklist: Example for selecting one best business idea

Availability of:

Business ideas D

eman

d

Per

sonn

el

Too

ls/

Raw

m

ater

ial

Tot

al

Com

petit

ors

Adj

uste

d to

tal

(+) (+) (+) (+) = (-) = 1st business idea 2 2 2 1 7 3 4 2nd business idea 5 4 3 5 17 3 14

3rd business idea 4 3 4 3 14 2 12

Scoring system: 5 - extremely high; 4 - high; 3 - average; 2 - fair; 1 - poor; 0 - absent.

Format to fill:

Availability of:

Business ideas Dem

and

Per

sonn

el

Too

ls/

Raw

m

ater

ial

Tot

al

Com

petit

ors

Adj

uste

d to

tal

(+) (+) (+) (+) = (-) = 1st business idea 2nd business idea

3rd business idea

Scoring system: 5 - extremely high; 4 - high; 3 - average; 2 - fair; 1 - poor; 0 - absent.

Critical Success Factors (CSF) After evaluating and rating these factors, go into a finer cross-checking of the key variables affecting the success or failure of the business idea. E.g. not just 'raw material' but seasonal availability of raw material, lack of standardisation of raw material, unpredictability of raw material supply. Attention! CSF implies a critical success factor particular to the identified business, which is very important for the success of that specific business. If that certain factor is missing, is inadequate or is not properly taken into account, it can result in the total failure of the envisaged business idea.

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By making comparisons between the scores of the above parameters for each business idea, it is possible to choose one, which is viable. In this example, the second business idea may be the best one. It is also important to see the following additional parameters in selecting the business idea: Ease of implementation criteria:

• What are your unique competencies which give the company its competitive edge to competitors?

• Whether the business can be started within a short gestation period or reasonable preparatory period (such as three months) or not; and

• The degree to which the entrepreneur can control unforeseen difficulties and commence operations;

• The available financial and human resources. Risk exposure criteria:

• Whether the product can readily be copied or imitated if found very profitable by others;

• Competitors who have more resources and expertise may effectively retaliate if threatened by the new business;

• The envisaged business may suffer from unforeseen factors such as unavailability of raw materials.

Government priority and support criteria:

• Is the envisaged business under government's list of priorities for promotion of investment and employment generation?

• Is there a possibility of getting government support such as tax exemption or reduction, loan on reduced rate of interest or other supports such as market access, technical or advisory services?

The following format is presented as an example to show you how it is possible to generate one best business idea in a step-by-step way.

Business idea

Name of the Business: ABC Bakery

The business is to provide the following products: Loaves of bread and bread rolls

Customers are:

If your choice is to produce loaves of bread and bread rolls, then the customers could be:

• General dealers and caterers in locality ‘A’ as well as the majority of people living around that location.

The business will sell in the following way:

• Bread will be delivered to general caterers and customers.

• Other customers will buy from a shop at the bakery.

The business will satisfy the following needs of customers:

• General dealers need to sell fresh bread to their customers.

• Caterers need bread to serve with their meals.

• Private customers need a convenient place to buy bread for their households.

Fill your own template of business idea

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1.3 SWOT analysis

Test your business idea with a SWOT analysis You need to know whether the selected business idea is a competitive and profitable venture. One way to test a business idea is to do a SWOT analysis. A SWOT analysis is a technique for identifying Strengths, Weaknesses, Opportunities and Threats of enterprises or projects whereby internal and external factors are considered. A SWOT technique can be applied to the functional areas of an enterprise as well as projects, products and services. For the purpose of starting a new business, the Strength, Weakness, Opportunity and Threat (SWOT analysis) deserves greater attention as it helps you evaluate or decide whether to start the business or not.

• For strengths and weaknesses you look inside your business and your personal situations, possibly affecting the business venture;

• For opportunities and threats you look outside of your business and try to assess situations outside of your influence, but which you can make use of or possibly avoid.

Project idea:

Strengths (positive factors to be capitalised)

Weaknesses (negative factors to be eliminated)

Opportunities (to make use of them) Threats (to avoid/consider them)

Outcome of the SWOT analysis will enable you to:

• Continue with the selected business idea and make a full feasibility study; • Make changes to the business idea or; • Drop the business idea completely.

In order to check the feasibility of your envisaged business idea, you need to make a SWOT analysis in terms of:

• Availability of market; • Availability of raw materials and other supplies; • Availability of appropriate equipment/technology; • Availability of technical skills; • Organisation and management; • Financial capacity and availability of appropriate loan facilities; • Analyses of other external factors.

The following overview helps you take all the necessary aspects of the SWOT analysis into consideration:

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Checklist: Coverage of a SWOT analysis

Financial aspects Physical aspects

• Capital of owner • Projected cash flow • Access to additional resources • Investment requirement • Profitability • Risk

• Building • Workshop and machinery • Technology/incubator parks • Location • Transport facilities • Infrastructure and utilities

Management and operator capabilities Market

• Management competence • Age/experience • Skills availability • Technical know-how • Management contacts/network • Salesmanship of owner/staff • Personnel management

• Profile of target market • Competitor's marketing strategy • Market share • Product features/quality • Expanding/contracting/stagnant market • Demand/supply situations (past, present,

future)

Information Supply of raw materials

• Is the necessary information available? • Is it available in time for decision making

and for taking corrective actions?

• Are the sources adequate in terms of quality, quantity and price?

• Are new materials becoming available which would be useful to the enterprise?

• Will they continue to be adequate?

Social environment Production process

• Are people accepting the product? • Is there any particular prejudice, likes or

dislikes for the product?

• Is the product going to be produced in mass? • Is it labour intensive? • Is it a job order or continuous operation?

Example

ABC Bakery: SWOT analysis



• Have worked in a bakery business for long time as an apprentice

• Knows most of the intended customers in locality ‘A’

• Will be able to buy supplies on good terms • Have start-up capital

• Do not know much about business management


• Locality ‘A’ is a highly populated area and population size is increasing from time to time and so is the demand.

• There are no many bakeries in the area, the location is big enough for more bakeries

• One of the bakeries in the nearby location has a good reputation

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Exercise to fill based on the above example (take your business idea and analyse it)

SWOT analysis of your project

Project idea:




Actions to take in order to overcome the inconvenie ncies:

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Exercise to fill

1.4 Business Idea

Name of promoter: Name and activity of the enterprise: Products and services: Clients: Sales and marketing strategy: Strategic location of the enterprise: The main competitors are: Characteristics of their products: Advantages and disadvantages to the competitors: The project will be financed as follows:

Own funds:

Financing: Risks:

enlarge this format to two or three pages if necessary

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2. Components of information seeking

You as a business start-up should have sufficient information and seek additional information on various factors that are relevant to your intended new business activity. The different types of information required are indicated in the following diagram.

1. Market

2. Supply

3. Infrastructure

5. Finance

6. Legislation

4. Business management

7. Business support facilities

Phase 2: Information Seeking

Market segments

Competitors and similar products

Sales forecast

Strategic business location

Machines/equipment

Raw materials

Other assets like office furniture

List of suppliers and prices

Business premises available

Size of premises and rooms

Power, water, other facilities

Transport facilitiesCommercial banks loan conditions

Rural banks loan conditions

Micro-finance loan conditions

Business Laws

Business registration

Tax obligations

Organzational form of business

Needs in accounting

What staff is needed ?

Availability of qualified personnel

Training facilities for staff and owner

Policy framework

Business support agencies

Business trainings

Access to finance

Vocational training centres

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Phase 2: Information seeking

• Market research • Supply market analysis • Infrastructure analysis • Business management • Financial analysis

• Legislation analysis o Laws and regulations o Business registration o Taxation procedures

• Business support facilities

2.1 Market research

Market research is a key to the success of new businesses or projects. Marketing analysis of the product is all about estimation of demand for the product. You, as an entrepreneur, should assure the quality and standard of your product as well as its effective distribution. You must also devise a correct pricing strategy. The following simplified contents of market research can help you get information and analyse the market.

Conduct market research to learn more about your cu stomers and competitors

Method Purpose

Talk to potential customers

� To know what products they want to buy � To know what they think about potential competitors

Study businesses of your competitors

� To find the quality and design of their products � To know what prices they charge � To know how they attract customers � To look for possibilities of developing the already

existing products of competitors to a superior design and quality, instead of imitating them as they are.

Ask suppliers and business friends

� To know which goods are selling best � To know what do they think of your business idea � To know what do they think of competitors'

products.

Read newspapers, catalogues, trade journals and magazines

� To get information and ideas on new products

For market analysis, introduce yourself into the "4P" marketing approach: Product, Price, Place, Promotion and add a big C - the Competitors!

15

The following questions need to be answered satisfactorily: What are your products and services? Are there similar products in the market? How is the quality of products of the competitors? Who would be the customers? What are the actual prices? Where are the selling points? Who are the potential wholesalers for the products? Which media channels could be used for promotion and advertising?

Market analysis format

• Description of the product What product should I produce? What should be the design, model, appearance and style of the product? What should be the brand name of the product?

• Comparison of the product with its competitors Can I produce a product of better quality compared to others? Can I provide warranty for my products? Is the design of my product better than others? Can I use quality raw materials? Can I label my product?

• Location of business Can I get proper business location not far from my customers? Can I get proper premises with reasonable rent?

• Major customers Who would be my customers: Individuals, households, and government/private/ non-government institutions? Urban/rural residents?

• Market share Do I have the capacity/possibility of measuring market share? Is there a possibility of getting some market share by competing with similar producers? What would be the possible number of customers per month/year? Is there a possibility to capture more market share in the future? Should the market share be high, do I have the necessary resources/capacity to respond to that market?

• Selling price - My pricing strategy: Should I go for profit maximisation in the short-term?

Profit optimisation in the long-term? A minimum return on investment? - Keeping parity with competition? Fast turnaround and early cash recovery? - My pricing methods: Should I follow cost-based pricing? Demand-based

pricing? Competition-oriented pricing? Product line - oriented pricing? affordability - based pricing? Or differentiated pricing?

• Promotional measures How can I promote my product: Which media channels (local newspapers)? Signboards? Leaflets and brochures? Exhibition/bazaar participation? Words of mouth?

• Marketing strategy - Selecting target clients: Studying the customer, his/her buying motives and

buying behaviour, segmentation of the market using relevant bases, evaluating each of the segments, selecting the appropriate segment as target market.

- Developing the “4P” marketing mix: Product, Price, Place and Promotion - Provision for the impact of uncontrollable environmental variables - Developing the detailed functional plans of marketing: production plan,

sales plan and advertising and sales promotion plan.

• Sales/demand forecast (for details on sales forecast see next)

More details are available at: www.start-your-business.net/market-analysis.html

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Sales/demand forecasting is required to predict or estimate a future situation. Since the future is unforeseen, no forecast can be 100% correct. However every business needs demand/ production/ sales forecast for taking decisions. In sales forecast, decisions concerning quantity, type and quality of products should be considered because production needs resources, i.e. finance, raw materials and manpower, which have to be arranged. The following steps are required to make a forecast: Foreca sting steps

• Determine the objective; • Select the period of forecast; • Select the forecasting techniques; • Collect the information to be used; • Make the forecast.

As an entrepreneur, you are required to make a study on availability of demand for the product. Demand for the product is manifested by a 'desire' backed by ability and willingness to pay. Demand for a product has always reference to price , period of time and place . The demand for a particular product can also depend on its supply. Demand forecasting for micro a nd small businesses

End-use/user expectation method

Steps:

- List the various users of the product; - Assert the individual likely demand of the product; - Consolidate the forecast for the demand.

Marketing plan guiding questions • What is/are the product(s)? • Which target market segment does each of the product aim at? Or: To whom will

the business sell its products? • Which geographical areas will be the chosen segments? • What will be the demand for the product, similar products and substitutes within the

target market segments in the target market areas? • What will be the supply of similar products and substitutes within the target market

segments from the target market areas? • What are the strategies of the competitors who supply to your chosen target market

segments and target market areas in terms of product, price, place and promotion? • What will be your strategies to supply to your chosen target market segments and

target market areas in terms of product, price, place and promotion? • What will be the selling price and how much will be sold? • What fixed assets will be required for marketing and how much will they cost? What

will be the life of the assets and how will they be depreciated? • How much of expenditure will be incurred in terms of marketing, including cost of

marketing personnel?

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Exercise: Table to fill

Check list for consumer analysis

Step of research Result

1. How much potential customers are in the area? How much customers use similar products in this area?

2. How much customers are actually with you? What is the real selling price?

3. Who are the customers? Houswifes, families, other enterprises, shops, retailers, wholesalers? What is their financial capacity?

4. Who are the buyers? Are they also the users?

5. Where are the selling points? In the enterprise? In shops? On the market?

6. Where are the customers? In the area? Next district? Next town? etc.

7. What type of product do they like (best one, or medium with normal price) ?

8. Why do they like this product?

9. Where do they buy actually? Only with you or also with your competitors?

10. If the customers do not buy your products, what products do they buy?

11. How much do they pay for the product?

12. Are customers actually not satisfied with the existing products on the market and why not?

13. When and how much do customers buy? Once per day/week/month? In the morning, afternoon, evening or irregular?

14. How do they buy and which quantity?

15. Is market growing or going down? Are there more customers or less? Do they spend more or less? Why?

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Strategies in relation to competition

Almost all micro and small enterprises have competitors. Therefore, the enterprises have to strategically stress their strengths over competitor offers. For instance, if one enterprise has lower costs in comparison to its competitor, then its pricing strategy can be based on selling at lower price. If the MSE has a broader selection of goods as compared to its competitors, then he/she should emphasize this issue and take advantage of more sales. If the competitor's store area is unattractive, a strategy can be set to make one’s own store more attractive for potential customers. In this way competition can be beaten. Joining chambers and trade associations is one way of interacting with competitors and learning how successful enterprises do business. If the enterprise suffers from different rivals, it could use a strategy that provides it with a competitive advantage over others as part of the sales deal.

A wiser strategy would be to try to be good in some competitive areas. MSEs need to select a few areas, in which they can excel in the competition,

since it is difficult to be good in all areas.

If competitors sell on a door-to-door basis then those who have no buyers at home can develop delivery to "x" buyer's premise. The strategy has to look into aspects that the buyer cares about.

The best strategy would be a strategy that separates micro and small sized enterprises from its competitors.

The issue of getting data and information is relevant, not only to competition, but to all other marketing mixes. Besides, information is a knowledge source of what is going on or what competitors are doing. In relation to the shortage of data and information already mentioned earlier, the service providers can play a role in establishing centres for data and information that the MSEs can effectively use in their proximity. It obviously requires a good budget, but with the assistance of some financiers the topic can be considered.

Competitors analysis Almost all micro and small enterprises have competitors. Therefore, the enterprises have to strategically stress their strengths over competitor offers. For instance, if one enterprise has lower costs in comparison to its competitor, then its pricing strategy can be based on selling at lower price. If the MSE has a broader selection of goods as compared to its competitors, then he/she should emphasize this issue and take advantage of more sales. If the competitor's store area is unattractive, a strategy can be set to make one’s own store more attractive for potential customers. In this way competition can be beaten.

1. Who are my competitors? − Local retailers? Local wholesalers? Importers of similar products?

2. Products − Their products / Product quality / Packaging.

3. Prices − What are their prices? Is there competition with prices? Do they give discount?

4. Location − Where are they? Are they near by the consumers?

5. Promotion − What are their advertising methods and are they efficient? − How are they doing their sales promotion? − Are competitors working with middlemen and sales agents?

6. What is the marketing mix of my competitors (conclusions of 2-5) ?

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Exercise: Table to fill

Check list: Analysis of competitors

Who are my main competitors?

What products do they offer?

At what price do they sell?

Since how long are they in the market? Are they efficient? What are their projects?

What are their strengths? Why do clients buy their products?

What are their weaknesses?)

Who are their suppliers?

Do they have promotion and advertising activities? How often and where?

Do they give discount in order to attract clients?

Are their clients satisfied?

What is/would be your competitors’ reaction when you are penetrating their market?

This exercise is based on the experiences made with the field visits and the group discussion during the course. But finally they are only estimations and show the necessity to engage a real market research, which will be made on the second day of the course (see market research format hereafter).

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Field study - Simplified market research In order to start an initial market research during the training course, we hereby present a simplified market study plan to help you analyse the competitors' market, the wholesalers, the main existing products in the market, the customers and market segments and the supply market with the main suppliers and available equipments.

Checklist for an initial market research

Name of promoter, activity of enterprise, products and services

Short description of the business activity

Competitor's market

Who are the main competitors for your activity? Short outline of your competitors and their products

Middle men

The middle men are the commercial agents, wholesalers, super markets retailers in your area

Existing products in the market

Main sales points, strategic sales location and detailed range of your products (price, quality, availability)

Target customers

The target customers depend on your products and your marketing strategy. Diversified clientele with different product ranges are also possible.

Target market segments

What are the main market segments of your activity and what is the marketing strategy?

Suppliers market

Who are the main suppliers and importers of the equipment and working materials of your activity? Prices, availability and quality.

For the detailed format for the initial market study see next page Do a market research in the field corresponding to your business idea or your actual business activity. The market research will be in the respective region for sales estimation, customers, retailers and wholesalers and in the capital city for suppliers and wholesalers. Do not hesitate to take information where you can get it and even with your potential competitors. You are a potential client who takes some information on different products and services. The market study exercise will take one day. After that, discuss the findings with friends and experts. The results of the initial study (see next page for the format) give you a first impression and idea for a further detailed market research study later on (see detailed marketing plan above).

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Simplified initial market study Name of promoter: Activity of enterprise, products and services: Competitor's market: (location and presentation of competitors):

Name, address, location Products and services / observations

Middle men (e.g., commercial agents with potential collaboration)

Name, address, location Products and services / observations

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Existing products in the market: (sales points, quantity, quality, price, presentation)

Sales point Main products Quantity, quality, price Observations

Target group of customers: Target market segments:

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Supply market:

Name, address and section of supplier

Equipments / raw materials / price

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2.2 Supply market analysis Supply refers to the different types of input you need from others for production. It requires identifying the main suppliers for your equipment and raw materials and making price and quality comparisons and a final ranking of price and performance of suppliers. A sound analysis of the availability and the best prices of equipment and working materials will stabilize your business, protect you from shortages and minimize costs.

Production-oriented business owners need to buy:

• Equipment/tools; • Inputs such as raw material.

Buying equipment/tools Equipment is all the machinery, tools, workshop fittings and office furniture that your business needs. Old equipment needs to be replaced. You should check regularly to see how well your equipment works - if it still produces as much as it used to and if it still produces the quality you need. You may need to buy new equipment when it:

• becomes difficult to operate; • does inferior work; • breaks down often; • becomes old.

Important questions to ask before buying equipment/ tools

• What kind of equipment do I need? • How much will the equipment cost? • Can my business afford to buy the equipment? • Can I buy the equipment second hand? • Will the increase in profit after I buy the equipment be high enough to pay for the cost of the equipment? • How much more work does my business get now and in the future? • How big must the equipment be to do the work I expect (capacity)? • Maybe you do not need to buy equipment of your own. In that case find out if you can:

- borrow or rent equipment only when you need it; - outsource to another business that has the equipment to do the work for you.

• Is there another new kind of equipment better than existing ones? • Which equipment is the cheapest to run and easiest to operate? • Do I need special training to use the equipment? Can I get it? Is the fee affordable? • How long would the equipment last? • Does the supplier give a written guarantee? • Will the supplier install the equipment and service it? • Can I have it serviced locally? • Are the spare parts available locally? Is the cost affordable?

Buying raw materials Raw materials are all the materials and parts that go into the products you make. Example: Wood and varnish for making furniture.

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Buying office and workshop furniture for your busin ess You have to know what type of furniture you need before the start of the business. Some of them include:

• Shelves, tables, seating; • Computer facilities, printers, photocopy machine; • Telephone, fax, Internet connection.

Conditions of raw material supply

• Try to use materials that are always available when you need them • Buy materials from reliable suppliers and make sure the quality is good

• Before you buy raw materials, find out: o what different materials you need; o what quality your customers need; o how responsible is the supplier for the quality of goods or materials; o how much raw material you need; o how often you need the raw materials; o how long it takes to secure raw material from the supplier; o affordability of the purchase price.

• Does the supplier grant discounts for bulk purchasing? • What is the smallest amount that can be purchased? • Is it possible to make credit purchases? How much can be obtained? • Terms of delivery: Will the supplier deliver to your business? Do you pay

for transport or is the delivery free? • Does the supplier accept returned goods or materials?

Get information about suppliers and compare them ba sed on the following offers:

• Lowest price; • Best credit terms; • Best terms of delivery; • Best quality of raw materials.

Institutions involved

• Contact Chamber of Commerce and “Yellow Pages” for list of raw materials, office and workshop equipment suppliers;

• Make visits to the most important commercial centres in town (including importers, if necessary);

• Contact wholesalers and retailers of supplies.

Steps to follow when you buy

• Find out what your business needs; • Buy only equipment which is really necessary for your business; • Get information about different suppliers; • Contact and choose the best suppliers for your business; • Place the order; • Check the goods immediately; • Check the invoice; • Pay.

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2.3 Infrastructure analysis

Infrastructure includes access to roads, transportation services, electric power, water supply, telephone services, storage facilities, production and marketing premises. Availability of transport facilities and electric power play great roles if you are engaged in the manufacturing and construction business sectors. You need to get a good transport facility with affordable fees to transport raw materials as well as your finished goods. If you are using power driven machines/equipment, availability and affordability of electric power will also play determinant role. In addition to the analysis of infrastructure, you also need to look for a strategic business location to reach potential customers.

Availability of infrastructure

• What commercial area is the best for your business? • How far are you from the competitors? • Are there shops available at affordable price? • Is the shop rent contract reasonable? • How are infrastructure facilities like electricity, water,

telephone, fax connection and public transport?

2.4 Business management

Business management aims at drawing upon effective organisation and management to achieve the entrepreneur's objectives. Business management is all about co-ordinating your meagre resources such as materials, financial and human, thereby undertaking your business activities efficiently and effectively. Having the necessary skills in the areas of marketing, costing your products and services, financial/business planning and record keeping are very crucial for you to succeed in business. You may have taken some business management courses during your school or college days, or you may not. Which ever the case may be, you need to look for opportunities to strengthen your business management skills continuously. This can be done by completing business management training courses intended for people like you. In addition, you as a business starter need to decide upon what form of business organisation you have to choose. The choice may partly be done based on the level of your investment capital as well as the commercial code of your country.

General aspects of business management

With regards to business management, you should give attention to questions such as:

• Do I have the necessary business management skills to start and run a new business? • What form of business organisation should I register in? • In case I am going to hire labour, what type of qualification do I need? • Do I have the capacity to manage my personnel issues? • What series of pre-operating activities should I perform? • What pre-operating costs am I able to bear? • Where shall I get as much information as possible pertaining to regulations, finance and

competitors?

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Before you start operating your new business, you need to select in which organisational form you should establish your business. The choice of organisational form is important and can make a difference in:

• Cost of starting and registering the business; • Simplicity of starting the business; • Financial risk the owner of the business faces; • Possibility of having partners; • Way decisions are made in the business; • Mode of taxation of the business profit.

Qualified personnel : This indicates the analysis of the number and qualifications of the staff you need and labour organisation (production workers, administrative personnel, salespersons) and job description for your staff, labour costs and its availability (survey of labour market using newspapers and contacting the labour and social affairs bureau).

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2.5 Financial analysis In manufacturing, you need capital for tools and equipment, raw materials stock, goods-in-process, labourers' wage and money to bring the finished goods to the market. However, having money and making profit are two different things. You as a business operator should know how to use money to make more money. You also need to know how you are efficient enough in managing it. Be sure that money is a real problem for you to start and run your business and not only for the sake of having it. There are several cases where lack of money is not a problem by itself, but the result of many other factors behind it. The following diagram is presented to show you the possible causes for lack of finance.

Insufficient labour qualifications

Low material or equipment quality

Bad shop location,

Low product quality

Rude competition

No incentive for savings

Funds used for private purpose

No marketing (advertising, promotion)

Market problems

No savings and own funds

Insufficient buying power

Lack of Capital

High costs

Management problems

No business plan

High rent, water, elec-tricity costs

High transpor-tation costs

High production costs

No accounting No stock listing

Inefficient use of working materials

Labour costs Material costs

Financial needs of business start-ups

Business enterprises, mainly manufacturing enterprises, need finance for:

• Renting premises/workshops; • Purchasing/leasing machinery, tools and equipment; • Purchasing furniture and fixtures; • Purchasing supplies and covering other pre-operating costs; • Covering the first six months of the business exercise.

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Loan requirements

With regards to finance, you should give attention to questions such as: • What is my total capital requirement? • Do I need a loan? What will be my equity contribution? How much is my

additional loan requirement? • Where do I get a loan fund from? What are the loan conditions? • What type of security (collateral) am I required to present to lending

institutions such as to micro finance institutions and other conventional banks? • What are the loan terms and conditions, grace period, interest rate, repayment

schedule, etc.? • What is the project feasibility? Is my business feasible enough to generate

profit and pay loans back within the specified loan term? • What is the break-even point?

Total capital refers to initial (investment) capital and working (operating) capital that is required to cover 'take-off' costs of the business. Capital investment is when you buy an asset for the business that has a high value and lasts for a longer period of time. Some businesses can be started with low level of investment while others must invest a lot. It is wise to keep the required investment to a minimum. Working capital is current assets minus current liabilities, which represents the amount of day to day capital available for the business.

Checklist: What finance do I need?

What do I want to finance? Specify the exact item and think through what else may be needed to make the investment work!

Do I need finance only once or regularly?

If you need it only once, you require a fixed investment loan. If you need it regularly, you require a working capital loan.

How much do I need? Get price information in the market to know what your investment will cost you! Think about your liquidity and whether you need working capital as well!

How much do I have myself? If you want to get a loan, the bank expects you to make a contribution from your own resources as well. Calculate how much you can contribute!

For how long do I need Finance? The bank wants to know when will you repay?! So, calculate your profits from the investment and how long you will need for repayment.

If you do not know how your credit / investment wil l generate profit, you may have a different problem – not financing!

Do I need finance because my customers do not pay?

You have a liquidity problem. You should not try to get a loan, but make your customers pay you!

Do I need finance because my sales are low recently?

If you do not plan to invest the money, how can you repay? Think of how to increase your sales (e.g. marketing) instead of getting a loan!

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Research on financing conditions

Inform yourself on the loan conditions of local financial institutions, notably commercial banks, rural banks and micro finance institutions:

• Contact appropriate financial institutions until your loan request is addressed; • Identify and contact appropriate government and donor programs that assist

businesses; • Be sure that you have a financial control system that helps you keep accounts

in acceptable standards. External auditors should also audit your financial statements. Audited financial statements increase the credibility of your business. Financial institutions, in particular, are interested in looking at your financial statements before they issue loans for your business;

• In case you do not have the necessary skills to keep your accounts in good order, you should either attend short-term training in accounting or try to get assistance from others.

What are the best sources to get finance? Sources of finance for sole proprietors

• Personal savings • Loan from friends and relations • Loan from financial institutions • Credit unions

Partnerships • Contribution from partners • Loans from individuals • Loans from financial institutions • Credit facilities

Limited liability companies • Shares: Ordinary, preference (cumulative, non-cumulative and participating) • Debentures1 (ordinary and secured) • Loans from individuals • Loans from financial institutions • Credit facilities

Capital structure Short-term funds up to one year

• Trade credit • Bank borrowing • Bills of exchange • Deferred tax payment.

1 Backed only by the integrity of the borrower, not by collateral, and documented by an agreement called an indenture. One example is an unsecured bond.

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Medium and long-term loans up to five or more years

• Mortgage debentures secured on specific assets • Floating charge debenture which only becomes a fixed charge on the assets of the

company in the event of certain contingencies. • Preference Shares which are a source of long-term or permanent finance, and are

similar in some respect of loan capital, but they carry the title of part of ownership of the business. The holders of such shares receive their fixed share of profits first and in the event of winding up they are given priority when paying back capital.

• Equity Capital. The major part of long-term business finance is provided in the form of equity capital which includes the accumulated profits over the life of the project. Equity funds are also residual claimants to earnings in that they can participate in earnings only when all creditors and other suppliers of funds have received their interest payment in full. Equity investors received only the residue of funds realized on winding up of a business after all creditors have been paid in full. Equity funds are therefore subject to the greatest risk of all forms of capital and so equity funds are forthcoming only when profit prospects are sufficiently attractive to compensate for the risk involved and this makes it the most expensive source of finance even though it is one essential source of finance. Equity shareholders are the „true“ owners of the business.

Long-term versus short-term

Long-term finance must cover the project cost of fixed investment and the estimated working capital requirements needed for normal operation. These should be procured in the form of equity and long-term credits. „Borrowing short“ to „finance long“ is not advisable. Short-term loans for financing fixed assets or working capital will burden a project’s cash balance with early and heavy principal repayments. The capital structure should be related to the earning power of the project.

Equity versus debts

The combination of equity and loans will determine a project’s debts to equity ration. Relatively heavy reliance on credit offers both advantages and disadvantages:

• Advantages o The rate of interest on loans may be lower than the rate of return on the

project, thus increasing the actual rate of return due to equity. o Since interest is charged against profits, less tax is paid and actual rate of

return due to equity is increased.

• Disadvantages o Interest charges, which are costs, are fixed and due for payment whether

profits are made or not. o Equity leaves management independent (to an extent) while creditors can

interfere with management’s programme. Note: There is no rule for an ideal debt/equity ratio. Each project or alternatives of a set of projects must be considered on their own merits.

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Guide for business consultants and BDS facilitators in order to facilitate access to finance

• The facilitator who deals with the operator often is confronted with operator's financial problems. In order to assess the real needs, it may be useful to get an overview of the situation of the enterprise concerned. What are the real causes for the "lack of finance"? The decisive matter of financing should be the market situation of the enterprises. If the operator meets problems in sales and clients, the facilitator should be hesitating to recommend credit activities. In general a micro or small enterprise with market problems may not be easily able to use the credit in a profitable manner.

• If the enterprise meets a shortage in investment, equipment, raw materials or wants to extend his enterprise by a normal or good sales situation, credit measures may be considered.

• In that case an analysis of the business situation and an analysis of the business projects should be undertaken by writing a business plan . The business plan should be written by the operator him/herself assisted by the facilitator.

• At the same time the operator should be urged to open a savings account and to strengthen his/her savings. Because proper funds are a good condition for a successful loan application procedure.

• Simultaneous to these preparations on operator's level, information on bank or micro-finance level should be obtained. What are the appropriate finance institutions for this kind of business? What are the loan application conditions? Individual or group collateral? Loan ceiling? The interest rates? Repayment period and conditions? Grace period?

• Finally, get the loan application form and help the operator fill out the form.

Institutions involved • Commercial banks, rural banks and micro finance institutions; • Governmental institutions with business support programs; • Donor programs involved in private sector development; • Accounting consultants; • Accounting training centres.

2.6 Legal issues (example of Ghana)

You as a business owner have a legal obligation to adhere to existing laws and regulations. These responsibilities include paying taxes, respecting regulations regarding employees, getting licenses and permits, adhering to lease and contractual agreements. Paying taxes is part of running a business and it applies to every one unless you get short-term preferential treatment from the government. It is, therefore, your responsibility to learn about the legal requirements that concern you as a business person.

Laws and regulation, legal forms of business and business registration in most cases are similar but nevertheless a country specific matter. That is why in the following we develop these issues on the example of Ghana.

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Engage your own country specific research on the ba sis of the following outline. (personal contacts, yellow pages, Internet research)

a. Laws and regulations - example of Ghana The relevant laws that govern the formation of entities that carry on business in the country are

• the Companies Code, 1963 (Act 179), with regard to companies, • the Incorporated Private Partnerships Act, 1962 (Act 152) ("IPPA"), with regard to

partnerships, • the Statutory Corporations Act, 1964 (Act 232), with regard to statutory corporations,

and • the Registration of Business Names Act, 1962 (Act 151), with regard to

unincorporated business.

The Registrar-General's Department is the government agency responsible for registration and regulation of business entities, except statutory corporations. The labour market is governed by the Constitution, the Labour Decree, 1967 (NLCD 157), the Labour Regulations, 1969 (LI 632), the Industrial Relations Act, 1965 (Act 299) and the Workmen's Compensation Law, 1987 (PNDCL 187). The labour decree , and amendments thereto, apply only to clerical workers whose remuneration does not exceed the prescribed sum, artisans, labourers and domestic servants.

One of the main provisions of the labour decree is the requirement that contracts of employment for more than six months or which stipulate conditions of employment which differ materially from those customary in the relevant district of employment for similar work, must be in writing. Failure to reduce such contracts into writing renders them unenforceable. Furthermore, the decree requires all contracts to be submitted by the employer to the chief labour officer or a labour officer for attestation and registration Any contract which a labour officer refuses to attest, shall have no further validity. Registration is for the purposes of enabling the worker to prove the existence and the terms of the contract and to verify the terms of the contract at any time. The decree also contains detailed provisions on inter alia the termination of contracts of employment, the determination of severance pay, civil proceedings in employment matters, the employment of females, children and young persons. b. Identification of legal forms of business organi sations - example of Ghana

This refers to the determination of what form of business organisation you are going to register your business in. The various kinds of companies are as follows:

Sole proprietor business. The sole proprietor business is the most common for micro and small enterprises in Ghana. The registration procedure for a sole proprietor business is less complicated and costly than for a company limited. The sole proprietor must register at the Registrar-General's Department.

Partnership business. A partnership is an arrangement whereby two or more persons combine some or all of their resources, skills or industry with the objective of making profit which will be shared by the partners.

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Company limited by shares. In a company limited by shares, the shareholder need not pay the whole amount of his shares to the company at once when acquiring the shares. The usual practice is that shareholders make payments when the directors make "calls" upon them to pay. The shareholder's liabilities are therefore limited to any amounts unpaid on the shares, and once a shareholder has fully paid for his shares, he is not to incur any further liabilities in respect of the company. Thus no contribution is required from any member, exceeding any amount unpaid on his shares, where the company is being wound up. However, the company may decide, by special resolution, to reserve any unpaid liability on shares until the company is being wound up.

The regulations of a company limited by shares must expressly state the fact of the limited liability of members. The last word of the name of a company limited by shares shall be "limited", or its abbreviation "ltd."

Company limited by guarantee. This is a company that has the liability of its members limited to amounts that they respectively undertake or guarantee to contribute to the assets of the company in case of liquidation. Unlike companies limited by shares, where the liability of the member may have to be implemented at any time during the existence of the company, that is, during the active life as well as during winding up, in the guarantee company, that liability need only be implemented after the commencement of the winding up of the company. The companies code provides for the total liability of members, and no further contribution shall be required from any member.

A guarantee company is not registered with shares and is not permitted to create any shares. This type of company is therefore only suitable if no initial funds are required or those funds are obtained from other sources, e.g. endowments and donations. The company is also not permitted to engage in trading. The company is not permitted to pay dividends or distribute/return any assets to members.

Whilst other companies may operate on a "one share, one vote" principle, the operating principle in respect of guarantee companies is "one member, one vote". The regulations of a guarantee company must contain the following mandatory provisions:

• That the liabilities of the members are limited • That the income and property of the company shall be applied solely towards the

promotion of its objects • That no portion of the income and property shall be paid or transferred in any manner

to the members, except payments permitted by the regulations, such as the payment of reasonable and proper remuneration to officers in return for services actually rendered, out-of-pocket expenses, interest not exceeding 6% on money lent to the company, and reasonable and proper rent for premises let to the company. Further, no director is to be appointed to any salaried office. These may be modified only with the approval of the registrar.

• That each member will contribute to the assets of the company in the event of its being wound up, to cater for the payment of the company's debts and obligations, costs of liquidation and other amounts required, up to whatever limit is prescribed by the Regulations. In respect of members, this liability extinguishes only where a person has ceased to be a member for more than a year. Note that membership of a guarantee company may end only by death, valid retirement or any other manner prescribed in the regulations.

• That upon winding up, the residue of the property shall not be distributed to members, but shall be either given to some other guarantee company with similar objects or applied to some charitable purpose. Members before the dissolution of the company shall determine the beneficiary.

Unlimited company. This company is also registered with shares, and, there is no limit on the liability of the members, e.g. they are liable to contribute whatever sums are required to pay the debts of the company in case of bankruptcy. There are not too many of such

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companies in Ghana. The few that exist are mostly law firms and other professional establishments who may be prevented from operating as limited liability companies by professional ethics.

Public and private companies. Each of the above types of companies may be "private" or "public". A company is a private company if by its regulations, it fulfils the following conditions:

• The total number of members and debenture holders do not exceed 50 debentures are similar to bonds except there are no pledges on specific assets. This number excludes genuine employees and ex-employees of the company who became members or debenture holders during their employment, and continued to be so after their employment. The exclusion of employees is designed to enable companies to institute co-partnerships schemes without forfeiting their private status.

• The company is prohibited from making of any public invitations for the acquisition of its shares and debentures.

• The company is prohibited from making an invitation to the public to deposit money for fixed periods or payable at call, whether interest-bearing or not.

Cooperative. Membership is unrestricted but is for specific purposes such as joint purchase of raw materials and group marketing of products.

External company. Corporate bodies formed outside Ghana that seek to operate in Ghana need not automatically incorporate subsidiaries in Ghana. Such a corporate body is allowed to establish a place of business in Ghana after it has registered with the companies registry as an "external company". Which form of business should I establish? You should consider varieties of conditions before deciding which form of business to establish. Assistance of others may be needed to select and register your business. But make the selection by yourself and try to understand why you should select that form and what consequences it will have in the future.

Basis for which form of business to select

Ease of registration requirement and simplicity of the process • Registration of limited company is relatively complicated.

Cost of starting the business

• Sole partnership and co-operative forms involve low cost; • Limited company involves high cost.

Number of owners

• Sole proprietorship - only one owner; • Partnership - at least two owners; • Private limited companies - at least two owners; • Share company- 5 or more share holders; • Co-operative - at least 10 members.

Financial responsibility of the owners

• Sole proprietorship - unlimited personal liability by the owner for all debts; • Partnership - unlimited personal liability by the owners for all debts; • Limited company - no personal liability by the shareholders for the debts; • Co-operative - no personal liability by the members for the debts.

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Decision making in the business

• Sole proprietorship - all decisions are made by the owner; • Partnership - decisions are made jointly by all owners, unless agreed

otherwise; • Limited company - shareholders appoint board of directors who in turn can

appoint managers to run the business; • Co-operative - every member has one vote, a management committee is often

appointed.

Mode of taxation • Sole proprietorship - the owner is taxed for business profits; • Partnership - the owners are taxed individually for their share of business

profits; • Limited company - the company pays tax for business profit; • Co-operative - the co-operative may pay tax for business profit or be made

exempt for a period of time.

c. Business registration

After selecting one of the above forms of business organisations, the next procedure is to register your business with the Registrar-General at the Registrar-General’s Department.

Registration procedure Application for registration of a company is made directly, or through agents or solicitors, to the Registrar-General. A company is duly registered after the company's regulations have been submitted to the registrar of companies and a certificate of incorporation issued. A specified fee is paid on presentation of the regulations. The information required includes:

• the name of the company with the word "limited" as the last word in the name; • the nature of the company's business; • a statement that the company possesses all the powers of a natural person of full

capacity; • the names of the first directors of the company; • a statement that the liability of the company is limited; • the share capital and its division into shares of no par value; • limitation on the powers of the board of directors in accordance with section 202 of

the companies code; • any other lawful provisions relating to the constitution and administration of the

company.

The requirements for a public company limited by shares are similar to those stated above, except that the public can buy shares.

Before commencing business , further information on the company must be provided. This includes the particulars of the company and a declaration of compliance. The particulars of the company are given on form no. 3 and signed by the directors and the company secretary. The information provided must include:

• name of company; • authorized business; • particulars of directors (at least two) and a secretary; • name and address of auditors; • addresses of the company's registered office and principal place of business;

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• address at which register of members is maintained; • amount of stated capital; number of authorized and issued shares, amount paid

(other than cash), and amount due for each class.

The declaration of compliance is made on form no. 4. This states that the conditions of section 28 of the companies code pertaining to a minimum capital issue of 25,000 cedis (C) has been paid and signed by all directors and the secretary of the company. There is a stamp duty of 0.5 per cent of capital issue payable. Upon due completion and presentation of the forms, the registrar issues the company with a certificate of commencement of business. Limited Liability Companies must file annual returns with the Registrar of Companies showing its audited balance sheet and profit-and-loss statement after 18 months of incorporation.

Registration of a sole proprietor business

The registration procedure for a sole proprietor business is less complicated and costly than for a company limited. The sole proprietor must register at the Registrar-General's Department and fill the following forms:

Registration of business name (form A, 5 copies): Business name; general nature of business; principal place of business; full address; all other place at which business is carried out; nationality; civil status; date of commencement of the business. The business must have commenced before registration is affected. Each proprietor is required under the registration of business names act to renew the registration of the business once every year.

If the name consists merely of the sole proprietor's surname without any additions apart from his entire true personal name or names or his initials, registration is not required.

Tax Identification Number for individuals, sole proprietor registration form to get the Tax Identification Number (TIN): name, birth information (date, town, region, sex); nationality; full address; occupation; business name; business location and full address; business activities; Registrar General's N°.

Partnership business

A partnership is an arrangement whereby two or more persons combine some or all of their resources, skills or industry with the objective of making profit which will be shared by the partners. Forms of partnership are non-trading partnership, commercial partnership, and limited partnership.

Non-trading partnership Firms of lawyers, chartered accountants, architects and other professional practitioners.

Commercial or general partnership All partnerships engaged in trading, manufacturing and other commercial activities.

Limited partnership This is a special type which is very rare. A limited partnership consists of general and limited partners. A limited partner is liable to the firm or its creditors to the amount of the capital he has agreed to contribute, but not more. He may share in the profits according to the partnership agreement, but must take no part in the management of the business or he becomes a general partner.

Partnership agreement It is customary for the partners to execute a signed agreement covering such matters as the purpose of the business, name of the firm, duration of the agreement, place of business, capital to be contributed by each partner, division of profits and losses, books of accounts, rights of management of partners, and procedure for termination or re-organization of the partnership.

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Advantages of partnership • A partnership is a simple, flexible and inexpensive form of business organization. • It is not subject to corporate taxes and is exempt from most of the statutory returns

and forms which must be filed by limited companies. • It is particularly suitable to service type of business that do not require too large

investments and when there is no element in the business which may lead to the risk of serious personal liability.

Disadvantage of partnership • Should there be insufficient assets in the partnership to pay any claim against it, the

partners are personally liable. • As the business grows, the partnership organization becomes less suitable, and it is

difficult to obtain investment capital for expansion. • The partnership act limits the number of partners to 20. The duration of a partnership

is uncertain as it may be terminated by death, bankruptcy or withdrawal of partner.

Co-operative society A Co-operative society is defined as a business voluntarily organized, operating at a cost, which is owned, capitalized and controlled by member-patrons, sharing risks and benefits proportional to their participation. Registration The registrar of co-operatives is responsible for registration, liquidation and general development of Co-operative societies in accordance with the Co-operative Societies Degree, NLCD 252 of 1968. The registrar as appointed by Government is responsible to the Ministry of Co-operatives. He is also head of the department of co-operatives. Subject to the provisions of the co-operative societies degree 252, any society which has as its object the promotion of the economic interests of its members in accordance with co-operative principles may be registered with or without limited liabilities.

________________

The following example is taken from World Bank / IFC: Doing business www.doingbusiness.org and available for other 150 countries. Data are available for "Starting your business; Dealing with licenses; Registering property; Getting credit; Paying taxes; Trading across borders and other issues.

12 Steps for business registration of companies lim ited in Ghana Example of private limited company.

1. Check the availability of company name 2. Apply to Registrar-general 3. A commissioner of Oaths authenticates forms 4. Obtain the certificate to commence business 5. Deposit paid in capital an account 6. Make a common seal 7. Apply for business license at the metropolitan authority 8. Inspection of work premises by the metropolitan authority 9. Register employment vacancies at the employment centre 10. File employment contracts with employment centre 11. File for social security 12. Environment certificate

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Advantages of incorporation • The shield of limited liability permits a person who invests in a venture to be assured

that in any event he cannot loose more than the amount of capital he agreed to contribute.

• A corporation has many ways of raising capital by the issuance of share, while the partnership is restricted to loans or contribution by the individual members.

• The company having a legal existence apart from its shareholders, is not affected by bankruptcy, insanity or death of a shareholder or other events which would terminate a partnership.

• A shareholder may easily transfer his shares (except in a private company) but a partner cannot transfer his interest without the consent of all partners.

Disadvantages of incorporation

• The limited company is normally the most expensive form of business enterprise to organize and maintain.

• A limited company enjoys the least privacy because it is required to file many statutory forms and returns to the government authorities.

• It must pay special corporation taxes and registration fees considerably greater than would a partnership doing the same business.

• Minority shareholders are at mercy of majority shareholders, because generally speaking, the rule of majority goes.

d. Taxation procedures How can you pay your tax - example of Ethiopia When you start business either as a sole proprietor, partnership or a limited liability company, you need to go to the Tax Office nearest your business to register. You require the following documents to register.

1. Sole proprietor • Business Registration Certificate • Registrar General Form ‘A’

2. Partnership Certified true copies of:

• Partnership Agreement • Certificate of Incorporation of Partnership • Registrar General’s Application Form (for manufacturing concerns)

3. Limited liability company • Certificate of Incorporation • Certificate to Commence Business • Company’s Regulation • Manufacturing Certificate for Manufacturing concerns • Vending Agreement (if company was purchased)

The tax office will issue you with the following forms for completion and submission.

1. Sole proprietor • I.T.form 21 (return of income – individual) • I.T.form 299B (application form for registration of trade, business, profession or

vocation.

2. Partnership • I.T.form 22 (return of income – partnership)

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• I.T.form 299B (application form for registration of trade, business, profession or vocation.

• I.T.form 21 (return of income – individual) completed by each partner in a partnership.

3. Limited liability company • I.T.form 22A (return of income – limited liability companies. • I.T.form 299B • The tax office will then have an interview with you about your business.

Based upon the interview, you will be given a provisional assessment. A person is expected to pay the provisional assessment in four quarterly instalments by the end of the year if that person’s basis period is a twelve month period beginning from the start of a calendar year.

A person whose accounting year differs from the government's fiscal year should pay his taxes by the end of each three month period commencing from the beginning of the basis period and a final instalment by the last day of the period.

After the end of the year you will be required to submit a copy of your accounts showing the amount of profit you have made. This should be done within 4 months after the end of your basis period.

You need to keep accurate records of all your business transactions and the receipts, bills bank statements, cheque stubs to back your claims.

To work out the profit you will need to know the details of everything paid in or owed to the business, and everything paid or owed out of it. This will include all your business expenses and any money or items you have taken out of the business for your private use. Types of taxes - example of Ethiopia

• Direct taxes: Corporate tax. The tax rate on all businesses is 35%, except for income from non-traditional exports (8%) and hotels (25%). There are, however, tax incentives which can significantly lessen the effective tax burden. There is a 10 year tax holiday for enterprises in the export processing zones and agriculture. Enterprises in real estate and agro-processing activities enjoy a tax holiday of 5 years.

Personal tax. For foreign nationals, a flat tax of 35 percent is exacted, irrespective of income level. Ghanaians earning incomes above 16,000,000 cedis (about USD 6,810) per year also attract the same rate. Anything below this is subject to tax at progressive rates.

• Indirect taxes: Customs tariff. Generally duty rates are 0% for raw materials and capital goods; 10% for intermediate goods; and 25% for consumer goods.

Sales tax. A flat tax of 15 percent is imposed on all imported and locally manufactured commodities. For imported items the tax is calculated on the duty inclusive value of the item while on the selling price for locally produced goods. There is also an excise tax on certain commodities, including cigarettes and alcohol.

The Value Added Tax (VAT) system replaced the sales and service tax in the last quarter of 1998.

Service tax: There is a tax of 15 percent on accommodation in hotels and guest houses, food in restaurants, hotels and snack bars, as well as advertising, betting and entertainment.

Wealth tax. A commercial or industrial business is subjected to a property tax of 0.05 percent on assessed value. This tax is levied by the local government.

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e. Check your legal responsibilities The following list refers to the legal statutes of your enterprise, the business registration, the taxation procedures and the staff management.

Checklist: Check your legal responsibilities

1. Business registration

• Identify concerned institution for a license/work permit; • Check procedures required to secure a license; • Check how much time it takes to secure a license; • Check how much it costs to secure a license; • Check how much the annual license fee you should pay; • Check when you should renew your license.

2. Taxation

• What type(s) of taxes you are required to pay? (e.g. value added tax, income tax, profit tax, turnover tax, sales and excise tax);

• What are the tax rates for each tax category? • Which organisations are responsible for tax collection? • What penalties are involved for untimely/missing tax payments?

3. Administrative procedures

• Check procedures for staff contracts; • Check inscription for social insurance; • Check different insurances.

Do your own country specific research by personal c ontacts, documentation research, yellow pages and Internet r esearch.

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2.7 Business support facilities - example of Ghana

In every country you will find various business support and financial institutions. Follow the example of Ghana below to identify your country specific business support institutions. Make your own research by yellow pages, Internet research and personal contacts.

Example of business support institutions in Ghana

• The Ghana National Chamber of Commerce and Industry (GNCCI) www.ghanachamber.org in its present form was established in 1961 under an act of Parliament following the amalgamation of the existing four Chambers of Commerce. The Ghana National Chamber of Commerce is an association of business operators, firms and industries set up to promote commercial and industrial interests in the country.

• Association of Ghana Industries (AGI) www.agighana.org is a non-profit voluntary business association with about 500 members – large, medium and small industries operating in all part of Ghana. Member companies of the association, from the private and public sector, account for the majority of the nation’s industrial output. The AGI’s objectives include: Studies, supports and influences legislative or other measures which are considered favourable for industry and oppose those which are considered inimical to the growth of industry. Considers all issues connected with industry in Ghana and presents the views and suggestions of industry to Government and all stakeholders. Delivers quality services to member-companies, particularly small and medium scale enterprises to bring about improvement in their performance.

• Ghana Export Promotion Council www.exportghana.org Republic House, PO Box M146, Accra, Ghana. Tel: (233) 21-228813/228830, Fax: (233) 21-668263/233725, Email: [email protected]. The Ghana Export Promotion Council (GEPC) is the public agency tasked with promoting Ghana's non-traditional products in international markets. The Council also provides private and government parties with a range of market information and statistical trade data services. Exporters receive business advisory services, product development assistance and representation at major trade events

• Federation of Associations of Ghanaian Exporters (FAGE). www.ghana-exporter.org is the major Ghanaian organization of private exporters. Its website, the Ghanaian Exporter On-Line, provides supplier contact information, business briefs, and product profiles. FAGE is a private, non-governmental organisation of Ghanaian exporters and exporter associations. The membership comprises of over 2,500 exporting firms in a range of sectors, including agriculture, seafood, crafts, timber, textiles, minerals, and industrial materials. Primary goal is to be the premier provider of technical and information services to facilitate transactions between Ghanaian firms and their global partners.

• Ghana Trade Fair Company (GTFC) Limited is an autonomous self-financing public enterprise, established by PNDC Law (215) 1989. GTFC is administratively responsible to the now Ministry of Trade and Industry. GTFC is organising the Ghanaian trade fairs and exhibitions.

• National Board for Small Scale Industries (NBSSI)

• Ghana Association of Consultants www.ghanaconsultants.org

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Financial Institutions - example of Ghana

Ghana's financial system is based on a number of banks and non-bank financial institutions, including the Bank of Ghana which, as the central bank, has the responsibility of advising the government on implementation and control of monetary policy. Other institutions include commercial, development and rural banks. Direct financing of projects is provided by the commercial and other banking institutions. There are three development banks in Ghana:

• The National Investment Bank is an industrial development bank providing financial assistance to manufacturing and processing industries, including agro-industrial projects. It maintains branches in all regions of the country.

• The Agricultural Development Bank principally serves the fishing and agricultural sectors — food production, livestock breeding, poultry farming and processing of agricultural produce. It has 30 branches throughout Ghana.

• The Bank for Housing and Construction finances the construction and housing sectors. It operates 12 branches in Ghana.

There are six commercial banks in Ghana:

• Ghana Commercial Bank, • Standard Chartered Bank (Ghana) Ltd., • Barclays Bank (Ghana) Ltd., • Social Security Bank, • Cooperative Bank and • The Trust Bank

These banks operate in 277 branches throughout the country and handle over 70 percent of all banking. In addition to commercial banking, The Trust Bank also renders merchant banking services. Five merchant banks operate in Ghana:

• Merchant Bank (Ghana) Ltd., • Ecobank (Ghana) Ltd., • CAL Merchant Bank Ltd., • Metropolitan and Allied Bank, and • First Atlantic Merchant Bank, Ltd.

These institutions specialize in management and corporate financing, underwriting and marketing of stocks and shares. The Merchant Bank (Ghana) Ltd. has branches in Kumasi and Takoradi. There are several proposals for additional merchant banks. Rural banks are unit banks established to provide facilities for the rural communities in which they are located. They are owned, managed and patronized by local residents. Some of these banks also operate agencies to cater to communities located far from the bank's facilities. Savings mobilized through rural banks are invested in small-scale agricultural activities, cottage industries, transportation and trading. There are currently 123 rural banks in the country.

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Other Institutions Discount houses . To improve financial intermediation in the country, the non-bank financial institutions comprising the insurance and trust companies have joined forces with banking institutions to establish discount houses to bring into a single market institution with cash balances for their effective use. These include the Consolidated Discount House and the Securities Discount Company. Nearly twenty insurance companies operate in Ghana today, including: State Insurance Corporation, Great African Insurance Company Ltd., Ghana Union Assurance, Vanguard Assurance, Company Ltd., Crusader Insurance Company Ltd., New India Assurance Company Ltd., Enterprise Insurance Company Ltd., Central Insurance Company Ltd., Trans Universal Assurance Company Ltd., Provident Insurance, Ghana Re-insurance Company Ltd., Madison Insurance Company Ltd., Donewell Insurance, Company Ltd., Star Assurance and Continental Assurance. Other institutions comprising Ghana's non-bank financial system include: Home Finance Company, Ghana Leasing Company, Ghana Venture Capital Co., the Export Finance Company, savings and loan associations and credit unions. There are also some ten stock brokerage and securities firms and investment advisory entities. 2.9 Checklist of information seeking The list helps you to analyse the preconditions for starting up your enterprise, especially the market conditions, availability of qualified staff and the necessary equipment, the competitors, the loan conditions, the administrative procedures and the necessary steps for efficient accounting and management system.

Summary of information seeking and decision-making

1. Market demand (to be checked in terms of) • Saturation of existing demand by existing suppliers; • Reliability of supply for existing product/service; • Expected increase of demand for the product/service; • Variety of distribution channels and target clients

(low, medium and high income group clients) and market segment; • Existing sub-contracting and market linkage opportunities; • Names and prices of advertising enterprises; • Same/similar kind of goods/services (number, price, concentration, and quality)

offered by competitors.

2. Availability of qualified personnel and trainin g • Availability of different skills (conceptual, managerial, technical, manual); • Steadiness of supply of skills; • Cost of labour; • Institutions that provide business management training and their fees; • Institutions that provide skill up-grade training and their fees.

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3. Availability of technology and equipment • Availability of proven technology/tasted equipment; • Availability of technology/equipment at reasonable prices; • Availability of technology appropriates for the level of production, level of

investment and desired product quality.

4. Availability of supply of raw materials • Availability of adequate local/imported sources of raw materials at reasonable

prices; • Reliability of supply of raw material; • Seasonal availability, quality and viability of raw materials.

5. Competitors • Competitors offering the same kind of goods/services

6. Availability of utilities and infrastructure • Availability of/access to electric power and water supplies; • Availability of affordable transportation facilities ; • Access to work premises and related costs.

7. Finance • Availability of alternative sources of finance (micro finance institutions, commercial

banks, government funds, donor funds); • General loan conditions, terms and interest rates of the various lending institutions

including government financial sources.

8. Legislation • Business laws and binding contractual agreements; • Special provisions and support from government; • Form of business enterprise to establish and related legal requirements and

licensing procedures (partnership, sole proprietorship, co-operative); • Tax holidays and exemptions, types and rate of payment; • Standards and quality regulations; • Tender procedures.

9. Business management • Deciding upon the organisational form of the business; • Availability of different skills (conceptual, managerial, technical, manual); • Steadiness of supply of skills; • Cost of labour; • Institutions that provide business management training and their fees; • Institutions that provide basic accounting training and their fees; • Auditing services and their fees; • Institutions that provide skill up-grade training and their fees.

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The following table is presented to show what decision variables should be considered in order to start a new business. Please note that the crosses indicated in the 'Yes' and 'No' columns of the table are presented as examples only.

Final decision to start your business - example

Decision variables Yes No Remark

Have you decided on what product/service to sell? x

Have you identified who your customers will be? x

Do you know who your competitors are? x

Do you know what price to charge for your product/service? Is it competitive?

x

Have you found a location for your business? x

Have you decided what kind of promotion to use and have you calculated the related costs?

x

Have you decided which legal form your business will have and do you have all the relevant information about licensing procedures?

x

Do you know what kind of skilled labour you are going to hire, their availability and the relevant costs?

x

Have you calculated how much start-up capital you need and from where to secure?

x

Have you decided what kind of record-keeping system your business uses?

x look for assistance from others

Have you prepared a sales and costs plan for at least six months?

x

Do your sales and cost plans show profit for a reasonable period of time, say at the end of the first year of operation?

x revise your plan and strategy

Have you prepared a cash flow projection, for at least 6 months?

x

Does your cash flow plan show your business will not run out of cash during the first few months i.e. 6 months?

x revise your cash flow plan

Have you found out what assistance you may get from government and other development agencies?

x look for information from relevant offices

Total 11 4

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Exercise - Table to fill

Final decision to start your business

Decision variables Yes No Remark

Have you decided what product/service to sell?

Have you identified who your customers will be?

Do you know who your competitors are?

Do you know what price to charge for your product/service? Is it competitive?

Have you found a location for your business?

Have you decided what kind of promotion to use and have you calculated the related costs?

Have you decided which legal form your business will have and do you have all the relevant information about licensing procedures?

Do you know what kind of skilled labour you are going to hire, their availability and the relevant costs?

Have you calculated how much start-up capital you need and from where to secure it?

Have you decided what kind of record-keeping system your business uses?

Have you prepared a sales and cost plan for at least six months?

Do your sales and cost plan show profit for a reasonable period of time, say at the end of the first year of operation?

Have you prepared a cash flow projection, for at least 6 months?

Does your cash flow plan show your business will not run out of cash during the first few months i.e. 6 months?

Have you found out what assistance you may get from government and other development agencies?

Total Now make your final decision based on the total sum of 'Yes' and 'No' answers for the indicated decision variables.

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3. Components of starting up your business

Followed by possible business idea generation, screening and information seeking concerning the selected best business idea, the entrepreneur is expected to start setting up the business in a step-by-step manner. Steps involved are: 1. Preparation of a business plan, 2. Determination of available and accessible sources of finance, 3. Going through (following) legislation and administrative procedures, 4. Setting up the necessary infrastructure, 5. Contact suppliers and undertake supply of equipment, 6. Undertaking product development activities, 7. Undertaking business management and 8. Marketing activities.

7. Marketing

5. Supply4. Infrastructure

2. Financing

3. Administrative procedures


1. Business planning and cost calculation

8. Product development

Phase 3:Starting up

your Business

Approaching customers

Advertising media

Pricing and packaging

Tenders

Buy machines/equipment

Buy raw materials

Buy other assets like office furniture

Compare suppliers and prices

Look for strategic location

Make rental contract

Arrange power, water and other facilities

Arrange transport and communication facilities

Generate own funds

Family

Loan application

Legal form of business

Staff contracts

Taxation

Contractual agreements

Implement accounting

Staff management

Training for staff and owner

Stock management of raw materials and finished products

Sales and marketing

Cost calculation

Production

Infrastructure

Equipments

Marketing

Organization/management

Financial plan

Identify product range

Packaging and pricing

Improve quality

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Phase 3: Starting up your business

Action plan To start your business, you need to have an action plan that shows a list of activities to be undertaken and when to do them. The following simplified action plan format is presented for your reference. Follow the graphic presentation and put all the necessary steps into the action plan including the timetable, responsibilities and institutions or persons to be contacted.

Example of Action Plan

Weeks Activities 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Pre-operating activities: Attending training (if required)

Product identification

Market survey

Renting/constructing workshop

Business plan preparation

Registering the business

Applying/approval of loan

Contracting equipment and suppliers

Hiring labour (if applicable)

Installing/placing the equipment

Purchasing raw materials

Trial production

Product costing

Pricing

Selection/securing sales outlet/shop

Promotion

Operating phase: Start actual production

Evaluate market share/sales

Set a plan to improve your business

Product diversification

Improve financial management capacity

Make market survey for further expansion

= continuous activity

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Exercise to fill

Action Plan Weeks

Activities 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Pre-operating activities

Operating phase

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3.1 Business planning and cost calculation

Why write a business plan?

The business plan is the most essential document involved when starting, building and managing a successful business and it is an effective tool for raising the necessary capital as well as capturing the interest of investors. The business plan is the document that clearly and concisely defines the goals and objectives of a business, outlining the methods for achieving them. The business plan is also an excellent communication instrument for investors and suppliers interested in understanding the operations and goals of the business.

Many businesses fail due to the lack of planning and preparation. To help plan for a successful business venture, guidelines in this publication would help an operator better understand what information is needed in the business plan. The more complete and accurate the information, the more promptly institutions, banks, investors, and suppliers will be able to respond to requests for business deals. Generally, the operator him/her self would be responsible for preparing the business plan.

The business plan describes what the business will do, how and where it will be done, and how the business will be financed and managed. The basic components of a simplified business plan include:

• personal data; I work premises at the disposal of the operator; • annual sales plan; I equipment owned and to be purchased; • annual raw material requirements; I annual operating expenses; • annual production/service plan; I annual profit and loss statements.

The business plan format outlined below presents all necessary chapters in detail, including all necessary explanations.

Who prepares a business plan? The question of who prepares the business plan depends very much on the type of business and the structure and size of the company. In very small companies, the drafting and planning of the document may be done by managers and owners themselves or it will be outsourced to external consultants. In a bit larger organisations contributions can come from different people both within and outside the organisation. It must, however, be stressed that even though you choose to include the support of an external consultant in your writing of the business plan, you must be very much involved in the process as well. You should know and understand every detail of your business plan, because in the end it is not the external consultant who will implement it but you together with your employees. You must work with the external consultant all the way and you must believe in the strategies and figures.

The preparation of a business plan is important bec ause it provides information about: • What profit your business can expect to make in the short-term and long-term perspective; • How much money you can expect to come into and go out of your business (cash flow); • Level of profit expected from your business within the period of the life of the business

(income statement); • Which part of your business you can improve.

The two most important planning documents for your business are: • Sales and cost plan; • Cash flow plan.

When you make business plans: • Make them simple; • Choose the most suitable period; • Make them before you need to use them; • Look for information.

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Overview on the aspects of business planning

Financial aspects Physical aspects • Capital of owner • Projected cash flow • Access to additional resources • Investment requirement • Profitability • Risk

• Building • Workshop and machinery • Technology/incubator parks • Location • Transport facilities • Infrastructure and utilities

Management and operator capabilities Market • Management competency • Age/experience • Skills availability • Technical know-how • Management contacts/network • Salesmanship of owner/staff • Personnel management

• Profile of target market • Competitor's marketing strategy • Market share • Product features/quality • Expanding/contracting/stagnant market • Demand/supply (past, present, future)

Information Supply of raw materials and technology • Is the necessary information available? • Is it available in time for decision

making and for taking corrective actions?

• Are the sources adequate in terms of quality, quantity and price?

• Are new materials/technology becoming available; would be useful to the enterprise?

• Will they continue to be adequate?

Social environment Production process • Are people accepting the product? • Is there any particular prejudice, likes or

dislikes for the product?

• Is the product going to be produced in mass? • Is it labour intensive? • Is it a job order or continuous operation?

In working out your own project, you should prepare a sound business plan based on data which you collected and in which you have the utmost confidence. Make your business plan tailor-made based on your specific strengths and weaknesses. Decide on how much of your savings should be invested in the project, how much income you should generate from the business, who your clients would be, and which technical process is in line with your level of skills, resources and market size.

A business plan is the most essential document for starting, building and making businesses successful. It is an effective tool for raising the necessary capital to start and/or run business enterprises. The business plan describes what the business will do, how and where it will be started. Many businesses fail due to lack of planning and preparation.

The preparation of a business plan is important bec ause it gives information about: • What profit your business can expect to make in the future; • How much money you can expect to come into and go out of your business; • Level of profit expected from your business within the period of life of the business; • The positions of your assets and liabilities; • Which part of your business you can improve.

The two most important planning documents for your business are: • Sales and cost plan / cash flow plan.

When you make business plans: • Make them simple; Choose the most suitable period; • Make them before you need to use them; • Look for accurate information.

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In working out your own project, you should prepare a sound business plan based on data which you collected and in which you have the utmost confidence. Make your business plan tailor-made based on your specific strengths and weaknesse s. Decide on how much of your savings should be invested in the project, how much income you should generate from the business, who your clients would be, and which technical process is in line with your level of skills, resources and market size.

The following checklists are presented to show you three business plan formats. Business plan format 1 is envisaged for start-ups, business plan format 2 to serve people who engage themselves in micro and small enterprise activities, whereas business plan 3 may be used by medium and large businesses. The formats will help you take practical steps to prepare your business plan accordingly. When applying the formats, you need to organise and make use of data collected in the information seeking stage.

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A. Business planning for start-ups

Business plans for start-ups are based on a business idea and initial market estimation and mainly use estimations and financial projections instead of existing enterprise data.

Business Plan Year of the business plan: from........................... to .................................

Personal data

Full name of the start-up / partners................................................................

Address: ........................................................................................................

Educational qualification ................................................................................

Special training ..............................................................................................

Work experience ............................................................................................

1. Business project profile

Business name ................................................................................................

Business activity ..............................................................................................

Products and services .....................................................................................

........................................................................................................................

Legal form of business project..........................................................................

Necessary administrative procedures..............................................................

1.1 Location Item Description Strategic shop / workshop location Costs of premises Electricity / water Access of roads

1.2 Facilities Item Description Availability of raw materials Appropriateness of equipment Transport and storage facilities

1.3 Management and organisation Item Description Availability of bank account Availability of bookkeeping/accounting system Administrative procedures undertaken Administrative procedures to be undertaken Tax payment status/application

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1.4 Risks and opportunities of the business project Strengths

(positive factors to be capitalised) Weaknesses

(negative factors to be eliminated)

Opportunities (to make use of them)

Threats (to avoid/consider them)

2. Market study

Main customers and market segments: .............................................................................

.................................................................................................................................................

.................................................................................................................................................

Competitors No. Competitor Main products Price per unit

Marketing strategy to win customers and overcome co mpetitors: ...............................

.................................................................................................................................................

.................................................................................................................................................

List of suppliers Suppliers Products / equipment /

working materials Ranking of price - performance

3. Production plan

3.1 Projected production and sales No. Item Total quantity

per year Sales revenue per year

Capacity utilisation (%)

1 2 3

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3.2 Machinery / equipment requirement No Item Unit price Total value Maintenance costs Source 1 2 3 4 Total:

3.3 Raw material requirement Total annual requirement No. Item Quantity Value Source

1 2 3 Total:

3.4 Utilities / Infrastructure No. Item Annual

requirement Total annual costs

Maintenance costs

1 Electricity 2 Gas 3 Water 4 Rent 5 Other Total:

3.5 Labour requirements No. Labour categories No. of staff Annual wages/

salaries Further training required

1 Skilled 2 Semi-skilled 3 Unskilled 4 Owner’s salary Total:

3.6 Administrative and selling costs No. Item Quantity Amount Total:

4. Estimation of costs

4.1 Fixed capital

Value No. Item Initial - Depriciation = Actual

1 Land /building 2 Machinery / equipment 3 Furniture and fixtures Total:

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4.2 Working capital No. Item Duration Quantity Value 1 Raw materials stock 2 Semi-finished goods stock 3 One year production expenses

(utilities, administration, wages, salaries)

4 Preliminary and pre-operative expenses Total:

5. Financing

Financing No. Item Value Remarks Own funds Loan for fixed capital items Working capital loan Other Total

6. Estimated Profit and Loss Statement

Estimated Profit and Loss Statement

Period: from............... to....................

Gross sales

Less: Returns and allowances -

= Net sales =

Less: - costs of goods sold -

- Direct material -

- Direct labour -

- Overhead -

= Gross profit =

Less: - administrative and selling expenses -

- Salaries -

- Telephone -

- Water -

- Electricity -

- Rentals -

- Others -

= Operating profit =

Less: - Interest expense -

= Net profit before tax =

Less: - estimated income tax -

= Net profit after tax =

Date

Signature

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Instruction to the business plan format for start-u ps

The business plan for start-ups is similar to the business plan for micro and small enterprises. The difference is that the start-up business plan is not based on existing experiences of previous production exercises but on estimations based on an initial market analysis and projected cost calculation. Administrative procedures, preliminary and pre-operative expenses for business start-up must be considered. That is why paragraph 1 on the business project profile is more detailed for the start-up business plan.

Instruction to 1: Write down the type of business activity in which the business start-up would like to be engaged. In this section the following issues have to be addressed: the legal form of the business, the business type / merchandizing, manufacturing or service/, the type of products or services. The strategic location of the business can play a decisive role in its success or failure. Explain the work premises and other utilities at the operator’s disposal and describe the specific working premise problems, the space needed for the business, the desirable features of the location and its accessibility to the market. If there is anything in the location that is of special interest for your business you can stress it, too. Set-up of business management, especially bank account, accounting system and administrative procedures done and to be done (business registration, tax ID etc.) have to be considered. As the project is normally not based on a previous business activity, the risks and opportunities of the project should thoroughly be analysed in a SWOT overview (Strengths, Weaknesses, Opportunities and Threats for the business project) and be discussed with friends, family, experts and other resource persons available.

Checklist for 1. Project profile

Questions Answers

Name of business

What is the name of the business? [Legal name] [Trade name]

Mission statement

What business are you in?

Retailing / merchandising Wholesale Manufacturing Service provider

What do you want to do with your business?

What is your product or service?

What benefits will your product or service provide to your customers?

How will you achieve your goals?

Objectives

Sales:

Profit:

What are your short-term financial goals? (12 months)

Growth rates:

Sales:

Profit:

What are your long-term financial goals? (after the first 12 months)

Growth rates:

Company history

What is the status of your business? Start-up Existing

Who started the business?

When was your business founded? [Date]

When will your business open? [Date]

Why was it founded?

When was your products introduced /will be introduced?

[Date]

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Legal structure

Have you registered you company? Yes. When have you registered your company? No. Do you plan to register your company and if so how? And when?

What is the legal structure of the company?

Sole proprietorship A partnership

Write down the names of your partners A corporation Other

What are the strengths and weaknesses of the legal structure?

Strengths: Weaknesses:

Owners

Who are the owners? [Names]

Company location and facilities

Where is your company located? [Address]

Why is the location advantageous for your company?

Close to customers Savings in rent or lease Convenience to suppliers Proximity to transportation Close to essential raw materials Close to markets and distribution channels Availability of transportation Availability of efficient and skilled labour Availability of skilled labour Infrastructure facilities Communication facilities

Does the company own the facilities or are they rented?

Owned Rented

How much space will you need for your business?

Instruction to 2: The key issue in sales performance or marketing as a whole is to know better the likes, dislikes and expectations of customers. The annual sales should be planned based on an initial market survey. The market survey will indicate the different customer segments (e.g. age, social status or region). Focus has to be given to those customers who are likely to purchase the product/service of the enterprise. Planning the annual sales enables to find out about the desired production amount (it makes no sense to produce more than you can sell) and the annual income. Describe the months during which sales are expected to be high, in order to make the necessary preparations ahead of time and exploit the advantage. For defining the unit price per product/service you should first know the unit costs (see production costs) as well as the prices of your direct competitors. In addition there is a need to identify the strengths and weaknesses of competitors in their product quality/quantity and identify how their product/services differ from yours, their pricing and advertising techniques. The supply market should also be analysed. Identify the main suppliers for your equipment and raw materials; make price and quality comparisons and consider a final ranking of prices and performance of suppliers.

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Checklist for 2: Marketing

Customers

Who are or will be your customers?

Individual consumers (answer questions related to individual consumers) Businesses (answer questions related to businesses) Wholesalers Retailers Service providers Government Other

Characteristics of the customers

Within the specific market you have chosen, to whom will you aim to sell (are you selling) your products?

- Individual consumers

Where do your customers live (geography)?

What is the age range of your customers?

What is the annual estimated income of your customers?

What is the educational background of your customers?

What is the sex of your customers?

What is the family size of your customers?

What is the occupation of your customers?

- Businesses

What kind of business is it?

Manufacturer Retailer Wholesaler Service provider

What is the company size? (micro, small, medium or large?)

Where are they located?

What are their sales volumes?

How many employees do they have?

Important factors

What factors are important for your customers when buying your product or similar ones?

Appearance (colour, texture, shape, material) Durability Fragility (ease of handling, transportability) Innovation Operating characteristics (efficiency, adaptability) Packaging Quality Service Warranties

Why, when and where? Why would the customers buy your product (Good quality, low price, good service etc)?

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What benefits do you (can you) provide your customers?

Why will they buy your products or services and not the ones of your competitors?

When would the customers buy your product or service?

Where do the customers currently buy products or services similar to yours?

Where would the customers buy your product?

Customer groups

Could you divide your customers into different groups? (age, gender, income bracket, rural/urban…)

What are the most important customer groups?

Market area / geographical coverage

What will your geographical coverage of your product be? Where will you market your product?

Local National Regional International

Market size

What is the size of the market?

How much of the product/service is currently being sold?

How many potential customers do you estimate exist in the market?

How many customers do you need?

Market share and estimated sales

What share or percent of this market can be captured by your business?

How often will the customers buy your product/service?

How much of your products/services do you expect that each customer will buy a year?

Competitors

Who are your 5 most important competitors? Competitor 1: Address: Competitor 2: Address: Competitor 3: Address: Competitor 4: Address: Competitor 5: Address:

How many years have they been in business?

What are they selling?

What is the price of their products?

What are their annual sales?

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How do their products differ from yours?

Why do you think that you can capture a part of their market/business?

Strengths and weaknesses

What are the perceived strengths of your competitors? (for each competitor) Why do customers buy their products?

Convenience (location)

Distribution Experience

and knowledge Image Longer

opening hours

Price Production

capabilities Quality Reputation Sales

Service Timeliness Value Other

What are the weaknesses of your competitors? (for each competitor)

Convenience (location)

Distribution Experience

and knowledge Image Longer

opening hours

Price Production

capabilities Quality Reputation Sales

Service Timeliness Value Other

What are your strengths compared to your competitors?

What are your weaknesses compared to your competitors?

Instruction to 3: The production plan includes the estimated production and sales per year based (estimation for start-ups). Capacity/utilisation means the percentage on how you are at the limit of your production and sales capacity with the respective product. In 3.2 put the value of the machinery and equipment and the maintenance costs. Depreciation costs will be highlighted under 4.1 Cost calculation - fixed capital. Utilities and costs of infrastructure such as electricity, water, rent to run the projected production plan including maintenance costs. 3.5 Labour categories required and salaries as well as further trainings required. 3.6 administrative costs to run the projected production plan.

Checklist for 3. Production plan

Questions Answers

What are you selling?

What are you selling and what are the characteristics of your product or service?

Product Describe size, colour, shape, quality

Service Is your product or service a new or a existing product? A new product/service

An existing one What problems do you solve with your product / service?

Which customer needs will be fulfilled and what benefits will the customers obtain?

How will your product or service be used?

Uniqueness

How is your product unique? Why will your product or service be successful in the market?

Competitive comparison

How is your product different from the product of your competitors?

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Questions Answers How does it compare in quality and price with its competitors?

What is the current state of your product or service? Is it ready for the market?

Yes No. When will it be ready?

What is missing? How will your product be further developed?

What have been the development costs?

Production process (manufacturer)

Production methods:

What is involved in the production process?

Materials:

What buildings and machinery (fixed assets) are needed and what will be their cost?

When and where can the machinery be obtained?

When and how will the machinery be paid for?

How will maintenance be done and are spare parts available locally?

What materials do you need for the production of the products and how much?

Source of supply:

Which parts of your product will be bought and which parts will you do yourself?

Who delivers these products?

What are the sources of raw materials? Are they available throughout the year?

Production Capacity:

What is your production capacity? How much capacity will be used?

What are the plans for using spare capacity?

Labour:

How many workers are needed and what skills should they have?

Costs:

What are the design and development costs?

How much will the raw materials cost?

What will be the cost of labour?

What factory overhead expenses are involved?

What is the production cost per unit?

Service providers

What is the process of delivering the service?

What is your service delivery capacity?

What are the design and development costs (e.g. consulting fee, preparation of materials, training)

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Instruction to 4: Under cost calculation it will be important to include depreciation costs of the fixed capital. Depreciation is the estimated price to the use of an asset. You need to know it to calculate the costs of your product/service. One of the various methods of defining annual depreciation, and the simplest one, is to divide the purchasing price of the asset by the number of years of usage. Working capital should be detailed in different categories including utilities and administrative expenses and calculated for a one-year production plan.

Checklist for cost calculation

Questions Answers

What fixed assets will be required for the office?

What administrative costs will be incurred?

Instruction to 5: Financing will be calculated on the basis of the preceding cost calculation and the availability of own funds. Own funds are important to convince the financial institution to grant loan because own funds show the capability of the business owner of organized savings and business management.

Checklist for financing

QUESTIONS ANSWERS

Capital requirements

What is the total capital requirement?

Projected Income Statement

What does the projected Income Statement indicate?

Projected Cash Flow Statement

What does the Cash Flow Statement indicate?

Projected Balance Sheet Statement

What does the Balance Sheet indicate?

Break-even point (BEP)

What is the break-even point?

Is the project feasible?

Funds requested

Is a loan needed?

What will be the equity contribution of the entrepreneur?

How much money is needed?

What security (collateral) can be given to the bank?

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Instruction to 6: The Profit and Loss Statement (PLS) is one of the financial analysis tools employed by business enterprises to track the performance of their enterprises. The PLS is the difference between sales and expenses of an enterprise over a given period of time, often one year. If this difference is positive, it is termed profit, while if it is negative, it is then termed loss.

The PLS is important for business operators/managers in checking the efficiency of their business strategies and taking proper actions. The statement is also important for bankers to check business profitability before extending credit. The statement can only be drawn up based on certain source documents such as the cashbook; otherwise it would be very difficult to apply, especially for micro enterprises. For the statement to be applied in a given enterprise a certain level of accounting system is needed to be in place. The PLS statement has the following components:

• Gross sales: the total value of sales which is obtained by multiplying the price of each product with the total units of output sold.

• Returns and allowances : stands for the value of damaged goods that are returned by customers to the business enterprise for which the business replaces the damaged goods with new. It also considers payments made as sales commissions, discounts, etc., which again are deducted from Gross Sales to result in Net Sales.

• Costs of goods sold : stands for the costs involved with regard to direct labour, direct material and factory overhead costs which are deducted from Net Sales to arrive at Gross Profit: Direct material: stands for those material costs directly accrued in the production process, such as raw material. Direct labour: refers to costs of all labour inputs directly used in the production of goods/services of a given enterprise. Often direct labour costs are measured on unit rates and costs of daily labour. Overhead costs: stands for those costs incurred, but which are not directly related to the production process. E.g. depreciation of machinery or equipment, shade rent, etc.

• Administrative and selling expenses : This includes costs incurred for certain administrative purposes and for the distribution of products. These are deducted from Gross Profit to arrive at Operating Profit. These expenses are for example, salaries of management and support staff, expenses related to telephone, water and electricity bills as well as office rents and other similar expenses.

• Interest expense : this is the amount of interest to be paid on the amount of loan obtained, based on the current interest rate. Try to figure out if the interest is charged at a flat or declining rate.

• Estimated income tax : the amount of tax that has to be paid as per the income tax proclamation.

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B. Business planning for micro and small enterprise s

Micro enterprises normally do not need a business plan. But sometimes it may be helpful for financing and business planning. Business plans for micro enterprise are rather rudimentary and adapted to the very limited accounting and management capacity of micro enterprises. Business plans for small enterprises are more detailed than micro business plans but also based on a limited capacity in accounting, cost calculation and financial projection of the small business owners.

Business Plan Personal data

Full name of the business operator / partners................................................

Address: ........................................................................................................

Educational qualification ................................................................................

Special training ..............................................................................................

Work experience ............................................................................................

1. Business profile

Type of the plan/work/business......................................................................

Legal form of the business: ............................................................................

Year of the Business plan: From........................... to .................................

Work premises at the disposal of the operator

(location, size, facilities) ................................................................................

......................................................................................................................

Specify if there is any advantage or problem related to the location:

......................................................................................................................

2. Market study Main customers and market segments: ...........................................................................

...............................................................................................................................................

Competitors No. Competitor Main products Price per unit

Marketing strategy to win customers and overcome co mpetitors: ...............................

.................................................................................................................................................

.................................................................................................................................................

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List of suppliers Suppliers Products / equipment /

working materials Ranking of price - performance

3. Production plan

3.1 Production and sales No. Item Total quantity

per year Sales per year Capacity /

utilisation 1 2 3

3.2 Machinery / equipment No Item Unit price Total value Maintenance

costs 1 2 3 4 Total:

3.3 Raw material requirement Total annual requirement No. Item Quantity Value Source

1 2 3 4 Total:

3.4 Utilities / infrastructure No. Item Annual

requirement Total annual costs

Maintenance costs

Sorce

1 Electricity 2 Gas 3 Water 4 Rent 5 Other Total:

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3.5 Labour No. Particulars No. of Staff Annual wages

/ salaries Further training required

1 Skilled 2 Semi-skilled 3 Unskilled 4 Owner’s salary 5 Total:

3.6 Administrative and selling costs No. Item Quantity Amount Total:

4. Cost calculation

4.1 Fixed Capital

Value No. Item Initial - Depreciation = Actual

1 Land / building 2 Machinery / equipment 3 Furniture and fixtures Total:

4.2 Working capital No. Item Duration Quantity Value 1 Raw materials stock 2 Semi-finished goods stock 3 Finished goods stock 4 One year production expenses

(utilities, administration, wages, salaries)

Total: 5. Financing

Financing No. Item Value Remarks Own funds Loan for fixed capital items Working capital loan Other Total

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6. Annual Profit and Loss Statement

Annual Profit and Loss Statement

Period: from............... to....................

Gross sales

Less: Returns and allowances -

= Net sales =

Less: - Costs of goods sold -

- Direct material -

- Direct labour -

- Overhead -

= Gross profit =

Less: - Administrative and selling expenses -

- Salaries -

- Telephone -

- Water -

- Electricity -

- Rentals -

- Others -

= Operating profit =

Less: - Interest expense -

= Net profit before tax =

Less: - estimated income tax -

= Net profit after tax =

Date

Signature

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Instruction to the business plan for micro and smal l enterprises

The Business plan for micro and small enterprises is similar to the business plan for start-ups. The difference is that the small business plan is based on existing experiences of previous production periods.

For each instruction have also a look on the checklists in the similar instructions for start-ups above

Instruction to 1: Write down the type of business/activity in which the business operator is engaged. In this section the following issues have to be addressed: the legal form of the business, the business type / merchandizing, manufacturing or service/, the type of products or services. The location of the business can play a decisive role in its success or failure. Explain the work premises and other utilities at the operator’s disposal and describe the specific working premise problems, the space needed for the business, the desirable features of the location and its accessibility to the market. If there is anything in the location that is of special interest for your business you can stress it, too.

Checklist: Viability of infrastructure

• What commercial area is the best one for your business? • How far are you from the competitors? • Are there shops available at an affordable price? • Is the shop rent contract reasonable? • How are infrastructure facilities like electricity, water,

telephone, fax connection and public transport?

Instruction to 2: The key issue in sales performance or marketing as a whole is to know better the likes, dislikes and expectations of customers. The annual sales should be planned based on certain market surveys or past experience, if any is available. The market surveys will indicate the different customer segments (e.g. age, social status or region). Focus has to be given to those customers who are likely to purchase the product/service of the enterprise. Planning the annual sales enables to find out about the desired production amount (it makes no sense to produce more than you can sell) and the annual income. Describe the months during which sales are expected to be high, in order to make the necessary preparations ahead of time and exploit the advantage. For defining the unit price per product/service you should first know the unit costs (see production costs) as well as the prices of your direct competitors. In addition there is a need to identify the strengths and weaknesses of competitors in their product quality/quantity and identify how their product/services differ from yours, their pricing and advertising techniques.

Checklist

Marketing plan format 1. Description of product(s) 2. Target market segments 3. Target market area 4. Demand analysis 5. Supply analysis 6. Competitors’ marketing strategies

• Product strategy, price strategy, place strategy, promotion strategy 7. Project marketing strategies

• Product strategy, price strategy, place strategy, promotion strategy 8. Sales forecast 9. Fixed sssets for marketing

10. Total marketing expenditure budget

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Marketing plan guiding questions • What is/are the product(s)? Who are my customers ? • Which target market segment does each of the product aim at? • Which geographical areas will be the chosen segments? • What will be the demand for the product, similar products and substitutes within the target

market segments in the target market areas? • What will be the supply of similar products and substitutes within the target market

segments from the target market areas? • What are the strategies of the competitors who supply to your chosen target market

segments and target market areas in terms of product, price, place and promotion? • What will be your strategies to supply to your chosen target market segments and target

market areas in terms of product, price, place and promotion? • What will be the selling price and how much will be sold? • What fixed assets will be required for marketing and how much will they cost? What will be

the life of the assets and how will they be depreciated? • How much of expenditure will be incurred in terms of marketing, including cost of marketing

personnel?

Checklist: Marketing budget

Chose what applies to your product and marketing strategy:

Item Months 1 2 3 4 5 6 7 8 9 10 11 12

Projected sales Marketing expenses: Promotion (specify) Distribution (specify) Advertising (specify) Selling (specify) Total expenses

The enterprises have to strategically stress their strengths over competitor offers. For instance, if one enterprise has lower costs in comparison to its competitor, then its pricing strategy can be based on selling at lower price. If the MSE has a broader selection of goods as compared to its competitors, then he/she should emphasize this issue and take advantage of more sales. If the competitor's store area is unattractive, a strategy can be set to make one’s own store more attractive for potential customers. In this way competition can be beaten.

Checklist: Competitors

1. Who are my competitors?

2. Products • Their products I product quality I packaging.

3. Prices • What are their prices? • Is there competition with prices? • Do they give discount?

4. Location • Where are they? I Are they near by to the consumers ?

5. Promotion • What are their advertising methods and are they efficient? • How are they doing their sales promotion? • Are competitors working with middle men and sales agents?

6. What is the marketing mix of my competitors (con clusions of 2-5) ?

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The supply market should also be analysed. Identify the main suppliers for your equipment and raw materials; make price and quality comparisons and a final ranking of price and performance of suppliers.

Checklist: Conditions of raw material supply

• Try to use materials that are always available when you need them • Buy materials from reliable suppliers and make sure the quality is good • Before you buy raw materials, find out:

- what different materials you need; - what quality your customers need; - how responsible is the supplier for the quality of goods or materials; - how much raw material you need; - how often you need the raw materials; - how long it takes to secure raw material from the supplier; - affordability of the purchase price.

• Does the supplier grant discounts for bulk purchasing? • What is the smallest amount that can be purchased? • Is it possible to make credit purchases? How much can be obtained? • Terms of delivery: Will the supplier deliver to your business? Do you pay for

transport or is the delivery free? • Does the supplier accept returned goods or materials?

Instruction to 3: The production plan includes the estimated production and sales per year based on the previous experience. Capacity/utilisation means the percentage on how you are at the limit of your production and sales capacity with the respective product. In 3.2 put the value of the machinery and equipment and the maintenance costs. Depreciation costs will be highlighted under 4.1 Cost calculation - fixed capital. Utilities and costs of infrastructure such as electricity, water, rent to run the projected production plan including maintenance costs. 3.5 Labour categories required and salaries as well as further trainings required. 3.6 administrative costs to run the projected production plan.

In order to analyse the cost components of the production (workers, working materials, furniture etc.), you should analyse step by step the production process:

• Who are the suppliers for working materials?

• What is the production procedure (assembling, finalising, packaging etc.)

• What staff is needed and which qualification?

The description of the production process will highlight the main steps of production. For visualization, a table of the production process (process flow chart) would be useful.

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How many direct and indirect workers are needed and what skills should they have? Labour in a factory is divided into direct and indirect labour. Direct labourers are those who are directly or intimately involved in the production process. Indirect labourers are all further workers who facilitate production such as utility men, foremen, maintenance workers, among others, who are not directly involved in production. To determine the number and type of direct labourers needed, break down their skills into three categories: skilled, semi-skilled and unskilled. Their salary scales should be calculated accordingly.

What will be the costs of labour? Estimate how much each worker (for example, from the production supervisor/foreman down to the production worker, maintenance man, utility man) should receive on a monthly basis. Labour costs should include effective total labour costs to cover basic salaries, wages, fringe benefits, paid leaves, free meals, social and medical insurance, etc. In certain cases, direct labour will be paid according to piecework. If this is the case, estimate the production output of the worker and multiply this number by the respective piece rate.

Instruction to 4: Under cost calculation it will be important to include depreciation costs of the fixed capital. Depreciation is the estimated price to the use of an asset. You need to know it to calculate the costs of your product/service. One of the various methods of defining annual depreciation, and the simplest one, is to divide the purchasing price of the asset by the number of years of usage. Working capital should be detailed in different categories including utilities and administrative expenses and calculated for a one-year production plan.

Checklist: Calculate variable costs for each produc t/service

Item Cost (purchasing price) Used quantity per unit (product, service)

Cost per unit (price / used quantity)

Raw materials - flour 15,000,000 LC per kg 10 kg per 100 cakes 1,500,000 LC per 100 cakes - sugar... 12,000,000 LC per kg 1kg per 100 cakes 12,000 LC per 100 cakes Labour costs.. 2,840/hr 16 hr/100 cakes 45,440 / 100 cakes Transportation.. 24,000 (1) Variable costs per unit 1,581,440 C/100 cakes

15,814.40 C per cake

Checklist: Calculate fixed costs for each product/s ervice

Item Fixed cost/month Rent Salaries (administration) Depreciation of building, machines.... ... (2) Total fixed costs (3) Monthly production (in units) (4) Fixed cost per unit (2/3)

Checklist calculate total costs per unit • Add up variable and fixed costs per unit

(1) Variable costs per unit (4) Fixed cost per unit (5) Total cost per costing unit (1 + 4)

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Instruction to 5: Financing will be calculated on the basis of the preceding cost calculation and the availability of own funds. Own funds are important to convince the financial institution to grant loan because own funds show the capability of the business owner of organized savings and business management.

Checklist: Loan requirements

With regards to finance, you should give attention to questions such as:

• What is my total capital requirement? • Do I need a loan? What will be my equity contribution? How much is my

additional loan requirement? • Where do I get a loan fund from? What are the loan conditions? • What type of security (collateral) am I required to present to lending institutions

such as to micro finance institutions and other conventional banks? • What are the loan terms and conditions, grace period, interest rate, repayment

schedule, etc.? • What is the project feasibility? Is my business feasible enough to generate profit

and pay loans back within the specified loan term? • What is the break-even point?

Checklist: Most important to know for the bank is the repayment capacity of the applicant:

Three important pieces of information: • The profit generated from the investment • The businesses overall profit • The repayment capacity of the applicant

Instruction to 6: The Profit and Loss Statement (PLS) is one of the financial analysis tools employed by business enterprises to track the performance of their enterprises. The PLS is the difference between sales and expenses of an enterprise over a given period of time, often one year. If this difference is positive, it is termed profit, while if it is negative, it is then termed loss.

The PLS is important for business operators/managers in checking the efficiency of their business strategies and taking proper actions. The statement is also important for bankers to check business profitability before extending credit. The statement can only be drawn up based on certain source documents such as the cashbook, otherwise it would be very difficult to apply, especially for micro enterprises. For the statement to be applied in a given enterprise a certain level of accounting system is needed to be in place. The P+L statement has the following components:

• Gross sales: the total value of sales which is obtained by multiplying the price of each product with the total units of output sold.

• Returns and allowances : stands for the value of damaged goods that are returned by customers to the business enterprise for which the business replaces the damaged goods with new. It also considers payments made as sales commissions, discounts, etc., which again are deducted from Gross Sales to result in Net Sales.

• Costs of goods sold : stands for the costs involved with regard to direct labour, direct material and factory overhead costs which are deducted from Net Sales to arrive at Gross Profit: Direct material: stands for those material costs directly accrued in the production process, such as raw material. Direct labour: refers to costs of all labour inputs directly used in the production of goods/services of a given enterprise. Often direct labour costs are

Revenues - Costs = Profit Profit - Personal expenditures = Repayment capacity

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• measured on unit rates and costs of daily labour. Overhead costs: stands for those costs incurred, but which are not directly related to the production process. E.g. depreciation of machinery or equipment, shade rent, etc.

• Administrative and selling expenses : This includes costs incurred for certain administrative purposes and for the distribution of products. These are deducted from Gross Profit to arrive at Operating Profit. These expenses are for example, salaries of management and support staff, expenses related to telephone, water and electricity bills as well as office rents and other similar expenses.

• Interest expense : this is the amount of interest to be paid on the amount of loan obtained, based on the current interest rate.

• Estimated income tax : the amount of tax that has to be paid as per the income tax proclamation.

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C. Business planning for medium enterprises

The business plan describes what the business will do, how and where it will be done, and how the business will be capitalized and managed. Although there are many types of business plan formats based on what it is needed for, basic components include the following chapters:

• Executive summary • Sales and marketing • Production • Organisation and management • Financial plan

What to include on a cover sheet The first page of your business plan will be the cover sheet. It serves as the title page and should contain the following information:

• Company name • Company address • Company phone number (including area code) • Web address, if you have a web site • Logo, if you have one • Names, titles, addresses, and phone numbers of the owners or corporate officers • Month and year in which the plan is issued

The month and year in which the plan was written is important to include as it lets the reader and especially – if the plan is also intended for providers of finance - the lender know if the business plan is up-to-date.

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Business Plan Outline for Medium Enterprises

Executive summary

a. Brief description of the business b. Brief profile of the entrepreneur c. Business's contribution to the economy

1. Sales and marketing

1.1 Product description 1.2 Competitors 1.3 Business location 1.4 Market area 1.5 Major customers 1.6 Estimated total demand 1.7 Estimated market share 1.8 Selling price 1.9 Sales forecast 1.10 Promotional measures 1.11 Marketing strategy 1.12 Marketing budget

2. Production

2.1 Required fixed asset 2.2 Life of fixed asset and production process 2.3 Maintenance and repair of fixed assets 2.4 Sources of equipment 2.5 Terms and conditions for purchasing equipment/tools 2.6 Factory location and layout 2.7 Raw material needed 2.8 Cost of raw material raw material availability 2.9 Labour availability 2.10 Cost of labour 2.11 Factory overhead expenses 2.12 Total production cost 2.13 Planned capacity (capacity projection for at least 3 years)

3. Organisation and management

3.1 Form of business 3.2 Organisational structure 3.3 Business experience and qualification of the entrepreneur 3.4 Pre-operating activities 3.5 Pre-operating expenses 3.6 Office equipment required 3.7 Administrative expenses

4. Financial plan

4.1 Project cost 4.2 Financing plan and loan requirement 4.3 Profit and loss statement 4.4 Cash flow statement 4.5 Balance sheet 4.6 Break even point analysis 4.7 Return on investment

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Instruction to the business plan for medium enterpr ises Cover page

The external appearance has its own contribution in communicating the content of the business plan. The information included in the cover sheet must be simple highlighting the name of the company with full address (telephone, fax, e-mail and name of person to be directly contacted for further question with the date of business plan preparation), company logo if there is one with limited size and at the centre the word business plan preceded by the company name should appear. The second page will be for table of contents and it is highly preferable that it will be limited to one page.

Executive summary

The Executive Summary, although appearing first in the order of presentation in the Business Plan, is actually the last to be prepared, that is, after the four sections of the business plan (marketing, production, organisation & management, and finance) have been completed. It should be short (not more than two pages and single spaced), however, loaded with vital information about the project.

1. What is the nature of the project?

Briefly describe the project – Benefits of the product/service and the need identified and why the need exists, trends and risks of the market and who are the customers and the expected market share, competitive advantage and key suppliers and technological change in the industry, location of business and zoning laws, legal form and historical background of the business, plan of operation and main financial indicators such as projected and actual sales earnings and profit after tax.

2. What are the entrepreneur's competencies and qua lifications?

Give a brief introduction of yourself as an entrepreneur, your background, your past track record, business experience and training, especially mention those skills, qualities, networks and contacts with persons/enterprises needed by or related to the project, and how you plan to use this knowledge and skills to successfully run the business.

3. What are the project's contributions to the loca l and national economy?

Describe the important socio-economic and developmental contributions of the proposed project to the local and/or national economy. These contributions should be significant factors and priority concerns of the government, banks and society in general. These contributions may include employment generation, utilisation of local skills and materials, income generation, import substitution, export earnings, etc.

Sales and marketing

1.1 What is the product?

Give a short description of the product, its size, colour, shape and the range of products to be offered. Describe product features, uses and benefits, whether it is a new or an existing product. The technology with the required training and the raw materials used to make the product has to be described in line with the market demand and potential competitors. The terms and conditions, volume, quality and price of potential suppliers of raw materials has to be stated. To ensure sustainability future products/services to be offered has to be identified and described briefly.

1.2 How does it compare in quality and price to its competitors?

In answering this question, determine what will make the product unique in the market. Will it be of better quality as compared to what is currently available, or will the price be significantly different to make it easier to sell? What other features will make it different from your competitor’s products?

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1.3 Where will the business be located?

Location of the business is essential to either reduce costs or to increase the chances of customers stopping at the business to look at your products or at least make inquiries. If the business is retail or service oriented, it must be near to the market. If it is production oriented, it may be better to be closer to its raw material sources or near necessary infrastructure facilities (e.g., port), transport and utilities (e.g., power) centres. The important factors to consider with regard to location are:

• proximity to essential raw material sources; • proximity to markets and distribution channels; • availability of transport facilities; • availability of efficient and cheap skilled labour; • existence of related industries (forward/backward linkages); • infrastructure facilities (e.g., road, power, port, etc.); • communication facilities (e.g., post office, telephone, fax); • zoning regulations and growth features; • cost and conditions of acquiring the land.

A good location is one of the most crucial factors essential for market development hence the choice of location should therefore be carefully considered. The location should also be differentiated in terms of marketing outlets or factory locations.

1.4 What geographical areas will be covered by the project?

Determining the geographical coverage (that is, where to market the product) depends very much on the nature of the product; how well it lend itself to transport and distribution; the size of the market in different localities; the presence of strong competitors in the areas under consideration; your willingness to travel and, of course, on existing contacts or channels of distribution you are familiar with. In general, it is easier to deal with a limited market area, since travel time and distribution costs can be kept to a minimum.

1.5 Within the market area, to whom will the busine ss sell its products?

Here we are talking about a specific target group or market segments among the population, within the specified market area you have chosen, to whom you will aim to sell your products. Identify these customers as clearly as possible (e.g., their characteristics and profile in terms of age, sex, income, buying practices, consumption pattern, etc.), in order to ensure that the product does indeed suit their taste, needs, wants, income, lifestyle.

Will you sell to wholesalers, retailers, and if so, what are the consequences? If you plan to have a retail outlet, the choice of location is critical.

1.6 Is it possible to estimate how much of the prod uct is currently being sold?

This estimate should be possible to carry out in a number of ways. Basically, the approach is to move from the general to the particular. For example, you can start by estimating consumption, usage or sales of the product per head of the population in your market area.

Then, one by one eliminate certain segments (specific groups categorised by age, income, location, sex, habits, etc.) of the population who may not be your consumers, so that at the end a reasonable figure can be assumed to be correct. If possible and available, it is also good to check certain statistics. If you cannot make use of any reliable statistics (secondary data), it may be better to carry out a simple and low-cost sample survey, i.e., gather firsthand or primary data. For example, if you know how many shops there are which sell your or similar products, and if you question a few of them regarding their sales, you can estimate the total sales of the product.

1.6.1 Market survey checklists

The following is a series of checklists which can guide you in your interview with wholesalers, retailers, and consumers (people who use the product) or customers (people who buy your product). The questions are intended to be illustrative and you should learn how to begin your interview (by being friendly with your interviewees so that they will open up and not feel suspicious

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or threatened) and pose your questions diplomatically, politely and clearly to attain the desired information and accurate answers.

If the questions are adequately answered, you can make a preliminary estimate of the total demand in your market area and the share of the market which you can realistically capture, given an effective marketing strategy. If similar products are distributed mainly by wholesalers and retailers, conducting such a survey is really the first step in establishing a relationship with your customers and finding out their needs. There are two main reasons for carrying out the survey:

a) Accurate collection of information, so that a reliable level of sales and production can be forecasted;

b) Establishment of good relations with your own potential customers.

1.6.2. Wholesalers' / importers' checklist

Most consumer products such as biscuits, sugar, toothpaste, matches, etc. find their way to the consumers by means of wholesalers who purchase the goods in bulk from a factory or distributors and then sell them in smaller quantities to grocery stores and retail shops (customers). Since there are usually few wholesalers and many retailers, it is often best to start your market survey by visiting the wholesalers. Once you have defined your market area, try and locate all the wholesalers who supply your area and ask the following questions:

1) How many wholesalers are there in your market area? What are their names and where are their locations?

2) What market areas does each wholesaler cover?

3) How often does each of your products sell per year? Are your sales of the product increasing every year? If yes, by how much?

4) Are seasonal fluctuations present?

For example: 1 2 3 4 5 6 7 8 10 11 12 months High Medium Low

5) What about the extent of competition? Are they large in size, are their product features the same, what are their quality standards? What are their marketing practices?

6) What about product improvements, i.e. do they think the market needs some new designs, more varieties, better features, new product specifications?

7) What are their selling prices of your products?

8) At what price do they buy them?

9) What is the length of credit extended to them by their suppliers (one week, one month?), if any?

10) Assuming your product is of suitable quality and priced competitively, how much of your product would they take as a sample order?

1.6.3. Retailers' checklist

Retail shops are the last link between producers and consumers. Ultimately, they make the final sale to the public. Their proximity to the buyers makes them valuable sources of information on what people actually want and buy.

For example, if a person buys ink that turns out to be of poor quality, then the customer will complain to the shop where he purchased it, rather than going to the factory. For this reason, retailers are in a strategic position to identify gaps within the market, particularly between what the customer’s demand is and what his wholesalers can supply. A few creative retailers may be able to give you new product ideas that could also be realised in your factory.

The objectives of interviewing retailers are: a) To cross-check data provided by wholesalers; b) To learn about the needs, wants, tastes, buying habits, etc. of the consumers;

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c) To look for potential new products; d) To learn how to position your product as against your competitor’s products; e) To learn how to market your product more effectively; f) To help identify promotional measures that will be useful in selling the product (e.g. display

boards, give-aways, samples, etc.); g) To help formulate the marketing strategy of the business. A few questions which may be asked from the retailer: 1) How much of the product does he sell in a year? 2) How many competitors does he have in his neighbourhood? 3) Does he experience any seasonal fluctuation in sales? 4) From what wholesaler or manufacturer does he buy the product? 5) Is he given any credit by his suppliers? 6) If he is given credit for the product, for how long is the credit given? 7) Does he sell on wholesale anywhere, if so, where? 8) What is his purchase price of the product? 9) What is his selling price of the product? 10) Does he have any ideas whether his customers would like some changes or improvements of

the product? 11) Does he buy the product by means of cash or on credit? 12) Does he sell on commission?

1.6.4. Customers' or consumers' checklist Even if you have interviewed wholesalers and retailers, it is important to discuss market acceptance with customers (who buy the product) and consumers (who use the product). Their feedback is very useful, either to cross-check previously collected opinions or to capture new ideas that neither of the other two groups of interviewees have touched on or reflected.

In particular, if your product is a capital good (e.g., machinery), it is necessary to talk to consumers as they normally purchase directly from the factory. A few questions which can be asked from customers and consumers are: 1) Why did you buy this product? 2) When (What month) did you buy it? 3) How often do you buy this product? 4) Will you need more of this product in future? How many units? 5) How much did you pay for it? 6) Are you satisfied with it? 7) Would you like to see any changes or improvements? 8) From where did you buy it (locality), from whom? 9) Why did you buy it from this particular supplier?

You must have a profile record of your interviewees (wholesalers, retailers, consumers), including information such as age, occupation, income, buying habits, sex, consumption patterns etc., as this information will be helpful in analysing and describing your market.

1.7 What share or percent of this market can be cap tured by the business? This is always a difficult question to answer precisely, since much depends on your ability as an entrepreneur to sell your product, your network, the effectiveness of your marketing strategy and your aggressiveness in pushing the product combined with business common sense. It also depends on the extent and strength of competition. However, certain guidelines can be given. If you have done your market survey properly, you will know the following information on your competitors: a) whether there are few or many competitors; b) whether they are large or small in size;

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c) whether their product features are similar or different to one another; d) whether their product features are similar or different to yours.

The following decision guide may help in processing this information to make an estimate of your market share.

Decision guide

Number of competitors

Their size * Their product features

Market share (in %)

Many Large Similar 0 - 2,5 Few Large Similar 0 - 2,5 One Large Similar 0 - 5 Many Large Dissimilar 0 - 5 Few Large Dissimilar 5 - 10 Many Small Similar 5 - 10 Few Small Similar 10 - 15 One Large Dissimilar 10 - 15 Few Small Dissimilar 20 - 30 One Small Similar 20 - 50 One Small Dissimilar 40 - 80 Total 100

* Assumed that your business is in the "small" category when entering the market.

1.8 How much of the product will be sold? Now that you have estimated the market share you can realistically capture, make an estimate of your targeted sales (sales forecast), that is, every month for the first year and annual for the next five years. The first annual sales forecast is generally a fraction of the estimated market share and could be anywhere from 60 to 80% of the market share at the beginning. This is to take certain errors in estimating the market into consideration.

1.9 What is the selling price of the product? There are three common ways of determining the selling price of your product. These are:

a) The "cost-plus method" This is done by adding a reasonable profit margin (say 20% to the final total product costs (i.e., marketing costs plus production costs plus administration costs, plus finance costs). The final product costs per unit are determined by dividing the total product costs by the number of units produced. To this figure you may add a profit margin.

b) The "comparative method" This method compares your product with others in the market and then, based on your product's quality and other features, you may fix your price lower, higher or at the same level as your competitor’s price.

c) "What the market will bear method" This method is based on supply and demand of the product. For instance, if there is a scarcity of the product in the market (sellers' market), you can set your selling price at a high level; hence your profit margin could be higher. Similarly, if there is a surplus of the product in the market (buyers' market), you may be forced to lower your price, and consequently your profit margin. (Two alternatives to avoid reducing profit margins are: (1) to reduce the product costs by identifying which areas under marketing, production, administration and finance can be reduced), and (2) to identify other market segments that can afford to buy at the original price).

In practice, all three methods should be used from time to time in any business, but in general and especially when starting a business, it is safer to use the "Cost-Plus Method". It is also a good business strategy to anticipate your competitor’s reaction to your pricing strategy.

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1.10 What promotional measures will be used to sel l the product? Promotion is one of the most neglected aspects of marketing a product. Promotion is necessary to entice and convince buyers into purchasing your product and not those of your competitor. Promotion is generally divided into advertising, sales promotion, publicity and personal selling. A few of these measures are:

• radio advertisements, newspapers, magazines, trade journals or, if appropriate also via television,

• volume discount (reduced prices when selling in bulk); • handbills distribution; • prompt, regular, courteous and efficient service; • good merchandising ensuring the proper display of your product on the shelves of

your market outlets; • special credit facilities to regular customers; • posters; billboards; signboards; • free samples; free trials; • press releases; • buy one - take two; • raffles; coupons; • sponsorship of local shows, festivals; • participation in trade fairs and exhibitions; • personal selling.

One word of caution on promotional measures: These activities cost money to your business, so be sure that for every promotional measure adopted, there is a foreseeable increase in sales. Without a justifiable increase in sales, costs will escalate, hence increasing the unit costs of the product. Make sure to include these costs in your marketing budget.

1.11 What marketing strategy is needed to ensure t hat sales forecasts are achieved? Formulating a marketing strategy means proper planning, balancing and integration of the business's product strategy, pricing strategy, distribution strategy and promotion strategy. In order to market effectively, you must identify your market, know your product and study your competitors. You also have to spend a certain amount of time on promotion activities, pricing your products correctly and distributing them to your retailers and/or consumers effectively and efficiently. You should not assume that because your product is good that customers will automatically buy your product.

1.12 How much do you need to promote and distribut e your product? You must have a marketing budget that includes your marketing costs, such as for promotion, distribution and salaries of your sales force, if any.

Production

2.1 What is the production process? In order to find out what costs (labour, raw material and overheads) are involved in production, it is useful to follow the whole production process and to identify how the raw material are received and gradually, step-by-step, transformed through various processes (e.g., cutting, mixing, assembling, finishing, packaging, etc.) into a finished product. Description of the process need not be a lengthy explanation, but should cover all the major operations. A process flow chart is a useful tool to depict the production process. This will also clarify how many workers are required at each stage and what skills are needed.

2.2 What building and machinery (fixed assets) are needed and what will be their costs? Identify these items carefully and estimate their costs accurately. If the requirements are over-estimated, the results can either be:

a) Too much production occurs and stocks are built up - this costs money and ties up capital uselessly and unnecessarily;

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b) Excess capacity means that you are investing in certain assets or paying interest on building and equipment that are not providing you with any return. This will also increase costs in the long-run by having a higher depreciation than necessary;

c) There is also the possibility that the project may not be financed at all because it appears too expensive.

In general, it is better to start on a very modest scale with a small building, or even rented space, and with the minimum essential machinery. Remember, if the demand for your product exceeds the 8-hour capacity (one shift) of the equipment, an extra shift can be added at a later stage, or you can operate on overtime after the regular shift has ended. Especially when starting a business, proceed with capital purchases with extreme caution and only when the market is secured.

Regarding machine capacity the supplier should give the correct information to the entrepreneur. In many cases, suppliers tend to over-rate the capacity and efficiency of their machinery; so do not count on the machines working at 100% rated capacity. By determining the realistic capacity of each machine, it is then possible to estimate accurately the proper balancing of the machines and men, i.e. how many of each tools or machines are required, and correspondingly the workers and skills required operating the machines to ensure a smooth and efficient production operation.

Determining the costs of building and machinery should be relatively easy, since every entrepreneur can find out this information from machinery suppliers. Again, you should be cautious not to build fancy buildings or obtain equipment which is too modern or too sophisticated to operate and maintain. Machinery salesmen usually try to sell the most expensive or most modern equipment first, so be aware of what you need and can afford, and do not be led into purchasing equipment which may not be essential or even suitable to your scale of production, especially in the initial stages of your operation.

Be aware that there may be a wide range of technology options ranging from labour-intensive (more labour is required relative to the number of machines or investment in machines) to capital-intensive (more machines are used or higher investment in machines relative to the labour required).

If quality labour supply can be assured, it is often wise to use labour-intensive technology, since your factory will be less dependent on its machines, which can break down at any time, suffer from power failure, and be idle for lengthy periods. If, on the other hand, labour is troublesome and unreliable due to seasonal availability, a more capital-intensive approach on a modest scale may be more practical. However, if workers are properly motivated, they can be encouraged to become more reliable.

Finally, list all the land and improvements, building, furniture and fixture, machinery and factory equipment including installation costs, stating their size, capacities and costs, to eventually arrive at the total costs of fixed assets.

2.3 What is the useful life of the building and mac hinery?

The answer will depend on the make of the building (i.e., whether made of wood, concrete structure, etc.) and machinery and on how much you use your fixed assets. To arrive at an annual depreciation charge, deduct the scrap value at the end of its expected life, and then divide the value of the asset by the number of years of its productive life. If it has no scrap value, simply divide the value by the number of years.

In your country, the Tax Office publishes general rates of depreciation. In many countries, general practice is as follows, although certain variations may exist:

Fixed assets Life Annual depreciation Machinery 10 years 10%

Building 20 years 5%

Furniture 5 years 20%

Vehicle 7 years 15%

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2.4 How will maintenance be done and are spare part s available locally?

It makes little sense to import equipment which, although it may be more dependable, may result in long work stoppages while you wait for the arrival of spare parts from abroad. Maintenance service and spare parts should be available locally to ensure continuous production. Do not forget

to estimate the costs of maintenance and spares, as this will form part of the production costs. Maintenance costs are part of factory overhead expenses.

2.5 When and where can the machinery be obtained?

It is necessary to check with machinery suppliers. Estimate accurately the delivery time of the machinery, as this is vital in preparing your pre-operating schedule. Also, do not forget to include in the costs of the machinery, the transport costs to the factory, import duties (if imported), insurance up to the point of installation and installation charges, if any.

2.6 How much capacity will be utilised?

100% capacity utilisation normally means that the equipment is working eight hours a day, six days a week. Most factories work on an 8-hour, one shift basis and many of them use their equipment for only a portion of this time. Seasonal fluctuations in capacity utilisation should be accounted for. A good example is a brick factory where operations may run continuously for 24 hours a day during the construction season and may be shut down for six months due to rainy season.

2.7 What are the plans for using spare capacity?

Machines and equipment should be used as much as possible. This keeps the workers in a steady rhythm and the equipment in good running order. During periods where low capacity utilisation is foreseen, attempts should be made to ensure that other works (e.g., product improvement and development) are undertaken, which may not at first be directly related to the main production, but which at a later stage may be developed into a new product.

2.8 When and how will the machinery be paid for?

Certain machinery suppliers are prepared to sell their equipment on hire-purchase scheme. This spreads the costs of the machinery over a longer period of time, resulting in higher total costs, but it enables the business to have greater cash liquidity or lower investment requirements during the start up period. Before purchasing the equipment, find out the terms of sale, i.e. whether cash, credit, or leasing, the length of payment and other conditions, such as guarantees, after-sales services, training of operators.

2.9 Where will the factory be located and how will the factory be arranged?

Almost always in small and medium industries the factories have the same location as their business addresses.

Equally important is to determine the floor space required by the business (for production, office, store room, toilet, etc.) and more importantly how the factory space is going to be laid out in terms of the spatial arrangement of the machines and equipment. To answer this question, it is essential that you must know the production process and the machines/equipment needed for each process, so that you can arrange the machines according to the production flow as much as possible.

You can also determine the size of the machines and the space they will occupy (including allowance for movement). A plant layout will be very useful for this purpose. You can arrange your machines in a straight line or a U-shape.

2.10 How much raw material is required?

Now that you have a good idea of the production level you want to achieve, find out the type, quality and quantity of raw material needed. Find out the input-output ratio or conversion ratio, e.g. how many kilos of oil would be required to produce 120 kg of soap per day. These should be specified according to square meter, kilo, ton, pieces, etc., which will be used per month.

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2.11 How much will the raw material cost? After determining the quality and quantity of the needed raw material, find out their unit costs (i.e., LC2,000 per ton, LC15 per square meter, etc.), list these costs next to the material and prepare a list of average monthly raw material requirements and their costs. Include duties and relevant taxes, if raw material is imported.

2.12 What are the sources of raw material? Are the y available throughout the year? In sourcing raw material, at least three factors are critical. Firstly, the price should be as low as possible. Secondly, their source should be as close as possible to the production site to reduce transport costs. Thirdly, the source should be reliable.

If raw material is not available throughout the year, at least two alternatives are possible - either the factory will have to reduce production or it must build up a stock of raw material when they are available and plentiful, so that production can be continuous. If the latter is chosen, additional working capital is required and should be included in the calculation of your cash needs and determination of your project's investment requirements, so that the business can cope with this situation. For example, think of the problem involved in obtaining fruit for a fruit processing plants during off-season! 2.13 How many direct and indirect workers are need ed and what skills should they have? Labour in a factory is divided into direct and indirect labour. Direct labourers are those who are directly or intimately involved in the production process. Indirect labourers are all further workers who facilitate production such as utility men, foremen, maintenance workers, among others, who are not directly involved in production.

To determine the number and type of direct labourers needed, break down their skills into three categories: skilled, semi-skilled and unskilled. Their salary scales should be calculated accordingly.

2.14 What will be the costs of labour? Estimate how much each worker (for example, from the production supervisor/foreman down to the production worker, maintenance man, utility man) should receive on a monthly basis. Labour costs should include effective total labour costs to cover basic salaries, wages, fringe benefits, paid leaves, free meals, social and medical insurance, etc. In certain cases, direct labour will be paid according to piece work. If this is the case, estimate the production output of the worker and multiply this number by the respective piece rate.

2.15 Are workers available throughout the year? If not, what effect will this have on production?

Many factory workers in small and medium businesses receive low wages and, therefore, supplement their income with agricultural or other extra external jobs. If this is the case, the business must be ready to cope with such a situation and, either pays its workers competitive or a higher wages/salaries/piece rates, or recruit new or temporary workers during this period, or even be prepared to reduce production. Whatever course of action is decided upon, it must be accounted for in determining the production schedule.

2.16 How will the workers be motivated? Workers can be motivated in a number of various ways: humane treatment, good working environment, increased responsibility, other incentives (e.g., profit sharing, awards for deserving workers, bonuses and providing facilities, such as meal and snack allowances, transport allowances, medical allowances, lodging, etc.) If these are given, their costs should be calculated and included in computing actual labour costs or as overheads.

2.17 What factory overhead expenses are incurred? Factory overhead expenses include such costs as rent of factory space, maintenance and repair costs, depreciation of factory machines and equipment, costs of utilities (water, electricity, and salary of supervisors, cleaners and maintenance men). In the case of electricity, if it is used in a large quantity and the amount used depends directly on the level of production, it should be treated

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as a raw material rather than as an overhead expense. But if electricity is only used for lighting and general purposes, treat it as an overhead expense.

Only the costs, such as those listed-above that do not change or vary much according to the level of production are treated under overheads.

2.18 What are the production costs per unit?

Production costs include the costs of direct raw material, direct labour and factory overheads. Two methods are mentioned here to calculate production costs per unit, as follows:

Method 1

To arrive at the production costs per unit, add the monthly costs of direct raw materials (step 2.11), direct labour (step 2.14), and overhead expenses (step 2.17), then divide this amount by the number of units produced during the course of the month (step 2.6).

Method 2

It is unfortunate that in real life costing is not quite as simple as illustrated above. The complication arises from the fact that few small and medium industries produce only one item for sale. Whereas it may be easy to identify the raw material costs in any one item, estimating the labour content or allocating a portion of the overheads to a particular item presents another problem.

Allocating labour costs:

To assign direct labour costs to any product, follow this simple rule: Multiply the hourly direct labour charge by the number of hours of direct labour that goes into manufacturing the product. The hourly direct labour charge is derived by dividing the total direct labour costs by the number of hours of direct labour available. For example, if 8 direct labourers work 8 hours a day, 6 days a week for 4 weeks, then the total hours of direct labour available per month is:

8 workers x 8 hrs/day x 6 days/week x 4 weeks = 1,536 hrs

If the total costs of these direct labourers amount to LC 4,000, then the hourly rate (LC) is:

Total direct labour costs of LC 4,000/1,536 hours available = LC 2.60 per direct labour hour (hourly rate).

Example:

If a chair requires 6 hours of direct labour to manufacture, then the direct labour costs of that chair lies at: Hourly rate of LC 2.60 x 6 hours = LC 15.60 Allocating Overhead Expenses: There are two ways of allocating overheads. These are:

a) by relating overheads to labour hours, b) by allocating them in relation to sales.

The first and preferred way is to relate overhead expenses to the hours of direct labour involved in manufacturing the product. This can be done by dividing the total overhead expenses by direct labour hours available and then multiplying this amount by the number of hours it takes to manufacture the product.

Example: If total overhead expenses amount to LC 3,000 and total direct labour hours are 1536 then the hourly overhead rate is:

Total overheads of LC 3,000/1536 total hours = LC 1.95 per direct labour hour (Hourly overhead rate). Then, multiply the hourly overhead rate by the number of direct labour hours used to make the product:

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Hourly Overhead Rate of LC 1.95 x 6 hours to manufacture one chair = LC 11.70

This figure can then be added to the raw material and direct labour charge to arrive at the unit production costs of the product. The second method of allocating overheads is according to the % of sales of that particular product in relation to total sales. If, for example, a furniture maker produces the following products:

Products Unit selling price (LC)

Sales per month

% of sales

20 chairs LC 200 4,000 20% 10 beds LC 400 4,000 20% 12 tables LC 1,000 12,000 60% Total Sales LC20,000 100%

Total sales are LC 20,000 of which 20% are chairs, 20% beds, and 60% tables. Therefore, 20% of overheads could be allocated to chairs. The overhead charge per chair can then be calculated as follows:

Total overheads for 20 chairs lies at: Total overheads per month of LC 3,000 x 20% = LC 600 Therefore, the overhead charge for each chair is LC 30: LC 600/20 chairs = LC 30 Similarly, for beds, it is: LC 600/10 beds = LC 60

And for tables: LC 600/12 tables = LC 150

After having determined the raw material costs per unit, the direct labour costs per unit and the overhead rate per unit, the unit production costs can be calculated by adding all of these three cost components:

+ Unit Raw Material Costs + Unit Direct Labour Costs + Unit Factory Overhead Costs = Unit Production Costs

Alternatively, unit production costs can be derived from the following calculation:

+ Total Raw Material Costs + Total Direct Labour Costs + Total Overhead Costs = Total Production Costs divided by Total Production Volume (e.g., kg or units)

= Unit Production Costs

Organisation and management

3.1 How will the business be organised? There are four common forms of business organisation: (1) sole proprietorship, (2) partnership, (3) private limited company (closed corporation), and (4) public limited company (public corporation).

However, most small and medium businesses are registered as sole proprietorship, meaning that the owner / manager or the entrepreneur is the owner as well as the general manager of his business.

Partnership involves co-ownership of the business by one or a few partners who may be a family member or close friends. Partners may bring their capital or expertise, or both into the business.

A private limited company involves ownership of the business by a limited number of people (usually relatives and close friends) who band themselves for purposes of the business. Ownership is based on shareholding, which can be transferred to other shareholders with the consent of the existing owners.

A public limited company (public corporation) involves many persons owning the business who may not be affiliated with one another. Ownership is determined by shareholding which are floated

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on the stock exchange and transferable to the public. A corporation has a legal personality and has limited liabilities. A corporation may be managed differently from its owners.

Countries have various regulations regarding the registration of business under each form. It is important that you know them - the relevant laws (e.g., taxation, liability, etc.), the forms to be filled in and the licenses/permits to be acquired (and paid for) before you can legally operate as a business.

3.2 How will the business be managed and operated? For the business to operate smoothly and efficiently, there must be certain structures of authority and responsibility (a chain of command), division of labour (job distribution), and definition of what each entity must do in the business (job description). Therefore, the business needs an organisational structure. This is mostly depicted through an organisation chart.

In designing the organisational structure, it is important that the various functions of the enterprise (marketing, production, organisation and management and finance) be performed well. In a small business, one person can handle several functions. For instance, the entrepreneur may ‘double up’ as general manager as well as production manager.

In small and medium businesses it is also common to have family members holding positions of responsibility in the business or even perform production work. For instance, the wife may be the treasurer and marketing manager, while the older children help out as part-time production workers.

3.3. What are the business experiences and qualific ations of the entrepreneur? To ensure business survival and growth, it is important that the people who run the business must have the proper qualifications and suitable experience. The survival and growth of the business depends on the competence and ability of management. A class B (medium potential) project managed by a class A (highly competent) manager will mostly turn out to be successful, while a class A project (high potential) run by class C (incompetent) management will fail.

In particular, if the proponent wants to borrow money from the bank or if he wants to get trade credit from his suppliers (raw material, machinery), he must be able to convince them about his ability, competence and integrity.

Therefore, it is of utmost importance that the proponent includes the highlights of his bio data as well as that of the other key officers involved in the business and being relevant to business operations.

If possible, the proponent should include bank references, former employers, or well-known and respected community leaders who can vouch for his integrity as well as his abilities.

3.4 What pre-operating activities must be undertake n before the business can operate? Before the business can start actual operations there are many preparatory steps that have to be carried out. The entrepreneur must be aware of these and plan their execution, so that costs, time and energy can be saved.

A few of these preparatory activities include attendance in a training program (whether skill-related, management or entrepreneurship), preparing your business plan, doing market survey, making trips to machinery and raw material suppliers, registering the business, hiring a consultant, etc.

It is advisable that the proponent lists down all these pre-operating activities and decides when and how long each activity will last. A few of these activities can be carried out simultaneously (e.g., drawing up market survey and contacting suppliers), while others have to be done sequentially (purchasing the machinery before their delivery and installation in the factory). To aid the proponent he can prepare a Gantt chart, which depicts in one column all these pre-operating activities and a further illustrating the timetable (in weeks, preferably) when each activity will start and be completed.

3.5 What pre-operating expenses will be incurred? Pre-operating expenses are those expenses which are needed in order to plan and to prepare for the business operation. These include worker training, market surveys, testing, travel to source suppliers of raw material and machinery or to negotiate with potential market outlets, etc.

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In a few cases, you may be able to find workers who do not need any training, but in many cases some form of training is required. As an owner / manager you should have a good idea of the manufacturing process. You may have acquired this knowledge and skill from your previous work, business experience or training. Or this may require that you spend some time in another factory of similar size for exposure and gaining of experience. In most cases, it makes sense to hire at least one good technician who is familiar with the process and who can give on-the-job training to the workers below him. However, this will take some time and time is money. Therefore, these costs should be estimated. It may be necessary, for instance, to pay workers a stipend during their on-the-job training before they start full production on a piece rate basis. These pre-operating costs have to be accounted for as part of the total project costs (project's total capital requirement).

3.6 What fixed assets will be required for the offi ce? Aside from the fixed capital needed to manufacture the products or to facilitate and maintain production operation, the business needs other fixed assets to maintain the administrative aspects of the business. These assets include a typewriter, furniture and fixtures, cabinets, electric fans, calculator, computer, vehicle, etc. These fixed assets also have to be depreciated according to their useful life.

3.7 What administrative costs will be incurred? To support production and marketing activities of the business a few administrative activities have to be performed and costs have to be incurred in the performance of these activities. For this reason, administrative costs are also termed operating expenses. Administrative costs include the salary of the office secretary, bookkeeper, driver, security guard, depreciation of fixed assets, furniture and fixtures used in the office, communications, etc.

Financial plan

4.1 What is the total capital requirement? Total capital requirement, also known as total project costs or total investment requirement is composed of three items: fixed assets, pre-operating expenses and working capital. Fixed assets is the sum total of all costs of land and improvements, building, machinery, furniture and fixtures, vehicles, etc. (step 2.2) Pre-operating expenses are those necessary expenses that are incurred before the business starts operating. These include registration fees and licenses, training costs, costs of preparing the business plan, trips to raw material and equipment suppliers, etc. (step 3.5). Working capital is the amount of money permanently needed in cash or in kind to keep the business operating while it is awaiting full payment for goods sold to customers.

Working capital can be calculated by adding five factors: 1) The costs of maximum raw material stocks that will have to be stored to ensure continuous

production. In a few cases this may be three to six months worth, if the raw material is difficult to obtain or has to be imported, whereas in other cases (where raw materials are readily available) only one or two weeks worth may be needed;

2) The costs of finished goods kept in stock and awaiting distribution to the customers; 3) The costs of a work-in-process that is on factory floor, but have not yet been converted into a

final product or finished goods; 4) The costs of goods already distributed to customers, but have not yet been paid (accounts

receivable); 5) The amount of ready cash needed to pay workers and overheads.

• To determine the costs of raw material stocks, simply multiply the quantity needed by its purchase price;

• to determine the costs of finished goods stock, multiply the number of units to be kept by the unit production costs;

• to determine the costs of the work-in-process, first estimate the number of days it takes to convert the raw material into finished goods, then multiply this by the daily production level, thereafter multiply the figure obtained by the unit production costs determined in, and finally divide this figure by 2;

• to determine the costs of goods already distributed, but not yet paid for, estimate the quantity that will be given on credit and multiply this number by the unit production costs;

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• to determine the amount of cash needed in the business, add the monthly labour costs and

overheads to the monthly marketing expenses and the administrative expenses.

Add these five cost elements together to arrive at the total working capital requirement. To calculate the total capital requirement, add the following:

+ Fixed assets + Pre-operating expenses + Working capital = Total capital requirement (project costs)

4.2 Is a loan needed? What will the equity contribu tion of the entrepreneur be? And if so, how much?

Sourcing of total capital requirement can also be termed the financing plan. Bankers want to know these sources and what different project cost components are being funded by these various financial sources. After determining the total capital requirement, the next step is to see whether the amount required is too much for you to finance on your own, or beyond your capability to finance. If this is the case, then a loan will be needed.

The entrepreneur is almost always expected to make an equity (owner’s capital) contribution to the project. For example, if the project costs LC 50,000, the bank may require the entrepreneur to put up at least LC 10,000, or 20%. The LC 10,000 constitutes the owner’s equity. To arrive at the amount of the loan needed, subtract the equity from the total capital requirement. List these as follows:

Source Amount Use Equity LC 27,000 Working capital

Loan LC 70,020 Machinery

Capital requirement LC 97,020 * LC stands for local currency

It is also possible to borrow from other sources like family members, friends, raw material and equipment suppliers, in addition to banks. Hence, your financing plan (although given here in a very simplified manner) may look like the above plan.

4.3 What security (collateral) can be given to the bank?

In addition to equity the bank will demand to know what kind of security the entrepreneur can offer the bank to ensure that the loan is really repayable and repaid. Normally, land and building (the title of ownership has to be certified by the appropriate government authority) are used for security purposes. Be aware that if your building or house is valued by the bank at LC 100,000, the bank may only accept 60% of its full value, or LC 60,000, for security purposes.

In many countries titled land has a collateral value from 80 to 100%. Likewise, the machinery, vehicles or building which will finance the loan can also be used as collateral. For example, machinery and equipment have a collateral value of 60% of its purchase costs in many countries.

Some credit institutions, especially those catering to small loans, accept personal property (e.g., jewellery, private car, refrigerator, sewing machine, etc.) as collateral.

If the entrepreneur does not have enough security to cover the loan needed, he must then raise this security from friends and relatives or reduce the size of his project until the loan size matches the security requirements of the bank.

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4.4 What is the loan repayment schedule? Prepare the Loan Repayment Schedule. An example is given below. For a loan of LC 120,000 at the cost of 10% for six years, the repayment schedule is shown in the table below:

Year Amount of principal outstanding

Instalment due Interest payable at 10%

Total amount

1 120,000 20,000 12,000 32,000 2 100,000 20,000 10,000 30,000 3 80,000 20,000 8,000 28,000 4 60,000 20,000 6,000 26,000 5 40,000 20,000 4,000 24,000 6 20,000 20,000 2,000 22,000 Total 120,000 42,000 162,000

4.10 Is the project feasible?

Now that all questions related to the four aspects of the business project - that is, marketing, technical, organisation and finance - have been answered, a conclusion should be made on the feasibility of starting the business. Is the profit on the first year sufficient enough to meet the loan and interest repayments? Can marketing or raw material supply problems be overcome? What will happen to project profitability, if raw material costs increase by 10%? What if, the sales forecast is only 80% realised? Any further outstanding questions should be dealt with in this last section.

You also have to decide for yourself whether the expected profit to make is worth all the risks you are taking by starting the business.

Likewise, in addition to ROI which is one of the measures of profitability, other kinds of financial analysis can be carried out to provide a better picture of the business.

These include:

1) Measures of liquidity (e.g., current ratio)

Current assets Current ratio = Current liabilities

A ratio of 2 to 1 has often been considered to be desirable. This rule of thumb, however, is not necessarily valid in all cases and is industry dependent.

2) Measures of solvency (e.g., debt-equity ratio)

Total debts Debt-equity ratio = Total equity

This ratio is very useful to creditors. A low debt-equity will be considered favourable by creditors, as it indicates the business is mostly funded by the owners themselves.

Another financial tool which is required by some banks is the Sensitivity Analysis, which entails subjecting the effects on production costs, profitability, margins, etc. by the changes of certain important inputs, such as raw material prices or labour costs increasing by a certain percentage, let us say 5 or 10%.

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D. Business plan checklist

Executive summary

• What is the nature of the project?

• What are the entrepreneur's competencies and qualifications?

• What are the project's contributions to the local and national economy?

• In addition, good to include the following: o Your knowledge of the business. How much do you know about the area? Will you have

to spend extra time and money teaching yourself the business? Will you have to take on a partner because you don’t know the business well enough?

o Your experience in the field. In some cases, you may have a lot of knowledge about the subject, but not much experience. Have you ever owned or worked in this type of business before? To what extent is hands-on experience crucial to the business?

o Your skills. Try to concentrate on skills that are unique to that business. To what extent do you possess those skills? If you lack them, how difficult will it be to acquire them?

o Ease of entry. Think both of the costs of entering the business and of the competitive barriers that might exist. For example, a service business that you can run from your home might be relatively inexpensive to start, but if several others are already providing that service, entry in the field may be difficult.

o Uniqueness. Uniqueness does not necessarily mean that literally no one else is providing the same product or service; it can mean that no one else is providing the product or service in the same way you intend to provide it, or it can mean that no one else is providing that product or service in your area. You’re looking for some way to distinguish your product or service from others who are already in business.

Sales and marketing

• What is the product? How does it compare in quality and price with its competitors? • Where will the business be located? • Which geographical regions will be covered by the project? • Within the market area, to whom will the business sell its products? • Is it possible to estimate how much of the product is currently being sold? • What share or percent of this market can be captured by the business? • What is the selling price of the product? How much of the product will be sold? • What promotional measures will be used to sell the product? • What marketing strategy is needed to ensure that sales forecasts are achieved? • How much do you need to promote and distribute your product?

Production

• How is the production process characterised? • What buildings and machinery (fixed assets) are needed and what will their costs be? • What is the useful life span of the building and machinery? • How will maintenance be carried out and are spare parts available locally? • When and where can the machinery be obtained? • How much capacity will be used? • What are the plans for using spare capacity? • When and how will the machinery be paid for? • Where will the factory be located and how will the factory be arranged? • How much raw material is required? How much will the raw material cost? • What are the sources of raw material? Are they available throughout the year? • How much direct and indirect labour is needed and which skills should they have? • What will be the costs of labour? • Are workers available throughout the year? If not, what effect will this have on production? • How will the workers be motivated?

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• What factory overhead expenses are involved? • What are the production costs per unit?

Organisation and management

• How will the business be organised? How will the business be managed and operated? • What is the business experience and qualifications of the entrepreneur? • What pre-operating activities must be undertaken before the business can operate? • What pre-operating expenses will be incurred? • What fixed assets will be required for the office? • What administrative costs will be incurred?

Financial plan

• What is the total capital requirement? • Is a loan needed? What will be the equity contribution of the entrepreneur?

And how high will it be? • What security (collateral) can be given to the bank? • What does the Profit and Loss Statement indicate? • What does the Cash Flow Statement indicate? • What does the Balance Sheet indicate? • What is the loan repayment schedule? • What is the Break-even point (BEP)? • What is the Return on Investment (ROI)? • Is the project feasible?

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E. Basic bookkeeping and accounting

Introduction

Consultations on accounting and bookkeeping for medium and large enterprises should be done by professionals. Most micro and small enterprise operators do not need a complex accounting system but a rather simple introduction to a cashbook and introduction to how to produce and keep records in the form of receipts. Micro and Small Enterprises (MSEs) often face problems with regard to recording their daily transactions. This is due to the fact that most of the operators do not know how to make such records in a simple and easy manner. As a result, many operators find it very difficult to provide information on their income and expenses and eventually do not know whether they have lost or profited from their business activities. The absence of recording has also caused some problems in handling customer needs, particularly in maintenance services and also in cases of sales on credit services. The lack of recording also makes it very difficult for the tax offices to levy reasonable taxes that are commensurate with the business activities. As a result, business operators complain on the taxes that are levied on them on the basis of estimation, which they say are too heavy to bear.

Cashbook format

The cashbook is very important to show the situation of the business at any time, as it provides both the charges and credits for any given period. The balance column is the difference between the charges and credits columns.

Cashbook No Date Item Cash in Cash out Balance Bank in Bank out Balance

Balance carried forward 1 2 3 4 5 6 7…

Total + balance carried forward

Note: In order to prepare a monthly and annual overview of inflows and outflows, you should calculate the total of the in- and outflows at the end of the month and transfer to the monthly overview sheet. Records for the next month continues accordingly.

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Simple cashbook for sale in libraries (take two: one for cash and one for bank account records)

Cashbook / Bank account records of ............................................

N° Date Designation Cash in Cash out Balance Balance carried forward

Total / Balance (this page)

Totals carried forward (from previous page)

Totals to carry forward (to the next page)

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Two months cashbook exercise

Formats: 2 blank sheets of cashbook (take previous page), calculator

The enterprise "Iron Maid" has carried out the following purchases and sales during May and June. Register the respective data in the cashbook.

May, 17 • Cash at start 14.500 local currency (LC) • Cost of furniture for stock 10.000 LC. • Cost of office furniture 120 LC • Payment for electric installation 1.000 LC • Sales 2.650 LC. • Cost of paper 150 LC. • Payment for commercial license 180 LC • Sales 3.755 LC May, 19 • Sales 1.780 LC. • Payment for insurance 2.500 LC May, 20 • Sales 2.890 LC. • Cost for working material 8.500 LC May, 21 • Sales 8.900 LC May, 22 • Sales 7.800 LC. 23 May • Sales 6.700 LC. • Transfer of 20.000 LC from cash to bank

account May, 23 • Sales 3.500 LC. • Payment of annual license to municipality 300

LC May, 25 • Sales 3.540 LC • Transfer from bank to cash 10.000 LC • Payment for maintenance services LC 100. May, 26 • Sales 3.560 LC. May, 27 • Sales 2.700 LC. May. 28 • Sales 3.565 LC. • Cost for working material 5.800 LC May, 29 • Sales 1.560 LC. May, 30 • Sales 2.770 LC.

June, 1st • Sales 1.568 LC • Payment of salairies LC 2.630 June, 4 • Sales 3.572 LC. • Payment for water, may 1.251 LC. June, 7 • Sales 1.575 LC. • Electricity 2.682 LC. June, 9 • Sales 2.570 LC June, 15 • Sales 3.730 LC • Working material 1.350.000 LC June, 18 • Sales 2.590 LC. June, 20 • Sales 1.744 LC. • Telephone costs, september 570 LC. June, 23 • Electricity 675 LC. • Sales 3.600 LC. June, 25 • Salaries 3.750 LC. • Sales 2.755 LC June, 27 • House rent 4.500 LC June, 28 • Sales 8.600 LC. • Salary of owner 5.500 LC. June, 29 • Transport costs 700 LC. June, 30 • Payment of salaries 2.450 LC.

What is the final result?

Take one page for each month.

• What to do with transfer from cash account to the bank account? o Register to cash out and bank in

• What to do with transfer from bank to cash account? o Register to bank out and cash in

• What to do with sales or purchase on credit? o Do not register to the cashbook but on separate cards of sales and purchase on

credit (see formats hereafter). Organise all cards in an office folder.

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Example of filled cashbook format . Cashbook of "Iron Hardware shop"

N° Date Designation Cash in Cash out Balance Balance carried forward 0

1 17/5 Cash at start 14.500 14.500 2 17/5 Stock in 10.000 4.500 3 17/5 Office furniture 120 4.380 4 17/5 Payment for electric installation 1.000 3.380 5 17/5 Sales 2.650 6.030 6 17/5 Office furniture 150 5.880 7 17/5 Commercial license 180 5.700 8 17/5 Sales 3.755 9.450 9 19/5 Sales 1.780 11.235

10 19/5 Insurance 2.500 8.735 11 20/5 Sales 2.890 11.625 12 20/5 Working material 8.500 3.125 13 21/5 Sales 8.900 12.025 14 22/5 Sales 7.800 19.825 15 23/5 Sales 6.700 26.525 16 23/5 Transfer from cash to bank

account 20.000 6.525

17 24/5 Sales 3.500 10.025 18 24/5 Annual license to municipality 300 9.725 19 25/5 Sales 3.540 13.265 19 25/5 Transfer from cash to bank

account 10.000 3.265

20 25/5 Maintenance 10.0 3.165 21 26/5 Sales 3.560 6.725 22 27/5 Sales 2.700 9.425 23 28/5 Sales 3.565 12.990 24 28/5 Achat matériel quincaillerie 5.800 7.190 25 29/5 Sales 1.560 8.750 26 30/5 Sales 2.770 11.520

carry forward the balance to the next month 11.520

Total / Balance (this page) 70.170 58.650 11.520

Totals carried forward (from previous page) 0 0 0

Totals to carry forward (to the next page) 70.170 58.650 11.520

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... filled example (do not show to participants before the end of the exercise)

Cashbook of "Iron Hardware shop"

N° Date Designation Cash in Cash out Balance Balance carried forward 11.520

27 1/6 Sales 1.568 13.088

28 1/6 Salaries 2.630 10.458

29 4/6 Sales 3.572 14.030

30 4/6 Bill for water, May 1.251 12.779

31 7/6 Sales 1.575 14.354

32 7/6 Bill for electricity 2.682 11.672

33 9/6 Sales 2.570 14.242

34 15/6 Sales 3.730 17.972

35 15/6 Working material 13.500 4.472

36 18/6 Sales 2.590 7.062

37 20/6 Sales 1.744 8.806

38 20/6 Telephone costs 570 8.236

39 23/6 Electricity 675 7.561 40 23/6 Sales 3.600 11.161

41 25/6 Salaries 3.750 7.411

42 25/6 Sales 2.755 10.166

43 27/6 House rent 4.500 5.666

44 28/6 Sales 8.600 14.266

45 27/6 Salary for the owner 5.500 8.766

46 29/6 Transport costs 700 8.066

47 30/6 Salaries 2.450 5.616

Total / Balance (this page) 32.304 38.208 - 5.904

Totals carried forward (from previous page) 70.170 58.650 11.520

Totals to carry forward (to the next page) 102.474 96.858 5.616

Total/Balance: make the sum of the cash-in column, make the sum of the cash-out column Total of in - less total of out = balance of this page Reports carried forward: take the cumulated totals from the previous page Totals carried forward = totals of this page + reports. The actual balance (see line 47) should be the same as balance carried forward (see last line)

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Cashbook and bank records with accounts

The cashbook with accounts gives the opportunity to systematise sales and costs. In the columns of sales and costs different sales and cost categories can be detailed. Finally this gives you a better overview on your sales and costs structure.

• Under sales you may introduce your two or three main sold products or services. • Under costs you may introduce

o Salaries o Administrative costs, furniture o Raw materials

You are free to introduce the sales and cost categories, which are important for your business.

The total gives you the opportunity to calculate the sum at the end of the sheet or at the end of each month and to prepare the monthly and annual overview (see next table).

This cashbook would be more comfortable if worked with Excel software and automatic sums.

The cashbook on Excel basis is available for download on www.bds-forum.net/training-modules and ready for use. Plan for cashbook with accounts:

• Number (reference for the proofs) • Date • Designation

• Cash o in o out

• Bank o in o out

• Balance • Sales accounts

• Costs accounts o Salaries o Administrative costs and furniture o Raw and working materials

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Cashbook / Bank account records of .....................................................

Cash Bank Cost accounts Date N° Designation

Cash in Cash out Balance Bank in Bank out Balance Sales

1 2 3 Total

... Balance carried forward..

Total / Balance ..

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Two months exercice for cashbook with accounts

May, 17 • Cash at start 14.500 LC • Initial amount at the bank account 450.000

LC • Working material costs 10.000 LC. • Office furniture costs 120 LC • Payment for electric installation 1.000 LC • Sales 8.185 LC. • Transfer from bank to cash 20.000 LC • Working materials 15.000 LC. • Commercial license 180 LC

May, 19 • Insurance 2.500 LC • Transfer bank to cash account 100.000 LC

May, 20 • Working material 85.000 LC

May, 21 • Sales 167.000 LC

May, 23 • Sales 95.900 LC • Working material 20.000 LC

May, 24 • Sales 35.000 LC. • Cash to bank 250.000 LC • Annual license to municipality 300 LC

May, 25 • Sales 35.400 LC • Cash to bank 50.000 LC • Maintenance LC 100

May, 27 • Sales 41.865 LC.

May, 28 • Salaries 18.000 LC

May, 30 • Bank to cash acount 100.000 LC • Sales 4.330 LC.

June, 1st • Sales 1.568 LC • Salaries LC 2.630

June, 4 • Working material 98.000 LC • Sales 35.720 LC. • Water costs 1.251 LC.

June, 7 • Sales 15.750 LC. • Electricity 2.682 LC.

June, 9 • Sales 25.700 LC • Bank to cash 100.000 LC

June, 15 • Sales 37.300 LC • Working material 135.000 LC

June, 18 • Sales 25.900 LC.

June, 20 • Sales 17.400 LC. • Telephone costs 570 LC.

June, 23 • Electricity 675 LC. • Sales 36.000 LC.

June, 25 • Salaries 3.750 LC. • Sales 27.550 LC

June, 27 • Cash to bank 120.000 LC • House rent 4.500 LC

June, 28 • Sales 86.000 LC. • Salary of the owner 5.500 LC.

June, 29 • Transport costs 700 LC.

June, 30 • Salaries 2.450 LC.

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Filled example with result (distribute two sheets with the blank format of the previous page to participants)

Cashbook / Bank account records of ................................................... / May

Cash Bank Sales Cost accounts N° Date Designation

Cash in Cash out Balance Bank in Bank out Balance Salaries Furniture Services

Working Material Total

....carried forward.. -- -- -- -- -- -- -- -- -- -- --

1 17/5 Initial cash 1.450.0 14.500

2 17/5 Initial bank 450.000 450.000

3 17/5 Working material 1.000.0 4.500 450.000 10.000 10.000

4 17/5 Office furniture 12.0 4.380 450.000 120 120

5 17/5 Electricity 100.0 3.380 450.000 1.000 1.000

6 17/5 Sales 818.5 11.565 450.000 8.185

7 17/5 Bank to cash 2.000.0 31.565 20.000 430.000


9 17/5 Commercial license 18.0 16.385 430.000 180 180

10 19/5 Insurance 250.0 13.885 430.000 2.500 2.500

11 19/5 Bank to cash 10.000.0 113.885 100.000 330.000


13 21/5 Sales 16.700.0 195.885 330.000 167.000

14 23/5 Sales 9.590.0 291.785 330.000 95.900


16 24/5 Sales 3.500.0 306.785 330.000 35.000

17 24/5 Cash to bank 25.000.0 56.785 250.000 580.000

18 24/5 Annual license to municipality 30.0 56.485 580.000 300 300

19 25/5 Sales 3.540.0 91.885 580.000 35.400

20 25/5 Cash to bank 5.000.0 41.885 50.000 630.000

21 25/5 Maintenance 10.0 42.785 630.000 100 100

22 27/5 Sales 4.186.5 83.650 630.000 41.865

23 28/5 Salaries 1.800.0 65.650 630.000 18.000 18.000

24 30/5 Bank to cash 10.000.0 165.650 100.000 530.000

25 30/5 Sales 433.0 169.980 530.000 4.330

Total / Balance . 62.218.0 45.220.0 169.980 750.000 220.000 530.000 387.680 18.000 4.200 130.000 152.200

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... Filled example with result

Cashbook / Bank account records of ........................................ / June

Cash Bank Cost accounts Date N° Designation

Cash in Cash out Balance Bank in Bank out Balance Sales

Salaries Furniture Services

Working Material Total

...carried forward.. 622.180 452.200 169.980 750.000 220.000 530.000 -- -- -- -- --

26 1/6 Sales 1.568 171.548 530.000 1.568

27 1/6 Salaries 2.630 168.918 530.000 2.630 2.630

28 4/6 Working material 98.000 70.918 530.000 98.000 98.000

29 4/6 Sales 35.720 106.638 530.000 35.720

30 4/6 Water costs 1.251 105.387 530.000 1.251 1.251

31 7/6 Sales 15.750 121.137 530.000 15.750

32 7/6 Electricity 2.682 118.455 530.000 2.682 2.682

33 9/6 Sales 25.700 144.155 530.000 25.700

34 9/6 Bank to cash 100.000 244.155 100.000 430.000

35 15/6 Sales 37.300 281.455 430.000 37.300

36 15/6 Working material 135.000 146.455 430.000 135.000 135.000

37 18/6 Sales 25.900 172.355 430.000 25.900

38 20/6 Sales 17.400 189.755 430.000 17.404

39 20/6 Telephone 570 189.185 430.000 570 570

40 23/6 Electricity 675 188.510 430.000 675 675

41 23/6 Sales 36.000 224.510 430.000 36.000

42 25/6 Salaries 3.750 220.760 430.000 3.750 3.750

43 25/6 Sales 27.550 248.310 430.000 27.550

44 27/6 Cash to bank 120.000 128.310 120.000 550.000

45 27/6 House rent 4.500 123.810 550.000 4.500 4.500

46 28/6 Sales 86.000 209.810 550.000 86.000

47 28/6 Salary of the owner 5.500 204.310 550.000 5.500 5.500

48 29/6 Transport costs 700 203.610 550.000 700 700

49 30/6 Salaries 2.450 201.160 550.000 2.450 2.450

Total / Balance . 1.031.068 82.990.8 201.160 870.000 320.000 550.000 308.892 14.330 10.378 233.000 257.708

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Monthly and annual sales and costs review

On the basis of a cashbook with accounts it will be easy to keep the monthly and annual records. The cashbook with accounts is the precondition for the table of the monthly and annual sales and costs review. Take the sums from the cashbook sales and costs columns and enter into the monthly review. For the annual review make the sum of twelve months and put it to the last column.

If the cashbook is kept properly, this means that the totals and balance are documented at the end of each month, and then you only have to carry forward the monthly data to the monthly and annual table of result in order to get an exact overview on your sales and costs per month and per year.

Because of the limited space on the A4 sheet, the sales accounts are not detailed and the cost accounts are limited to three. This limitation does not exist for the electronic cashbook with Excel (see the chapter that follows the manual cashbook). (see next page for the table of monthly and annual overview results) Supply and sales on credit

Do not register sales and purchases on credit in the cashbook and the results overview; cashbook and overview are only for sales and purchasing in cash or by real bank transfer. Nevertheless, they have to be documented. For a real picture of your activities you should complete the results overview with a table on sales and purchasing by credit as follows: Situation of sales and purchasing on credit

January-March April-June July-Sept Oct-Dec

1. Situation of purchasing by credit

2. Situation of sales by credit Compute the result every three month and act immediately in case of danger:

• Too much purchasing on credit means too many liabilities. Action: pay back to suppliers

• Too much sales on credit means problem of liquidity. Action: ask customers to pay their debts as soon as possible.

Note:

• Don't go too far with sales and purchasing on credit. • Do not accept orders without any down payment (at least 20%).

Without down payment, the customer may not come back to take his order. • Avoid sales on credit of 100% and make a contract. Even in case of contract,

sales on credit are always with risk. • Try to avoid accepting sales on credit with new clients as much as possible.

107

Exercise: Fill results of sales and costs of the previous cashbook exercise with accounts (see previous pages)

Monthly and annual sales and costs review

January February March April May June July August Sept. Oct. Nov. Dec. Total

LC (local currency)

1. Sales:

Total of sales

2. Costs:

Salaries

Furniture + services

Merchandises

Total of costs

3. Balance of sales - costs:

Sales

Costs

Balance (LC)

108

Filled example with results (don't hand out to participants before end of exercise)

Monthly and annual results of sales and costs


LC (local currency)

1. Sales:

Total of sales 387.680 308.892

2. Costs:

Salaries 18.000 14.330

Furniture + services 4.200 10.378

Working materials 130.000 233.000

Total of costs 152.200 257.708


Sales 387.680 308.892

Costs -152.200 -257.708

Balance (LC) 235.480 51.184

The sales and costs columns of the cashbook and bank records allow you to carry forward the monthly results to the monthly and annual sales and costs overview above. For this, it is recommended to close the actual cashbook sheet at the end of the month and to start with the next sheet for the following month. At the end of the year calculate the total of the monthly results in order to get the annual overview.

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Electronic cashbook / bank records format on Excel basis This electronic cashbook and bank records add the sums and balance automatically on the basis of an Excel sheet. The results are automatically carried forward to the monthly and annual results overview.

Try a first test:

• Enter some figures for January into the cash and bank records and the sales and costs accounts.

• You will see, that the data have been automatically carried forward to the next month and the monthly and annual results overview.

The cashbook on Excel basis is available for download at www.bds-forum.net/training-modules and ready for use. Do not work on the original, but make a copy of it first.

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Example of electronic cashbook on Excel basis

Cashbook / Bank account records Month/Year: January 07

Cash Bank Costs of the month N°

Date

Designation

in out Balance in out Balance

Sales of the month Salaries

Furniture Services

Raw material C-Total

Report carried forward

(last year) 25.000 25.000 0 -- -- -- -- -- 1 5.600 30.600 0 5.600 0 2 3.000 27.600 0 3.000 3.000 3 4.000 23.600 0 4.000 4.000 4 3.500 20.100 0 3.500 3.500 5 23.000 43.100 0 23.000 0

43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 Total / Balance 53.600 10.500 43.100 0 0 0 28.600 3.000 4.000 3.500 10.500

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Electronic cashbook example on Excel basis In the electronic cashbook you can see that the data from January have been automatically carried forward to February. Because we want to see the results of sales and costs separately for every month, the data of the sales and costs columns of January are not carried forward to the cashbook of February but directly to the monthly and annual results overview (see next page).

Cashbook / Bank records Month/Year: February 07

Cash Bank Costs of the month N°

Date

Designation

in out Balance in out Balance

Sales of the month Salaries

Furnitures Services

Raw material C-Total

Report carried forward

(last year) 53.600 10.500 43.100 0 0 0 -- -- -- -- -- 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 43.100 0 0 Total / Balance 53.600 10.500 43.100 0 0 0 0 0 0 0 0

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Electronic format of monthly and annual sales and costs overview with results The data of the cashbook and bank records have been automatically carried forward to the annual overview table. No more manual calculating, but immediate automatic results overview at any time.

Monthly and annual results overview of sales and c osts - electronic format


1. Sales:

1.1 Products/services 28.600 0 0 0 0 0 0 0 0 0 0 0 28.600

Total of sales 28.600 0 0 0 0 0 0 0 0 0 0 0 28.600

2. Costs:

2.1 Salaries 3.000 0 0 0 0 0 0 0 0 0 0 0 3.000

2.2 Furniture and services 4.000 0 0 0 0 0 0 0 0 0 0 0 4.000

2.4 Raw material 3.500 0 0 0 0 0 0 0 0 0 0 0 3.500

Total of costs 10.500 0 0 0 0 0 0 0 0 0 0 0 10.500


Sales 28.600 0 0 0 0 0 0 0 0 0 0 0 28.600

Costs 10.500 0 0 0 0 0 0 0 0 0 0 0 10.500

Balance 18.100 0 0 0 0 0 0 0 0 0 0 0 18.100

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Dealing with accounting documents

The cashbook and bank records have to be accompanied by a documentation folder of the receipts and transaction evidences. Use a folder with separators in order to store the necessary evidences such as:

• Receipts - bills - delivery notes - cards for sales on credit - cards for purchasing on credit - salary payments etc.

The documents have the numbers of the cashbook and bank records. Accounting documents

• Standard receipt format (available on sale in every stationery) • Standard bill format (available on sale in every stationery) • Card for sales on credit to clients • Card for purchasing on credit with suppliers • Stock management card • List of investments

Standard receipt format on sale in stationeries

Amount .................................

Receipt of: M .......................................

...........................................

...........................................

the ............................20.......

N°................

Amount .....................

Receipt of M ......................................................................

Amount of ..........................................................................

...........................................................................................

................................. the ..................... 20 ...........

N° ................................

for seller for client

Standard bill format for sale in stationeries

The .................. Bill ................................................................................................

N° Quant. Designation Tax Total with tax. 1 2 3 4 5 6 7 8 9 10

Total without tax % tax Total tax Total with tax

Total

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Sales on credit

Name of customer: Address, Tel: Ceiling: Starts to pay the............ or will pay the...............

Date Details Price Amount paid Remaining paiment

Signature

Remark: one card per customer- to file into the accounting folder Signatures:

• credit: signature of client • repayment: signature of seller

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Supply on credit (dealing with suppliers)

Name of supplier : Address, Tel: Credit period: Deferment period Date Details Credit

amount Amount

paid Remaining payement

Signature

Remark: one card per supplier- to file into the accounting folder Signatures:

• credit: signature of buyer • repayment: signature of supplier

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Stock management

Stocks are all your products for sale and all your working materials necessary for production or services.

Stock management means:

• Store your working materials and products in good conditions.

• Keep records on your stock in terms of quantity and condition.

• Keep records on the sales and purchasing of products and working materials.

• Expose your existing products and samples (advertising).

• Guard your products in a safe and proper place and control it regularly.

• Order new working materials in time and take care of delivering periods, in order to avoid stock ruptures.

Verify if you considered all the necessary aspects for stock management and fill the following format.

Format for stock inventory

Product ...............................

Cost per product .......................

Price per product .........................

Number of products to be ordered .......................

Date Stock in number of products

Details (supplier, remarks) in out Balance

Take one card for each product

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F. Professional accounting

Introduction

Professional accounting is the concern of professional accountants. Small and medium enterprises with needs in professional accounting have two possibilities:

• Often small enterprises take on professional accountants by part-time. Those professional accountants are normally working in medium or big enterprises and then during the weekend working on their own for several small enterprises. The business owners have to prepare the necessary documents and a simple cashbook and then the professional accountant transfers data to his/her accounting system. This is a low cost solution for small enterprises that do not want to engage a professional accountant for full-time. These accountants are working in a rather informal manner and have to be identified by taking some information in the area.

• Medium enterprises have normally full-time accountants on their disposal and even a professional accounting department.

For small and medium enterprises professional accounting is needed in order to comply with accounting standards acceptable by the tax authority. Thus, the list of adapted software, certified providers and training institutions should be looked for.

Accounting software and software providers (example of Ethiopia) Example CyberSys Technology Befekadu building, Bole road, opposite to Saay pastry Software: - Peachtree accounting, Original 300 Birr

- Quick Book accounting, ask for price - DAC accounting, ask for price

PRO - TECH P.O.Box 1612 Addis Ababa, Tel. +251.11.662.0425, 662.0729, Fax +251.11.662.0840 Software: - Peachtree Accounting

Accounting training courses (example of Ethiopia) CyberSys Befekadu building, Bole road, opposite to Saay Pastry P.O.Box 19674 Addis Ababa Courses provided: • Peachtree accounting, 40 Hrs, 700 Birr

• Quick Book accounting, 28 Hrs, 700 Birr • DAC accounting, 28 Hrs, 700 Birr • Web page design, 20 Hrs, 600 Birr

African Lakes Near the National Stadium, P.O.Box 3533 Addis Ababa, Tel. +251.11.551.8444 Courses provided: • Peachtree accounting 2002, 50 Hrs, 690 Birr

• Other as Word, Excel, Access, Windows City Business Computers Bole Road, in front of Bole Printing Enterprise, P.O.Box 6052 Addis Ababa Tel. +251.11.551.7197, 5513365, 5533730, Fax +251.11.5522756 Courses provided: • Peachtree accounting

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G. Cost calculation manual

• Identifying cost components • Systematising costs • Calculating variable costs • Calculating fixed costs • Calculating total costs per unit • How cost calculation improves business

• Cash flow statement • Balance sheet • Break-even point • Return of investment • Profit and loss statement

__________________

Introduction

Many people are unaware of costs and waste scarce resources. Be cost conscious and think about systematic but simple cost calculation! Cost calculation is the way to calculate the total costs of making and selling a product or providing a service. How can it improve the business? Costing helps to:

• set prices; • control and reduce costs; • plan for the future; • make better decisions; • write a business plan to obtain a credit.

Steps

1. identify cost components; 2. systematise costs; 3. calculate variable costs; 4. calculate fixed costs; 5. calculate total costs per unit; 6. set prices, deduct the breakeven point.

Identify cost components

What cost components are involved in this enterprise?

Production • labour; • raw materials; • electricity, transport, rent, water; • machinery, equipment and tools.

Management • labour, entrepreneur’s salary; • stationery, telephone, rent, electricity, insurance; • Equipment.

Selling • publicity, promotion, commissions.

Finance • interest on loans

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List all costs in simple tables, such as material, electricity etc.

Items Quantity Costs Remarks Flour 10 kg 15 000 LC per kg (variable) Sugar 10 kg 12 000 LC per kg (variable) .... (v or f)

Machinery, equipment, tools

Items Costs Estimated use

Remarks

Weighing Scale 150,000 LC 5 years (v or f) Dough mixer 6 000 000 LC 5 years (fix)

Labour. Calculate the labour costs per hour for each employee:

Name Job description Costs per month Costs per hour Adwoa Administration: .. 450,000 (LC) (fixed) Akosna Production: ... 500,000 (LC) (v or f) ..... ....

Production process. Calculate the working hours

and the direct labour costs needed to finish the product/service: Step Time Executed by Costs ..... ..... .....

The cost of a step in the production process is calculated by multiplying the manpower cost per hour of the employee executing this step and the required time.

Systematise costs

Each operator has to differentiate between costs like rent and flour (e.g. in a bakery) to deduce the concept of fixed and variable costs.

• Fixed costs are the sum of all costs required to produce any product. They do not change when the volume of production/service is changed. Fixed costs can include facilities costs, certain general and administrative costs, interest and depreciation expenses.

• Variable costs are costs associated with producing additional units. They do change with the volume of production/service. They can include direct material and labour costs, transportation and sales commission expenses.

• Variable unit cost: Cost associated with producing one additional unit.

• Total costs: Sum of fixed costs and variable costs.

This concept implies that (due to contracts, commitments etc.) fixed cost components can be reduced only after a certain period of time. In principle, the classification of costs depends on the type of production. Furthermore, some components can be both fixed and variable in the same enterprise: Electricity consumed by a production unit is variable, while electricity for the office building is fixed cost. However, there are some rules of thumb.

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Examples of fixed and variable costs

Fixed costs Variable costs Bakery Carpentry Retailer Services

Items Administration expenses (tel, fax), stationery, rent, electricity, water, transport public services maintenance advertisement depreciation

Flour sugar eggs salt butter milk ... electricity water

Wood hinges paint screws glue... electricity water

Goods’ cost

Materials, spare parts’ used in the service.... electricity

Man- power

Entrepreneur’s salary, wages and salaries (not piece wage!)

Salary per produced piece, per kg

Salary per produced piece

Sales commissions

Fee per deli-vered service

• raw materials normally entail variable costs; • productive work being directly related to the product or service results in direct

labour costs, which are variable; • administration costs are mostly fixed costs.

The operator should classify one by one all his costs as variable or fixed. Does he understand the difference between fixed and variable costs? Only when he is able to classify his costs, can he calculate the fixed costs and the variable cost per unit of each of his products - the basis for pricing.

Calculate variable costs for each product/service Item Cost (purchasing price) Used quantity per unit

(product, service) Cost per unit (price / used quantity)

Raw materials - flour 15,000,000 (LC) per kg 10 kg per 100 cakes 1,500,000 LC per 100 cakes - sugar... 12,000,000 (LC) per kg 1kg per 100 cakes 12,000 LC per 100 cakes Labour costs.. 2,840/hr 16 hr/100 cakes 45,440 / 100 cakes Transportation.. 24,000 (1) Variable Costs per unit 1,581,440 C/100 cakes

15,814.40 C per cake

If a unit produced is very small (e.g. cake) and during the relevant period thousands of units are produced, it is not necessary to quote exactly the quantity of raw material used per unit. Rather, one can take quantities used per 100 or 1000 units. However, at the end variable costs have to be adjusted to one unit. (see example)

Calculate fixed costs for each product/service Item Fixed cost/month

Rent Salaries (administration) Depreciation of building, machines.... ... (2) Total fixed costs (3) Monthly production (in units) (4) Fixed cost per unit (2/3)

Depreciation is the theoretical price to the use of an asset. One of the various methods of calculating depreciation, and the simplest one, is to divide the purchasing price of the asset by its period of usage.

Example: A machine costs 6,000,000 C supposed to work for 5 years Depreciation per year: 6,000,000 LC / 5 years = 1,200,000 LC per year. Depreciation per month: 1,200,000 LC / 12 months = 100,000 LC per month.

(Note: Good practice should be conservative depreciation: a car which normally is driven in Africa for 30 years should however be depreciated in a reasonable time period of 8-10 years.)

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If the business produces more than one product, the fixed costs have first to be split between products as exactly as possible. The relation of total variable costs for each single product can be used as an estimator for the split up of fixed costs. Calculate total costs per unit

• Add up variable and fixed costs per unit

(1) Variable costs per unit (4) Fixed cost per unit (5) Total cost per costing unit (1 + 4)

How cost calculation improves business

Price setting

To set prices the operator needs the following information • his costs; • competitors’ prices; • how much the customers are willing to pay.

In general the price must be

• low enough to attract customers to buy; • high enough to give the business a profit.

To make a profit, the price must be higher than the total costs of the product! Hence, knowing the total costs of a product is essential in determining the price. There are two methods:

• the business operator takes his total costs per unit and adds a percentage margin to get his selling price;

• the operator takes the prices of his competitors and makes sure that his prices are competitive with theirs. But he has to make sure that his prices cover his total costs!

However, only if the product is better than that of competitors and the operator is able to transfer the additional benefit to the customers, he can charge more than his competitors.

Calculation of the breakeven point

The breakeven point is an estimate of the level of sales necessary to operate a business profitably, i.e. how many units of a product must be sold at a given price to make a profit. The following steps are involved in calculating the breakeven point:

• identify the total fixed and variable costs of the business based on actual results during a relevant time period.

Calculate the contribution margin as follows:

Contribution margin per unit = selling price per unit - variable costs per unit

• this amount is available to offset fixed expenses and (hopefully) produce an operating profit for the business.

Calculate the breakeven point as follows:

Breakeven unit volume = total fixed costs / contribution margin per unit

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If sales exceed the breakeven unit volume, the business makes profit; if not, the business makes a loss. By performing a breakeven analysis and then varying the assumptions regarding sales levels and variable and fixed costs, the real factors behind the profit potential (or lack thereof) of a business become more clear. This process will highlight the most significant factors and assumptions (particularly assumptions about the ability to set prices) in the buyer's business plan. Pricing strategies

Generally, the sales price for a product or service should cover more than the variable costs of producing that product, but the margin from sales must be enough to cover fixed costs as well.

If the sales price does not cover total costs, it can, however, still cover the variable costs. Then an appropriate strategy would be to implement measures to increase sales. If the market share can’t be modified, this may require reduction of fixed costs - to make fixed costs become variable.

But if the sales price is below variable costs, it does not make sense to sell more. With every additional unit sold, the operator increases his losses. Then measures to increase sales would not be an appropriate strategy, the operator rather has to reduce his variable costs. Reducing fixed costs – though always recommendable – would not be sufficient!

Ways to reduce costs Many people are unaware of costs and therefore waste scarce resources. Making an operator cost conscious is always a good point, particularly when he has the potential to reduce costs without neglecting quality:

• turn off a tap which is running;

• handle your tools and equipment with care; clean your tools;

• switch off any unnecessary light and machines which are not used;

• work faster, but still be precise.

Reduce variable costs:

• find cheaper suppliers, but at the same or better quality;

• find others and co-operate to order larger quantities;

• share expenses with others;

• the higher the stock, the higher the interest expense; but: the lower the minimum stock the higher the risk of running out of stock;

• improve the workplace layout: good workshop layout means that the product travels and is handled as little as possible between processes from the beginning to the end of its manufacture.

Competitors’ price: sell more, reduce costs Total costs per unit

Variable costs per unit

Competitors’ price: Do not try to sell more before you reduced variable costs per unit !!!

LC

Pricing strategy

Fixed costs per unit

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Make fixed costs become variable:

• if average utilisation of equipment or human resources is low, it can make sense to outsource these services/production. Then the operator has to rent/buy the product/service only when necessary.

Simplified sales and cost plan format Year ………..

Details Months

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Tot

al

Sales Direct material costs Direct labour costs Gross profit Indirect costs Net profit

Direct costs : Are those costs incurred in direct proportion to the volume of output or to the time spent on making a specific number of units of the product. Direct material costs - are all the money your business spends on the parts and materials that become part of, or are directly related to, the products or services you make or sell. To be counted as direct material costs, the amount of material must be easy to calculate, and the cost of the material must be big enough to add a considerable amount to the total direct material costs. If this is not the case, they may be considered as indirect costs.

Direct labour costs - are all the money your business spends on wages, salaries and benefits for the people who are directly involved in the production of your products or services. The time spent on making the product must be easy to calculate, and the cost of the labour must be big enough to add a considerable amount to the total direct labour costs. If this is not the case, they may be considered as indirect costs. Indirect costs - are all other costs that you have incurred by running your business when running your business, for example rent, interest and electricity. Indirect costs are not directly related to one particular product or service. They are sometimes called overheads or expenses. Manufacturing cost sum of direct material cost, direct labour cost, manufacturing overheads.

Non-manufacturing cost - is the sum of selling expenses and general and administrative expenses. Factory overhead - includes costs such as auxiliary materials, factory/workshop supplies, supervision, tea for workers, depreciation of building and equipment, maintenance/repair of tools, equipment and machinery. Administrative cost - includes costs such as salaries, depreciation (office equipment, etc), office supplies, communication, transport, insurance, rent, taxes/fees and financial charges or interest on loans. Selling expenses - salaries, packaging, transport, allowances for sales persons, communications and promotions and miscellaneous others. Full cost - is the sum of manufacturing and non-manufacturing costs.

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Suggested examples for direct and indirect costs

Costs Direct Indirect Wages for workers in the workshop X Telephone X Salary for the secretary X Electricity X X Rent for factory building X Petrol for car X Raw material cost X Cost of replacing a worn out tool X

Note: categorising costs as direct and indirect is sometimes controversial. A direct cost in one enterprise may be considered as indirect cost in the other based on their size or nature.

Fixed costs and variable costs : Some costs vary with the volume of production or services, whilst others do not. This means that certain costs increase or decrease proportionally with the increase or decrease in production activities. These costs are called variable costs . Fixed costs, however, do not generally change over a range of different production levels except in the long run. Depreciation : A cost charged against fixed assets for their replacement. Fixed assets are depreciated over time to reflect the decline in value of these assets. Depreciation is a tax deductible but non-cash expense for the business and does not appear in the cash flow.

Many people are unaware of costs and waste scarce resources. Be cost conscious and think about systematic but simple cost calculation! Cost calculation is the way to calculate the total costs of making and selling a product or providing a service. How can it improve the business? Costing helps you to:

• Set prices; • Control and reduce costs; • Plan for the future; • Make better decisions; • Write a business plan to obtain a credit.

Steps of cost calculation:

• Identify cost components; • Systematise costs; • Calculate variable costs; • Calculate fixed costs; • Calculate total costs per unit; • Set prices, deduct the breakeven point.

It is also important to know and identify cost components involved in your enterprise as follows:

Production: Manpower; raw materials; electricity, transport, rent, water; machinery, equipment and tools. Management: Manpower, entrepreneur’s salary; stationery, telephone, rent, electricity, insurance; equipment.

Selling: Publicity, promotion, commissions. Finance : Interest.

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What does the Cash Flow Statement indicate?

In this part of the business plan, the Cash Flow Statement is calculated and included. While the profit and loss statement gives the results of financial transactions of a business during a certain period (e.g. month or year), the cash flow statement shows the sources (inflows) and applications (outflows) of the cash in the business throughout the year.

Cash Flow Statement (example)

0 1 Item Real Forecast Real

1. Initial cash 90,000 35,000

2. Inflows: 2.1 Sales 2.2 Others

0 0

22,000

0

2. Total inflows 0 22,000

3. Outflows: 3.1 Dividends 3.2 Labour costs 3.3 Promotion material 3.4 Rent 3.5 Energy 3.6 Telephone 3.7 Publicity/promotion 3.8 Registration fee 3.9 Others (insurance...)

0 0

1,500 19,000

0 6,000

10,000 3,000

0

8,000

12,000 1,500 6,500 1,000 1,000

0 0 0

3. Total outflows 55,000 30,000 4. Net flow return (2-3) -55,000 -8,000 5. Final cash flow (1+4) 35,000 27,000

NB: The cash flow projection goes up to the end of the business life. Cash-flow plan : It is a forecast which shows you how much cash you can expect to flow into your business and how much cash you expect to go flow out of your business each month. A cash flow forecast helps you make sure that your business does not run out of cash at any time. That means that it helps predict cash needed - how much money will be needed and when it will be needed - or to predict cash surplus and plan investment. A business with more cash outflow than inflow will soon get into trouble. It will not be able to pay its expenses when they fall due. Diagrammatic presentation of cash flow:

Collections (from sales, loans, equity)

Payments (for material and other supplies, salary, water, electricity, rent, interest, transport)

Business

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Simplified cash flow format Year…………

Month Details

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Tot

a l

Beginning cash balance (1)

Cash Receipts: Example - Sales - Equity - Loans - Collections from credit sales

Total receipts (2)

Cash available for use (1+2)

Cash payments: example - Materials - Wage/salaries - Rent - Stationery - Transport - Other expenses

Total payments (3)

Ending cash balance (1+2-3)*

* The cash balance at the end of the previous month shall be forwarded to the beginning of the next month.

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What does the Balance Sheet indicate?

The balance sheet is the statement of assets and liabilities and provides the financial picture of the business on a certain date, for example, at the end of the year.

Balance Sheet as at the end of the first year

Assets LC (local currency) Current assets: - Cash 23,354 - Raw materials (RM) inventory 26,070 - Work-in-Process (WP) inventory 750 - Finished Goods (FG) inventory 15,000 - Accounts receivable 16,800 Total current assets 81,974 Fixed assets: - Land 4,000 - Building 20,000 - Machinery + equipment 9,000 - Office equipment 1,000 - Less: Accumulated depreciation - 3,400 Net Fixed Assets 30,600 Other assets: Pre-operating expenses - Total Assets 112,574

Liabilities Current liabilities: Accounts payable - Loans payable 4,004 Total current liabilities 4,004 Long-term liabilities: Loans payable 52,008 Total liabilities 56,012

Owner's equity: Beginning capital 27,000 Add: Net profit after tax 29,562 Less: Withdrawal/dividends - Total owner’s equity 56,562

Total liabilities and equity 112,574

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Components of a balance sheet: The balance sheet is the statement of assets and liabilities and gives the financial picture of the business as of a certain date, for example, at the end of the year.

Balance sheet (example for first year of operation) Assets Amount (Cedis) Current assets:

Cash Raw materials inventory Work-in-process inventory Accounts receivable

Total current assets

10,000,000 12,000,000 11,000,000

2,000,000 35,000,000

Fixed assets: Land Building/workshop Equipment

Total fixed asset - Less accumulated depreciation Net fixed asset

0

15,000,000 15,000,000 30,000,000 (3,750,000) 26,250,000

Total assets 61,250,000

Liabilities

Current liabilities: Accounts payable Loans payable

Total current liability

2,000,000

10,000,000 12,000,000

Long-term liabilities: Loans payable

Total long term liability

10,000,000 10,000,000

Total liability 22,000,000 Owner's equity:

Beginning capital Add: Net profit after tax Less: Withdrawals/dividend

Total owner's equity

30,250,000

9,000,000 (0)

39,250,000 Total liability and equity 61,250,000

Note: Total asset = total liability + total owner's equity.

What is the Break-even Point (BEP)?

Three kinds of break-even points (BEP) are commonly referred to, namely: 1) BEP Sales (LC) 2) BEP Production (volume) 3) BEP Percentage (%)

a) Break-even Point (BEP) sales Break-even point (BEP) Sales - is that amount of sales value at which no profit or loss is incurred by the business.

b) Break-even Point (BEP) production The Break-even point (BEP) Production - is that level (volume or quantity) of production at which no profit or no loss is incurred on the part of the business. Production above this level will result in a profit and production below this point will result in a loss.

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c) Break-even Point (BEP) percentage Break-even point (BEP) Percentage - is that percentage level of sales or production at which the business neither makes a profit nor loss. Production above this level will result in a profit and production below this point will result in a loss.

To determine the BEP, three figures need to be calculated. These are:

Sales: annual sales as documented in the profit and loss statement (step 4.4).

Variable Costs - these are the costs that change significantly according to levels of production, and usually consist of raw material costs plus direct labour (step 4.4), provided it is hired and terminated according to the high level of production a factory is making.

Fixed Costs - these are costs such as indirect labour and overhead expenses (steps 2.17 and 3.7), interest and depreciation. These costs do not change significantly, if the factory produces more or less.

Break-even Point (BEP) calculation

a. BEP sales To determine BEP annual sales, multiply annual sales found in the income statement by the annual fixed costs and divide by annual sales less annual variable costs:

Annual sales x annual fixed costs BEP (sales) = Annual sales - annual variable costs

b. BEP production To determine BEP production volume, divide BEP sales by the Unit Selling Price (USP):

Break-even point sales BEP production = Unit selling price

A further method is to: Divide annual fixed costs by the Unit Selling Price less Unit Variable Costs, also known as Contribution Margin, that is, the remainder of what is left to cover fixed costs and profit. At BEP, the contribution margin can only cover fixed costs, not profit:

Annual fixed costs BEP production = Unit selling price - unit variable costs

c. BEP percentage To determine the BEP percentage on annual sales, multiply the annual fixed costs by 100, divided by annual sales minus the variable costs.

Annual fixed costs x 100% BEP percentage = Annual sales - annual variable costs

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What is the Return on Investment (ROI)?

One important issue that should be looked into when deciding on whether or not to go ahead with your business is to answer this crucial question: "Will my money be better off in this business or safe at the bank, where it can earn a fixed interest in long-term bonds, savings or time-based deposits?" To answer this question, calculate the project’s return on investment (ROI), presenting one of the means of measuring profitability.

This is done by dividing Net Profit (step 4.4) by the total capital requirement times 100 (step 4.1): It is more advisable to use Net Profit after Tax, if this is applicable.

Net profit Return on Investment = x 100 Total equity

A variation in the profitability measure is the Return on Owner's Investments (ROI). This is derived by dividing Net Profit before Taxes by the Owner’s Equity (Capital or Investment) times 100, as shown below:

Net profit Return on Owner’s Investment = x 100 Owner’s capital

If the percentage is greater than the bank’s rate on long-term deposits, including allowances for the country’s inflation rate during the same period, then the project appears to be financially viable. If it is below the bank rate, then you may consider several alternatives which could include measures, such as increasing the level of production (provided the market is sufficient), looking for ways to reduce costs, or even abandoning the project altogether.

Break-even point analysis. Break-even analysis is a tool to determine the level of production/sales at which the project will cover both fixed and variable costs. It indicates the minimum amount of revenue that the project must earn in order to cover the total cost incurred so that it does not incur any loss. For the break-even analysis costs are categorised into variable and fixed costs. In addition, it is important to know the level of the Contribution Margin (CM). What is a contribution margin? The Contribution Margin (CM) is the contribution of each unit of production towards covering fixed costs of the project and eventually the margin of profits. Simply, it is the difference between selling price (SP) and the Variable Cost per Unit (VCU), i.e. CM = SP-VCU The following can help you calculate the Break-even Point (BEP):

BEP in units = Total fixed costs Contribution margin per unit

The BEP can be calculated in terms of volume of production, sales revenue, plant capacity and sales price.

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What does the Profit and Loss Statement indicate?

From the annual sales revenue figure, step-by-step, subtract all the annual expenses.

Profit and Loss Statement (one year) LC

Sales: 120 kg per day x 20 days per month x 12 months x LC14, or unit selling price (step 1.9)

403,200

Less: Raw material: LC26,070 x 12 months (step 2.11) Labour: LC1,600 x 12 months (step 2.14) Overheads: LC2,333 x 12 months (step 2.17)

- 312,840 -19,200 - 27,996

- 360,036 Gross Profit 43,164 Less: Marketing (step 1.12) & administrative costs (step 3.7) (LC50 + 500 x 12 months)

- 6,600

Operating Profit 36,564 Less: Interest expense (step 4.6) -7,002 Net Profit before tax 29,562

1) Raw material costs: This is the sum of all raw materials used to produce the products that were sold.

2) Labour costs: This is the sum of all direct labour costs for the whole year.

3) Factory overhead expenses: This is the sum of all miscellaneous costs such as minor raw materials, indirect labour, maintenance and repair costs, depreciation of production machinery, electricity, water, supplies, etc. that are associated in producing the product throughout the whole year.

The three items above are known as costs of goods sold. Sales minus these three items results in gross profit.

4) Marketing costs: This is the sum of all selling and promotional costs, including distribution costs to retail shops, commissions, etc.

5) Administrative costs: This is the sum of all administrative costs, including office supplies, security guard salaries, accountant/ bookkeeper’s salaries, telephone bills, entertainment expenses, and the depreciation of office equipment and furniture, etc.

Gross profit less marketing/administrative costs results in operating profit.

6) Financial costs: This is the sum of interest paid to banks on the amount of borrowing.

Operating profit less financial costs results in net profit before tax. Net profit before tax less the relevant business income tax results in net profit after tax. If you are borrowing money from the bank, the latter would usually require you to project your profit and loss statement (and other figures) corresponding to the life of the loan. That is, if you intend to pay the loan within a span of five years, the bank will ask you to project your figures (e.g., sales forecast, profit and loss statement, cash flow statement, balance sheet, loan repayment schedule, etc.) for five years.

Determination of selling price and profit margin

Item Monthly costs Raw material 26,070 Direct labour 1,600 Overhead expenses 2,333 Total monthly production costs 30,003 Marketing and administrative costs 550 Interest 583.50 Total monthly product costs 31,136.50

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3.2 Financing A. Constraints of access to finance for micro and s mall enterprises (MSEs) Although the banks emphasize their interest in lending to small enterprises, they highlight the problems of it to the same extent. The crucial aspects of loan appraisals – financial records, demonstration of repayment capacity and securities – are considered to be more problematic with small enterprises than with larger ones. Many bankers say that MSEs often simply do have neither accounts, nor formal business plan, nor titles for their securities. These are the major factors that obstruct MSEs access to the loan services of conventional banks. Further clarification of these factors are provided in the following paragraphs. Financial records The first constraint for MSEs in access to credit is the banks’ requirement of financial records on the past performance of the enterprise. Many MSEs have difficulties in providing these. The official financial statements include the cash flow, balance sheet and profit and loss statements. Usually, bankers evaluate cash flow statements seriously. The constraint put on MSEs’ access to finance by the level of requirements of financial records varies between the different financial institutions. Those who target mainly micro enterprises do generally not require balance sheets or profit and loss statements. However, they are nevertheless interested in the past performance of the applicant’s enterprise. To build an idea on it, they often rely on simple sales records. Other institutions, as for example ADB and GCB, require from the loan applicant to fill their financial data into a form designed by the bank. The task is less complex for the MSEs than producing own records. However, they still need to have some form of record keeping in place in order to be able to fill in the forms correctly. For the lack of proper accounts, many banks use bank statements as a proxy to analyse the financial track record of a small enterprise. For the enterprise this means that its access to credit is constrained by having an active and positive banking track record. The strictest forms of financial records are audited accounts. In Ghana, for instance, all enterprises registered as limited liability companies (Ltd.) are required by the law to keep audited accounts. Therefore, the banks request from Ltd.s – and a large part of MSEs in Ghana are Ltd.s – to present audited accounts with their loan applications. The banks’ experience is that the problem of most Ltd.s is not so much to present audited accounts, but the quality of the accounts. This is also true for other forms of records: The main constraint for MSEs is to convince the bank of the reliability of the data. The banks’ trust in all forms of records is low. They check sales records and the data filled in their forms on consistency and whether they correspond to other information given by the loan applicant. When banks analyse bank statements they also inquire whether the applicant has debts at other banks. For audited accounts it plays a major role whether the bank considers the auditor who did the accounts as a reliable source or not. One source of mistrust in financial records is the experience that MSEs often understate their sales and profits for tax purposes. Although the banks show a certain degree of understanding to this, the access to credit is seriously hampered by this form of record keeping. An enterprise that has the declared objective to grow will need to overcome this practice, as it is a substantial obstacle for a smooth banking relationship. Demonstration of repayment capacity The second constraint for MSEs in access to credit is the banks’ scepticisms of their repayment capacity. Generally, MSEs have difficulties in convincing the banks on this issue.

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The core of the repayment capacity is the cash flow of the enterprise after receiving the loan. If the loan serves to finance one specific transaction only, it is fairly easy to establish the cash flow. The only requirement in this case is that the applicant brings the contract of the order for the transaction. The bank then cross-checks directly with the issuer of the order. It becomes more complicated if an MSE applies for working capital or for a fixed investment. The returns are more difficult to determine and the analysis of the bank becomes more complex. Consequently, MSEs have more to prove. The main factors considered by the banks are the personality of the owner or manager of the enterprise, the marketability of its products, the reliability of its supplies and the profit margin. These factors are not relevant for access to finance only, but they are the basis for every sound enterprise. If the business model of an enterprise is not viable, it is more than justified that it does not get a credit. However, here access to finance is not discussed as a problem of unsound business models, but as being constrained by the inability of MSEs to communicate with banks on their business model. The requirements of the banks on how to demonstrate repayment capacity vary and thus challenge MSEs’ ability to communicate to a different degree. The strictest form is a formally written business plan including cash flow projections for the future. Not many MSEs are able to meet this requirement. And many banks complain that MSEs submit business plans that look very sophisticated on paper only, as they have been developed by consultants on behalf of the MSE. But the MSE itself is unable to understand or implement the plan. A more flexible way of analysing the repayment capacity is to conduct an interview with the owner/manager of the MSE, often combined with a site visit in order to understand his/her business model. This approach is mainly used by those banks serving the smaller segment of the MSEs. [In Ethiopia, for instance, the loan officers of microfinance institutions usually do this.] Securities The third constraint for MSEs in accessing credit is the security or collateral requirements of the banks. MSEs often do not have assets that qualify as security for a loan, or if they have the assets they do not have proper titles. Again, the banks’ requirements are different according to different market segments. The institutions specialised in microfinance (MFIs) have group facilities where group members guarantee for each other’s that rely on peer pressure without any other form of collateral. But also the participation in a group poses certain constraints on an enterprise and it risks having to cover for the other members of the group’s loan. The easiest forms of collateral apart from group schemes are receivables . However, they are applicable only if the loan finances a given transaction. In this case a third party, the buyer of the MSEs products, enters into the relation. The MSE has to present a contract of the order of his buyer and the bank makes an agreement with the buyer that his payments will go jointly to the MSE and the bank.

Personal guarantors are another possibility to overcome the lack of valuable assets for security. The acceptance of personal guarantors as a security depends on their proven “net worth”. The person’s near cash properties must be sufficient to cover the loan sum. In addition, it must be plausible from the relation of the guarantor to the applicant that the former would pay on behalf of the latter in case of default. In the case of Ltd.s the manager/owner of the enterprise may act as a personal guarantor. Still, the banks accept personal guarantors only if they are very convinced of the viability of the investment.

Equipment or other moveable assets of the enterprise or its owner can also be used as collateral. This can be a very flexible option for an MSE as the range of items extends – depending on the loan volume – from refrigerators or DVD players to vehicles or machinery. Again, the constraints imposed vary between the different financing institutions. In some

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cases the bank requires insurance for the pledged item, especially for vehicles, to ensure that the value is guaranteed even in case of an accident. Many banks, however, reject moveable assets as securities, simply because they can literally be moved out of reach and be inaccessible for the bank in case of default.

Mortgages of landed property can be used to secure larger loans. In theory mortgage is a good security for the bank. In practice, however, banks are reluctant to accept mortgages for two reasons. One is the value of the property. To establish the value the banks require not only a valuation of the property, but also an analysis of its marketability. Usually only properties in high priced residential areas are considered to be easily sellable. The other reasons are are legal constraints to realize the value of the mortgage. In case of default, the bank cannot directly sell the property but it must go through a legal process to obtain this right. And, although there is a centralised registration system for mortgages, in practice it often fails to avoid multiple mortgaging of the same property. The preferred options of most banks are near cash securities such as fixed deposits, treasury bills or listed shares. For smaller loans some institutions accept savings far below the loan volume as a security. In most cases, however, the banks demand securities of at least 100% of the loan volume. This makes sense for a short term loan if the MSE does not want to disinvest a long term investment. In many other cases the availability of near cash securities implies that the MSE would better off if it sells these instead of taking a loan and paying interest.

The determining factors for security requirements by the banks, apart from the loan volume, are the relationship with the applicant and the degree of trust in his/her repayment capacity. For an MSE the form of security it can provide depends very much on the individual situation. Those who cannot provide any material assets need to build a relationship either with a group or with somebody who qualifies as a personal guarantor. B. Financing your business The preconditions for access to finance are the following.

Financial records General rules: • Ltd.s need to have audited accounts (by law)! • Apart from that, there are no strict rules. It depends on the relation to the financial

institution (FI). • Many FIs apply thresholds. Up to loans of about LC (e.g. Cedis) 50 m. they accept other

forms of accounts, above that they request audited accounts. • The crucial point is to convince the FI that the accounts make sense and are consistent.

Accounts that are formally stamped as audited, but do not properly reflect the business situation, are of no use for FIs.

Cashbook

Sales records: Most simple to keep. Tells the FI at least about the receivables in the past and it would not be sufficient to calculate profits. This method is applied by FIs that provide smaller loans and have a limited outreach (e.g. Atwima, First Allied, Sikaman, Sinapi, Trust).

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Bank statement Bank statement: Is an option for those applicants who have a banking relation with a positive track record. It tells the FI about the financial situation of the account holder, not specifically of the business and also gives some indication of his repayment capacity. If the applicant has his/her account in a different FI, the loan officer wants to know why he/she does not get a loan from that FI. This method is applied by FIs that provide medium sized loans and have a good coverage of a given country. (e.g. CAL Merchant, Prudential, Unibank of Ghana, Accra).

Accounts Accounts: Some FIs demand audited accounts, some ask applicants to fill their financial data in a form. Accounts cover various financial data including revenues, costs and profits. This method is applied by FIs that provide medium to larger loans and often have larger branch networks and a more formal approach towards appraisal procedures (e.g. ADB, Barclays, Ecobank, GCB, ICB, NIB, SSB).

Cash flow Most important to know for the bank is the repayment capacity of the applicant. Three important pieces of information:

• The profit generated from the investment • The businesses overall profit • The repayment capacity of the applicant

Personal qualifications

Integrity and reliability The integrity and reliability of the borrower will be known from previous dealings with the customer. The Bank will therefore like to know how previous facilities were utilized/whether repayments were made on schedule or with difficulties. If the account was a troublesome one the bank will have to find out if the previous facility helped the customer to improve upon his/her business or left him/her worse of. These studies will further answer the question as to the customer’s ability to apply the advance to the stated purpose.

Business management capacity The business acumen and industriousness of the applicant as well as his/her business management capacity can be seen from a steady growth of the business and the account of the customer. When interpreting the customer’s current account care is taken not to place premium on false turnover. Accounts with identical balances but with huge turnover are carefully studied.

Other banks’ accounts It is also necessary to find out whether the customer maintains accounts elsewhere and the status of such accounts. If the customer is committed to another bank it is very important to know the extent of his/her commitments. The position(s) may be the result of the manner in which his/her account is being operated with the present bank/branch.

Revenues – Costs = Profit Profit - Personal expenditures = Repayment capacity

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Control your costs and investments

Capital is needed to provide assets like building, office equipment, fixtures and fittings. These assets are called fixed capital, as they are not used in the production of goods. Capital is also needed to pay salaries, office supplies, etc. and such capital is “variable” capital, as it changes with the level of output. To control investment in fixed capital a manager should consider whether:

• All equipment held is really needed • Plant or vehicles could be leased instead of bought • Premises could be rented rather than bought • Any assets are held merely for status or prestige?

To control investment in working capital, the manager should consider how to keep it circulating rapidly and ensure that none is lying idle. In particular, the manager should check:

• Raw materials o buying at best prices I keeping stock levels as low as possible o delaying payment.

• Work in progress o improving productivity o better quality control at an early stage to prevent further investment

• Finished goods o prepare for orders I faster distribution to customers.

• Debtors o tighter credit control o more stringent trading terms o vigorous follow-up procedure.

What are the best sources for finance? Sources of finance for sole proprietors

• Personal savings • Loan from friends and relations • Loan from financial institutions • Credit Unions (E.g. including „Susu“ in Ghana and „Iqub“ in Ethiopia)

Partnerships • Contribution from partners • Loans from individuals • Loans from financial institutions • Credit facilities

Limited liability companies • Shares: Ordinary, preference (cumulative, non-cumulative and participating) • Debentures2 (ordinary and secured) • Loans from individuals • Loans from financial institutions • Credit facilities

2 Backed only by the integrity of the borrower, not by collateral, and documented by an agreement called an indenture. One example is an unsecured bond.

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Capital structure

Short-term funds up to one year • Trade credit • Bank borrowing • Bills of exchange • Deferred tax payment.

Medium and long-term loans up to 5 or more years

• Mortgage debentures secured on specific assets • Floating charge debenture which only becomes a fixed charge on the assets of the

company in the event of certain contingencies. • Preference shares which are a source of long-term or permanent finance, and are

similar in some respect of loan capital, but they carry the title of part of ownership of the business. The holders of such shares receive their fixed share of profits first and in the event of winding up they are given priority when paying back capital.

• Equity capital. The major part of long-term business finance is provided in the form of equity capital which includes the accumulated profits over the life of the project. Equity funds are also residual claimants to earnings in that they can participate in earnings only when all creditors and other suppliers of funds have received their interest payment in full. Equity investors received only the residue of funds realized on winding up of a business after all creditors have been paid in full. Equity funds are therefore subject to the greatest risk of all forms of capital and so equity funds are forthcoming only when profit prospects are sufficiently attractive to compensate for the risk involved and this makes it the most expensive source of finance even though it is one essential source of finance. Equity shareholders are the „true“ owners of the business.

Long-term versus short-term Long-term finance must cover the project cost of fixed investment and the estimated working capital requirements needed for normal operation. These should be procured in the form of equity and long-term credits. „Borrowing short“ to „finance long“ is not advisable. Short-term loans for financing fixed assets or working capital will burden a project’s cash balance with early and heavy principal repayments. The capital structure should be related to the earning power of the project. Equity versus debts The combination of equity and loans will determine a project’s debts to equity ration. Relatively heavy reliance on credit offers both advantages and disadvantages:

• Advantages o The rate of interest on loans may be lower than the rate of return on the

project, thus increasing the actual rate of return due to equity. o Since interest is charged against profits, less tax is paid and actual rate of

return due to equity is increased. • Disadvantages

o Interest charges, which are costs, are fixed and due for payment whether profits are made or not.

o Equity leaves management independent (to an extent) while creditors can interfere with management’s programme.

Note: There is no rule for an ideal debt/equity ratio. Each project or alternatives of a set of projects must be considered on their own merits.

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Guide for business consultants and BDS facilitators in order to facilitate access to finance

• The facilitator who deals with the operator often is confronted with operator's financial problems. In order to assess the real needs, it may be useful to get an overview of the situation of the enterprise concerned. What are the real causes for the "lack of finance"? The decisive matter of financing should be the market situation of the enterprises. If the operator meets problems in sales and clients, the facilitator should be hesitating to recommend credit activities. In general a micro or small enterprise with market problems may not be easily able to use the credit in a profitable manner.

• If the enterprise meets a shortage in investment, equipment, raw materials or wants to extend his enterprise by a normal or good sales situation, credit measures may be considered.

• In that case an analysis of the business situation and an analysis of the business projects should be undertaken by writing a business plan . The business plan should be written by the operator him/herself assisted by the facilitator.

• At the same time the operator should be urged to open a savings account and to strengthen his/her savings. Because proper funds are a good condition for a successful loan application procedure.

• Simultaneous to these preparations on operator's level, information on bank or micro-finance level should be obtained. What are the appropriate finance institutions for this kind of business? What are the loan application conditions? Individual or group collateral? Loan ceiling? The interest rates? Repayment period and conditions? Grace period?

• Finally, get the loan application form and help the operator fill out the form.

Practical approach of loan application and credit a ssessment

Before applying to a loan you should get the necessary information on the credit products and interest rates of different banks and rural banks and ask for the respective loan application forms. On the loan application forms you will see what information will be required.

The most common loan types are the following: • Individual loans (individual borrower) • Travel loans • Salary loans (salaried employees) • Savings and credit • Group loans • Commercial loans for business (institutional borrower).

The loan application form The Credit Application Form requires the following information (example of commercial loan):

• General information o Account, business name o Customer full name and address

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• Business information o N° and date of registration o Type of business, sector of activity, location o Period business has been in operation o Main goods/items o State 3 months with highest and lowest sales o Estimated sales per month o Estimated net income or profit per month o Estimated assets value (after depreciation): both business and personal

assets (land, buildings, equipment, tools, stocks, inventories)

• Banking Information o List of accounts o List of other financial institutions o List last 2 credit facilities obtained with other financial institutions

• Security o Security offered by customer.

Client performance report The loan application form often is completed by a “client performance report” with the following information required:

• Previous loan facilities granted o Type, amount, start date, end date

• Last loan repayment performances o Contracted: date due, instalment, arrears o Actual: date paid, amount paid, arrears

• Recommendation for repeat loan o Performance rating, eligibility o Maximum amount, waiting period

Guarantor's pledge The loan application form often is also completed by a “guarantor’s pledge” with the following information required:

• Loan to be secured by guarantor o Name of borrower, name of business o Loan amount, loan term, interest charge

• Guarantor personal information o Name and address, guarantor’s employer o Relationship to borrower, guarantor’s own business

• Security offered by guarantor o Cash in bank account, net month salary o Estimated assets value (after depreciation)

Loan application procedure The application procedure is different from bank to bank, but the following are provided as examples: Firstly, you have to provide information on the economic / financial standing of your business (some sort of financial accounts, your personal qualifications as an entrepreneur, external factors). Secondly, learn to explain how the investment contributes to your cash flow (basic profit projections, assessment of relations to suppliers and buyers, proof of technical feasibility). Finally, you need to be prepared to talk about securities and make up your mind what you have to offer.

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Application and interview • All requests for Bank facilities must be submitted in writing stating:

i. Purpose of the loan I Duration of the loan ii. Amount of the loan I Source and mode of repayment iii. Securities offered

• After receipt of the application a short interview is arranged during which the proposition is discussed fully to bring vital information which is likely to influence decision taking. After the Interview the customer’s file and other documents are closely studied again to cross-check information gathered during the interview.

• When a bank is requested to provide an advance for financing a new venture (i.e. outside the customer’s usual sphere), extreme caution is taken. The customer’s ability to mange the new venture is to be put to test.

The customer and his/her accounts • The customer’s account with the bank is studied to ensure that it is reasonable in

relation to the borrower’s business.

• For example the oscillation of balances on a trading account will be far higher than that of an account for a construction firm which will receive periodic payment for works satisfactorily completed.

Conduct of account Customer’s ledger and unpaid cheques register are examined for:

i. Cheques returned I “Marginal working” ii. “Earn making of credit” I Unusually large debit/credit items iii. Turnover, cross firing I “Switching” between associated accounts

The borrower

i. Integrity and reliability The integrity and reliability of the borrower (i.e. YOU!) will be known from previous dealings with the customer. The bank will therefore like to know how previous facilities were utilized/whether repayments were made on schedule or with difficulties. If the account was a troublesome one the bank will have to find out if the previous facility helped the customer to improve upon his business or left him/her worse of. These studies will further answer the question as to the customer’s ability to apply the advance to the stated purpose.

ii. Business accumen The business acumen and industriousness of the applicant can be seen from a steady growth of the business and the account of the customer. When interpreting the customer’s current account care is taken not to place premium on false turnover. Accounts with identical balances but with huge turnover are carefully studied.

iii. Other banks accounts It is also necessary to find out whether the customer maintains accounts elsewhere and the status of such accounts. If the customer is committed to another bank it is very important to know the extent of his commitments. The position(s) may be the result of the manner in which his account is being operated with the present bank/branch.

Security offered

• When it is decided to take a security it is usually asked for at the very outset and taken before the advance is actually made.

• The bank will make sure the customer is charging his/her own property and/or has authority to do so. The bank will have to investigate ownership of the property, for example from the Lands Commission.

• By asking the customer to provide security, the bank is asking him/her to put in some of his/her own money and show his/her confidence in the project before the advance is made.

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• A good security must be adequate to support the facility and easy to realize in case of need.

Borrower’s other records Business plan. A business plan is an important guide to starting, building and managing a successful business. It defines clearly the goals and objectives of a business, and outlines the methods for achieving them. It should be complete, accurate, and professionally presented.

Final accounts and balance sheets of previous years profit & loss account: Records the total income and total non-capital expenditure over a period, say one year. The net result is either a profit or a loss.

Balance sheet: It shows the financial position of the business at a point in time. It is a statement of assets and liabilities of the business and he owners stake in the business (net worth).

Cash flows: A statement showing the expected cash receipts and payments. It reveals the cash requirements of the business over a future period.

Possible dangers Overtrading and liquidity: Overtrading here means the situation in which a company finds itself when it undertakes more business than can be conveniently supported by the finance available. Under such circumstances the company will face liquidity difficulties and it cannot discharge its current liabilities from its current assets. Businesses which find themselves in such situations normally turn to the bank for help. A banker should be firm and tactful in advising such companies to expand slowly otherwise the banker will find himself granting “permanent” overdrafts to finance the overtrading.

Over-optimism: Most customers present rosy pictures of their requirements and their ability to repay facilities requested. Customers are not always to be taken at their face value. A large house and an expensive motor car, together with a lavish style of living, are no guarantee of means. They may mean the exact opposite. The banker should be able to sift out and verify the actual facts.

The Banker’s judgment After digesting the figures and verifying the facts a decision should be taken. Very few propositions measure up to all the ideal principles of lending discussed so far.

• Some facilities are approved with difficulty. • Others are declined without having a second look at them. • Some others are granted only if a satisfactory compromise can be reached.

The important thing for bankers is being able to ascertain where the risk lies and whether it is worth accepting in view of the small margin or profit on money advanced.

The above issues are the important keys with which a prospective borrower can access bank credit.

Expect a personal visit from the bank to your enter prise

Most of the banks and micro finance institution will organize a visit to your enterprises in case of financing. The visit is one of the preconditions to get a loan. Prepare yourself:

• Is your business presentation ok? • Are your workshops and offices clean and well organized? • Are your accounting documents up to date? • Is your personnel prepared for the visit and eventual talks?

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Categories of financial institutions and the market segments of loans

The financial system of most countries is based on a number of banks and non-bank financial institutions, including the central bank which has the responsibility of advising the government on implementation and control of monetary policy. Other institutions include commercial, development and rural banks. Direct financing of projects is provided by the commercial and other banking institutions. There are different financial institutions for different categories of clients and loan requirements:

• Commercial banks do not always dispose of credit lines adapted to micro and small enterprises. Their market segments are rather medium and big enterprises.

• Micro finance institutions have often more adapted credit lines to micro and small enterprises but less for medium ones.

But there are exceptions. Banks may also accept individual promoters and small enterprises and some micro finance institutions may also intervene into the market segment of medium enterprises. That is why the promoter should finally take the following information:

• Contact personally the financial institutions in your area.

• Ask for the actual conditions for loans and the interest rate which may change every month;

• Collect the loan application forms and other necessary forms.

• Take all necessary information on the financing procedures.

Details of commercial banks and microfinance instit utions for access to finance

Make a complete list of the financial institutions of your country and replace the following country specific samples by your own coun try specific data (examples see on www.senegal-entreprises.net/institutions-financieres.htm and www.bds-ethiopia.net/finance/index.html. Examples of presentation: A. Commercial banks Bank of Africa (BOA) - Senegal

Adresse: BP 1992 Dakar, Tél. 33.849.62.40, Fax 33.842.16.67, [email protected] Domaines d'intervention: Toutes opérations financières, commerciales, mobilières, immobilières. Secteurs de commerce, services, BTP, industrie, agriculture

Types de financement: Crédits court et moyen terme pour fonds de roulement et investissement. Création et extension de projets. Crédit Import-Export. Taux d'intérêts de 9-13%. Durée de 2-6 ans, différé de 6-12 mois. Garantie à proposer. Critères d'éligibilité: Compte bancaire, dossier viable du projet, étude de faisabilité, toutes pièces justificatives de l'activité. Commercial Bank of Ethiopia - Ethiopia Address: P.O. Box: 255 Addis Ababa, Ethiopia,Tel.: +251-11-5515004/ 5515000, Fax: +251-11-5514522, E-mail: [email protected] , Website: www.combanketh.com Types of loans: short-term loan, single merchandise loan, revolving merchandise loan, project finance, agricultural loans, other loans (letter of credit, advance on export bills, Overdraft loan and foreign bank guarantee) Loan critera : varries depending on the type of loans mentioned above. For example, the following criteria apply for financing a new project:

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- Project feasibility study; - Lease agreement and license (only for construction of buildings); - Work permit from concerned government offices; - Land ownership certificate (for building); - Memorandum and articles of association (for organizations); - Pro forma (list of prices) collected within a period of not more than two months; - Project equity contribution; - Bill of quantity and specification (for building); - Curriculum vitae of project administrators.

Collateral for all loans include: Building: residential houses, buildings of associations / organizations and warehouses, building under construction, privatized building and houses, etc. Vehicles of different types; Bank guarantee: local bank guarantee, Foreign bank guarantee Unconditional Insurance guarantee; Money in bank account: savings account, current account, time deposit. Merchandise pledge; Treasury bills; Government bond. B. Microfinance institutions

Example of presentation

Meklit Micro Finance Institution (MMFI) S.C. – Ethi opia P.O. Box: 27634/1000 Addis Ababa, Ethiopia, Tel. +251-11-5533509/5533729, Fax +251-11-5504941, E-mail [email protected], Website: www.mmfi.com Loan and savings services/products: Small merchandizing business loan, Petty trade loan, Household manufacturing and processing loan, Service loan, Agricultural loan (farming, cattle fattening, vegetable gardening, etc) , Emergency loan (with in-built insurance scheme). Saving services include, individual compulsory and voluntary savings, institutional savings Collateral: group guarantee, personal/institutional guarantee for individual loans.

Detailed loan conditions of commercial banks and micro finance institutions

in Ethiopia are published on www.bds-ethiopia.net/financing.html

Details of loan conditions may change every month. The purpose here is just to give you an idea of the different loan conditions, but further updated information will be necessary:

• Consult the web sites of the financial institutions.

• Take personal contact with the institutions and get updated financing conditions.

Alliance de Crédit et d'Epargne pour la Production (ACEP) - Senegal Adresse: BP 5817 Dakar-Fann, Avenue Bourgiba, 3.825.29.32/33, Fax 33.825.29.35, [email protected] , http://senegal.portailmicrofinance.org/article.php3?id_article=481 Conditions d'adhésion: Libérer une part sociale de 5.000 FCFA. Verser des droits d'adhésions de 5.000 FCFA. 15.000 FCFA pour le solde minimum du compte courant. Domaines d'intervention: Fournir des services d'épargne et de crédit aux entrepreneurs. l'ACEP vient de mettre en place un guichet dédié aux petites et moyennes entreprises (PME) Types de financement: Prêt micro-entreprise: fonds de roulement et d'investissement, durée maximale de 24 mois. Taux d'intérêts 13,5%. Prêt guichet PME: Fonds de roulement, investissement 15 millions à 75 millions FCFA, durée maximale de 36 mois, différé de 3 mois. Epargne obligatoire 10%. Taux d'intérêt 12-12,5% /an.

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Critères d'éligibilité: Etre membre de la mutuelle. Personne physique ou morale. Entretien avec le client et visite sur le terrain. Disposer d'une activité économique viable. Dossier exigé. Epargne obligatoire de 5-10% du crédit.

3.3 Administrative procedures An administrative procedure refers to the various types of legal requirements you are expected to fulfil prior to or after implementation of your business. In part 2 of this toolkit it has been indicated that information pertaining to legal requirements should be collected prior to implementation of the envisaged business idea. In this section, however, the main concern is to bring to the attention of the business operator that he/she should take practical steps towards implementing the business. a) Decide on the legal form of the business and st art the registration process As indicated in Part I of the toolkit, there are about six alternative forms of business organisations. Choose the business form based on the following criteria:

• Ease of registration; • Number of owners and financial capacities; • Financial responsibility of owners; • Degree of freedom in decision-making.

Once you decide on the form of business organisation to establish, you can start the process of registering the business and securing a license/work permit. The different legal requirements as well as relevant registration forms are also annexed to this toolkit. At this stage you are expected to be familiar with the procedures involved in business registration and you have to know that there are different legal provisions for the different types of business forms. For instance, there are independent registration procedures and application forms for sole businesspersons and business organisations such as share companies and partnerships. In addition, registration for trademark has also its own procedure. In general, the practical steps you should consider are:

• Make sure that you have decided to register your business and get license in one of the business forms and that you have the necessary capital, infrastructure, personnel and other minimum requirements that registering authorities are going to ask for;

• Go to the concerned authorities and take registration form; • Fill the registration form. If needed you can consult legal persons on the

contents of the application form and their legal consequences; • Submit the application form to the concerned office; • Make follow-ups until you secure the license.

b) Staff contracts If you come to the decision that you as an entrepreneur miss important competencies or cannot cope up with the high demand in your product or service, you should consider employment of additional personnel. You should be able to recruit the best available skilled candidates. You can organise your hiring activities in a five-step process. These are:

• Organising and planning: before starting recruitment; you first need to decide on the salary range and minimum level of skills. Place vacancy advertisements through possible existing media. In the meantime prepare interview guidelines and selection criteria;

• Interviewing: Based on interview guidelines, invite candidates for an interview. If necessary, you can also screen candidates through written exams;

• Select competent candidate(s) based on the pre-set criteria;

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• Conclude staff contracts, write letters of employment provide orientation to the newly contracted employee(s) about your business and give a written job description. At this stage it will be good if you consider a probation period of at least 15 days.

• Plan for a strong 'first week at work' test to make sure that your new staff is doing the job according to your expectation. Sometimes you may also need on-the-job training for new staff.

Contents of staff contract should comply with the existing labour proclamation. The contract between you and the staff may have the following contents:

• Responsibilities of the employee; • Responsibilities of the employer; • Employee’s rights; • Employer’s rights; • Performance evaluation standards for technical skill and workplace ethics; • Starting salary, benefits, safety measures at workplace and promotion; • Working days, working hours and holidays; • Annual leave and sick leave; • Starting date.

c. Follow taxation procedures Taxation issues are discussed in detail in Part 2 of the toolkit. The different types of taxes such as income tax, business profit tax, value-added tax and turnover tax are defined and their corresponding schedules are also indicated there. In this stage, too, you are required to take the following practical steps concerning taxation.

• Be informed of the different tax categories Put books of accounts and accounting system in place. This is important because the tax authorities require you submit relevant financial statements for registered businesses. It is also important to know relevant tax provisions such as income exempt from tax, adding tax on income, deductible expenses, non-deductible expenses, deductible interest, conditions for deducting gifts and donations, loss carried foreword, depreciation allowance and similar issues.

3.4 Infrastructure This refers to the different facilities you should access to implement your business smoothly. They include both external and internal facilities. The following are presented as checkpoints:

• Look for a strategic sales location near potential customers; • Compare rental fees for the sales premises, negotiate and enter into a rental

agreement; • Equip sales shop (put sales shelves, etc.); • Arrange for facilities (power, telephone, fax, computer, internet connection,

furniture); • Buy/hire transport facilities.

3.5 Suppliers This is an implementation step where you should:

• Make contact with suppliers; • Get pro forma and prices and detailed leaflets for equipment and raw materials,

compare prices and suppliers; • Order and buy machines/ equipment and raw material.

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At the start-up stage of your business you need to have optimum quantity of raw materials to start production. The more raw material stock you need the more working capital you should have.


Under this step you are required to: • Identify, engage and train qualified personnel; • Organise work procedures; • Organise marketing activities; • Install an accounting system; • Install a stock management system for raw materials and finished products:

In organising your accounting system, you may not need a sophisticated computerised system that you cannot afford or make use of. A simple accounting system can be used to meet your needs. The simplest accounting system called 'open invoice system' (Hailay Gebretinsae 2003) that requires only a cashbook and four boxes or files. The following figure, taken from the same author, is presented to show you a simple accounting system. Sales invoice Cash receipts Cash payments

Purchase invoices Instruction to the above figure

Help1 : Keep unpaid sales invoices and paid sales invoices separately in boxes A and B respectively.

Help2: Keep unpaid purchase invoices and paid purchase invoices for goods and services separately in boxes C and D respectively.

Help3 : The total sales for the period are the sum of A and B.

Help4 : The total purchases for the period is the sum of C and D. Time and stock management With respect to time and stock management in the implementation stage of your business, you should monitor the following:

• Quantity of raw materials used to produce the items; • Inventory of raw materials remaining unused; • Time taken to produce the items; • Amount of the products produced; • Amount of the products sold and revenue generated; • Amount of the products remaining unsold.

Unpaid sales invoices Box (A)

CASHBOOK

Receipts Payments

Unpaid purchase invoices Box (C)

Balance sheet and Income statement

Paid sales invoices (B)

Paid purchase invoice (D)

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3.7 Marketing strategies

The "4P" approach

A marketing strategy is about developing a good marketing mix. The elements of the mix are: Product, Price, Place and Promotion . Of course, there is a fifth element which is very important in marketing, i.e, the Person itself. This module, however, deals with the above mentioned elements. The mix also involves selecting the target client/market: Studying the client with respect to his/her buying motive and behaviour, segmentation of the market using relevant bases, evaluating each of the segments, selecting the appropriate segment as target market.

Marketing is everything you do to find out who your customers are and what they need and want to purchase. Therefore, decide on how to satisfy your customers while making profit. At the implementation stage you should consider and decide upon how to:

• Provide the products or services they need; Set prices that they are willing to pay; • Get your products or services to them; • Inform and attract them to buy your products or services.

In your marketing plan take practical decisions on the following marketing strategies.

• Product : Test your product(s). Before launching the products, you are required to give attention to the quality of your products, size, colour and packaging.

• Price : Test the price of your product(s) that you set based on your market research during the information seeking stage. You are now required to know if the price of your product is competitive in the market. Be sure that you have kept your costs down as much as possible so that you will have room to vary your selling prices within an acceptable range. Check that the price is attractive to customers and competitive with that of producers of the same product(s).

• Place : Determine where you should locate your business in a way you can best reach your customers. Location of the business is essential to reduce costs, or increase the chances of customers stopping at the business to look at your products or to at least make inquiries.

• Promotion is defined as a means of informing your customers about your product(s) and how to attract customers to buy from you. Make sure you have used one or more promotional measures during the implementation stage.

The matrix of marketing mix

Product Price

- Product range - Diversification of products - Quality, conception - Packaging - Maintenance - Service, garantie - Possibility to take back

- Pricing in the market - Pricing strategies - Price reduction and conditions of payment - Prices of competitors - Customer segments

Place Promotion

- Distribution channels - Strategic location - Building, area, ground - Public infrastructure facilities - Transport facilities

- Advertising - Public relations - Personnel sales - Sales promotion - Branding and packaging

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Product development

Product development is an extension of business idea generation and implementation. You have been shown how you can generate and implement your business idea in module one . Some explanation on product development has also been provided under the chapter for implementation in this module. Once you implemented your business, the next step is to think of how it would be possible to further develop or improve the product. You, as a designer-entrepreneur, should try to develop your product on a continuous basis. It is only then that you could satisfy customer needs and sharpen your competitive edge. In the follow-up and improvement stage of your business, you are required to undertake the following activities to develop the product.

• Carry out a simplified feasibility study on the product to be developed in terms of availability of own skill, technology, tools/equipment, raw material, and skilled labour;

• Make a market assessment for the product to be developed; • Design the product; • Develop a model or prototype of the product; • Make limited initial production; • Test the product for quality (physical strength and acceptability by the

consumer); • Promote/advertise the product; • Commercialise.

When planning to develop a new product the decision of which product and design to manufacture needs to be based on research, and not just on a temporary demand for a certain product by a handful of people. When the demand for existing products is on the downturn the possibility of changing the design, size, features, colour etc. becomes necessary in order to maintain sales. Moreover, such strategies require expertise in idea development and technical skills to make the product.

Improve your product quality

Product quality improvement is one of the major critical success factors for your business and you should take care of it in the follow-up and improvement stage of your business. Customers are always concerned with the quality of the product they purchased from you. Quality assurance begins from the very beginning of starting a business. Therefore, in the follow-up and improvement stage check that you have been selling products with the required quality. In the follow-up and improvement stage of your business, evaluate product quality in terms of:

• Raw materials used; • Production technology selected; • Tools/equipment used; • Efficiency of the production process/line; • Product finishing skill of your staff.

Since your customers are the best sources of information for product quality improvement, ask them how they felt when using your product.

Product diversification is possible in two ways. The first possibility is to diversify the product (to introduce new products to the market) and the second is to diversify the market (to go to new markets). You can introduce new products related to the existing product line. In this case the risk involved is low. On the other hand, you can introduce a completely different product to the market. This may have a higher risk than the first strategy, as you do not have prior experience with the newly developed product.

Before starting your production and marketing activities, you should deeper into the analysis on how to develop your products. Take the check list next page.

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Checklist for product development

Aspects of product development Findings of analysis

Potential market of the product

• What products are sold and to which prices? • Are their similar products in the market? • What is the product potential in the market? • What market segment holds your business actually? • How much can the share of market be increased? • How to minimise costs? • Who are the buyers of your product? • What are the threats in future? • Direct sales or by wholesalers/retailers/supermarkets?

Products of competitors

• Why do customers prefer your product compared to the products of your competitors?

• Who are your competitors? • Competitors in the market and their products. • Advantages and disadvantages to sell at less price

than your competitors. • What are your strengths and weaknesses compared to

your competitors?

Quality

The definition of product quality is not only limited to the product itself, but concerns also external factors of marketing, usability and needs: • What products/ which/ what kind of quality are already

in the market? • Performance, efficiency, elegance, lifetime, usability,

security, conforming to standards. • Does your product respond to the customers'

expectations? • Do you permanently improve your product? • Has your staff been qualified to assure the product

quality? • How is product quality of your competitors?

Branding

The branding strategy needs to analyse the following aspects: • What brand name to choose? • Which marketing strategy will be the adapted one? • What kind of branding is less cost intensive for

promotion, packaging and sales? • What are the advantages and disadvantages of the

different branding options?

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Developing existing products The customers are ready to buy your products provided there will be some modifications responding to their needs. For product modification the following market research steps and analyses will be necessary:

• Can the product technically be modified? • What will be the value added for the customers? • What are the modification costs? • Will the product be competitive? • Will the price increase or go down after modification? • Will new increased prices be accepted by the

customers?

Developing new products in comparison to the initial marketing plan should treat the following questions:

• Volume and continuity of customers' demand. • Price tendencies • Tendency of the actual situation with competitors. • Availability of resources. • Necessary competencies. • Profitability of the investment.

Managing prices

Price is understood as the value customers pay to acquire a product. It is an important factor in selling. A basic principle is that the relationship between the price of a product and the value it gives to customers has to be fair and proper. Customers know how much they have to pay for their commodities and, therefore, are interested in comparing the value they attained by the product to what they paid for it. In order to carry out a sound pricing strategy, some facts on marketing and simple accounting have to be prepared. The firm needs to:

• calculate costs of operation separately from family expenses;

• refer to the enterprise’s profit objective ;

• study if the product is unique or is available in the vicinity;

• find out if the plan is to satisfy a certain niche of market or if a plan is still to be defined.

Price is a ratio reflecting the exchange value of a good or a service, measured in terms of money. The following questions may clarify the idea of pricing:

• My pricing strategy: Should I go for profit maximisation in the short-term? Profit optimisation in the long-term? A minimum return on investment? Keeping parity with competition? Fast turnaround and early cash recovery?

• My pricing methods: should I follow cost-based pricing? Demand-based pricing? Competition-oriented pricing? Affordability-based pricing? Or differentiated pricing?

The answers to the above questions will help setting the selling price for each product/service.

Pricing strategies The strategy of considering price decreases for market entry can be carefully applied and based on study. However, under-pricing without studying the market can be a dangerous risk.

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Since a small decrease in cost structure leads to high improvement in profit, the best tactic would be to minimize costs. With due consideration to the profit margin, temporary price reduction can be used as a strategy to increase sales or to sell products in high stock. Reduced offer announcements encourage customers of purchasing larger quantities. The tactics of decreasing cost would be the safest way to improve profit margins.

The pricing strategy has to regard the profit margin. In view of this fact, the volume of sales has an important meaning. Some enterprises focus on unit sales and not too much on profit margins, which can be risky. The price being the most common strategic element of marketing, some related schemes will be outlined below. Offering reduced prices is a valuable tool to attract customers as well as to try a product. However, this should only occur for a given period of time.

Price reductions do not have to be as low as throw- away prices

Micro and small enterprises that are engaged in selling their products to organizations or companies can send price reduction notices in attractive envelopes. This is the cheapest means.

A strategy to produce good quality products and charge an appropriate price is a practical approach to pricing. A more practical approach to the micro enterprises could be to produce a lower quality product and charge a lower price. Nonetheless, the market has to be segmented first, since this can be unsafe, if applied to the wrong market.

The best and most preferable pricing strategy is to lower costs and consequently to minimize profit margins, which will both benefit the manufacturer as well as the buyer. For instance, if a micro or small enterprise has a profit margin of 10 % and lowers its costs by that extent, it will automatically be able to increase its profits. In this case raising profits by increasing sales would require a 100 percent increase in sales.

Offering special store/retail shop discounts to loyal customers is a workable strategy that is also imaginable. Quick and easier sales can be reached by selling on a gross or bulk basis. However, it has to be noted that the profit margin can be thin. In such cases, the selling strategy should include tactics on how to introduce efficient selling systems with a minimal number of staff. The scheme should consider:

• how to make collection control more efficient; • how to make credit sales system tighter; • how to maximize sales volumes so that overhead costs can be spread reasonably.

Price testing Setting price without prior testing of its impact on sales is risky. It is therefore much safer to test the effect of the price on:

• demand; • competition; • movement of market shares; • acceptability of the product; • quantity of sales.

The method therefore needs to be tested at a modest level before spending time and resources. Such trials can give the company an opportunity to:

• understand potential reactions of customers; • evaluate if the pricing approach will pay off; • earn how the domestic market works; • discover competitors’ reaction.

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Checklist for managing prices

Market / business analysis • Who are the competitors? • At what price level do competitors sell the products?

Pricing • Is there a viable accounting system, which gives information on your costs? • What are the costs per product unit? • Did you consider all pricing methodologies for different products?

o Should I follow cost-based pricing? o Demand-based pricing? o Competition-oriented pricing? o Affordability-based pricing? o Or differentiated pricing?

• Which pricing strategies are the adopted ones? • Is there any need to set alternative pricing strategies for products and

services? • Discuss the advantages and disadvantages of setting increased

and as well decreased prices. • Did you test the new pricing strategy?

Strategic place of business and channel of distribu tion

The place refers to the MSEs’ location of the business and the channel of distribution chosen to reach potential customers. One should ask questions like: “Can I get a proper business location not far from my customers and not too near to my competitors? Can I get proper premises with reasonable price/rent? What should be the channel of distribution?” Distribution is the physical movement of goods through a system called the value chain. Distribution channels include wholesaling, retailing, mail order, catalogue sales, telemarketing, contracting, or working through brokers.

Strategic business location

Most MSEs may require retail stores to sell their products. Although, location means a lot in retailing, a viable location usually costs a lot. A small shop with an attractive set-up and front can be a good selling location. Establishing a retail shop is a necessary activity, but it is not easy. Joining chambers and trade association can help in doing so. The study notes that the attainment of retail areas can be enhanced in its processes by using chambers and associations, as compared to a single micro or small enterprise operator on his/her own. If the vicinity markets are not large enough to support daily sales, then the wholesales strategy can be an alternative.

As a retail shop is an essential linkage within the marketing channel, the location has to be chosen strategically. Even if it is a micro or small enterprise the location is a deciding factor.

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The premise can be chosen by making a comparison analysis between the costs and benefits to be gained. Before choosing a location for the retail shop carrying out simple research concerning the potential buyers and the nature of the product could be advantageous. The study should identify the following:

• the type of potential buyers (attitudes towards the product and habits); • the product type (e.g. durable, perishable, for low income, for adults, for girls); • whether the product or service is in high competition or not; • the method with which the retailer intends to attract the purchaser; • the period of time in which buyers prefer to do their shopping.

Based on the result of the above research, the shop location can be selected by putting some criteria such as the ones cited below:

• if the product is consumable, such as food and beverages the shop can be located in residential neighbourhoods;

• if the product is meant for student consumption, then the shop can be located near schools and universities;

• if the product or service is aimed at tourists, it can be any busy location of interest to them;

• if the service is for young girls, such as hair dressing, the shop can be located in areas that can be reached easily and comfortably;

• if shoppers are from the upper class, the best location for the shop may be in a clean and safe area;

• if many competitors are situated in the same area, then this may be an advantage or disadvantage, all depending on your products and buyers – so please analyse this!

Promotion measures

The role of promotion is to facilitate exchange between product/service providers and customers. Commercial enterprises are concerned with attracting customers. Different types of enterprises will have distinct promotional mixes utilising a variety of promotional methods. The major promotional mixes are as follows:

Advertising : is a form of impersonal broadcasting through commercial mass media. Advertising is the pervasive form of promotion because it is one form that captures our attention.

Sales promotion : is a term used to imply an activity that is specifically designed to induce sales by enhancing the value for the consumer. This value may be created through volume discounts.

Publicity : is the result of public service announcements or news generated through media. Newspaper articles, recognition in public affairs, magazine stories and talk-show interviews.

Packaging strategies

Packaging is a competitive tool and an important factor in strategic marketing. The use of appropriate packaging can improve sales and transporting aspects related to the product. Therefore, setting packaging strategies is of importance. The packaging strategies for MSEs have to be very much cost oriented due to the limited access to finance they have. Some strategies will be discussed below.

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A strategic packaging container would be one that can communicate a message of quality, convenience and reliability.

In the event of the enterprise considering a new packaging, a strategic container will be the one that can be used over a longer period of time. This is due to the fact that constructing a new one can be an expensive venture for MSEs. A package, which has a relevant design on the container, is an expressive receptacle. The design does not have to be an expensive one. The packaging should have a relevant graphic design on its outside. With respect to the MSEs the design need not be expensive, but should be one that can convey the 'Quality Message '.

Branding aspect As mentioned earlier some buyers are impulsive and make their shelf-choices quickly. Hence, the brand mark has to be clearly written. Most buyers in developed countries are brand-oriented. Manufacturers have to give much consideration to the quality of the product and equally good consideration to the branding. In most cases it is difficult to try or taste the quality and standard of a product at the point of sale. Therefore, buyers concentrate on brands of packaging or label design.

Basic information for potential consumers, middleme n and sales agents • Contact address for sales agents and distributors • Product range, specifications and product design • Conditions and period for delivering • Sales conditions, prices and payment conditions • Availability of stocks • Transport costs • Customer references • Order conditions.

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4. Components of business follow-up and improvement

After setting up your business, there should be a day-to-day follow-up and improvement of activities. You should consider 1. Accounting and data management and on-going cost calculation, 2. Product development, 3. Advertisement and price adaptation, 4. Staff training, 5. Stock management, 6. Maintenance of tools and equipment and 7. Financial follow-up.

6. Accounting / management

8. Financing


1. Marketing

2. Product development

3. Standards and quality

4. Tendering

5. International trade

Phase 4:Follow up and

improve your Business

Improve accounting / statistics

Evaluate data on sales

Cost calculation

Assure repayment of loans

Generate own funds

StaffStaff trainings

Specialise staff

StockRaw materials

Finished products

MaintenanceEquipment

Tools

Premises

Increase sales outreach, look for potential customers

Advertise

Adapt pricing and packaging policy

Improve quality

Diversify products

Compare with products of competitors

Quality management

International standards

Certification

Bid announcements

Invitation to tender

Types of tendersExport procedures

Buy and sell through Internet

Trade fair guide

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Phase 4: Follow up and improve your business

4.1 Improve your marketing activities At the beginning of your business venture you designed a marketing strategy where you determined what product to produce, what price to charge, how to promote the product, where and how to sell it. Now, it is time to examine the effectiveness of your marketing strategy and look for improvements. For this purpose, you need to evaluate your previous marketing activities, adopt them and find new strategies. The following questions should get answers before you re-design your marketing strategy:

• Was the price I set too high/too low/optimum? What was the feeling of the customers?

• How was the demand for the product? Was it equal/higher/lower to your initial projection?

• Was the business location found good or bad? • Did your product promotion attract a sufficient number of customers? Was the

cost of promotion too high for you? (this is the same like the demand) • After evaluating the above situations, you can determine whether to:

o Increase/decrease price (if the existing one is found very low/high); o Increase/decrease production volume; o Change business location or not; o Reconsider market segmentation or not (note: market segmentation is

the process of focussing on specific customer groups and separating business activities according to well defined target group);

o Re-engineer the product to enhance quality and meet customers' needs; o Alter channel of distribution.

If you want to diversify your market be aware of the following:

• Needs, purchasing power, tastes of target consumers, taste of sales and competitors etc. are assessed with the help of market research;

• Availability of work premises close to the new market, availability of transport facilities and additional costs thereof;

• Is the channel of distribution done by wholesalers or retailers? Channel of distribution In this respect, you can have different alternatives to choose from:

1. Producer - Direct Sale - Consumer 2. Producer - Wholesalers - Retailers - Consumer 3. Producer - Agent/Broker - Wholesalers - Retailers - Consumer

Compare with products of competitors Products of different enterprises can be compared in terms of:

• Production cost; • Selling price of the product; • Quality of the product; • Design and packaging of the product; • Availability of the product any time required by the customers; • Accessibility of the product; • Service life of the product.

After evaluating the differences you are expected to make the necessary corrections against the items you have found to be inferior.

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Sub-contracting arrangements with medium and big companies can also help you get a market for your business. Sub-contracting is an arrangement between you and another company that needs your product/facility to produce the output it needs. For example, if you are engaged in a woodworking activity, you can supply a wide range of household furniture to a company, say, engaged in real estate development. Sub-contracting creates good market opportunities for you, especially when you have excess production capacity (idle machinery and labour).

Advertising. Advertising is one form of promotion that is aimed at mass markets through media and impersonal commercial messages. After evaluating your market situation, you can determine whether to advertise your product (if not advertised so far) or reduce advertisement (if it was done aggressively and no need for further advertisement because of more than sufficient number of customers or limitation in supply of products). In the follow-up stage of your business, evaluate the past advertising measures and re-adopt them if necessary.

Promotion and fairs participation. Promotion is a broad term applied to marketing tactics that serves to attract customers or inform them of products or services. The question, therefore, is:

• During the last business cycle, did you promote your product sufficiently? • Did you use the proper tools of promotion based on the nature of your target group? • How was the frequency of promoting your product? Was it sufficient? • Did the promotion help you increase your sales outreach?

If your answer to the above questions is "No", take corrective actions during the next business cycle.

Promotion can be done through different means. Participation on trade fairs and exhibitions/bazaars is just one of them. You can use government programs and that of business associations to participate on trade fairs. However, it would be up to you to solicit information on trade fair calendars. You can refer to the Website www.bds-forum.net/tradefairs.htm

4.2 Product development Product development is an extension of business idea generation and implementation. You have been shown how you can generate and implement your business idea in this booklet. Some explanation on product development has also been provided under the chapter for implementation. Once you implemented your business, the next step is to think how it is possible to further develop or improve the product. You, as a designer-entrepreneur, should try to develop your product on a continuous basis. It is only then that you could satisfy customer needs and sharpen your competitive edge. In the follow-up and improvement stage of your business, you are required to undertake the following activities to develop the product.

• Carry out a simplified feasibility study on the product to be developed in terms of skill, technology, tools/equipment, raw material, and skilled labour;

• Make a market assessment for the product to be developed; • Design the product; • Develop a model or prototype of the product; • Make limited initial production; • Test the product for quality (physical strength and acceptability by the consumer); • Promote/advertise the product; • Commercialise.

When planning to develop a new product the decision of which product and design to manufacture needs to be based on research, and not just on a temporary demand for a

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certain product by a handful of people. When the demand for existing products is on the downturn the possibility of changing the design, size, features, colour etc. becomes necessary in order to maintain sales. Moreover, such strategies require expertise in idea development and technical skills to make the product. Improve your product quality

Product quality improvement is one of the major critical success factors for your business and you should take care of it in the follow-up and improvement stage of your business. Customers are always concerned with the quality of the product they purchased from you. Quality assurance begins from the very beginning of starting a business. Therefore, in the follow-up and improvement stage check that you have been selling products with the required quality.

In the follow-up and improvement stage of your business, evaluate product quality in terms of: • Raw materials used; • Production technology selected; • Tools/equipment used; • Efficiency of the production process/line; • Product finishing skill of your staff.

Since your customers are the best sources of information for product quality improvement, ask them how they felt when using your product.

Continuous quality upgrading is the best strategy to follow, however, only if you can afford it. If upgrading of product quality is too expensive, then maintaining the existing quality may be a better strategy. In the event that your products are for sale to conscious clients (who are sensitive to quality), then precautions should be taken to keep the products satisfactory to them. An existing product can be modified by improving its features, without altering the benefits to be gained, in order to attract new users or to increase its usage. In this connection you can resort to a method known as "value engineering". Value engineering is reducing the costs of a product by keeping the quality constant or increasing the quality, and hence the selling price of a product with production costs held constant. The producer should constantly exercise value engineering alone or with his friends, family or qualified personnel in his enterprise so as to reap increased benefits.

If the life span of the product is on the downturn, then you can look for new target markets and introduce the product appropriately. In the next run of your business, make sure that you have done your best to keep the product quality to the highest possible level. A product with good quality would improve your business in the future by:

• Creating satisfied customers; • Facilitating sales in volume; • Bringing repeat sales easily.

Diversify your product and/or market

Diversification is possible in two ways. The first possibility is to diversify the product (to introduce new products to the market) and the second is to diversify the market (to go to new markets). You can introduce new products related to the existing product line. In this case the risk involved is low. On the other hand, you can introduce a completely different product to the market. This may have a higher risk than the first strategy, as you do not have prior experience with the newly developed product.

In a similar manner, you can diversify your market base within the existing geographic location or start selling in a completely different market. Diversification in existing market is also possible by type of customer - selling to low or middle or high-income level customers. At the end of each business cycle, you should be able to analyse your past performance and see if it is necessary to take one of the above actions for the next run.

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If you want to diversify your product be aware of the following: • The skill required to produce the new product; • The technology and tools/equipment required for production; • The personnel required for production; • The additional investment required; • Readiness of the market for the newly diversified product:

o within the existing market; o within a new market.

If you want to diversify your market be aware of the following: • Needs, purchasing power, tastes of target consumers, taste of sales and competitors

etc. are assessed with the help of market research; • Availability of work premises close to the new market, availability of transport

facilities and additional costs thereof; • Is the channel of distribution done by wholesalers or retailers?

Compare with products of competitors Products of different enterprises can be compared in terms of:

• Production cost; • Selling price of the product; • Quality of the product; • Design and packaging of the product; • Availability of the product any time required by the customers; • Accessibility of the product; • Service life of the product.

After evaluating the differences you are expected to make the necessary corrections against the items you have found to be inferior.

You can develop a strategy of manufacturing broader product lines. This strategy allows profiting from economies of scale, which in turn will benefit customers to enjoy reduced prices due to low overhead costs. In addition, manufacturing a wide or full range of products in different designs allows customers to do all their shopping in one location.

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4.3 Standards and quality

A. Quality management

Quality as related to the success of business enter prises The objective of a business organisation is to create products that satisfy customers’ needs with some proceeds that go to the firm as profit. With more customer satisfaction there could be a higher demand for products, and consequently a more efficient transformation of resources. Quality is related to the success of business by means of:

• creating satisfied customers; facilitating volume purchase; repeated purchase.

What is quality? Quality is not an isolated field. It is a recognised guide related to other marketing mixes. It encompasses different elements of theories. Depending on the product type, some define quality as:

• performance, effectiveness, elegance, fitness, reliability, durability, safety, taste, conforming to standards, uniformity.

The definition found in the Oxford business dictionary is: • degree of goodness or worth; • general excellence; • unbreakable; • high social standard.

Some local enterprises define quality as: • maintaining requisite standards; • defect-free product; • systematic inspection of products.

While others define it as: • relative to competitors rather than to fixed internal standards; • relative to customers’ needs rather than to departmental standards.

A recent report carried out by the American Society for Quality Control sees quality at a larger scope. It considers quality as:

• a product that gives satisfaction to consumers related to competitive offering; • an output whose measure is not just during the event of purchase, but over the

product's entire lifetime; • an item whose judges are those whom it serves – the customers and end-users.

Quality thoughts

In the past, the concept of quality was strictly based on fixed standards, and whatever parameters to be set were product-driven, rather than grounded on sales. The quality measuring tools were specifically designed to evaluate those products produced according to the specified standards. Moreover, quality professionals used to detect manufacturing defects at the end of production. Whereas presently quality is measured in terms of customer preferences and needs.

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In a certain companies there were sets of internal product quality standards for export products. All too often, customers were unhappy with the quality of the products. The company was puzzled by their complaints because it was positively sure that production was being carried out according to the parameters set by the quality section of the firm. However, sales remained to be difficult, especially for reasons related to the quality of products. The manager of the firm was someone who liked to get the best out of any situation. Nevertheless, everybody was confused of what the buyer actually wanted. Eventually, the buyer started to say, 'before we sign a new contract, you have to agree on our proposed quality requirements.' Only then could we realise that we should have known the customers' quality requirements and that the setting of our own internal standards and parameters was not enough. Finally, when the firm started to comply with the customer’s quality preference, the complaints ceased.

Quality and productivity

There are some debates that quality is directly related to productivity. This theory assumes that producing quality products requires more time, more material and so forth, in which case the quantity to be produced will be automatically reduced. Enterprises whose policy towards employees’ salary increment is based on the quantity of manufactured products without due consideration to quality can suffer from high rejection. In such instances, there is obviously a risk that many more products with poor quality will be produced because employees may concentrate on quantity and not on quality.

Quality is an asset that marketing counts on

and it is unrestrained to get it done.

So, as mentioned before, quality control or inspection starts from the designing stage and goes all the way through to manufacturing. Such a system can correct defects at an early stage. Quality experts should be involved from the design stage to the point of sale because, unless the products are sold effectively, the enterprise will fail to gain anything.

Let us now consider an enterprise engaged in international markets and that follows a policy of "quality at any cost." The enterprise should also give serious thought to competitive pricing because if it does not, it may not be able to survive. Nowadays, the subject of quality without paying much attention to costs is just not acceptable because now that competition is severe, a firm cannot sell to international markets, if its pricing is not competitive.

An Ethiopian enterprise shares the following experience. The firm's policy is 'quality at any cost.' With this policy, it produces good quality products; but the price of its unit output is so high that it is just unable to compete. Consequently, it is pushed out of international markets. It is therefore necessary that quality professionals be cost-conscious because quality cannot be seen in isolation to total marketing management.

Factors that cost money are the non-quality raw materials, the unnecessarily wasted overheads, and carelessly handled workmanship that does not accomplish work appropriately right from the beginning.

Quality and trade

The association between business and quality can be seen in combination. This can be illustrated by the fact that the objective of a business organisation is to create goods to satisfy customers’ needs at a profit. This need can be satisfied, if consumers get the right

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quality product. With more consumer satisfaction a higher demand for a product can be generated and consequently, a more efficient usage of resources can be achieved. If the quality of a product is unsatisfactory and valued by international consumers, then it may be rejected.

Quality is related to the success of international business because a product with quality can:

• create satisfied customers; • facilitate a higher volume of purchases; • easily generate repeated purchasing.

In the past, changes in market preferences were not too frequent. Nowadays, however, the market changes very rapidly, reflecting the altering needs of international consumers.

Quality and customers

In relation to international markets, reacting to new consumers’ needs has become the norm of trading. Therefore, exporters have to cope with the accelerated pace of change. Quality plays an important role in building up business and in getting repeated purchases.

Some research studies carried out by the American Productivity and Quality Centre note that happy customers spread good news to about five people, while unsatisfied buyers spread the bad news to about nine to twenty people. There is a saying that, "bad news travels fast", and with respect to quality this is the same.

If the customer’s requirement for a given product is 'fitness for use' and the firm commits itself to this reality, then it can sell its products at a premium price. In contrast, if a firm manufactures a superior quality product with many additional features, the costs can increase, resulting in an increased sales price. This fact can cause products to only sell in smaller quantities. Finally, if the product does not adhere to the customer's requirement, it will not be bought.

There is a misconception that a talented sales person can convince consumers to buy poor quality products. The misapprehensions that may exist in some firms have to be corrected. "The enlightened type of sales man and the enlightened customer are both based on the assumption of a good and worthwhile product. If the product they turnout is not good, then this type of management will destroy the whole enterprise, as truth generally will destroy untruth and phoniness and fakery.” (Abraham Maslo)

In addition to that, the sales function requires support from the technical or quality section in order to follow-up and to help customers after sales.

Impact of unacceptable or poor quality product

The impact of poor quality products can be seen from both the exporting firm’s as well as the customer's point of view.

a) Danger to enterprise

The enterprise can encounter various difficulties by producing unaccepted products. The damages that can occur are as follows:

• loss of image; • loss of market share; • high costs; • customer complaints; • claims;

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• waste of resource; • loss of finance; • finally, closing down of business.

Firms that deliver products whose quality is unacceptable to buyers are exposed to culpability and dispute.

b) Loss to customer

Poor quality products can have various negative impacts, of which some could be serious. Few of the negative impacts are as follows:

• health problems; • safety problems; • discomfort; • economic losses; • dissatisfaction; • loss of confidence; • temporary unavailability of material.

In the light of this situation, the author of this booklet would like to share her experience as follows: When she was working as an export market coordinator for the Ethiopian Ministry of Industry, the following happened: a certain enterprise was exporting textile products. The practice was that quality control was done at the end stage of manufacturing. This practice resulted in a high rejection rate. Consequently, the quantity to be exported in a given time was always short and the amount of foreign currency to be earned was affected. The rejected products had to be sold domestically, and selling them domestically was found to be the most difficult thing to do because the products were produced according to foreign market specifications, size, colour and other characteristics.

Therefore, enterprises engaged in international markets have to hold a wider scope about quality. They should not think of "quality controllers", but rather of "quality planners who act in a cost conscious manner" because thoughts related to quality for the market have changed greatly.

Quality as a benefit

The issues of quality can be apprehended as an opportunity for exporting business organisations, if and when:

• the quality of the product/output is good. In this case, there will be more customers and thus higher sales. Ultimately, higher sales result in a boost in profitability.

• the gap between cost and price is high due to appropriate planning for quality production. In such cases, the enterprise can attain high incentives to run the business.

• the cost of production is lower. This can create the opportunity to sell at a lower price and in turn achieve higher market shares.

Producing quality products, in general, is a means of introducing and promoting a country to a certain greater stage. For instance, if Ethiopian products for international markets are of superior quality, Ethiopia can be positively imaged and other importers can judge Ethiopian products as having an excellent quality.

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Quality and market

To some enterprises, the need for quality requirements can be a constraint in situations where:

• some enterprises find themselves way behind their competitors with regard to offering a superior quality of goods.

• international consumers are increasingly concerned with the quality of what they buy. If Ethiopian exporters are not quality-oriented, they will not survive and be knocked out of market.

• closing the gap between poor and good quality is difficult. It requires hard work and good coordination.

• buyers of other goods can generalise and conclude that the other exportable products are also of lower quality and workmanship.

Marketing has to look into strategic quality improvement because presently consumers are much more concerned about quality, and are greatly aware of their needs than before. An exporting firm can gain higher market shares, if it follows consumer requirements and measurements. Quality can thus be stated as the "Life Blood of a Firm" because:

• it intensifies sales; • it is a means of enhancing profit.

Quality and price

In relation to quality versus price there are two different views. One outlook is that quality and price are positively correlated. In which case, higher quality can be produced only at a higher cost because of additional labour, expensive materials, higher overheads, skilled manpower and increased inspection time. The other view is that quality and cost are inversely related. This can be explained by the following: If the costs involved in manufacturing lower quality products were avoided, the cost of production would have been reduced tremendously. Such costs are the costs of reworking the product, and costs related to the rejection of raw materials, the final withdrawal of finished products as well as costs related to responding to customer complaints.

Some consumers believe that a product with a higher price is of higher value. With this thinking some prefer to buy higher-priced goods, since they perceive the product as being of higher quality. In instances where enterprises believe that the consumer’s purchasing decision is positively correlated with 'higher price implying higher quality', they set higher prices just to imply a superior grade. Still, such a strategy has to be well thought out because at a later stage, if research indicates that the price has to be decreased, the effect could be negative. In relation to price versus quality there is a common question raised by many buyers. The question is: 'If an item is of the same quality, then why do some sellers charge more than others?' In this aspect, the points that can convince prospects are that the higher price is charged because of different and/or additional costs (the issue is mainly treated in view of marketing.) The additional costs can be due to:

• added product features; • extra costs of international reputation and branding; • promotional expenses; • transportation charge of different shipping and airlines; • export taxes; • convenience and attractiveness of the package offered; • quality of the sales force; • commission given to the agent.

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International sellers like to show the higher price of their products as a reflection to its quality, and thus as an advantage against other competitors. They want to use quality as a single remedy for charging higher prices. This concept is difficult to be accepted nowadays on the part and because of enlightened buyers. Quality-associated packaging

Packages preserve and protect the product that was carefully manufactured a while ago and facilitate international buyers to consume it at the time of their own preference. The function of packaging in relation to maintaining the quality of products for international markets can be expressed in different views as follows:

Information aspect: The package may contain the following information: • specification listing of ingredients; • method of usage • colour, size, weight (net and gross); • use-best-before date.

Containment aspect: The package contains the product in order to: • avoid spilling; • avoid loss of its composition and grading; • provide a uniform measuring.

Protection aspect: The package protects the product from: • impact and stress factors; • abrasion; • vibration; • dirt and dust; • bacteria; • moisture.

An appropriately protected product reinforces the image of the product and helps address the needs of agents, representatives and their channels in the international market to transport the product in its original quality, standard and/or specification to its desired destination.

In terms of preservation

The package preserves the product’s: • aroma, taste, softness and colour.

Distribution aspect

Distribution is one of the most important marketing aspects in international trading. The role of packaging in maintaining the quality of the product during distribution to foreign markets is considerable. At the time of transportation, all the way from the country of departure to the final destination, packaging facilitates protection against:

• damage as a consequence of rigorous climate and air conditions; • impairment during loading and unloading at ports.

Packaging facilitates international transporting across boarders without affecting the quality of the product.

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Handling and storing aspect

Through proper lightning, fumigation and ventilation, the package protects the product from deterioration and damage.

Packaging makes it easier for wholesalers and agents to store and display products and prolongs and insures the product's shelf life.

Elements of quality in promotion

Superior quality can be communicated through promotion. Before planning to run a quality promotional programme, the organisation has to make sure that the product is the correct one. Whatever quality statement is made in the promotional scheme, it has to be proved correctly. There is a strong possibility that goods promoted can entail renewal of deals as long as international consumers respond to advertisements. Promotional programmes pertinent to quality could have objectives such as:

• getting known in international markets as quality producers; • making customers to be assured of, and trust the product.

A business organisation that is confident of the superb quality of its product can run or pass the quality message in different ways such as:

• by means of brochures; • through sales people; • through trade associations; • during trade fairs; • through Chambers of Commerce; • through demonstration in a good hotel or in appropriate rented apartments in foreign

areas.

Heavy promotion in relation to quality can be taken as a sign that the product has very limited "quality uncertainty". In contrast, some experts believe that intensive publicity can be misunderstood as trying to sell lower-quality products and items which are in large stock. In any case, providing market instruction can minimise the difference between the two concepts.

In relation to promotion, for customers to be more assured of quality and to give more trust to the company, the 'international sales proposal package' has to include the following quality assurance programmes:

• giving guarantee; • allowing return warranty; • posting the general quality policy in the manufacturing areas; • making the quality slogan known to buyers; • putting some quality commitments on product labels, e.g. on textile products and

leather jackets.

The promotional strategy in relation to quality has to include and emphasise the following issues:

• regularly inform all manufacturing employees about quality requirements; • enlighten sales staff about quality, (it must be clear to everybody that the company

will have to be imaged with the quality of its products); • produce high-quality characterised by excellent workmanship and standards; • make executives constantly aware of the quality policy; • ensure the quality and standard of the raw material and all components; • establish highly imaged office;

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• impress buyers by the fact that the company policy is to 'upgrade quality continually' and not to 'maintain existing quality' only;

• seek out customers’ opinions and complaints through the sales personnel.

If the company, in its slogan, states 'we are committed to quality' but the actual production does not demonstrate quality merchandise, the company will not be successful in the market. Thus, the quality statement should not just be a slogan as a sort of state-of-the-art promotion. If international buyers are not satisfied with the quality, they will not appear to conclude a second contract. Market promotion to international buyers can be done in order to:

• persuade customers of the properties and quality of the product; • dispel any doubts about the quality of the product; • motivate potential buyers to try the product.

Quality-related complaints

In foreign marketing, complaints about quality and standards of products are quite frequent. Any complaint has to be handled properly and professionally. Dealing with customers’ dissatisfaction requires specific skills. There are instances where a company thinks that the customer just complains to profit from the company. However, it is much safer to take the complaints seriously. Some companies believe that it is better and quicker to find new clients than to try to follow up and solve quality problems of existing clients.

As is said - 'It takes about ten times more effort to bring back lost customers and it takes about five times more effort to generate new clients.'

However, in the international market it is common to give guarantees in relation to quality, delivery and other aspects of the market. The objectives of the guarantee can be:

• means of confirming quality; • framework for guaranteeing repair; • means of replacement in case of defaulted product; • form of promise to observe delivery dates.

If companies do not take sales complaints seriously, in addition to other consequences, there is a risk that customers will be lost forever.

Unlike in the domestic market, the issue of handling buyers’ complaints is serious in the international market. Not acting as promised and not attending to disapproval rapidly creates a difficult situation.

Attributes of public relation The public relation's (PR) job pertaining to quality can be to:

• meet customer's requirements as promised; • handle complaints fully and as quickly as possible.

This aspect is a very crucial issue for Ethiopian companies. The author feels that enterprises need to do much more than they are currently doing because the foreign market is sensitive and does not tolerate if too much time is needed to solve buyers’ problems. Some PRs try to jolly international customers until the quality complaints is forgotten. Buyers can feel insincerity in this and consequently, the problem may be exacerbated and result in the loss of clients.

There is no way for public relations to satisfy foreign buyers if the company sells products that are of bad quality and wear out soon.

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If the customers’ quality complaints are handled carefully and with sincerity, they may be satisfied. In fact, some customers whose complaints have been settled in a satisfactory way come back to the organisation for repeat purchase.

Cost considerations

The issue of costs will only be discussed in the context of marketing. The cost of some products destined for the international market may be much higher and thus cause difficulties in competition. Yet, measuring the cost of quality is not enough. The source has to be tracked because this will help management to know where to start when planning quality improvements.

Some of the reasons for high costs could be: • insufficient volume of sales; • low quality of output; • no commitment on the part of the management; • poor planning; • outdated machines; • high rejection of products; • low quality of raw material; • constrained operating costs; • unskilled labour; • working below capacity; • no loyalty of customers; • negligent staff.

Cost reduction

As mentioned earlier, in a competitive market, it is no longer practical to check the quality at the end of the production line. Costs have to be monitored in order to ensure that the product meets the international price level. Different quality programmes can be introduced to reduce production costs with the following objectives:

• follow up quality right from the design stage (Ethiopian companies need to focus on this point);

• create quality-committed management; • reduce the rejection of raw material (the system needs to record the expense of

buying and using inferior materials); • improve efficiency by lowering the rate of defects; • speed up delivery (by introducing a quality-oriented quantity production policy - this

point is most critical for Ethiopia); • obtain the effect of poor quality in profitability (it is necessary for the management to

participate in this programme); • improve working conditions related to producing quality products; • improve employees' quality awareness.

It is a worthwhile exercise for Ethiopian enterprises to determine first the sales price, which is competitive on the international market, and then to control the costs in order to meet that price.

The role of management in manufacturing quality pro ducts

A manager of an export company has to commit himself to quality production and customer satisfaction. Whether an enterprise focuses on sales or on customer satisfaction, a quality improvement system which is not supported by the top management is always going to fail.

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Management support and commitment to a quality programme is critical.

The quality system has to be explained and has to reach the producers or operators through the management in a manner that they can understand it. Nonetheless, there is not one single successful model of strategic quality management. Ethiopian enterprises have different business needs so that attention needs to be given to different issues. Unless the management votes for a quality system, the project will not be fruitful as can be observed in some companies. Likewise, unless the quality programme is mandatory, it becomes difficult to implement the policy. Managers decisively promote the issue of quality when there is:

• deeper understanding of international quality and standards; • appreciation of the value of quality for consumers; • awareness of competition at international level; • knowledge of international measurements.

Employees’ reliability

In any organisation, there may be careless and negligent staff who can oppose the quality system unless management advocates it. Moreover, employees have to be well informed about the advantage of producing high-quality products and, equally, about the impact of poor quality. Basic requirements are concern and concentration. Staff has to be committed to the new ideas and system. If a member of the team fails to do what he is required to do in terms of quality, the entire team is affected. If everybody is committed to quality and customer satisfaction, the result will be:

• higher productivity, • fewer rejections, • lower costs, • higher profits.

It is necessary that employees are well informed and trained right from the start.

Employees must accept ownership of the quality system and its results.

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B. Standards

The International Organisation for Standardisation (ISO)

ISO is the International Organisation for Standardisation. It is made up of national standards institutes from countries large and small, industrialised and developing, in all regions of the world. ISO develops voluntary technical standards, which add value to all types of business operations. They contribute to making the development, manufacturing and supply of products and services more efficient, safer and cleaner. They make trade between countries easier and fairer. ISO standards also serve to safeguard consumers, and users in general, of products and services – as well as to make their lives simpler. ISO develops only those standards for which there is a market requirement. This work is carried out by experts on loan from the industrial, technical and business sectors which have asked for the standards, and which subsequently put them to use. Others may join these experts with relevant knowledge, such as representatives of government agencies, consumer organisations, academia and testing laboratories. Published under the designation of International Standards, ISO standards represent an international consensus on the “state of the art” in the technology concerned. The webpage of the International Organisation for Standardisation (www.iso.org) containing the following issues:

• International standards • ISO 9000 and ISO 14000 • ISO Management systems • Customer services • ISO store.

ISO 9000 and ISO 14000 in brief

The vast majority of ISO standards are highly specific to a particular product, material or process. However, both ISO 9000 and ISO 14000 are known as generic management system standards. Generic means that the same standards can be applied to any organisation, large or small, whatever its product – independent of whether its “product” is actually a service – in any sector of activity, and whether it is a business enterprise, a public administration, or a government department. ISO 9000 is primarily concerned with quality management. The definition of “quality” refers to all those features of a product or a service, which are required by the customer. Quality management means what the organisation does to ensure that its products conform to the customer’s requirements. ISO 9000 is not a product quality label or guarantee. ISO 14000 is not a “green” label for products. ISO does not assess or audit quality or environmental management systems. When an organisation has a management system certified to an ISO 9000 or ISO 14000 standard, this means that an independent auditor has checked that the process influencing quality (ISO 9000), or the process influencing the impact of the organisation’s activities on the environment (ISO 14000), conforms to the relevant standard’s requirements.

Implementing ISO 9000 quality management system Implementation of ISO 9000 affects the entire organisation right from the start. If pursued with total dedication, it results in 'cultural transition' to an atmosphere of continuous improvement. The process of implementing ISO 9000 depends on:

• the sophistication of your existing quality program; • the size of your organisation; • the complexity of your process.

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The 14 essential steps, briefly described below, are to be followed through in order to implement ISO 9000 quality management system successfully:

Step 1 Top management commitment Step 2 Establish implementation team Step 3 Start ISO 9000 awareness programs Step 4 Provide training Step 5 Conduct initial status survey Step 6 Create a documented implementation plan Step 7 Develop quality management system documentation Step 8 Document control Step 9 Implementation Step 10 Internal quality audit Step 11 Management review Step 12 Pre-assessment audit Step 13 Certification and registration Step 14 Continual improvement

ISO and the environment - ISO 14000

The ISO 14000 family of International Standards on environmental management is a relative newcomer to ISO’s portfolio. In fact, ISO has a two-pronged approach to meeting the needs of business, industry, governments, non-governmental organisations and consumers in the field of the environment. On the one hand, it offers a wide-ranging portfolio of standardised sampling, testing and analytical methods to deal with specific environmental challenges. It has developed more than 350 international standards (out of a total of more than 12 000) for the monitoring of such aspects as the quality of air, water and soil. These standards are a means of providing business and government with scientifically valid data on the environmental effects of economic activity. They also serve in a number of countries as the technical basis for environmental regulations. On the other hand, ISO is leading a strategic approach by developing environmental management system standards that can be implemented in any type of organisation in either public or private sectors (companies, administrations, public utilities). This followed ISO’s successful pioneering experience in management system standardisation with the ISO 9000 series for quality management. ISO’s direct involvement in environmental management stemmed from an intensive consultation process, carried out within the framework of a Strategic Advisory Group on Environment (SAGE), set up in 1991, in which 20 countries, 11 international organisations and more than 100 environmental experts participated in defining the basic requirements of a new approach to environment-related standards. This pioneering work was consolidated with ISO’s commitment to support the objective of “sustainable development” discussed at the United Nations Conference on Environment and Development in Rio de Janeiro in 1992.

Inspection and certification

Conformity assessment defined

Conformity assessment is any activity concerned with determining directly or indirectly that relevant requirements are fulfilled. Typical examples of conformity assessment activities are testing, inspection, assurance of conformity, accreditation and mutual recognition agreements.

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Testing

Testing is perhaps the most common form of conformity assessment. It can include other activities like measurement and calibration. Testing also provides the basis for other forms – for example, it is the main technique used in product certification.

Inspection

With the growth of world trade and increasing trade liberalisation – as well as the rapid development of new manufacturing and distribution technologies –hundreds of third-party national and multinational inspection bodies have come.

These organisations examine a huge range of products, materials, installations, plants, processes, work procedures and services, in the private as well as the public sector, and report on such parameters as quality, fitness for use and continuing safety in operation. The overall aim is to reduce the risk to the buyer, owner, user or consumer of the product being inspected.

Assurance of conformity

This is the activity resulting in a statement giving confidence that a product, process or service fulfils specified requirements. There are two main types of assurance of conformity:

• Supplier's declaration is the procedure by which a supplier gives written assurance that a product, process or service conforms to specified requirements;

• Certification is the procedure by which a third party gives written assurance that a product, process or service conforms to specified requirements.

Supplier's declaration

This is the process whereby conformity assessment to a standard, specification or regulation is carried out by the supplier organisation itself. In other words, it is a self-assessment.

By making a self-declaration of conformity, a supplier organisation avoids the costs of third-party assessment. A supplier may decide to take this option if it believes that it enjoys a sufficiently high market reputation for it to dispense with independent confirmation of conformity. However, supplier's declarations may not be appropriate in all cases, particularly where the health, safety or environmental risks of the product concerned are higher. A self-declaration does not exempt the supplier from its responsibility to meet relevant regulations – for example, in relation to product liability – and such declarations generally need to be accompanied by effective post-market surveillance.

Certification/registration

The most well known examples are management system certification and product certification. Other types of certification would include personnel certification, certification of services, certification of forests, and others.

Management system certification

The most well known examples are the certification of quality management systems and environmental management systems as conforming, respectively, to ISO 9000 and ISO 14000 standards. More than 360000 organisations worldwide have been certified to an ISO 9000 and/or ISO 14000 standard. It should be noted that ISO itself does not assess the conformity of quality or environmental management systems to ISO 9000 or ISO 14000 standards. ISO does not issue certificates of conformity to these standards. ISO 9000 and ISO 14000 certification is carried out independently of ISO by more than 720 "certification" or "registration" bodies active nationally or internationally.

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The terms "certification" and "registration" are employed in a broader conformity assessment context than ISO 9000 and ISO 14000 alone and their standardised definitions show that they are not synonymous. However, in the ISO 9000 and ISO 14000 context, "certification" and "registration" are used interchangeably and they both mean the same thing. One term is preferred over the other depending on the country. Likewise, the bodies that issue ISO 9000 or ISO 14000 certificates are referred to in some countries as "certification bodies" and in others as "registration bodies" or "registrars".

Product certification

Many variants exist. For example, product certification may consist of initial testing of a product combined with the assessment of its supplier's quality management system. This may be followed up by surveillance that takes into account the supplier's quality management system plus testing of samples from the factory and/or the open market. Other product certification schemes comprise initial testing and surveillance testing, while still others rely on the testing of a sample product – known as type testing.

Accreditation

Accreditation is the procedure by which an authoritative body gives formal recognition that a body or person is competent to carry out specific tasks. In the ISO 9000 or ISO 14000 context, it relates to the work of the accreditation bodies that have been set up in a number of countries to evaluate the competence of certification bodies. An accreditation body will accredit – approve – a conformity assessment body as competent to carry out ISO 9000 or ISO 14000 certification in specific business sectors. Accreditation is also carried out of testing laboratories, inspection bodies and product certification bodies. In some countries, accreditation is a legal requirement for conformity assessment bodies. Even in countries where this is not the case, when there are several conformity assessment bodies in a geographical area or business sector, some may want to distinguish themselves from their competitors by having an impartial evaluation of their competence by an accreditation body based on internationally recognised criteria.

The role of certification

Certification is an asset and an advantage, both for the producer and for the purchaser, consumer or distributor. It gives an incontestable added value to the product or service bearing its mark. For the manufacturer or service provider, it valorises the goods or service, it opens up markets and simplifies relations. For the user, it provides assurance that the product purchased meets defined characteristics or that an organisation's process meets specified requirements. Certain product certification marks may represent an assurance of safety and quality. Certification enables one to distinguish apparently identical products or services; it offers to everyone a possibility of appeal in the event of dissatisfaction.

Mutual Recognition Agreements (MRA's)

The primary objective of conformity assessment is to give its users confidence that requirements applicable to products, services, systems, processes and materials have been met. One of the reasons why internationally traded goods and services are subject to repeated conformity assessment controls is a lack of confidence by users of conformity assessment in one country regarding the competence of bodies carrying out conformity assessment activities in other countries. Therefore, measures are needed to increase the confidence of both private and public sector purchasers, and of regulators, in the work of conformity assessment bodies and accreditation bodies – particularly those in other countries. Such confidence can be achieved through cross-border cooperation among conformity assessment bodies and also among accreditation bodies. This cooperation is formalised in what are known as mutual recognition agreements (MRA's) whereby the parties involved agree to recognise the results of each other's testing, inspection, certification or

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accreditation. MRA's can be an important step towards reducing the multiple conformity assessment that products, services, systems, processes and materials may need to undergo, especially when they are traded across borders. Since MRA's facilitate the acceptance of goods and services everywhere on the basis of a single assessment in one country, they contribute to the efficiency of the international trading system to the benefit of suppliers and customers alike.

QSAE's role in conformity assessment

QSAE provides the following conformity assessment services to clients: • regulation enforcement through mandatory inspection and licensing of

products; • batch product inspection based on agreements made between QSAE and

clients; • product certification and system certification; • testing of materials and products.

Metrology

What is metrology?

Metrology is the field of knowledge concerned with measurement, and includes all aspects both theoretical and practical with reference to measurements, whatever their level of accuracy, and in whatever fields of science or technology they occur.

Duties of the National Metrology Laboratories, National Measurement Technology Assisting Society and Industry, System International, and Calibration Services.

A growing need for reliable measurement

Measurements play a key role in modern life - in industry as well as in trade and in society in general, in assuring quality and safety in assigning costs. In addition, there is a growing need in science and technology for increasingly accurate and more complex measurements. In Ethiopia, the Government has authorised QSAE as the custodian of the national standards for the base (length, mass, temperature, etc) and some derived measurement quantities of the SI system. The QSAE's responsibility as a National Metrology Laboratory is to meet the needs of industry and society for traceable measurements and to provide close access to measurement technology competence.

Duties of the national metrology laboratories

The duties of the National Metrology Laboratories involve maintaining and upgrading the national measurement standards and ensuring their international traceability, and provide calibration service to national customers.

National measurement technology assisting society a nd industry

With the national standards as our starting point, it is our task to ensure that measurement expertise and traceability find their way out to Ethiopian industry and society in general. In practice, this means that we calibrate measuring instruments, arrange technical training and assist industry in solving measurement problems. For these tasks, we possess advanced measuring equipment and measurement environments, together with skilled and experienced personnel.

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Sl (System International)

SI is a coherent system of units defined through international consensus. Whenever possible, the definitions are based on established laws of nature, and the units can be realised and maintained through primary standards constructed according to well-defined procedure.

Calibration service

As mentioned earlier, one of the pillars of a standardisation infrastructure is the metrological system in place at a national level. In this regard, QSAE has set as one of its core objectives the establishment of a sound metrological system nationally, and as a consequence spearheads this effort by providing traceable calibration service and assuming the custodianship of the national primary measurement standards.

This service to industry and others is in the following areas.

• dimensional measurement; • mass measurement and volume measurement; • density measurement and pressure measurement; • force measurement; • temperature measurement; • electrical measurement; • frequency measurement.

International Involvement in metrology

The International Organisation of Legal Metrology (OIML) promotes the global harmonisation of legal metrology procedures. The OIML has developed a worldwide technical structure that provides its members with metrological guidelines for the elaboration of national and regional requirements concerning the manufacture and use of measuring instruments for legal metrology applications. Ethiopia is a full member of OIML.

The Southern African Development Community Cooperation in Measurement Traceability (SADCMET) coordinates metrology activities and services in the Southern African Region, in order to provide regional calibration and testing services, including regulatory bodies, with readily available traceability to the SI units of measurement, through legally defined and regionally and internationally recognised national measurement standards.

Testing

Products/materials testing is perhaps the most common form of conformity assessment and, generally, it can include other activities like measurement and calibration. Testing also provides the basis for other forms of conformity assessment – for example, it is the main technique used in product certification. QSAE operates well-equipped and modern testing laboratories capable of carrying out vast number of tests (presently about 580) in the following fields of testing:

• mechanical testing (including construction materials, textiles, leather, and polymeric materials);

• electrical testing; • chemical testing and microbiological testing.

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Training and education

Training and education form an essential component of the national standardisation effort by helping to ensure effective implementation of Ethiopian Standards by industry, government and other user groups. To achieve this and attain its broader objectives, QSAE offers awareness and professional-level training in quality management, standardisation, metrology and testing areas for industry personnel as well as educating the public of the principles and benefits of standardisation. Regular sensitisation radio programs are conducted by QSAE in conjunction with the Ethiopian Radio. The general public (consumer) at large is the target audience of these programs. The following materials broadcasted in the said programs are available for download (Amharic language versions only) on www.qsae.org :

• Program Material on Basic Concepts of Quality and Standards; • Program Material on Basic Concepts of Metrology; • Program Material on Basic Concepts of Laboratory Testing.

Technical information

ICT & Standards Information Information and Communication Technology (ICT) is not just a fashionable trend soon to be forgotten. The importance, development and application of this technology are increasingly reflected in day-to-day reality and in the management of activities in daily life, in and out of the office. The revolution that has taken place and still is taking place in the field of telecommunications and information technology can be seen in the way people live, work, write, ask for and get information, or even think: business, education, health, social and cultural activities are some of the fields most affected by the introduction and use of these new tools called computers, e-mail and the Internet.

Available information Each national standards body manages its own collection of standards and has access to the collections of other institutes. It places this collection at the disposal of the economic players and proposes a range of services. These may include:

• free information tools or services for identifying standards or for announcing new standards: catalogues, newsletters, Web;

• chargeable services for access to the normative texts in different forms: subscription, hardcopy form, CD-ROM;

• notification or subscription services for regular information; • technical assistance, including to exporters.

The range of information services provided by QSAE covers most of the above-mentioned functions. For more information, go to www.qsae.org.

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Related Websites

On the following webpage please find links to other institutions involved in standards and quality: www.qsae.org/web_en/links/en_links.html

ARSO African Regional Organisation for Standardisation CI Consumers International COMESA Common Market for Eastern and Southern Africa EcoSA The Ethiopian Computer Standards Association EMC Engineering Manufactures Catalogues ESTC Ethiopian Science and Technology Commission Eur-Lex European Union Law IAF International Accreditation Forum, Inc. IFAN International Federation of Standards Users ILAC International Laboratory Accreditation Cooperation ISO ISO 9000 and ISO 14000 ITC International Trade Centre NAPT National Association for Proficiency Testing NML-CSIR National Metrology Laboratory of South Africa OIML International Organisation of Legal Metrology SADCMET Southern Africa Development Community Cooperation

in Measurement Traceability WCN World Chambers Network WTO World Trade Organisation

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4.4 Participation on tenders

Contents of a bid notice

Bid notice contains various issues on the following main topics:

• authority in charge of tender (name and address);

• scope of tender, short description of tender subject (product or service type, specification, quality and standard level);

• bases for delivery (where to deliver, how to deliver);

• bid documentation compulsory contents (form of bid bond, bank guarantee, evidence as to the conditions’ fulfilment);

• conditions to be fulfilled by the bidder in order to be inserted into the potential suppliers or service providers list (registration with the concerned authority, all taxes or other enforced government taxation levied in accordance with legal requirements of the country, no measures implemented against the bidder);

• date and hour of cut-off to submit the bid (the bid’s arrival at the latest time, address to submit the bid);

• department and person responsible from whom to get tender documentation (time extent, day and time to get it, observance of the charge payment);

• amount and manner of payment for tender documentation (bidder’s fee within the locality, bidder’s fee outside the locality);

• dealing and marking of bidding documents;

• bid opening date and manner of opening;

• restrictions on the side of the tender authority;

• criteria for bid evaluation (monetary investment, professional references, character and extension of participation).

Bid announcements from a marketing perspective

From a marketing point of view, tendering is an efficient method to minimize the purchasing price and to create higher competition. Preparing tender documents for competitive government bids as well as every day non-competitive, non-government pitches take time. Some may be frustrated by the time it takes to prepare a tender document.

Bidding is never a simple or a straightforward task. The technique of the tender process has to be a vehicle to buy at a good price and with a high quality product or service in a fixed period of time. The formula for conducting successful tendering requires planning. When preparing a tender announcement document, the following issues have to be considered from the market point of view:

• the type of product/service required; • the quantity needed; time schedule; • the stock level and the purpose of buying; • the situation of potential suppliers and the state of competition.

Product procurement or consultant services procurem ent

The first step in the tender procedure is the identification of the need to procure. These are referred to as technical specifications. When it comes to descriptions of consultant services, those are usually referred to as “Terms of Reference”.

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Technical specifications for vehicles and equipment are normally performance-oriented and should refer specifically to the required:

• functional attributes; • outputs and end uses of the goods/services. • service aspects.

Procurement of consultant services requires the preparation of terms of reference, explaining mainly the following:

• objectives • scope of work • methodology • out puts

Qualification of suppliers At the preparatory stage of procurement, public bodies need define, not only their needs in terms of technical specifications, but also the minimum qualifications that suppliers must have in order to be eligible for government contracts.

Formal qualification; registration In order to participate in public procurement proceedings, suppliers must demonstrate that they;

• have legal capacity to enter into a procurement contract, normally through a trade license; and

• that they have fulfilled their obligations to pay taxes normally through a tax clearance certificate.

In order to demonstrate their formal qualifications, suppliers must file with the Ministry of Finance, Government Procurement Unit, an application for registered supplier status in the form to be supplied by the Unit.

The Ministry of Finance will, if necessary consult other appropriate authorities, and will, upon being satisfied that the application is complete, issue a registration certificate within 5 days.

Substantive qualifications Suppliers must also demonstrate that they possess the necessary substantive qualifications to perform the contract for which they compete in the particular case, meaning that they possess the necessary:

• professional and technical competence and experience, • financial resources, • equipment and other physical facilities, • managerial capability and personnel.

Public bodies may require suppliers to provide appropriate documentary evidence or other information, as it may deem useful to satisfy itself that the suppliers are substantively qualified. Any substantive qualification requirement must be set forth in the bidding documents.

The public body shall evaluate the substantive qualifications of suppliers in accordance with the criteria and procedures set forth in the bidding documents. This evaluation is distinct from, and carried out separately from, the evaluation of the tenders submitted.

Tenders from suppliers who fail to demonstrate the required formal and substantive qualifications must be rejected.

In prequalification proceedings , the public body will invite interested suppliers to demonstrate their qualifications. The invitation to prequalify shall contain, as a minimum:

• a summary of the contract for which prequalification is deemed necessary; • instructions for preparing and submitting prequalification applications;

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• any documentary evidence or other information which must be submitted by applicants;

• the qualification criteria.

Duration and location The public body shall ensure that invitations to bid are publicised for sufficient duration and location (at least two times in one consecutive week). The publicity should clearly state how, where and when the bidding documents are obtained. This may include:-

• the procuring agency; • the tender number (if any); • the items or services to be procured; • the price of the bidding documents; • the amount of the bid security; • the place, final date and time of submission of bids; • the date of opening the bid; • the procuring agency’s address and other details. • Sale of bidding documents

Payment for bidding documents Bidding documents may be sold to any interested bidder upon the submission of a written application and a non-refundable fee.

Time allowed for preparation of bids Bidders shall be afforded at least 20 days from the date of publication of the first notice for preparation of tenders in the case of domestic purchases; when foreign bidders are expected to respond to the invitation, the preparation period shall be at least 45 days.

Bid documents For all tenders public bodies must prepare bid documents that include:

• an invitation to tender; • instructions to bidders; • specifications; • bid proposal including the price schedule; • terms and conditions of contract.

Invitation to tender Public bodies shall ensure invitations to bid are publicised for sufficient duration and location-invitations should be publicised at least 2 times in 1 consecutive wee in The Ethiopian Herald and/or Addis Zeman or other public media.

Instructions to bidders Instructions to bidders will vary between different types of procurement contract. However, every instruction should include:

• the methodology of evaluating all bids and the criteria for that evaluation; • an indication that the bidders should include in their offer the type of item and the

name of the producer, country of origin, model number and year of manufacture; • the requirement that bidders have a Certificate of Registration in the suppliers

list; • the requirement bidders shall put their name, signatures and addresses in offers • an indication that the bidders shall not alter or amend and that they shall not

withdraw their tender after the opening ceremony; • an indication that bidders who attempt to influence the tender shall be

disqualified from that contract, future Government contracts and shall forfeit its bid security;

• the place and the time where any samples will be openly shown to bidders and an indication that the samples shall be returned to unsuccessful bidders;

• the time and place of delivery; • the validity date of the tender;

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• an indication of bid and performance securities required; • the date and time of the closing deadline for bids and the opening of those bids; • the requirement that bidders shall undertake to observe the country's laws

against fraud and corruption (including bribery) as listed in the bidding documents during the procurement process.

Specifications An essential step in procurement is to draw up a clear statement of the user's requirements. This is especially important for the procurement of high cost or complex goods or services. Also referred to as the functional specification, the user requirement should specify the desired functional attributes, outputs and end uses of the goods or services that are to be procured, including those attributes relating to required technical capabilities, operating characteristics and performance standards.

Bid proposals and price schedules Public bodies shall include it in the bid documents, where relevant, detailed technical proposals and a price schedule for completion by the bidders.

Terms and conditions of contracts Draft terms and conditions of contract shall be issued to the bidders as part of the tender documents. A pro-forma contract that public bodies should use as a template is included in the procurement manual, main clauses must include:

• Liquidated damages: it is recommended that public bodies include in their invitations to tender a statement that for each day of delay for the main good or service and its accessories beyond the delivery date stated in the bid document, the supplier will be due to pay 1/10th of 1 percent liquidated damages to the public body of the CIF value of the undelivered item to a maximum of 10% of the contract price). If the supplier fails to do so then the public body shall have the right to terminate the contract;

• Price: there are 2 price aspects that public bodies should state in the bid document:

o the supplier will indicate unit and total price. In case of error the unit price shall be accepted and used as the base for recalculation of the bid price;

o for price analysis the conversion of any currency to a common currency, the official rate of exchange on the day of opening the tender shall be applied.

• Delivery time: the bidder shall state the definite date of delivery or delivery period. The delivery period shall commence on the opening of the letter of credit for international purchases, and the date of signing of the contract for local purchases.

• Inspection and acceptance: final inspection of the good or service shall be made in the presence of a representative of the supplier at the agreed destination. All assembly and demonstration costs shall be borne by the supplier.

• Warranty: the supplier shall guarantee that all items included in the good or service shall be new, of high quality and workmanship. Suppliers shall give warranty in writing as part of their bid.

Settlement of dispute/arbitration : the conditions of contract should include provisions dealing with the applicable law and the forum for the resolution of any disputes relating to the contract.

• Force major: neither the buyer nor the supplier shall be responsible to perform the contract in case of failure due to force major such as earthquake, flood, epidemic disease, war or other natural calamities and industrial disruption.

• Terms of payment: the bid document shall also include reference to payment terms.

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Modifications to tender documents Any alteration to the content of tender documents shall be effected only through the public media by which the original invitation to tender was made. The time for closing and opening the bids may be extended where modifications in the tender documents are to be announced in the invitation to tender.

Bid opening Bids shall be opened in public at the time and place stated in the invitation to tender. Bids shall be opened on the same day as the closing date. Public bodies shall invite bidders to attend. Bids shall be opened in the presence of:

• the bidders or an authorised representative of the bidder whether or not the bidder has chosen to be present;

• members of the tender committee, and internal audit if possible.

The chairman of the tender committee shall open each tender and read out the name of the tenderer, the price of bid for the contract and any salient points. The Secretary of the tender committee shall take minutes of the tender opening procedures. These minutes will include a record of the bidders, price and any other salient points. This record and the original tenders will be signed by the tender committee members present.

Public bodies may disqualify any bidder that commits any of the following offences: • fails to observe any provisions in the financial regulations and directives or any

conditions stipulated in the tender documents; • fails to fulfil any obligations he has undertaken in previous Government tenders; • fails to deposit the required bid bond or performance bond; • offers or gives gratuities to any official or employee with a view to securing

favourable treatment or to win the tender, if proven beyond all reasonable doubt; • commits any fraudulent act in respect of the tender, if proven beyond all

reasonable doubt.

Obtaining a letter of credit A letter of credit is a document issued from one bank to another that promises to pay a supplier on receipt of a written document on behalf of the supplier. The letter of credit will be based on the agreement between public bodies and suppliers. The issuing bank will inform the correspondent bank by opening of the letter of credit in the name of the supplier to pay the supplier on receipt of shipping documents. Consequently, the correspondent bank will make the payment effective immediately after receiving the shipping documents from the supplier.

There are 2 types of letters of credit: • revocable, where the issuing bank has the right to cancel or amend the payment

after the opening of the letter of credit. This is possible only where the issuing bank informs the correspondent bank before it has paid the contract price to the supplier. As this type of letter of credit does not bind the purchaser to fulfil its contractual obligation, it is not practical for use by public bodies; and

• irrevocable, where the letter of credit cannot be altered after it has been opened. Furthermore, there are 2 types of irrevocable letters of credit :

o unconfirmed, where the issuing bank is bound by law to pay the supplier in question, whereas the advising or correspondent bank is not bound by Law to pay the supplier. If the correspondent bank does not pay the contract price to the supplier, the supplier can only sue the issuing bank for the unpaid amount;

o confirmed, where both parties (issuing and advising bank) are obliged to respect all conditions stated on the letter of credit and make the disbursement effective. In such a case, the advising bank is known as the confirming bank. The issuing bank informs the confirming bank about the

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opening of the confirmed and irrevocable letter of credit and hence to give the supplier a payment guarantee.

• Once the letter of credit is opened, if the confirming bank fails to pay the contract price to the supplier, the supplier has the right to sue both banks.

The letter of credit should be opened by the purchaser within one working week after the foreign exchange permit for imports has been received.

Transportation and shipping

Goods can be transported by sea, air, in land or rail based on the contract agreement that is signed by both parties. The responsibility for arranging the insurance depends upon the contract:

• if the contract entails the delivery of the goods on a free on board (FOB) basis, the purchaser is responsible to cover all costs associated with the transportation and insurance;

• if the contract entails the delivery of the goods on a cost and freight (C&F) basis, the supplier is responsible to cover all costs associated with the transportation up to the port of the purchaser, whereas the purchaser is responsible to insure the goods;

• if the contract entails the delivery of the goods on cost, freight and insurance (CIF) basis, all costs associated with the transportation and insurance of the goods will be covered by the supplier.

Insurance Where the purchaser has the responsibility for the insurance it should insure using the Ethiopian Insurance Corporation (EIC). Public bodies will require following documents when they want to make a claim for short-shipment or damaged goods:-

• take the original forms - insurance policy, bill of lading/airway bill and the chamberised invoice as evidence;

• also use the exchange of letters with the relevant Port Authority, Captain of the ship in connection with the damage or short-shipment of the goods;

• the short landing certificate of the Maritime and Transit Services Enterprise; • the insurance survey report; and • a report on the delivery and receipt of the goods.

Customs clearance After the international and internal transportation of goods, public bodies will have to clear the goods through the customs authority. Public bodies should use the facilities of a clearing agent to do this.

There are number of documents that public bodies will have to give to customs in order to clear the goods being imported:-

• the original bill of lading or airway bill; • the original invoice; • the bank import permit; • the insurance policy; • the bank debit advice.

Public bodies should submit all of the above documents to customs with a completed "Declaration ". This form can be bought by public bodies from customs. The information that public bodies should insert onto the declaration are as follows:-

• the names of the supplier and the buyer; • the method of shipping; • the port of lading; • the license number; • the tax payer number;

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• the year of production of the goods; • the bill of lading/airway bill number; • the bank permit number; • the production price; • the currency of purchase; • the quantity of goods; • the kind, type and weight of the goods; • the tariff number or homogenised systems code;; • the price of the goods; • the taxable amount; • the rate of tax; • the tax amount due; • other taxes and charges; • gross amount of other taxes and charges; • the name of the transit agent;

Types of Tenders

There are 6 approved methods of procurement:

Except as otherwise provided by articles 14 - 20, public bodies engaging in the procurement of goods and construction shall do so by means of open tendering procedures. Public bodies may use a method of procurement other than tendering proceedings only pursuant to these articles.

1. Open Tendering

Public bodies should prepare the documents and follow the steps required for open tendering provided for in articles 22 - 51. These steps should also be followed when procuring under alternative methods of procurement, except where specifically provided for.

Procedures for Open Tendering

The public body should firstly assess its need or demand for the goods or services to be purchased.

The need or demand for the goods or services to be purchased should be requested and approved by the authorising unit within the public body. It should also reflect the interests of all concerned units in the public body;

After the need assessment is undertaken, the public body should prepare bidding documents. These documents should include the following:

• An invitation to tender; • Instructions to bidders; • Specifications and detailed descriptions of the goods and services to be

purchased; • Draft of basic terms and conditions of contracts; and • Standard forms for tenders, including the quality and price schedules.

2. Two-stage tendering The solicitation documents shall call upon suppliers to submit, in the first stage of the two-stage tendering proceedings, initial tenders containing their proposals without a tender price. The solicitation documents may solicit proposal relating to the technical, quality or other characteristics of the goods, construction or services as well as to contractual terms and conditions of supply, and, where relevant, the professional and technical competence and qualifications of the suppliers.

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The public body may, in the first stage, engage in negotiations with any supplier or contractor whose tender has not been rejected pursuant to articles 12 and 13 concerning any aspect of its tender.

In the second stage of the two-stage tendering proceedings, public bodies shall invite suppliers whose tenders have not been rejected to submit final tenders with prices with respect to a single set of specifications. In formulating those specifications, public bodies may delete or modify any aspect, originally set forth in the solicitation documents, of the technical or quality characteristics of the goods, construction or services to be procured, and any criterion originally set forth in those documents for evaluating and comparing tenders and for ascertaining the successful tender, and may add new characteristics or criteria that conform with this Directive. Any such deletion, modification or addition shall be communicated to suppliers or contractors in the invitation to submit final tenders. A supplier not wishing to submit a final tender may withdraw from the tendering proceedings without forfeiting any tender security that the supplier may have been required to provide. The final tenders shall be evaluated and compared in order to ascertain the successful tender as defined in article 45.

3. Restricted tendering When public bodies engage in restricted tendering on the grounds referred to in article 16(a), it shall solicit tenders from all suppliers from whom the goods, construction or services to be procured are available.

When the public body engages in restricted tendering on the grounds referred to in article 16 (b), it shall select suppliers from whom to solicit tenders in a non-discriminatory manner and it shall select a minimum of 3 suppliers from the approved suppliers list.

4. Request for proposals

Requests for proposals shall be addressed to as many suppliers as practicable, but to at least three. These suppliers should be selected from the approved suppliers list.

The public body shall publish in a newspaper of wide international circulation or in a relevant trade publication or technical or professional journal of wide international circulation a notice seeking expressions of interest in submitting a proposal, unless for reasons of economy or efficiency the public body considers it undesirable to publish such a notice; the notice shall not confer any rights on suppliers or contractors, including any right to have a proposal evaluate.

Public bodies shall establish the criteria for evaluating the proposals and determine the relative weight to be accorded to each such criterion and the manner in which they are to be applied in the evaluation of the proposals. The criteria shall concern:

• the relative technical and managerial competence of the supplier or contractor; • the effectiveness of the proposal submitted by the supplier or contractor in

meeting the needs of the public body; • the price submitted by the supplier or contractor for carrying out its proposal and

the cost of operating maintaining and repairing the proposed goods or construction.

5. Request for quotations

Public bodies shall request quotations from as many suppliers as practicable, but from at least three, if possible. These shall be selected from the approved suppliers list. Each supplier from whom a quotation is requested shall be informed whether any elements other than the charges for the goods or services themselves, such as any applicable transportation and insurance charges, customs duties and taxes, are to be included in the price.

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Each supplier is permitted to give only one price quotation and is not permitted to change its quotation. No negotiations shall take place between public bodies and a supplier with respect to a quotation submitted by the suppler.

The procurement contract shall be awarded to the supplier that gave the lowest-price quotation meeting the needs of the public body.

6. Single-source procurement

In the circumstances set forth in article 19, public bodies may procure goods, construction or services by soliciting a proposal or price-quotation from a single supplier.

Citing an example of a domestic bid announcement - example of Ethiopia

In case the source of funding for procuring the supply is from Ethiopia and the invitation is mainly for potential domestic bidders, bids are normally published in government newspapers. Hence, an example of a tender invitation, which was issued in the Ethiopian Herald, is demonstrated below. If the looms requested in the example below would be at a smaller scale so micro and small enterprises (MSEs) would be potential suppliers, it would be important to note the announcement carefully.

Example Tender Invitation No. KTSC-05/2003

Kombolcha Textile S.C. would like to invite eligible suppliers for the supply of 4 pcs. of weaving looms on tender basis.

The objective of purchasing 4 pcs. of looms is a pilot project to change the existing old versamat looms by better low cost weaving looms to produce both local and export products.

Bidders can obtain bid documents against non-refundable payment Birr 30 from the office of the Commercial Department of the Company, located near the Ministry of Defence, or from the head office of the Company (Kombolcha-Wollo). Bidders should submit their offer and technical specification sealed and separately within 30 days of the first announcement of this tender to the address of the company as indicated in the bid documents along with 1% bid bond in cash, C.P.O. or bank guarantee (insurance guarantee will not be considered).

The bid will be opened at the 5th day of the closing date of the bid at 7:0am in the presence of the bidders at Kombolcha, Wollo. The company has the right to reject partially or the whole of the tender.

Tel. 251-1-51-3797/511805, 251-3-510215/510103 Fax 251-1-511771, 251-3-510266

Kombolcha Textile Share Company

Source: The Ethiopian Herald, Wednesday 31 December 2003

Characteristic of an international bid

The nature of international bidding varies from domestic bidding. International bids require that a notice be placed in well-known magazines or daily newspapers and trade publications of wider international circulation. The time allowed for bidding on an international level is therefore much longer than that for domestic bidding.

An example of an invitation to bid where the fund was partially or totally from the African Development Bank will be cited below:

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Example Invitation to Bid

Date 31 December 2003 Loan No. ADF/ETH/EDU-3/98/40 I IFB No. ADF/NCB/BEN/01/2003

1. The Federal Democratic Republic of Ethiopia has received a loan from the African Development Fund in various currencies towards the cost of Education III project. It is intended that part of the proceeds of this loan will be applied to eligible payments under the loan agreement for the construction of two new primary schools in Metekel Zone for Eyaja and Albasa Village Primary Schools. Bidding is open to all bidders from eligible member countries as defined in the ADB's rules of procedures for the procurement of goods and works.

2. The Benishangul Gumuz Regional State Education Bureau now invites bids from eligible bidders for any or all of the lots described below. Bidders shall be in the category of GC/BC 7 and above, and who have renewed their license for the years 2003/2004.

3. Complete set of bidding document may be purchased at the Regional Works and Urban Development Bureau Engineering Department, P.O. Box 53. Tel. 07 - 75 03 98 / 75 03 95 upon submission of written request and non-refundable fee of Birr 150 or its equivalence in a freely convertible currency, for each lot. Interested eligible bidders may obtain further information and inspect the bidding documentation at the same address.

4. The provisions in the instructions to bidders and in the general condition of the contract are the provisions of the African Development Bank standard bidding documents: Procurements of small works.

5. Bids shall be valid for a period of 120 days opening and must be accompanied by a bid security, in the form of C.P.O. of at least 2% of the bid amount or its equivalent in a freely convertible currency, from a reputable bank and shall be delivered to the above office on or before Friday, Feb.13, 2004, 10:00am local time. They will be opened in the presence of the bidders or their respective representatives who wish to attend at Monday, Feb. 16, 2004, 4:00pm local time at the same address above.

6. The employer reserves the right to reject any or all bids.

Benishangul Gumuz Works and Urban Development Bureau P.O. Box 53, Assosa I Tel. 07-75 03 98, Assosa

Source: The Ethiopian Herald, Wednesday 31 December 2003

Rejection of Bids and Bid Extensions

There can be various reasons for bid invitations to be cancelled or rejected after the announcement. Bid-inviting organizations put the statement that they have the right to reject part or all bids. Even after responses are delivered, rejections of some documents presented by suppliers are inevitable. Not all bidders can be winners.

Tender participants need to handle any potential buying objections in advance and try to turn those disapprovals and complaints into buying triggers. Some of the main reasons for rejecting are the following:

• the bid did not meet the circumstances mentioned in the tender; • the license was not renewed or not valid any more; • the tax clearance certificate was not presented; • the renewal registration certificate on the specific products/services invited for

bidding was not presented;

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• the technical data required were altered; • the budget allotted for the purchase was not compatible with the offer; • the document was not signed and sealed; • the bid received enclosed critical irregularities.

If the bid is rejected, the bidders are not allowed to compensation.

For various reasons bid announcements are sometimes extended by the newscasters or announcers. The extensions are in relation to submission dead lines, and opening dates. In the issue of time addition some bidders are seen to complain but it is appropriate and can be done for various reasons. One example of bid extension will be shown below.

Example

Bid extension

As time extension for the bid submission date for furniture and fitting is required, the submission date, which was scheduled to be January 08, 2004 announced in The Ethiopian Herald Vol. LX-No. 076 on 9th December, 2003 and Vol. LX-No. 078 on 11th December 2003, is extended to January 15, 2004 on or before 9:00am local time. All other instructions and conditions remain enforcing.

Commercial Bank of Ethiopia

Source: Ethiopian Herald, January 4, 2004

Micro and small enterprises' (MSEs) role in tender issues/subjects

When micro and small enterprises (MSEs) are issuing tenders to buy raw materials, unique products, or expensive services, it is important to follow the bid procedure as well as all legal procedures. If MSEs are looking for suppliers of unique and upscale or high standard products, their buying announcements need to be strategic and be based on an intense bid program.

Like in any other business, participating in a tender requires planning. If invitations to tender do not contain all relevant information that enable the potential bidders to make a competitive offer at the first time, they may need to repeat the bidding exercise taking more time and cost resources.

In contrast, if micro and small enterprises are ready to participate as suppliers or service providers in a tender, they need to take the opportunity to clearly reply to the potential buyers’ requirements and supply professional bidding documents.

In the event where competition is severe bidders need to be tactical in their presentation and responses. In general, they need to quote prices so as to convince prospective buyers that they will receive a good return on their investment.

A winning bidding document (bid responding)

If a tender participant wants to succeed in a tender, following the below listed tips could help:

• plan for a serious participation and not for a half-hearted partaking;

• understanding the priorities of buyers is an important factor to consider before writing the proposal;

• study the demand level of the item/service required to be procured;

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• the structure and words of the document to be presented has to be sellable and persuasive to prospective buyers;

• set pricing strategies that will impress potential clients for getting exceptional value for the money they pay;

• the delivery time of services is an important aspect; express it in a very appealing manner;

• find out about prospective buyers’ vital requirements;

• learn competitors’ way of participation (if beneficial) and make use of it;

• in the event where technical involvement is required during and after supplying, impress your prospective buyers by highly-skilled professionals;

• clearly emphasize your strengths;

• safely underplay any inadequacies of your business;

• look into how to outline your document and make it persuasive, readable and comprehensive in order to establish a good thought and feeling;

• make your outline as persuasive as possible in order that the offer is perceived feasible and valuable by the decision makers;

• plan in advance how to adjust your offer according to the request and requirements of the tender provider if asked at any time;

• find out what your competitors are doing and use the information and records to stand out against them;

• find out about the prospective buyers’ techniques for comparing different offers;

• in the event you have to justify your outline and demonstrate your products, set strategies on how to present yourself.

Bid formats

There are various bid forms that are important in a tender procedure. Some of the main forms are the following:

• Invitation to tender: Invitations to bid are published for a minimum duration. They should be published at least twice in one consecutive week in The Ethiopian Herald and/or Addis Zeman or other public media.

• Instruction to bidders: every instruction should include: o the methodology of evaluating the bids including the evaluation criteria; o an indication of what the bidders should include in their offer: type of item,

name of the producer, country of origin, model number and year of manufacture;

o the information that a Certificate of Registration in the supplier’s list is required;

o the information that bidders must indicate their name, signatures and addresses;

o an indication that the bidders shall not alter or amend and that they shall not withdraw their tender after the opening ceremony;

o an indication that bidders, who attempt to influence the tender shall be disqualified from that contract, future Government contracts and shall forfeit its bid security;

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o the place and the time where bidding documents will be presented to the public and an indication that the samples shall be returned to unsuccessful bidders;

o the time and place of delivery of proposals; o the validity date of the tender; o an indication of bid and performance securities required; o the date and time of the closing deadline for bids and the opening of the

bids; o the indication that bidders must observe the country's laws against fraud

and corruption (including bribery) during the procurement process.

• Contract forms: With this form the purchaser and the supplier agree on specific conditions. The points for agreement include for example the product type and technical specification, price tables, general circumstances for pertaining the agreement, delivery schedules or governing law.

• Bid form: The points that are included in such form are total price, guarantee of money for x % of the contract value for the due performance of the contract, agreement on not accepting any other bid after the signing of this contract.

• Price schedule: This form takes care of issues concerning the description of the item, its quantity, country of origin, unit price, and total price.

• Performance security form: This document is usually used as a guarantee by institutions like banks and insurance companies on behalf of the supplier. It fixes payments in case of default by the suppliers or service providers.

• Bid security form: This form is used to guarantee payment in order to enable a bidder to participate in a tender invitation. It refers to situations where the bidder fails to comply with the tender requirements except in the case of force majeure. It specifies clearly the guarantee validity date.

• Manufacturer's authorization form: This document is meant to contain issues like authorization of manufacturers to their agents and warranting for the supply of goods. This manufacturer’s form is mostly required to be stated on the letterhead of the manufacturers and be signed and sealed by them.

Payment for bidding documents Bidding documents may be sold to any interested bidder upon the submission of a written application and a non-refundable fee.

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4.5 International Trade Promotion Export procedures

Export business demands entrepreneurial know-how, effective communication and good understanding of the international trade process. The involvement of companies in export business is increasing with the presence of the various trade incentives and privileges both from within and the rest of the world’s trading partners. To maximise the benefits, companies should be able to properly position themselves in the global market, which is highly characterised by stiff competition as well as end-less innovations. Your company's readiness to export will be determined when the under mentioned general questions about how exporting will enhance your company's short, medium and long-term goals is answered.

• What does the company want to gain from exporting? • Is exporting consistent with other company goals? • What demands will export place on the company's key resources, management and

personnel, production capacity, and finance and how will these demands be met? • Are the expected benefits worth the costs, or would company resources be better

used for developing new domestic business?

Once you have decided to sell your products abroad, it is time to develop an export plan. The purposes of the export plan are (a) to assemble facts, constraints, and goals and (b) to create an action statement that takes all of these into account. The statement includes specific objectives, it sets forth time schedules for implementation, and it marks milestones so that the degree of success can be measured and help motivate personnel.

Sample outline for an export plan Table of contents

• Executive summary (one or two pages, maximum)

Introduction: Why this company should export

Part I - Export policy commitment statement

Part II - Situation/background analysis • Product or Service I operations • Personnel and export organization I resources of the firm • Industry structure, competition and demand

Part III - Marketing component • Identifying, evaluating, and selecting target markets • Product selection and pricing I distribution methods • Terms and conditions I Internal organization and procedures • Sales Goals: Profit and loss forecasts

Part IV - Tactics: Action steps • Primary target countries I secondary target countries I indirect marketing efforts

Part V - Export budget • Pro forma financial statements

Part VI - Implementation schedule • Follow-up I periodic operational and management review (results versus plan)

Annexes: Background data on target countries and ma rket • Basic market statistics: Historical and projected I background facts I competitive environment

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Analyze foreign market potentials and foreign compe titors Market research To successfully export your product, you should examine foreign markets through research. The purpose is to identify marketing opportunities and constraints abroad, as well as to identify prospective buyers and customers.

Market research encompasses all methods that a company can use to determine which foreign markets have the best potential for its products. Results of this research inform the firm about: the largest markets for its product, the fastest growing markets, market trends and outlook, market conditions and practices, and competitive firms and products.

A firm may research a market by using either primary or secondary data resources. In conducting primary market research, a company can collect data directly from the foreign marketplace through interviews, surveys, and other direct contacts with representatives and potential buyers. Primary market research has the advantage of being tailored to the company's needs and provides answers to specific questions, but the collection of such data is time-consuming and expensive.

When conducting secondary market research, a company collects data from various sources, such as trade statistics for a country or a product. Working with secondary sources is less expensive and helps the company focus its marketing efforts. Although secondary data sources are critical to market research, they do have limitations because it is less specific. Getting organized for export market – Issues to con sider Internal company assessment

• Adequate and qualified staff to handle export related communications and monitor the process;

• Sufficient production capacity; • Adequate working capital to make quick purchase of raw material, accessories and

investment capital, if need be; • Good marketing strategy with sufficient amount of marketing budget; • Cost effectiveness in production and competitive labour productivity to overcome

international price competition; • Acceptable level of product quality by international market.

Foreign market analysis

• Desk research: mainly through browsing company websites and contacting promotional institutions/programs;

• Field research; • Analysis of trade intermediaries, i.e. that of direct and indirect distributors; • General marketing factors: consumer tastes and preferences, trends in competition,

quotation and payment terms, standards used – weights and measures; • Leading import houses; • Main shipping and air links; • Relevant government ministries and department; • Pricing structures for products; • Trade fairs; • List of potential distributors and agents; • General import policy of the destination country.

Transport and communications • Main ports and facilities; • Shipping services and costs;

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• Freight services; • Inland transport routes; • Condition of roads. Special customs provisions • Entry regulations and procedures; • Samples, advertising and postal packages; • Duty rates, if any. Social and fair trade compliances • Compliance with laws and workplace safety • Prohibition of forced labour • Prohibition of child labour • Prohibition of harassment/abuse • Prohibition of discrimination • Hours of work • Environment • Health and safety • Customs compliance • Security (drugs and explosive shipments)

Other factors • Access to information on foreign exchange controls, repatriation of profits,

convertibility of currency • Access to information on food, health, safety and quarantine regulations

(especially for food and drug items).

Market research

• Obtain export statistics that indicate product exports to various countries.

• Identify five to ten large and fast-growing markets for the firm's product.

• Identify some smaller but fast-emerging markets that may provide ground-floor opportunities. If the market is just beginning to open up, there may be fewer competitors than in established markets. Growth rates should be substantially higher in these countries to qualify as up-and-coming markets, given the lower starting point.

• Target three to five of the most statistically promising markets for further assessment.

• Examine trends for company products as well as related products that could influence demand.

• Ascertain the sources of competition, including the extent of domestic industry production and the major foreign countries the firm is competing against in each targeted market by using competitive assessments.

• Analyze factors affecting marketing and use of the product in each market, such as end-user sectors, channels of distribution, cultural idiosyncrasies, and business practices.

• Identify any foreign barriers (tariff or no tariff) for the product being imported into the country.

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Evaluate the export potential of your products

There are several ways to evaluate the export potential of your products and services in overseas markets. The most common approach is to examine the success of your products domestically. If your company succeeds at selling in the local market, there is a good chance that it will also be successful in markets abroad, at least those where similar needs and conditions exist.

Another means to assess your company's potential in exporting is by examining the unique or important features of your product. If those features are hard to duplicate abroad, then it is likely that you will be successful overseas. A unique product may have little competition and demand for it might be quite high.

Prepare your enterprise for export

• Which products are selected for export development? What modifications, if any, must be made to adapt them for overseas markets?

• Which countries are targeted for sales development?

• In each country, what is the basic customer profile? What marketing and distribution channels should be used to reach customers?

• What special challenges pertain to each market (competition, cultural differences, import controls, etc.), and what strategy will be used to address them?

• How will the product's export sale price be determined?

• What specific operational steps must be taken and when?

• What will be the time frame for implementing each element of the plan?

• What personnel and company resources will be dedicated to exporting?

• What will be the cost in time and money for each element?

• How will results be evaluated and used to modify the plan?

Export strategies

The most common methods of exporting are indirect and direct selling. In indirect selling, an export intermediary such as an export management company (EMC) or an export trading company (ETC) normally assumes responsibility for finding overseas buyers, shipping products, and getting paid. In direct selling, producer deals directly with a foreign buyer. The paramount consideration in determining whether to market indirectly or directly is the level of resources a company is willing to devote to its international marketing effort. Other factors to consider when deciding whether to market indirectly or directly include:

• The size of your firm; • The nature of your products; • Previous export experience and expertise; • Business conditions in the selected overseas markets.

The way your company chooses to export its products can have a significant effect on its export plan and specific marketing strategies. The basic distinction among approaches to exporting relates to the company's level of involvement in the export process. There are at least four approaches, which may be used alone or in combination:

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1. Passively filling orders from domestic buyers who t hen export the product. These sales are indistinguishable from other domestic sales as far as the original seller is concerned. Someone else has decided that the product in question meets foreign demand. That party takes all the risk and handles all of the exporting details, in some cases without even the awareness of the original seller. (Many companies take a stronger interest in exporting when they discover that their product is already being sold over-seas.)

2. Seeking out domestic buyers who represent foreign e nd users or customers. Many U.S. and foreign corporations, general contractors, foreign trading companies, foreign government agencies, foreign distributors and retailers, and others in the United States purchase for export. These buyers are a large market for a wide variety of goods and services. In this case a company may know its product is being exported, but it is still the buyer who assumes the risk and handles the details of exporting.

3. Exporting indirectly through intermediaries. With this approach, a company engages the services of an intermediary firm capable of finding foreign markets and buyers for its products. EMCs, ETCs, international trade consultants, and other intermediaries can give the exporter access to well-established expertise and trade contacts. Yet, the exporter can still retain considerable control over the process and can realize some of the other benefits of exporting, such as learning more about foreign competitors, new technologies, and other market opportunities.

4. Exporting directly. The company sells directly to foreign buyers. This approach is the most ambitious and difficult, since the exporter personally handles every aspect of the exporting process from market research and planning to foreign distribution and collections. Consequently, a significant commitment of management time and attention is required to achieve good results. However, this approach may also be the best way to achieve maximum profits and long-term growth. With appropriate help and guidance from the Department of Commerce, state trade offices, freight forwarders, international banks, and other service groups, even small or medium-sized firms can export directly if they are able to commit enough staff time to the effort. For those who cannot make that commitment, the services of an EMC, ETC, trade consultant, or other qualified intermediary are indispensable.

5.

Distribution channels and intermediaries

• Which channels of distribution should the firm use to market its products abroad?

• Where should the firm produce its products and how should it distribute them in the foreign market?

• What types of representatives, brokers, wholesalers, dealers, distributors, or end-use customers, and so forth should the firm use?

• What are the characteristics and capabilities of the available intermediaries?

• Should the assistance of an EMC or ETC be obtained?

Export intermediaries are of many different types, ranging from giant international companies to highly specialized, small operations. They provide a multitude of services, such as performing market research, appointing overseas distributors or commission representatives, exhibiting a client's products at international trade shows, advertising,

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shipping, and arranging documentation. In short, the intermediary can often take full responsibility for the export end of the business, relieving the manufacturer of all the details except filling orders.

Intermediaries may work simultaneously for a number of exporters on the basis of commissions, salary, or retainer plus commission. Some take title to the goods they handle, buying and selling in their own right. Products of a trading company's clients are often related, although the items usually are non-competitive. One advantage of using an intermediary is that it can immediately make available marketing resources that a smaller firm would need years to develop on its own. Many export intermediaries also finance sales and extend credit, facilitating prompt payment to the exporter.

The foreign distributor generally provides support and service for the product, thus relieving the purchasing company of these responsibilities. The distributor usually carries an inventory of products and a sufficient supply of spare parts and also maintains adequate facilities and personnel for normal servicing operations.

Shipping your products

Packing and shipping When shipping a product overseas, the exporter must be aware of packing, labelling, documentation, and insurance requirements. It is important that exporters ensure that the merchandise is:

• Packed correctly so that it arrives in good condition;

• Labelled correctly to ensure that the goods are handled properly and arrive on time at the right place;

• Documented correctly to meet U.S. and foreign government requirements, as well as proper collection standards; and

• Insured against damage, loss, pilferage and delay.

Most exporters rely on an international freight forwarder to perform these services because of the multitude of considerations involved in physically exporting goods.

Exporters should be aware of the demands that international shipping puts on packaged goods and should jeep four potential problems in mind when designing an export shipping crate: breakage, moisture, pilferage and excess weight.

Be sure the goods are prepared using these guidelines:

• Pack in strong containers, adequately sealed and filled when possible.

• To provide proper bracing in the container, regardless of size, make sure the weight is evenly distributed.

• Goods should be palletized and when possible containerized.

• Packages and packing filler should be made of moisture-resistant material.

• To avoid pilferage, avoid writing contents or brand names on packages. Other safeguards include using straps, seals, and shrink wrapping.

• Observe any product-specific hazardous materials packing requirements.

Normally, air shipments require less heavy packing than ocean shipments, though they should still be adequately protected, especially if they are highly pilfer able. In many instances, standard domestic packing is acceptable, especially if the product is durable and there is no concern for display packaging. Finally, because transportation costs are

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determined by volume and weight, specially reinforced and lightweight packing materials have been developed for exporting. Packing goods to minimize volume and weight while reinforcing them may save money, as well as ensure that the goods are properly packed. It is recommended that a professional firm be hired to pack the products if the supplier is not equipped to do so. This service is usually provided at a moderate cost.

Marking and labelling Specific marking and labelling is used on export shipping cartons and containers to:

• Meet shipping regulations; • Ensure proper handling; • Conceal the identity of the contents; • Help receivers identify shipments; and • Insure compliance with environmental and safety standards.

Price considerations The price considerations listed below will help an exporter determine the best price for the product overseas.

• At what price should the firm sell its product in the foreign market? • What type of market positioning (customer perception) does the company want to

convey from its pricing structure? • Does the export price reflect the product's quality? • Is the price competitive? • Should the firm pursue market penetration or market-skimming pricing objectives

abroad? • What type of discount (trade, cash, quantity) and allowances (advertising, trade-off)

should the firm offer its foreign customers? • Should prices differ by market segment? • What should the firm do about product line pricing? • What pricing options are available if the firm's costs increase or decrease? Is the

demand in the foreign market elastic or inelastic? • Are the prices going to be viewed by the foreign government as reasonable or

exploitative? • Do the foreign country's antidumping laws pose a problem?

As in the domestic market, the price at which a product or service is sold directly determines a firm's revenues. It is essential that a firm's market research include an evaluation of all of the variables that may affect the price range for the product or service. If a firm's price is too high, the product or service will not sell. If the price is too low, export activities may not be sufficiently profitable or may actually create a net loss.

The traditional components of determining proper pricing are costs, market demand, and competition. Each of these must be compared with the firm's objective in entering the foreign market. An analysis of each component from an export perspective may result in export prices that are different from domestic prices.

It is also very important that the exporter takes into account additional costs that are typically born by the importer. They include tariffs, customs fees, currency fluctuation transaction costs and value-added taxes (VATs). These additional costs can add substantially to the final price paid by the importer, sometimes resulting in a total of more than double the U.S. domestic price.

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Other costs should be assessed for domestic and export products according to how much benefit each product receives from such expenditures. Additional costs often associated with export sales include:

• Market research and credit checks; • Business travel; • International postage, cable, and telephone rates; • Translation costs; • Commissions, training charges, and other costs involving foreign representatives; • Consultants and freight forwarders; and • Product modification and special packaging.

After the actual cost of the export product has been calculated, the exporter should formulate an approximate consumer price for the foreign market.

Sample cost-plus calculation of product costs (LC) Domestic sale Export sale Factory price 7.50 7.50 Domestic freight .70 .70

subtotal 8.20 8.20 Export documentation .50

subtotal 8.70 Ocean freight and insurance 1.20

subtotal 9.90 Import duty (12 % of landed cost)

1.19

subtotal 11.09 Wholesaler markup (15 %) 1.23

subtotal 9.43 Importer/distributor markup 2.44

subtotal 13.53 Retail markup (50 %) 4.72 6.77 Final consumer price 14.15 20.30

Checklist for pricing

In summary, here are the key points to remember when determining your product's price:

• Determine the objective in the foreign market. • Compute the actual cost of the export product. • Compute the final consumer price. • Evaluate market demand and competition. • Consider modifying the product to reduce the export price. • Include "no market" costs, such as tariffs and customs fees. • Exclude cost elements that provide no benefit to the export function, such as

domestic advertising.

Financing export transactions Export financing is often a key factor in a successful sale. Contract negotiation and closure are important, but at the end of the day, your company must get paid.

Exporters naturally want to get paid as quickly as possible, while importers usually prefer to delay payment until they have received or resold the goods. Because of the intense

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competition for export markets, being able to offer attractive payment terms customary in the trade is often necessary to make a sale. Exporters should be aware of the many financing options open to them so that they choose the most acceptable one to both the buyer and the seller. In many cases, government assistance in export financing for small and medium-sized businesses can increase a firm's options. The following factors are important to consider in making decisions about financing:

• The need for financing to make the sale. In some cases, favourable payment terms make a product more competitive. If the competition offers better terms and has a similar product, a sale can be lost. In other cases, the buyer may have preference for buying from a particular exporter, but might buy your product because of shorter or more secure credit terms.

• The length of time the product is being financed. This determines how long the exporter will have to wait before payment is received and influences the choice of how the transaction is financed.

• The cost of different methods of financing. Interest rates and fees vary. Where an exporter can expect to assume some or all of the financing costs, their effect on price and profit should be well understood before a pro forma invoice is submitted to the buyer.

• The risks associated with financing the transaction. The riskier the transaction, the harder and more costly it will be to finance. The political and economic stability of the buyer's country can also be an issue. To provide financing for either accounts receivable or the production or purchase of the product for sale, the lender may require the most secure methods of payment, a letter of credit (possibly confirmed), or export credit insurance or guarantee.

• The need for pre-shipment finance and for post-shipment working capital. Production for an unusually large order, or for a surge of orders, may present unexpected and severe strains on the exporter's working capital. Even during normal periods, inadequate working capital may curb an exporter's growth. However, assistance is available through public and private sector resources discussed in this chapter.

For help in determining which financing options may be available or the most beneficial to your exporting endeavours, the following sources may be consulted:

• Your banker; • Your local department of commerce Export Assistance Centre (EAC); • Your local small business administration office; • The export-import banks such as that found in Washington, D.C. and selected cities; • Your state export promotion or export finance office;

Export intermediaries

In addition to acting as export representatives, many export intermediaries, such as export trading companies (ETCs) and export management companies (EMCs), can help finance export sales. Some of these companies may provide short-term financing or may simply purchase the goods to be exported directly from the manufacturer, thus eliminating any risks associated with the export transaction as well as the need for financing. Some of the larger companies may make counter trade arrangements that substitute for financing in some cases.

Buyers and suppliers as sources of financing

Foreign buyers of capital goods may make down payments that reduce the need for financing from other sources. In addition, buyers may make progress payments as the goods are completed, which also reduce other financing requirements. Letters of credit that allow

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for progress payments upon inspection by the buyer's agent or receipt of a statement by the exporter that a certain percentage of the product has been completed are not uncommon.

Pro forma

A quotation describes the product, states a price for it, sets the time of shipment, and specifies the terms of the sale and terms of the payment. Since the foreign buyer may not be familiar with the product, the description of it in an overseas quotation usually must be more detailed than in a domestic quotation. The description should include the following 15 points:

1. Seller's and buyer's names and addresses. 2. Buyer's reference number and date of inquiry. 3. Listing of requested products and brief description. 4. Price of each item (it is advisable to indicate whether items are new or used and to

quote in U.S. dollars to reduce foreign-exchange risk). 5. Appropriate gross and net shipping weight (in metric units where appropriate). 6. Appropriate total cubic volume and dimensions packed for export (in metric units

where appropriate). 7. Trade discount (if applicable). 8. Delivery point. 9. Terms of sale. 10. Terms of payment. 11. Insurance and shipping costs. 12. Validity period for quotation. 13. Total charges to be paid by customer. 14. Estimated shipping date from U.S. port or airport. 15. Currency of sale.

Terms of sale

In any sales agreement, it is important that there is a common understanding of the delivery terms since confusion over their meaning can result in a lost sale or a loss on a sale.

Export documentation

The following documents are commonly used in exporting; but which of them are necessary in a particular transaction depends on the requirements of the U.S. government and the government of the importing country.

• Air freight shipments are handled by air waybills, which can never be made in negotiable form.

• A bill of lading is a contract between the owner of the goods and the carrier. The customer usually needs an original as proof of ownership to take possession of the goods.

• A commercial invoice is a bill for the goods from the seller to the buyer.

• A certificate of origin is a document that is required in certain nations. It is a signed statement as to the origin of the export item. Certificate of origin are usually signed through a semi-official organization, such as a local chamber of commerce. A certificate may still be required even if the commercial invoice contains the information.

• An export license is a government document that authorizes the export of specific goods in specific quantities to a particular destination. This document may be required for most or all exports to some countries or for other countries only under special circumstances.

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• An export packing list considerably more detailed and informative than a standard domestic packing list.

• An insurance certificate is used to assure the consignee that insurance will cover the loss of or damage to the cargo during transit.

The number and kind of documents the exporter must deal with varies depending on the destination of the shipment. Because each country has different import regulations, the exporter must be careful to provide all proper documentation.

Glossary of basic terminologies / INCOTERMS

• Exworks (EXW): means the seller/exporter fulfils his obligations to deliver when he has made the goods available at his premises (i.e. work, factory, and warehouse) to the buyer. The importer bears all the costs and risks involved in taking the goods from the seller’s premises to the desired destination.

• Free Carrier (FCA): The seller fulfils his obligation to deliver when he has handed over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place or point.

• Carrier: means any person who is in a contract of carriage by rail, air, sea and land or by a combination of such modes.

• Free on Board (FOB): means that the seller fulfils his obligation to deliver when the goods have been passed over the ship’s rail at the named port of shipment. The buyer has to bear the costs and risks of loss or damage to the goods from that point.

• Cost and Freight (CFR): means that the exporter must pay the cost and freight necessary to bring the goods to the named port of destination, but the risk of loss or damage to the goods as well as any additional costs due to any events occurring after the time the goods have been delivered on board the vessel is transferred from the seller to the buyer when the goods pass the ship’s rail in the shop of shipment.

• Cost Insurance and Freight (CIF): the seller has the same obligation as under CFR above but with additional that the seller has to procure cargo insurance at the buyer’s risk of loss or damage to the goods during the carriage. The seller contracts for insurance and pays the premium.

• Advance Payment: payment for the goods is done at a time of placing the order or sometimes before the goods have been shipped.

• Sales on Open Account: The exporter sends goods to the foreign buyer abroad, prepares and sends invoice and waits for payment, which has to be made on an agreed date.

• Documentary Credit: invented by banks and the buyer (customer, importer) is known as the Applicant. The seller (supplier, exporter) is known as the Beneficiary. The buyer opens the credit at his usual bank (known as issuing bank). The issuing bank accordingly transmits the documentary credit to its correspondent bank in the exporter’s country through its network. The latter is called Advising Bank.

• Letter of Credit (L/C): is a written instruction issued by a bank – called the issuing bank or opening bank at the request of the buyer/importer. It is an undertaking from the buyer’s bank to the exporter’s bank that payment will be made against certain documents such as invoice, certificate of origin, certificate of quality and bill of lading (for sea transport) or waybill (for road or rail transport) or air-waybill (for air transport). The importer authorizes the exporter to draw drafts for payment on L/C in accordance with its stated terms and conditions.

• Revocable and Irrevocable Letters of Credit: An irrevocable letter of credit cannot be amended or cancelled without the agreement of all the parties concerned. In contrast a revocable letter of credit can be modified or cancelled at any time without prior notice to

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the buyer. All letters of credit explicitly state whether they are revocable or not, if there is no clear indication of this, it is assumed that the L/C is revocable.

• Cash Against Documents (CAD): payment is made as set out in the contract. Documents should be presented to the buyer before payment is made. The documents are usually presented to the buyer’s bank or agent and are sent to the buyer against prompt payment.

• Bills of Exchange: it is an unconditional order in writing, addressed by one person to another, signed by the person giving it requiring the person to which it is addressed to pay, on demand, or at a fixed or determined future time, a certain amount of money to a specified person, or to the bearer.

Prepare your management and enterprise presentation for export

Management and staff

A company new to exporting generally treats its export sales no differently than its domestic sales, using existing personnel and organizational structures. As international sales and inquiries increase, the company may separate the management of its exports from that of its domestic sales. The advantages of separating international from domestic business include the centralization of specialized skills needed to deal with international markets and the benefits of a focused marketing effort that is more likely to increase export sales. A possible disadvantage is that segmentation might be a less efficient use of corporate resources. Once your company is organized to handle exporting, a proper channel of distribution needs to be carefully chosen for each market. These channels include sales representatives, agents, distributors, retailers, and end users.

• What in-house international expertise does the firm have (international sales experience, language capabilities, etc.)?

• Who will be responsible for the export department's organization and staff? • How much senior management time (a) should be allocated and (b) could be

allocated? • What organizational structure is required to ensure that export sales are adequately

serviced? • Who will follow through after the planning is done?

Develop your product presentation

Before contacting commercial partners, you should elaborate a detailed presentation of your products. The following check list gives you some ideas:

• Name of products and photos • Usability of the product and utilization • Product details: size, weight, form, presentation, quality, material • Price: you may indicate the price or contact first your commercial partners.

Prepare samples In making contacts to potential buyers, you must act rapidly and without any delay. That is why, before commercial relationship you should already have samples and brochures on your disposal, including a detailed description of your products.

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Prepare your enterprise presentation

It is your product which is on sale, not your enterprise. In first line you need product presentations and descriptions. Nevertheless it will not be wrong to enclose your business presentation including your production capacity and the quality of your services. The business presentation may be outlined as follows:

• business owner, business activity and address; • pictures and history of your enterprise; • main activities, products and services; • references of commercial activities successfully achieved.

The business presentation may be published on classic support like brochures. But for international relations it will be better to publish on CD-ROM or on a web site in Internet, because your web site shows the modern vision of your business. In addition, many buyers are interested in knowing the following:

• Production capacity per month.

• Materials used.

• Delivery interval.

• Shipment time to destination, say, Nairobi - Genua.

• Does your company manufacture or purchase products for export? If purchase, from which country ?

• List of the countries you export to, if any.

• Does your company have the financial resources to meet expanded production?

• Do you have a business plan?

• Any particular training, and/or financing assistance available.

• Has your company participated in trade shows in the past, if so which ones?

• Your bank’s name, address, telephone and fax number.

• Language preference for proposals and communications and other requirements that will influence the partnership or sale

• What kind of information does your company want the responder to include in its Letter of Interest? Specify format, if applicable.

• List of credentials and professional memberships, which your company is a member

• What certifications or trade preferences does your company have for these products?

• List current or past clients as references (client name, telephone, email)

Export procedures

Once an exporting company is legally established the various procedures that are regularly necessary to follow, in order to make exports successful are the following.

Order acknowledgement to the buyer. This involves the production of internal instructions on the part of the exporter with regard to the work, production and preparation of the goods for the export order.

Finalization of the export contract. Finalize the export contract, stipulating the method of payment for the export consignment, and submit a copy to the respective commercial bank by any of the following methods: hand delivery, fax, telex or post. Commercial banks require six copies of the letter of credit, and five copies of the advance payment, cash against documents, and one consignment note each.

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Application to export. Register the export order with a commercial bank, which in turn will issue the export permit for the particular consignment. All sorts of exports with the exception of coffee have to be registered with any of the commercial banks. Only the registration for coffee remains at the National Bank of Ethiopia.

Registration of export consignment. Fill in the customs declaration form issued by the commercial bank and submit it to the international/foreign business department of the bank.

Application for quality testing and certification. When export products are ready, make arrangements for suitable packaging and apply to the Quality and Standards Authority of your country for quality testing, and acquire the Export Authorization Certificate.

Compliance with movement requirements Compliance with rules of origin. Fill in the certificate of origin in order to qualify for preferential tariff treatments. Compliance with tariff schemes. Fill in the special movement forms or certificates issued by the Customs Authority. Currently, the special movement certificates include the EURI movement certificate that is required by European Union Countries, and form A for the Generalized System of Preferences (GSP), form A is required by its member countries.

Insurance of export cargo. Insure the export cargo and acquire the insurance certificate or policy document issued by an insurance company.

Customs declaration. In order to avoid costly delays, the exporter declares all facts about the export consignment, and all supporting original documents should be forwarded to the customs clearing agents to enable customs formalities and authorization of the dispatch of the export goods. Accordingly, the exporter must hand over the Export Permit, the copy of the Customs Declaration form, the Certificate of Origin and the special movement forms/certificates (the EURI Movement Certificate and the GSP form A) to the clearing agents.

Movement of export cargo. To facilitate the movement of goods, transport documents should be acquired from the respective carrier. Although the type of transport document depends on the mode of transport, the documents should be completed and signed by the carrier or its representatives.

Export business registration and licensing

The opening of a business in Ethiopia requires a compulsory registration prior to holding a business license. However, principal registration only takes place once, regardless of which commercial activities are undertaken.

The export trade business that requires registration and licensing by the Federal Ministry of Trade and Industry can be carried out by forming different types of business organizations, such as the sole trader, partnerships, share companies, private limited companies, public companies and cooperative societies.

2.3.1 Registration procedure In the registration process all required documentation and application forms should be signed by the persons who subscribe to the declaration and be submitted to the Ministry of Trade and Industry for verification and approval. When this has been done the documents are sent to the Ministry of Justice for certification and then to the Ministry of Information for public announcement of the business formation in the national newspapers. Upon completion of this procedure the Ministry of Trade and Industry will issue the Principal Registration Certificate.

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2.3.2 Export licensing procedure Having now registered, an application for an export license should be submitted to the Ministry of Trade and Industry who in turn issues the export license. The documents required for the issuing an export license are applications in two copies, the principal registration certificate, a passport size photograph, an investment permit and residence permit, if a partnership exists, as well as the memorandum and articles of the association or contract of partnership.

The export license covers a duration of twelve months. At the end of the duration the license has to be renewed not later than two months into the next fiscal year, which is in accordance with Ethiopian law.

Dealing across borders from World Bank / IFC:

Example of Ethiopia - on www.doingbusiness.org for all countries available

Nature of export procedures Duration (days) US$ cost

Documents preparation 18 150

Customs clearance and technical control 10 337

Ports and terminal handling 7 500

Inland transportation and handling 11 630

Totals: 46 1617

Export documents Import documents

Customs export declaration Bill of lading

Export license Certificate of origin

Health certificate Commercial invoice

Insurance certificate Foreign exchange authorization

Packing list Import license

Shipment booking Insurance documentation

Tax certificate Packing list

Truck manifest Technical standard/health certificate

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International institutions of trade promotion

A general support for exporting products to the European markets is the Export Helpdesk for Developing Countries http://export-help.cec.eu.int/ I Requirements + Taxes I Import Tariffs I Links I Customs Documents I Rules of Origin I Trade Statistics I Market Place The European Union (EU) provides information on exporting products to the European markets. The web site contains custom duties, customs documentation, rule of origin, and trade statistics about EU markets. Helps business operators to obtain the necessary information on EU preferential import regimes and links to relevant authorities and organizations in EU trade operations and up-to-date information on import tariffs.

World Trade Organization www.wto.org Goods, Services, Electronic commerce, Regional trade agreements, Trade policy reviews.

International Trade Centre (UNCTAD/WTO) www.intracen.org/ Market analysis and development services. Statistics.

Centre for the Promotion of Imports of Developing C ountries (CBI) www.cbi.nl/ Netherlands. Exporters - Importers - Business Supporters. The Centre for the Promotion of Imports from Developing Countries (CBI) is an Agency of the Dutch Government, created in 1971. It has three target groups: Medium sized exporters from developing countries, Export Promotion agencies (TPOs), and European importers. In order to accomplish its mission CBI concentrates on five core competencies.

FITA. Federation of International Trade Association s www.fita.org/ European Business Directory. International Trade Directory. Advertising Opportunities. Calendar of Trade Events. Links to 7,000 trade related websites. Buy and Sell. The FITA Buy/Sell Exchange is an international, business-to-business marketplace that facilitates international trade by providing qualified import/export trade leads and catalogue posting.

Bundesagentur für Aussenwirtschaft (BFAI) Germany www.bfai.com KfW Tenders, Business Opportunities

German Business Portal www.german-business-portal.info/ Business infrastructure, Industrial sectors, Foreign trade statistics, Economic data

Tradeport USA www.tradeport.org All about export to USA. Import-Export guide.

African Growth and Opportunity Act (AGOA) www.agoa.info and www.agoa.gov .

Export guides

A Basic Guide to Exporting www.unzco.com/basicguide/ Developing an export strategy and a market plan, export advice, methods and channels, making contacts, technology licensing, joint ventures, preparing your product for export, service exports, international legal considerations, shipping, pricing, methods of payment

Export forms and documentation www.unzco.com/storefront/doc.html

Projet Commerce International, GTZ et Chambre Tuniso-Allemande, Tunis 2005 Guide d'accès au marché allemand. Downl.: www.bds-forum.net/international-trade.htm

UK export guide www.exportbuyer.com/ Information on the statistics of various countries

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E-commerce: Sell and buy through Internet

Virtual trade

Internet has revolutionized the commercial activities and relations with virtual market places and electronic commercialization and payments. The commercial opportunities in the Internet are increasing rapidly with a world wide access to international buyers and sellers.

Virtual markets are international and without frontiers as well as very favourable to small countries, small enterprises and individual promoters because access is everywhere. The sole criteria for participation are innovative and competitive quality products and modern payment procedures by bank transfer.

Hereafter we present the main international virtual e-commerce platforms. Most of the virtual market places offer services for buyers and sellers for free - you are allowed to present your products including pictures and descriptions.

Virtual trade platforms in Internet

Alibaba . http://importer.alibaba.com/ The most important virtual market for import-export in the Internet. Sell and buy. Data base on how to find buyers. http://importer.alibaba.com/buy_leads/4c1p/Textiles_Leather_Products.html All categories of textile and leather products

One Trade World Market Place www.onetrade.biz/ot/ Sell and buy. Industrial sectors and agriculture.

The Import-Export Help Buy/Sell Exchange http://imexhelp.worldbid.com/ International trade leads, and tender opportunities from companies and government organizations around the world. Over 340,000 businesses have registered with us to help increase their sales, reduce supplier costs, and find new business contacts. The Import-Export Help Buy/Sell Exchange is an online international marketplace designed to help small to mid-sized companies do business. Whether it is buying or selling products or services, domestically or internationally, we are confident our marketplace will meet your company's needs. Company Showroom: Your Company has the opportunity to showcase your product or service offering to the world. The Import-Export Help Buy/Sell Exchange's Company Showrooms enable your company to upload its complete product line and market it internationally 24 hours a day, 7 days a week.

German E-Trade Centre. www.e-trade-center.com Sell and buy. Looking for business contacts. This is a market place for searching and offering business contacts around the world in different sectors.

Berlinkauf . www.berlinkauf.com/ Sell and buy. Business Exchange. Trade Markets. News

Premier International Business to Business Trade Po rtal www.foreign-trade.com/ with the most complete foreign trade, import and export information! FREE services for importers, exporters & trade shows organizers. Directories of Importers and Exporters, of Freight Transporters, Embassies and Consulates, Marker Research Tools Trade terms and Codes, Measurements and Conversions.

Kompass - The Business to business search engine www.kompass.com/kinl/index.php?_Lang=fr Public tenders. Request for quotation.

TOBOC, Canada - www.toboc.com. Directory of Exporters, Importers, Transporters.

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How to use virtual e-commerce platforms

Example of Alibaba.

On the importers homepage of Alibaba http://importer.alibaba.com/ you will find the necessary items:

• Browse buying leads by category • Post your company profile and products, tell buyers who you are and show them

what you sell. • Receive and reply buyer inquiries

There are two ways to reach buyers on Alibaba: 1. Find buyers yourself, 2. Let buyers find you.

1. Find buyers yourself Search the product name you want to sell on Alibaba.com. Or browse information by category in the "Sell" channel. View the results page and click any link to read more details. Choose one of the contact methods in the "Contact Us" section. You will be able to reach buyers very quickly.

2. Let buyers find you Post a selling lead or product information and describe what kind of product you are selling (fill the Alibaba sellers' format). Buyers will find your selling information and contact you using different methods. Receive buyers' messages in your email, Message Centre or Trade Manager. Answer the buyer's message and send your reply through either Message Centre or Trade Manager as soon as possible! Personal contact is important! Buyers will not come automatically after you presented your products. You must look for contacts actively by yourself and contact by e-mail one potential buyer after the other. Take a whole day to identify and contact individually 20 to 30 potential buyers by individual e-mail messages including your company profile and products. But be short!

Web site examples of export enterprises

www.selambaltena.com.et/index.html Selam Baltena, Ethiopia, food processing www.selambaltena.com.et/products.html#bulla products www.selambaltena.com.et/gallery.html product photos www.nileenterprises.com/ Blue Nile enterprises, Ethiopia, drinks and grains www.nileenterprises.com/Seeds.html seeds www.iflexsenegal.org/accueil.html Information sur les fruits et légumes d'exportation du Sénégal

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Trade Fair Guide A. Trade fair and its relevance to market promotion for micro

and small enterprises (MSEs)

Promotion, being one of the components of the marketing mix, is comprised of different elements. Although products can be boosted through different types of promotional activities, trade fair is an important tool, as it involves face-to-face communication. It is a means of displaying products to persuade and remind prospective buyers about the enterprise.

A trade fair requires careful planning and systematic decision-making, since direct contact with consumers is involved. Trade fairs are highly competitive. Therefore, trade fair organizers have to be experts and strategic planners to pursue the lead. Promotion by means of trade fairs is effective because it is not only useful for promoting established companies, but also for newcomers. However, it cannot be expected that during the show a large pile of orders will be generated.

Trade fairs are very relevant for the promotion of Micro and Small Enterprises (MSEs). Some practical points are provided below:

• If a customer gets to know the MSEs' products by means of publicity or any other advertisement activity, and then again sees the products at a trade fair it will help him to attain more information on the product and will create a good product awareness.

• Arrangements to distribute trade and industrial journals as well as other printed documents can be done during the trade fair because they are good promotional tools. MSEs can use advantage of trade fairs to survey the latest product lines, mixes and designs of competitors.

• Trade fairs open doors to building future relationships with current and new customers. Trade fairs not only create the opportunity for MSEs to meet customers, it also paves the road for them to meet representatives from the media and press. This is a good opportunity, due to the fact that there are few chances for MSEs to meet the press in other occasions.

• Buyers who get the opportunity of seeing the MSEs' products at the trade fair are more likely to respond to follow-up calls from MSEs, compared to those not seeing the products at a trade fair. Besides, during the trade fair market research can also be carried out. This can help the MSEs create a basis for future market studies and planning. Carrying out market research during trade fairs may seem to be expensive, but it is far less costly than running research activities as compared to other occasions. The research at trade fairs can focus on studying:

o the demand situation of the specific planned exhibits; o the main consumers within the trade; o the existing price level.

B. Types of trade fairs There are several types of trade fairs. They can be classified as:

Major general trade fairs This trade fair category exhibits all types of consumer and industrial commodities. They are open to the general public, with the visitors being regional, national or international. When

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exhibiting in major general trade fairs it is difficult to attract worthwhile target visitors, although the number of visitors is huge.

Major specialized trade fairs This type of trade fair is specialized in terms of the involved sectors. Examples of such sectors could be the leather sector, the handicraft sector, the textile sector, or the wood sector. However, the degree of specialization varies. This type of trade fair is primarily for business exhibitors from various levels of trade and industry. It attracts large number of business people, specifically concerned with the trade shows area of specialization. The exhibitor can be sure that a large portion of business people will be at the fair. For new companies entering these fairs, it can offer the best opportunity to find large buyers, distributors and retailers.

Consumer fairs These are general trade fairs in terms of products to be exhibited and the interest of the visitors. The primary visitor is the general public who may come from the nearby regions. Some 'consumer fairs' specialize in food products, beverages, shoes, etc.

Consumer fairs are more appropriate for companies that are already established, with distributors and identified products that have already found their way into retail shops.

C. Guide for trade fair organizers and participants

Participating in trade fairs is a valuable tool in attaining information on competition, carrying out market research as well as reaching end users and retailers. It has the advantage of attracting publicity via media and the press through conveying announcements connected to the presentation of the business and its products.

The decision to participate in a trade fair should not be due to the fact that other MSEs are exhibiting; this decision rather has to be based on the individual company’s specific needs. Participating in a trade fair requires a lot of time and is very costly. Nevertheless, the costs can be offset, mainly due to the large coverage of customers, if appropriately handled.

Procedures for planning, conducting and managing trade fairs on the part of trade fair organizers as well as business operators are outlined below.

Setting objectives Trade fair organizers: before planning to organize a trade fair or entering into a show, trade fair organizers have to be able to set clear objectives. The nature of the enterprises and their marketing problems should shape the specific objectives that the show should try to achieve at the trade fair.

Business operators: if they are looking to contact specific buyers, then exhibiting would be an expensive venture. If their objective is to undertake market research activities, then carrying out market research would probably be more effective and less expensive to realise. That is why the objective for a business operator in participating in a trade fair should generally revolve around building future relationships with current and potential customers.

Getting information Trade fair organizers should collect all the necessary information ahead of time for effective planning. The number of MSEs that are to participate in the planned fair has to be known in advance and is also necessary to know the types of products that are to be displayed in the fair.

All the above-mentioned information serves as a basis for planning and should be done in the early stages of preparing for the fair.

Overall operational planning For trade fair organizers careful planning is vital because trade fairs involve many details. If the exhibition is not well planned and all the details are not realised on time, it can end in

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embarrassing confusion and the costs will be much higher than anticipated. The operational planning of a trade fair should include the following issues:

• one person should be made responsible for the entire operation as a coordinator or project manager;

• each task and responsibility has to be clearly identified;

• a working plan has to be drawn up in detail as per the table shown below:

Working plan for trade fair participation

Activity Starting

date Finishing

date Responsible

Planning of space Reserving of space Preparing a preliminary budget Sending questionnaires to exhibitors Recruiting facilitators Assigning a project coordinator Payment for space Deciding on printed advertising material Arranging insurance Preparing passes etc.

Finally, based on the type of products to be exhibited the layout of the fair and the stand can be properly planned. In addition, the organizers need to plan how to control the admission of visitors and exhibits.

Budgeting

a. Information A detailed budget should be drawn up immediately after the decision to organize a trade fair is made. Although it may be difficult to decide on the exact budget, it is necessary to have detailed information and quotations regarding the overall accrued costs. Cost estimates should therefore be obtained on time. It is safer to add 10 % for contingencies to the estimate.

b. Major cost items Some of the cost factors are outlined below:

• space rental; • design fee; • display racks; • temporary staff; • furniture rental; • market research; • electric and water; • electrical fitting; • cleaning;

• telephone installation and charges; • forwarding and insurance; • dismantling; • clearing; • security; • reception; • mailing; • printed matters; • public relations; • contingencies.

Staff planning Temporary staff has to be recruited. The function of the staff can be seen as follows:

• coordination of the trade fair; • stand designing;

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• registering; • taking care of communications; • controlling passes; • cleaning; • taking care of security.

All staff members have to be thoroughly briefed before the show starts on issues like: • the objectives of the fair; • their duties; • the products of the exhibitors; • rules of the trade fair.

Strategic stand location for MSEs Choosing an appropriate stand location is a major factor involved in trade fair planning. When choosing a stand location it is important that the following key elements be considered:

• strong negotiation with the trade fair organizers long before the trade fair starts; • choose an area in one of the busiest sites; • situate the stand in an area where residents can flow through freely; • situate the stand in a location where it can easily be found by visitors; • design the stand so that it can be seen from different focal points.

A poorly located stand can discourage visitors to see the displayed products.

However, the exhibitors may sometimes be limited to choosing from among given halls for reasons such as:

• the area may be divided according to the type of product; • the location may also be assigned according to industry or category of company.

Stand design and construction A trade fair has to be physically attractive. The furnishing and decorations of the stand have to be suitable and adequate. Paying due consideration to the budget of micro and small enterprises, the stand should perform vital functions such as:

• displaying the products appropriately; • attracting the attention of visitors; • providing physical conditions for briefing exhibitionists and demonstrating

products; • creating good flows of traffic; • creating enough space between one exhibitor and the other, in order to make

sure that one stand is not sandwiched between others. Transportation On the opening day of some domestic fairs, it can also be observed that in certain cases, there are empty stands with embarrassed staff around. Such incidents underline the need for careful planning and preparation, especially for transporting the products and promotional materials to the trade show in time.

• Each transported case should be correctly marked to avoid mishaps during transportation and to assign it to the right stand. If and when necessary, adequate insurance coverage should be made.

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Briefing exhibitors The number of micro and small enterprises that are to participate in the exhibition has to be based on the available space and the type of fair.

• Non-cooperating exhibitors need special attention because they may not be ready with the products on time or they may not follow the rules of the fair. A meeting with the exhibitors is therefore very important.

• Exhibitors should be encouraged to keep their display area tidy and clean.

Untidy areas with ashtrays, empty coffee and tea cups around create a poor impression.

• At times it has been noted that some frictions arise between competing exhibitors, especially if they are not well oriented. Therefore, extra effort should be made by the organizers to encourage cooperation among each other and to instruct them to observe and adhere to the rules of the game.

• Participating in a trade show is critical for promotion reasons. The micro and small enterprises need to prepare suitable exhibits and make their stands attractive. The booth should be attended at all times.

An empty booth gives the customer the impression that the company is also careless in the firm. Besides, if the booth is not

properly attended, then it is waste of time and money to participate in a trade fair anyhow.

Promotion Planning a special promotional program for the trade fair is necessary. With their expertise in publicity and market knowledge, organizers can effectively and fully play an additional promotional role during the show.

a. Printed materials. Printed materials have a vital role to play before, during and after the fair. They inform visitors and journalists of what is to be seen at each stand and stimulate interest. After the fair printed materials serve as references and reminders. The cover of the leaflet should feature both the name of the exhibiting group and that of the organizers. It should clearly specify the date of the fair as well as its location. Because printed documents are expensive they should not be wasted and their supply should be controlled, so as to let them last throughout the duration of the fair. A leaflet that captures the facts listed below is of much help:

• the description of the exhibits; • the full address and telephone number of participants.

b. Press coverage. Press coverage is a valuable promotional tool because it can attract important visitors who may not have been included in the mailing or telephone list. If the placement of professional publicity is expensive or not feasible, the organizer of a joint participation can carry out some public relation activities himself. Finally, essential members of the press release or media community could be invited to a reception along with important business contacts.

c. Advertisement. If the budget allows, the placement of a full-page advertisement in a special business journal can be effective. Such advertisements can be placed in one of the Ghanaian business newsletters such as “Business and Financial Times”.

d. Posters. Placing posters and other means of advertisements within the trade fair premises can also be worthwhile to consider.

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Closing When the fair comes to an end the organizers should perform the following activities in collaboration with the exhibiting MSEs:

• register items to be returned to respective company; • remove the exhibits from the racks; • dismantle the stand safely and without destroying the stand materials; • have a reception on the closing day or early to facilitate contacts between

exhibitors and potential customers and other stakeholders. Such occasions can attract some non-government organisations to pledge sponsorships for MSEs in other similar fairs in future;

• sending out press releases is a helpful promotional activity. Hence, in the case of press releases for the media, the MSEs should be prepared and organized to be able to state the positive results of the participation.

For MSEs to attain good press results, they should be prepared with the points that the enterprises want the audience to know and to be informed about.

Follow-up Making contacts at a trade fair is only the start of a process that may lead to sales. Some follow-up plans will be mentioned below: The starting points for follow-ups are elements, such as:

• the basic collected information; • the discussion that took place during the show; • the nature of fair visitors' interest.

In order to facilitate for a follow-up, simple data and analysis sheets can be prepared. If it is not possible to prepare such formats, a note-book or a register can do the job.

Carrying out follow-up activities has a certain purpose. All those ideas and comments given by trade fair visitors

are of importance. Therefore, collect all the necessary data and elaborate the analysis.

Immediately after the trade fair closes visitors can be called: the names of those who showed interest for the products can be listed and consequently transferred to the sales forces for follow-up activities. The best way to undertake follow-up activities would be to do these using exhibitors themselves. However, the organizer should also carry out some follow-up activities with the exhibiting MSEs.

Unless contacts that are made during the trade fair are followed up, all the efforts that went into exhibiting may end up being entirely fruitless.

Follow-up activities should not be postponed. Any promise given during the fair has to be kept.

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Trade fairs and exposition databases

AUMA, Germany. International Trade Fair Data www.auma.de

• Database on international trade fairs

• Trade fair benefit check tool The basic idea is that exhibitors should first be clear in their own minds which objectives they wish to achieve, to what extent they wish to achieve them and how they can measure their achievement. The utility value of quantitative objectives is determined in by the costs which would be involved in the use of alternative marketing instruments. Thus, for example, the extremely expensive sales force would have to be employed more intensively if the company wished to achieve a specific number of contacts to new customers by means other than a trade fair participation. The utility values thus calculated for the individual trade fair objectives are added together to arrive at the quantitative utility value of the trade fair participation. In addition to this, the exhibitor checks what the achievement of qualitative trade fair objectives is worth to him, for example, the presence at the trade fair as a central sector event. The value of such objectives is expressed as a percentage of the total expenditure. Subsequently, within the scope of the trade fair check, the costs of the participation are calculated taking into account the desired benefits. These costs are then compared with the total utility value of the quantitative and qualitative objectives.

• Trade Fair library

• Trade fair participation guide Biz Tradeshows www.biztradeshows.com The Indian directory of international trade fairs and business events by industry, by country, by date or by organizer brings you an exhaustive coverage of exhibitions, trade shows & expositions, conferences and seminars for various industries worldwide: individual trade events worldwide, along with their event profile, organizer, exhibitor and visitor profile, venues and dates to plan your participation. The Fair Calendar of the Tunisian Centre of Export Promotion www.cepex.nat.tn Concerns all information on international textile fairs (multilingual) Expolink www.expolink.com/ Trade fairs and expositions by countries Exhibitions/Trade Fairs in Africa www.ieoexhibitions.com - www.africantradefairs.com

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4.6 Evaluating sales and cost structure Check your accounting system As a businessperson you should be able to check if your accounting system is good enough to record your daily transactions. If you do not know how to make such records in a simple and easy manner it will be very difficult for you to identify your income and expenses and eventually you will not know whether you have made a profit or a loss with your business activities. The absence of recording will also cause some problems in handling customer needs, particularly in providing sales on credit. The lack of recording also makes it very difficult for the tax offices to levy reasonable taxes that are commensurate with the business activities. As a result, you may feel that taxes that are being levied on the basis of estimation are too heavy to bear. Therefore, to improve the accounting and statistics of your business check the following: Do you have proper cashbook? Example: Cashbook

Cash in Cash out Balance No. Date Description Cedis Cedis Cedis

1 2.2.04 Initial cash in 2,345,000 2 3.2. Electricity 126,000 3 3.2. Shop rent 930,000 4 4.2. Sales of products 455,000 5 5.2. Taxes 780,000 962,000 6 5.2. Sales of products 1,675,000 2,638,000 7 5.2. Raw materials 1,675,000 962 000 8 7.2. Sales of products 780,000 1,743,000 ... ... ...

Do you have proper records of maintenance services? Example: Records on maintenance services No. Date item

received Name of client Type of item

received Estimated fee

to be paid Date of

submission Signature

1. 17.3.04 ddd Television Cedis 100,000 22.3.04 2. 18.3.04 eee Video deck Cedis 200,000 24.3.04 3. 24.3.04 fff Tape recorder Cedis 20,000 26.3.04 ... ... ... ... ... ... Do you use proper records of sales on credit? Example: Sales on credit No. Date Name and

Address of client

Product / Service

Unit value Advance paid

Remained to be paid

Date of final

payment

Signature

1. 17.3.04 ddd Table Cedis 120,000

Cedis 60,000

Cedis 60,000

17.4.04

2. 18.3.04 eee Dining table

Cedis 700,000

Cedis 350,000

Cedis 350,000

17.5.04

3. 22.3.04 fff Cup board Cedis 350,000

0 Cedis 350,000

25.5.04

... ... ... ... ... ...

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Do you use proper records of raw material inventory? Example:

Raw material inventory Raw material purchased Raw material used Inventory

No. Date Type Qty

Total value

Type Qty Total value

Qty Total value

1. 24.3.04 Timber 200 Pcs. Cedis 2,000,000

Timber 170 Pcs.

Cedis 1,700,000

30 Pcs Cedis 300,000

2. 25.3.04 Glue 5 litters Cedis 125,000 Glue 2 litters

Cedis 50,000 3 litters

Cedis 75,000

3. 01.4.04 10 k.g. (12mm)

Cedis 150,000

Nails 8 k.g. Cedis 120,000

2 k.g. Cedis 30,000

... ... ... ... ... ... Evaluate sales At the start of your business, you were expected to make projections of sales at least for one year. At the end of the first year of operation you are expected to evaluate actual sales against the projection. After evaluation of sales you may get one of the following three outcomes:

1. Value of actual sales greater than the projected sales; 2. Value of actual sales less than the projected sales; 3. Values of actual sales and the projected sales equal.

If the result is No.1, it can be considered that your business has been doing well. In this case, try to build upon your strengths that helped you perform well. But be sure that you have taken all the necessary precautions while preparing the projection and that you did not underestimate it because of limitations in planning. If the result is No. 2, look for the reasons that hindered you from performing well and try to prepare a strategy to recover from your difficulties during the next business cycle. Some of the reasons for decreasing sales could be:

• Poor product quality; high sales price; market saturation with similar products; poor business location; poor customer handling.

If the result is No. 3, it can show that you have made a good estimation of sales before you started the business. In reality, however, this may not be the case.

Follow-up on cost structure Identify and evaluate what cost components have been involved in your enterprise during the previous year of operation. Example:

• Production costs such as personnel cost, raw material cost, electricity, transport, rent, water, costs of tools and equipment;

• Administrative costs such as stationery, telephone, rent, depreciation, electricity, insurance and equipment;

• Selling expenses such as publicity, promotions and commissions; • Financial costs such as interest payments; • Taxation such as business profit tax.

Be sure that you have properly classified the different cost items into fixed and variable costs. Identify which of the above cost components have shown unexpected increment than envisaged and find means to decrease them. Many people are unaware of costs and therefore waste scarce resources. Making yourself cost conscious is always a good point,

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particularly when you have the potential to reduce costs (variable and fixed costs) without neglecting quality. Simple ways to reduce costs are:

• Turn off a tap that is running; • Handle your tools and equipment with care; clean your tools perfectly; • Switch off any unnecessary lights; • Switch off machines, if they are not used for hours; • Work faster, but still be precise; • Avoid unnecessary wastage of raw materials, finance and productive time; • Try to reduce unit cost of items through mass production; • Reduce variable costs; • Find cheaper suppliers, but at the same or better quality; • Find other similar businesses and make orders in large quantities; • Share expenses with others; • Optimise the stock level: The higher the stock, the higher the expense for

storage; and: The lower the minimum stock the higher the risk of running out of stock;

• Improve the workplace layout: Good workshop layout means that the product travels and is handled as little as possible between processes from the beginning to the end of its manufacture.

Data management To collect data in an organised way, you should have a data management system that suits your needs and capacity. If you have the capacity to use computers, life would be easier for you. But, this requires investment and the necessary knowledge to use computers. However, data can also be managed manually as it is the case for the majority of micro and small enterprises. The importance of collecting data that reflects your business to achieve competitive advantage is now a widely recognised fact. You should collect data on each of the above-mentioned items to evaluate your past performance and adjust yourself in the market and remain competitive. You herewith keep yourself informed about the internal and external environment you are doing business in. After collecting data, you should further organise and process this into valuable information that can be used in decision making. In business information should give warning signals when something starts going wrong, or even improves. Therefore, after the first run of your business, usually at the end of the year, you should collect data on:

• How much you produced and how many products you sold; • How much raw material you consumed; • How many finished goods you are left with; • Your total operational/production cost; • Your total administrative cost, including wedges and salaries; • Your profit (before and after deduction of tax); • How many clients you served; • Who your customers were (low, middle or high income level/rural or urban

population). To get data easily on the above items you should have a properly designed record keeping system .

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Staff management At the start of your business you might not have wanted to hire more personnel because of lack of financial capacity and/or limited production level. As your business starts to grow, however, you need to employ people to assist you in running the business. On the other hand, you might have employed more staff just at the start of the business. In any case, after the first run of your business you have to evaluate the staff situation. In this connection, you should ask yourself the following:

• How was the performance of the employee(s)? Did their skills fit the requirement of my business?

• How was the salary? Was it too high compared to what similar enterprises pay for their employees? Or was it too low compared to staff performance?

• Did I provide the necessary safety facilities and motivating factors? • How was the staff turnover? Was it too high? • How was the number of employees? Was it more than required (hence idle

labour) or was it too small (staff overload?) • How was the productivity of each employee?

After examining the above staff related issues, take corrective actions against the weaknesses before commencement of the next business cycle. Staff specialisation should also be considered. The more specialised staff you have the more productive your staff would be. Staff specialisation is a situation whereby you assign each member of your staff to undertake a specific task of the enterprise, especially in the production unit. Your staff can specialise in:

• Product development; • Finishing work; • Product packaging and labelling; • Quality control; • Salesmanship.

Organise continuous staff trainings If your staff, including yourself, needs skill upgrade training, try to make the following:

• Identify clearly what type of training is needed; • Get information on which institutions are providing the training; • Get information on the cost of the training; • Get information on the duration of the training; • Be sure that your employees make proper use of the skills they got through training.

Stock management Stock means all the products your business has for sale and also all the raw materials or parts your business keeps and uses to make products or provide services. Stock management (stock control) is the way you:

• Receive your stock (quantity and condition); • Record your stock (write down all goods or material coming into or going out of

your business); • Store your stock (keep the right amount of stock in a safe and orderly manner);

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• Display your stock (it entices customers to buy and makes it easy for you to see and count);

• Check your stock (check and count your stock often to make sure that it is in good condition and that no stock is missing);

• Re-order your stock (re-order the right stock, in the right quantity and right time). Re-order level is the minimum level of stock of raw materials and finished goods you need to keep the production process continuous and not to fall short of finished products to meet orders from customers, respectively.

Now, check if you have considered all the above stock control items during the previous period. Take corrective action if you did not do them. Stock card form Product __________ Cost per item __________ Selling price __________ Re-order level __________

Date Details Stock In Out Balance

Maintenance Maintenance refers to repairing/renewal of equipment and tools that your business is using, so that they function without interrupting the production process. Maintenance of equipment and tools can be regular or irregular based on the pre-set specification of suppliers or any time the equipment and tools get damaged. Regular maintenance would enhance the life of equipment and tools and minimises frequency of interruption in the production process. Therefore, at the end of the business cycle, you should check the situation of your equipment and tools and get them maintained for the next production process. Do not forget that you should put aside certain amount of money to cover maintenance costs. In addition, be sure that you know there are enterprises or individuals who would do the maintenance. Premises refer to the places where your production and/or sales activities take place. During making follow-ups on your premises check if:

• The premises needs more space to add more equipment/machines; • The premises needs more space to serve more customers; • The premises requires renovation; • You have the necessary budget to renovate the premises.

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4.8 Financing Finance is one of the important and scarce resources you need for your business. Be sure that your business money is used properly and effectively. If you have borrowed money from lending institutions, be sure that:

• You used the money for the intended business purpose only; • You paid the principal and interest amounts regularly; • You might need additional money to borrow in case you decided to expand your

business or improve internal capacity.

Loans involve financial expense in a form of interest. But, it is not always necessary to depend on loans. You have to be able to generate your own funds through savings. Check that you have opened a savings account for this purpose. If you did not have one during the previous business cycle, try to have the account in the next run.

Checklist for follow up of finance

• Are the accounting documents up to date? • Are all proofs filed? • Do you have a banking account? • Are you doing regular savings? • How many interests do you have to pay per month? • Is repayment of interests and loan ensured? • Do you have sufficient reserves for production, supply and marketing?

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Summary of follow-up

By carrying out a follow-up, you may use the following checklist to help you accumulate the necessary information and evaluate your business. After collecting the information, you can take good decisions towards implementing the above-mentioned issues. Upon completing this format, you can easily identify weaknesses of your business. Try to eliminate or minimise them during the next business cycle. On the other hand, try to use your strengths to improve your market share, increase production capacity, improve product quality and diversify products. Provided that your business is running well, you can inject additional capital into the business from your own savings or take loans from financial institutions, or invite others to invest into your business.

Follow-up format Description Remark

Your position in the business: - full-time owner or manager - part-time owner or manager - no active managerial involvement except providing capital

Total number of workers (if applicable): - paid workers / paid family members - unpaid family members

Production capacity: - limited utilisation of capacity (e.g. 25%) - partial utilisation of capacity (e.g. 50%) - improved utilisation of capacity (e.g. 75%) - maximum utilisation of capacity (e.g. 100%)

Reasons for limited and partial capacity utilisatio n: - no market - shortage of raw materials - high cost of raw materials - high utility expense (power) - no qualified workers (including yourself)

Monthly sales: - very high I - moderately high - break-even sales I - losses

Reasons for loosing sales: - low product quality I - bad location I - rude competition - no advertising I - insufficient marketing strategy - insufficient buying power of customers - limited business management skills

Profitability of business: - very profitable I - moderately profitable - break-even I - moderate losses I - heavy losses

Reasons for moderate and heavy loss of profits : - insufficient sales - high costs (insufficient use of working materials, high transportation costs, high production costs, high marketing costs) - misuse of business money for non-productive activities

Location of business: - near to customers I - near to supplies - not strategically located

Reasons for not locating your business strategicall y: - lack of awareness I - high cost of premises - insufficient infrastructure/utilities

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Exercise to fill

Reformulation of your initial project idea

After your introduction to the four steps of business implementation and business management, take the initial format of your project idea mentioned in the chapter for "Identification of your business idea" and fill it with the complementary information you got during the training. This reformulation will be better founded but you should know that the final can only be done after a real market research on the ground (see training module 2: marketing and market analysis).

• The following reformulations of your project ideas will be discussed with the participants.

• Revise also your action plan of phase 2: ‘business implementation’.

Project Idea

Name of promoter: Name and activity of the enterprise: Products and services: Clients: Sales and marketing strategy: Strategic location of the enterprise: The main competitors are: Characteristics of their products: Advantages et disadvantages to the competitors: The project will be financed as follows:

• Own funds:

• Financing: Risks:

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Annexes

1. Extended market research format

2. Standard loan application format

3. Export- and action-oriented workshop on submissi on to e-market places and website publishing for export-oriented e ntrepreneurs

4. Business portals and learning platforms in Inter net

Annex 1: Extended market research format

Market analysis plan

Description of the product What product should I produce? What should be the design, model, appearance and style of the product? What should be the brand name of the product?

Comparison of the product with its competitors Can I produce a product of better quality compared to others? Can I provide warranty for my products? Is the design of my product better than others? Can I use quality raw materials? Can I label my product?

Strategic location of business Can I get proper business location not far from my customers? Can I get proper premises with reasonable rent?

Major customers Who would be my customers: Individuals, households, and government/private/non-government institutions? Urban/rural residents?

Market share Do I have the capacity/possibility of measuring market share? Is there a possibility of getting some market share by competing with similar producers? What would be the possible number of customers per month/year? Is there a possibility to capture more market share in the future? Should the market share be high, do I have the necessary resources/capacity to respond to that market?

Selling price - My pricing strategy: Should I go for profit maximisation in the short-term? Profit optimisation in the long-term? A minimum return on investment?

- Competitors: Keeping parity with competition? Fast turnaround and early cash recovery?

- My pricing methods: Should I follow cost-based pricing? Demand-based pricing? Competition-oriented pricing? Product line - oriented pricing, affordability - based pricing? Differentiated pricing?

Promotional measures How can I promote my product: Which media channels (local newspapers? signboards? Leaflets and brochures? Exhibition/bazaar participation? Words of mouth

Marketing strategy - Selecting target clients: Studying the customer, his/her buying motives and buying behaviour, segmentation of the market using relevant bases, evaluating each of the segments, selecting the appropriate segment as target market.

- Developing the “4P” marketing mix: Product, Price, Place, and Promotion.

- External factors: Provision for the impact of uncontrollable environmental variables.

- Marketing plan: Developing the detailed functional plan of marketing: production plan, sales plan and advertising and sales promotion plan.

Sales/demand forecast (for details on sales forecast see next)

Market Research Format

1.1 Discription of the product

1.2 Comparison of the product with its competitors

Competitive analysis of product

Features Proposed

business Competitor

1 Competitor

2 Competitor

3 Product quality Price Delivery time Brand name Multiple use Taste etc. 1 outstanding, 2 very satisfactory, 3 good, 4 fair, 5 poor

1.3 Location

(add location map)

1.4 Market area

(add list of market areas and size of market) 1.5 Main customers

(add list of major customers and their requirements) 1.6 Total demand

Table 1.6 Table of projected demand

Year Quantity Amount 1 2 3 4 5

1.7 Market share

(add table of projected supply and sources of supply) 1.8 Selling price

Comparison of competitors’ selling prices

Project’s product(s)

Project’s selling price

Prices of competitors

Competitors’ average

price Competitor

1 Competitor

2 Competitor

3

1.9 Sales forecast

Projected sales by year, sales volume and amount.

Year Sales volume (units) Amount (LC) 1 2 3 4 5

1.10 Promotional measures

1.11 Marketing strategy

(add table of competitors’ marketing strategy) 1.12 Marketing budget

Year Budget item Amount (LC) 1 2 3 4 5

Table 1.12 Marketing Budget Chose what applies to your product and marketing strategy:

Item Months

1 2 3 4 5 6 7 8 9 10 11 12

Projected sales

Marketing expenses:

Promotion (specify)

Distribution (specify)

Advertising (specify)

Selling (specify)

Total marketing expenses

Comments:

Annex 2: Example of a standard loan application form

Summary

Standard Loan Application Form

Basic data • Personal data of the promoter • History of credit • Type of business and professional experience • Loan amount • Repayment capacity • Guarantee, security • Quality of the guarantee • Stability of residence

• Analysis of savings o Monthly savings o Transactions of the last three months

• Risk analysis o Repayment capacity o Guarantees offered o Quality of security o History of credits

� Regular repayments (10 points) � Irregular repayments (0-7 points) � Loan request to be rejected in case of 0-2 points.

(Note: The repayment capacity is the most important precondition; to be eliminated in case of 90 days of delay of the loan application)

o Loan categories � Economic sector with potential � Economic sector stagnant � Economic sector with high risk

• Recommendation o Strengths and Weaknesses of the loan application o Risk factors o Factors for risk minimizing o Final decision

Standard Loan Application Form Financial institution: ................................................................................................................. Name of promoter/borrower ............................. No of bank account ................................... Member since ............................ History of credits: ...................................... New loan ........................................ Renewal....................................... Family situation : ........................................... Number of persons in charge: ....................... Private address ................................................................ Location of enterprise ................................................................... In rent...................................................or Owner.............................................. Worked in this location since? ............................................... Type of business : ............................................................................ Experience in this activity : ................................................................................ Category of loan (investment or running costs, extension) : .................................................... Credit amount : ............................................................. Period of repayment in months............... Repayment schedules.............................. Repayment capacity .......................................................................................................... Guarantees offered. ............................................................................................................. Guarantee :

• Name of the guarantor : ........................................................................

• Address : ...............................................................................................................

• Telephone: ......................................................

• Occupation : ..........................................................................

• Financial capacity : ........................................................................................ Note : The guarantor must be client of the financial institution. If the guarantor is not a member, then he/she has to become client of this financial institution.

Quality of the guarantee

Financial capacity

Monthly income ...................................

- Monthly liabilities ................................... _____________________________________

= Monthly net income ...................................

Property of the promoter Details Value Total

Stability of residence

• Less than one year • More than one year • More than two years

Comment: ...........................................................................................................................................................................................................................................................................................................................................................................................................................................................

Analysis of savings of the promoter

The information on the account transfers should be analysed for a period of three months.

1. Monthly savings in the last three months : ....................

2. Average of transactions in the last three months: ........................

• Less than 40.000 local currency (LC) with less than 20 transactions

• From 40.000 LC to 70.000 LC with less than 40 transactions

• 70.000 LC and more with more than 40 transactions

Risk analysis

Subject Comment

Repayment capacity

Guarantees offered

Quality of guarantee

History of credit • Regular repayments • Repayments with 2 delays of less than 30 days • Repayments with 3 delays of less than 30 days • Repayments with one delay of 30 to 60 days • Delays of more than 90 days

Loan category • Structured economic sector with potential • Sector with competition • Sensitive economic sector • Weak economic sector • Sector with high risk

Analysis of savings

Summary

The loan application will be rejected if:

• there is limited repayment capacity • loan application procedure delayed for three months

Recommendations

Strengths of the loan application ....................................................................................................................................................

....................................................................................................................................................

....................................................................................................................................................

....................................................................................................................................................

....................................................................................................................................................

Weaknesses of the loan application ....................................................................................................................................................

....................................................................................................................................................

.................................................. .................................................................................................

....................................................................................................................................................

....................................................................................................................................................

Risks (actual or in future) ....................................................................................................................................................

....................................................................................................................................................

.................................................. .................................................................................................

....................................................................................................................................................

....................................................................................................................................................

Risk minimizing measures ....................................................................................................................................................

....................................................................................................................................................

....................................................................................................................................................

....................................................................................................................................................

....................................................................................................................................................

Recommendations : ....................................................................................................................................................

....................................................................................................................................................

....................................................................................................................................................

....................................................................................................................................................

Direction Signature

1-Week Workshop (Proposal from Dieter Gagel, [email protected] )

Export- and action-oriented workshop on submission

to e-market places and website publishing for export-oriented entrepreneurs

1. Workshop objective • Ten export-oriented companies are introduced to present their 1-3 export products on

10 e-commerce Internet market places. • The participants will identify potential buyers on the e-commerce platforms as well as

by Google and take direct contact by e-mail. • The participants work out a draft of their export-oriented website focussing on their

product presentation. • Local hosting services as well as 3 international Internet-based hosting services are

presented to the participants (conditions, procedures, prices) • Local website designers show their references and give information on conditions and

prices.

2. Target-groups Export-oriented companies.

3. Preparation phase • Participants will be invited one week before the workshop in order to present the

programme and to give them some advice for preparing the product pictures and presentations.

• Test the webhosting procedure of at least one Internet-based webhosting service, e.g. www.europehosting.com . All procedures for web space and domain including payment procedures by Visa Card should be done (costs about 40€ per year).

• 3 local webhosting services will be identified and visited. Conditions, procedures and prices will be identified. Webhosters will be invited for day 6 of the workshop and present their services.

• 3 local web designers will be identified, visited and their references analysed. They will be invited for day 6 of the workshop in order to present their services.

• Prepare the workshop facilities (computer, beamer etc.).

4. Workshop programme Programme of workshop see Mind map hereafter. A detailed time table will be worked out later.

5. Follow-up During the 3 days of follow-up with the participants will focus on additional works on demand, finalizing of website designs and finalizing and publishing of sub-websites (e.g. www.ethiopianchamber.com/tutu-honey)

6. Time-table • 6 days field works and workshop preparation • 7 days workshop implementation • 3 days follow-up phase

7. Workshop facilities

You need workshop rooms with 10 PC in order to enable 10 participants simultaneously to introduce their products on the E-Commerce platforms.

E-Market places Alibaba . http://importer.alibaba.com/ Biggest market place in Internet ; multilingual. http://importer.alibaba.com/buy_leads/4c1p/Textiles_Leather_Products.html All categories of textile and leather products

One Trade World Market Place www.onetrade.biz/ot/ English market place. Buy and sell.

The Import-Export Help Buy/Sell Exchange http://imexhelp.worldbid.com/ English. The Import-Export Help Buy/Sell Exchange is an online international marketplace designed to help small to mid-sized companies do business. Whether it is buying or selling products or services, domestically or internationally, we are confident our marketplace will meet your company's needs. Company Showroom: Your Company has the opportunity to showcase your product or service offering to the world.

German E-Trade Centre. www.e-trade-center.com English. Buy and sell. Looking for business contacts. This is a market place for searching and offering business contacts around the world in different sectors.

Berlinkauf . www.berlinkauf.com/ English. Buy and sell. Business Exchange. Trade Markets.

Premier International Business to Business Trade Po rtal www.foreign-trade.com/ with the most complete foreign trade, import and export information! Free services for importers, exporters & trade shows organizers. Directories of Importers and Exporters, of Freight Transporters, Embassies and Consulates,

Kompass - Annuaire et information d'entreprise www.kompass.com/kinl/index.php?_Lang=fr Marchés publiques. Appels d'offres privés.

TOBOC, Canada - Directory of Exporters, Importers, Manufacturers and Suppliers by sectors www.toboc.com English. Exporters, Importers, Transporters

1. Prepare product presentation of 10 entrepreneurs (1 day)

5. Website publishing(1 day)

2. Put products on 10 e-market places- sellers side (1 day)

3. Work with the buyers-side of the market places (1 day)

4.Contact potential buyers (1 day)

7. Presentation of 3 local website designers (1/2 day)

6. Presentation of website hosting services (1/2 day)

Export- and Action-oriented Workshop on Submission to E-Market places and Website Publishing for Entrepreneurs

Entrepreneurs prepare product pictures (.jpg) and product descriptions

Product presentation (1-3 products) including pictures are presented+discussed

Take pictures of products without good presentation

Group works on modification of presentations

Picture treatment for Internet (cut and compress pictures)

Finalize presentations

Show website presentation samples

Introduce sample template

Group works on product-oriented website presentation: elaborate table of contents and write presentation text

Discuss presentations

Deliver presentation text in Winword format

Presentation of 10 E-Market places

Alibaba, Export Bureau, E-Trade center, Berlinkauf

ITC Market place, EU Helpdesk market place

One-Trade-World Market place

Premier, Kompass, Toboc

1 Indian and 1 Chineese Market place

Demonstration of submission in the first market place by beamer

Group works on PC submission of 1-3 products to 10 market places

CD-ROM of websiteCD-Label

Website contents

Electronic newsletter

Design

Contents

Address list

Demonstration on how to identify potential buyers on the market places

Group works on buyers identification by commodity

Take addresses/e-mail of potential buyers

Demonstration on how to identify potential buyers by Google

Group works: identify potential buyers by Google

Collect addresses of potential buyers

Prepare letter with product and company presentation

Write individual e-mails to potential buyers

Send 1-page fax presentation to individual buyers

3 Website designers present their references

Contact between designers and participants

2 local website hosters present their services (procedures, conditions and prices)

Presentation of 3 international website hosting services (ask webspace and domain name by Internet and pay with credit card)

Presentation of sub-webpage publishing. Example: www.bds-ethiopia.net/moab.html

7-days workshop + 6 days field preparation to web hosting services and web designers + 3 days follow-up to enterprises including on-the-spot website publishing

Some examples of on-the-spot website publishing for enterprises (1 hour to develop, 1 min. to publish)

www.senegal-entreprises.net/gica/

www.senegal-entreprises.net/senkodaye/

www.unacois.sn/touba-taif/

www.artisanat.sn/ustec-construction/

www.bds-ethiopia.net/women/index.html

www.bds-ethiopia.net/moab.html

Business Development Services (BDS) Contact: [email protected]

BDS Portals and Learning Platforms in Internet

Business Development Services (BDS) Forum

www.bds-forum.net All about small and medium enterprises (SME) development: BDS portals, BDS approach, training reports. Business information on marketing, import-export, business planning, taxation, bookkeeping, cost calculation.

Ethiopian Business Development

Services (BDS) Network www.bds-ethiopia.net Ethiopian rules and regulations for SME development. Directories of banks and micro-finance, tender procedures, trade fairs guide, trade opportunities, appropriate technologies, women entrepreneurs.

Services d'Appui aux Petites et Moyennes Entreprises (PME) du Sénégal

www.senegal-entreprises.net Répertoires des structures d'appui et établissements financiers, cabinets d'études. Stratégies d'appui, formation professionnelle, recherche de financements, méthodes de suivi-évaluation, appels d'offre.

Participatory Action-Research www.action-research.de Participatory methods of business development services and organizational development with examples of Mali, Tanzania, Tunisia, Mauritania, Niger, Burkina Faso.

6-Pack for SME Development www.bds-forum.net/6-pack-for-sme.htm Six product descriptions for SME development: 6-month BDS cycles, BDS portals, Networking, Capacity building of partner organizations, Monitoring and Evaluation for international projects and M+E for local partners.

Start and Improve your Business www.start-your-business.net Manual for busi-ness start-up and business improvement: Business idea generation. Information seeking (market, supply and infrastructure analysis, financial analysis). Business implementation (registering, financing). Follow-up (business management).

ISBN 978-3-8370-5916-8