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SECTION 2: ENTERPRISE DEVELOPMENT Introduction Enterprise development is a process of creating, improving and expanding business operations in order to make

a profit. It aims at identifying, developing and promoting business initiatives that generate income and thus make them profitable. In farming for example, in order to intensify production and attain commercialization, the following key processes are necessary: Involving farmers in participatory planning in order to identify potentially profitable enterprises Identification of major constraints to the production of the identified enterprises Prioritization of enterprises in order to achieve specialization Contracting the necessary advisory services and accessing the necessary technical information Provision of technologies that alleviate production constraints thus enhancing productivity. Farmers have a range of enterprises to choose from and these include: crops, livestock, fish farming, apiary, piggery, agro-processing, input and produce trade. Other possible service enterprises include: farm equipment repairs, food preparation, crop protection and animal treatment. This section therefore covers key aspects of enterprise selection, profitability analysis, business planning, management and record keeping.

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

Session 1: Introduction to Enterprises Learning objective: By end of this session participants will be able to: 1. Define an enterprise. 2. List key productive resources for any business development 3. Explore the common agriculture related businesses run by different people/groups within their village. 4. Describe farming as a business and its management. Time: 3 hrs Method: Field visit, brainstorming, group discussions, presentations in plenary. Training Materials: Flip Chart Paper, Marker Pens, Masking Tape, Note books and pens Procedure 1. Introduce the session and learning objectives 2. Ask participants to brainstorm on the definition of an enterprise or business. Note the responses on a flip chart paper and by consensus agree on a common definition. 3. In 3 working groups, participants identify the main enterprises/businesses that are run by individuals and groups in their localities (e.g. coffee growing, goat rearing, produce trade, milling etc.). They also explore new promising enterprises such as vanilla, citrus, apples etc. 4. In working groups still, participants identify the key resources for two enterprises (crop and livestock enterprise) such as land, labour, cash and managerial skills etc. 5. The working groups present their findings in plenary and under the guidance of the facilitator the most common enterprises and requisite resources are identified. 6. Inform participants about a field visit to a farm and a market in the neighborhood. (Note to the facilitator: Make prior arrangements for the field visit. Contact and brief the two people to be visited). 7. Divide the participants into 2 working groups. One group visits a nearby farmer, while the other visits the trader for 11/2 hours.
Discussions points with the farmer Main enterprises on the farm Key inputs used Main products from each enterprise How the products are marketed. How the enterprises were selected Checklist for the field visit Discussions points with the trader Main commodities being sold Sources of commodities Key inputs How the business started Day-to-day management of the shop

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

Types of records kept.

8. On returning to the training venue, each group discusses its findings and writes them on a flip chart paper. 9. Invite each group to present its findings to the plenary for discussions. 10. Guide the groups to compare main enterprises, resources, records kept, daytoday management, similarities and differences of the two enterprises, lessons learnt. 11. From the findings in no. 9 above, participants redefine what constitutes an enterprise/business. 12. Wrap up the session by explaining farming as a business and how it should be managed in a profitable manner
What is an enterprise? An enterprise is defined as an economic activity that produces goods (commodities) or services for sale to earn income. It is driven by a profit motive. The profits earned are usually reinvested in order to expand the business. Learning points: key productive All enterprises utilize theEnterprises resources namely land, labour, capital and managerial skills to produce the desired product or service. Most common enterprises in rural areas The most common economic activities in rural areas include crop and livestock farming. Unfortunately the scale of production is very low and the products realized are used mainly for home consumption with only minimal quantities being sold to meet cash needs for household basics such as soap, clothing, medical expenses etc. Other enterprises that have emerged over time include: Agro-processing (milling, fish smoking, juice extraction etc), food preparation, produce trade, farm input supply, apiary, piggery and non-agricultural activities such as weaving, tailoring, pottery, crafts, blacksmithing, carpentry, brick making and charcoal burning. High value crops such as vanilla, apples, citrus are also being adopted. Farming as a business Most rural people are already engaged in farming but the scale at which they operate makes them believe that they are not in the business of farming. However, farming is actually a business and should be run and managed like any other business. It is a business because it utilizes the key factors of production namely: land, labour (family and hired), capital (cash, tools, implements, seed, agro-chemicals etc.), the farmers management skills and time. Through their small-scale endeavours, rural farmers produce commodities (crops, livestock and their bye-products), which are consumed at home and the rest sold to earn income. Rural farmers therefore need to ensure that they must only increase their scale of operation but must ensure that their enterprises are carefully selected, planned and properly managed in order to increase productivity. They should select a narrow range of enterprises in order to attain specialization and they should seek the necessary advisory and technical services. More importantly they should opt for improved technologies (improved seed/animal breeds and labour saving equipment) in order to alleviate production constraints and increase productivity. Efforts should be made to regularly seek out marketing information in order to know the potential buyers, their location, quantities demanded, quality requirements and the prices offered for each commodity. Existing and potential competitors who are producing the same products should also be known. Only when this 4 has been achieved will rural farmers realize meaningful benefits from their farming activities.

Session 2: Group Enterprises Learning objectives: By the end of the session participants will be able to: 1. Identify the different group enterprises in their localities 2. Identify advantages and disadvantages of running enterprises as a group 3. Describe factors that lead to successful management of group enterprises Time: 2 hrs 30 mins Methods: Brainstorming, field visit, group discussions and presentations in plenary Training Materials: Flip Chart Paper, Marker Pens, Masking Tape, Exercise Books, Pens Procedure 1. Introduce the session and learning objectives 2. In small working groups, participants discuss the following questions: What are the enterprises in their group? How were the enterprises selected? How are the enterprises managed on day-to-day basis? What are the advantages and disadvantages of running group enterprises? Suggest ways of minimizing the disadvantages

3. Invite groups to make presentations for discussion in plenary. (Note to the facilitator: The following may be suggested: Advantages such as pooling resources, sharing knowledge and skills, easing the work burden, better bargaining power, better access to advisory services, support from government and NGOs. Likewise disadvantages such as slow decision making, lack of group land, mistrust, unequal participation by members, conflicts maybe mentioned) 4. Inform the participants about a field visit they are going to undertake to share experience of managing an enterprise as a group (Prior arrangements should have been made by the facilitator with the group to be visited) 5. Take the participants for the field visit. In an interactive discussion with the host group members discuss the following: How the enterprise was initiated What criteria were used to select it How enterprise activities were planned How the enterprise is run on the day-to-day basis The key products and how they are promoted/marketed. They should also note the records kept Explore the advantages and disadvantages of operating enterprises as a group 6. On returning from the field visit, participants review their findings and lessons learnt with a view of making informed decisions in selecting, planning and managing enterprises as a group 7. Wrap up the session by emphasizing the advantages and disadvantages of running group enterprises. Also point out that an enterprise can be managed as a group on the same piece of land or individually managed. However, when individually managed, members come together for services (training, credit, inputs, sharing experience e.t.c.) and marketing.

Learning points: Group Enterprises


What are group enterprises? Group enterprises like individually run enterprises are economic activities run by groups for purposes of earning income for members and are also driven by a profit motive. However, there are enterprises that are better run at individual level (e.g. perennial crops, livestock etc), but in general there are many advantages of running enterprises in groups. Why group enterprises? It becomes easier for members to share labour, knowledge, skills, experiences and produce on a larger scale. By pooling resources and bulking products, group members gain better negotiating powers when buying inputs (bulk purchases) and selling group products (collective marketing). It is easier to access advisory services, technical advice, market information and markets By working in groups members can ensure quality of their products by monitoring each other to follow the set standards It minimises operational costs such as labour, transport, licenses, market dues etc There are more possibilities for joint processing and adding value as groups can easily acquire the necessary processing equipment/machinery by pulling resources or getting loans. Constraints and challenges Mutual trust among members, dedicated and trusted leadership Some enterprises such as perennial crops and livestock are difficult to run as a group. Perennial crops require permanent land, which, groups often do not have while management of livestock requires full time attention, which members cannot adequately share out Some members may not actively participate in the group enterprise activities thus overburdening the others. Key success factors The enterprise must be carefully chosen based on set of criteria agreed by all members The business should be properly planned and managed Roles and responsibilities of managing the enterprise clearly assigned among members. Able trustworthy and transparent leadership Clear channels of communication with the leadership established. Maintaining proper records. There must be deliberate efforts to promote and market the group products. Efforts at collective marketing with other groups and adding value to products through processing Identification of competitors and ways of out-competing them.

Session 3: Enterprise selection Learning Objective: By the end of this session, participants will be able to: 1. Explain key criteria for selecting viable enterprise 2. Apply the criteria for selecting their own enterprises. 3. Prioritize potential enterprises using participatory ranking tools. Time: 2 hrs 30 mins Methods: Brainstorming, group discussions, presentations in plenary. Training materials: Flip Chart Paper, Marker Paper, Masking Tape, Notebooks and Pens Procedure 1. Introduce the session and explain the learning objectives. 2. In an interactive presentation, describe the different criteria for selecting an enterprise with examples, and agree on the most important. (Note to the facilitator: ensure all participants have clearly understood the selection criteria) 3. Assign weights to the criteria based on the following: Perceived profitability Availability of market for enterprise product(s) Availability of resources required by the enterprise Start-up costs Existence of knowledge and skills among members to run the enterprise Access to advisory services and improved technologies Risks associated with the enterprise Compatibility with existing farming system, culture and norms in the area (Note to facilitator: This will be location specific, but in all cases the issues of profitability and availability of market must be weighted highest). 4. Explain the matrices (to be used in enterprise selection) with examples 5. In groups, participants: List the common enterprises in their localities (e.g. maize, poultry, produce trade and input retail trade). Also explore options for new enterprises such as vanilla, citrus,
apples etc.

Rank the enterprises using the agreed criteria as explained in no.2, fill the matrix table and select at least six priority enterprises Analyze the impact of the selected enterprises in relation to cross cutting issues such as gender, poverty, environment, disadvantaged groups e.g. elderly people, disabled people and people infected with HIV/AIDS

Learning points: Enterprise Selection 6. Invite Types of Enterprises groups to present in plenary for discussions and agree on at least the 3 most promising options 7. of enterprises that individual or groups the importance of proper in the previous There is a range Wrap up the session by emphasizingcan choose from as outlined selection for section. However, there are clearly two distinct types of participants One type focuses on session the selected enterprises. that in the next producing products or commodities profitability. Inform for direct consumption, sale orwill be subjected includes most agricultural production, processing and value adding processing. This to a profitability analysis enterprises

activities (e.g. Cash/food crops, livestock, poultry etc). The other type produces services, which are not directly consumed but assist individuals in It is important that all participants fullyinput trade, produce trade etc). Note to facilitator: performing day-to-day activities (e.g. Agricultural participate in the Common enterprises in the farming sector

selection process and they should try to be as objective as possible. For completely new enterprises, as much information should be availed to farmers as The mostpossible enterprises inselection process. Thislisted in the table below. tomajority of the rural farmers common before the the agricultural sector are enables farmers not A only consider those enterprises known to them, but assists them potentiallyup to new onesenterprises fall in the are mainly engaged in crop and livestock production. However, the to open more profitable
category of agro-processing and provision of services. These enterprises however have high start-up costs, require specialized skills, often require improved technologies and require specialized marketing skills thus tend to discourage small-scale farmers. Crops Livestock Bye-products Learning points: Enterprise Selection Coffee Cattle Milk Bananas Goats Eggs Beans Sheep Hides/skins Ground nuts Pigs Honey Upland rice Poultry Sorghum Fish farming Maize Apiary Citrus Rabbits Vanilla Agro-processing Flour milling Fruit canning Tannery Oil extraction Services Input supply Produce trade Equipment repair Pests/disease control

Considerations in selecting enterprises For any enterprise to succeed it needs proper choice/selection and prioritization based on specified criteria. Some of the key questions to ask include: 1. Are basic resources (e.g. land, labour, capital) readily available? If not where/how will they be got? 2. What are the start-up costs? Do members have enough resources to meet these costs? 3. Do individuals/members have the knowledge and skills to run the enterprise? 4. Are there reliable sources of technical information and advisory services? 5. Is market and accompanying marketing information available? 6. What is the size of the market and the quality requirements? 7. Does the enterprise entail high risks such as vulnerability to weather changes, pests/diseases or perishability? 8. Is the enterprise profitable? Are costs of production low? What output or yields are expected? What market prices are expected? 9. Does the enterprise address cross cutting issues of gender, poverty and environmental conservation? 10. Is the enterprise compatible with the current farming system and the culture/norms of the local community? Practical steps in selecting and prioritizing enterprises 1. Make a list of all the enterprises in the village (including potential new enterprises) 2. Use pair wise ranking to narrow the range of enterprise ideas to 5-6 as shown in the hypothetical example below:
Maize Maize Beans Sorghum Cassava G/nuts S/potatoes Cowpeas Millet Beans MZ Sorghum S S Cassava MZ C S G/nuts GN GN GN GN S/potatoes MZ SP S C GN Cowpeas MZ CP S C GN CP Millet MZ M S C GN SP CP Tally 5 0 6 4 7 1 3 1

3.

4. 5. 6. 7. 8.

(In this case g/nuts, sorghum, maize, cassava and cowpeas are the 5 most promising enterprise ideas) Set criteria for screening and further selection and give weights to each criterion say from 1-6, the most important criteria getting the higher weighting e.g. profitability has weight 6, market has weight 5, advisory services has weight 4, etc. (Note that these criteria are usually location specific and communities may weight them differently. Other criteria such as compatibility with the farming system, culture and norms may also be considered. However profitability and marketability must always be considered and assigned the highest weights). Participants guided by the facilitator reflect well on each enterprise based on the weighted criteria and accordingly decide which enterprises score highest. Tally the votes against the respective boxes as shown in the table below Multiply the tallies for each enterprise by the criterion weight Add the scores for all the criteria for each enterprise to get the total score Rank the enterprises by total scores. The highest score ranks no. 1 as shown in the example below:
Enterprise G/nuts Sorghum Maize Cassava Cowpeas Tally // /// / / // Risks Weight 1 1 1 1 1 Use of local resources Tally Weight // 2 // 2 /// 2 // 2 // 2 Knowledge and skills Tally Weight / 3 // 3 /// 3 // 3 // 3 Advisory services Tally Weight // 4 / 4 / 4 /// 4 // 4 Market Tally /// / / /// // Weight 5 5 5 5 5 Profitability Tally /// // // /// // Weight 6 6 6 6 6 Score 50 34 47 56 42 Rank 2 5 3 1 4

Based on the above example, it can be seen that out of the five enterprise ideas, cassava, G/nuts, and maize are the most promising enterprises and need to be further subjected to profitability and risk analysis in order to zero on one or two priority enterprises. It should be noted that an enterprise which scores highest in the pair wise ranking may not necessarily perform best in the prioritization process as is the case in this hypothetical example.

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Session 4: Profitability Analysis of Enterprises Learning objective: By the end of this session, participants will be able to: 1. Define and explain profitability analysis and its importance 2. Carry out profitability and risk analysis of the selected enterprises and select to one or two priority enterprises Time: 3 hrs Methods: Brainstorming, presentations and discussions in plenary. Training Materials: Flip Chart Paper, Marker Pens, Masking Tape, Role Play Scripts, Note Books and Pens Procedure 1. Introduce the session and learning objectives 2. Give an interactive presentation on the key aspects and process of profitability analysis with emphasis on the inputs that go into production of various enterprises, their costs, expected outputs/yields, market prices, marketing costs and expected returns. The facilitator continues with the explanation of the aspects of risk analysis, which involves subjecting the expected gross margins to shocks arising from changes in costs of production, output/yields and market prices. (Note to facilitator: Give examples on profitability of crop and livestock enterprises in order to help participants internalize the process). 2. In groups, participants carry out an exercise on profitability and risk analysis of enterprises prioritized in session three no. 4. Each group should work with at least two enterprises following the procedure given in no.2 above. 3. Invite groups to make presentation to the plenary for discussion. (Note to facilitator: Ensure that the calculations are done correctly and steps followed). 4. Depending on the results of the profitability and risk analysis in no. 3 above, the facilitator guides the participants to select at least three most profitable and less risky enterprises to continue with. 5. Wrap up by emphasizing the importance of profitability analysis.

Learning points: Profitability Analysis of Enterprises

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Exercise on Profitability Analysis of a crop enterprise (Sorghum) Egangainos Youth Group in Asuret Sub County, Soroti District identified Epuripur sorghum as one of the promising enterprises in their area. They have decided to open up 1 acre of the crop in the 1st rains of 2004. The group plans to hire land at a rate of Shs. 15,000/acre. The other key inputs include: Oxen hire for ploughing at a rate of Shs. 15,000/acre; Improved seed, which costs Shs. 2000/kg; hired labour which is paid at Shs. 1,500/man day; gunny bags, which cost Shs. 500 each; promotion of the group products over the local FM station will cost Shs. 5,000; hire of transport to the market will cost Shs. 10,000 and market dues will cost Shs. 3000. The group expects a sorghum yield of 1,000kgs/ acre and the market price is projected at Shs. 300/kg. The group is however conscious that the weather pattern in their area changed and is no longer predictable. They therefore consider two future scenarios as follows: Scenario 1: The sorghum crop is hit by a severe drought at flowering and the group only realizes 700 kg/acre as compared to the anticipated 1,000 kg/acre. However because the drought will affect a number of producers, the market price will rise to shs.400/kg. Scenario 2: The season is favourable and the group realizes a higher yield of 1,200 kg/acre. However due to high sorghum production in most parts of the district, prices slumped to only Shs. 200/kg. Note: In either case the costs of production are assumed to remain unchanged. Assignment 1. List all the key inputs and activities required for the sorghum enterprise and their costs 2. Using the estimated yields/ outputs, compute the expected income or revenue (Yield/output x market price) 3. Compute the expected gross margin (Income expenditure/costs) 4. Carry out a risk analysis under scenarios 1&2 for each of the enterprises 5. Accordingly advice the group whether or not to proceed with the enterprise

Exercise on gross margin and risk analysis for a poultry enterprise (Layers) Kweterana Poultry group in Bwanswa Sub County, Kibaale District has embarked on a poultry enterprise. They want to start with 100 layers, as market for eggs is readily available in the area. They have constructed a poultry unit using locally available material and it cost Shs. 120,000. Furnishing the house with feeders, water troughs, and litter will cost Shs. 40,000. Day-old chicks are sold at Shs. 1,500 each. Treatment/Vaccination will cost on average Shs. 1,000 per bird. Feeding, which constitutes the main expenditure item will cost shs. 15,000 per bird over the 18 months period. The group will also incur other direct labour costs, water, lighting and other incidentals to a tune of Shs. 500,000. Due to high standards of management, the group hopes to lose only 10 birds. It is expected that each hen will lay at least 280 eggs and eggs will be sold at farm-gate price of Shs. 2700 per tray (30 eggs). The group will also sell 90 off-layers at Shs 4,000 each after the production cycle. However there is uncertainty over the future of the enterprise and the group foresees the following scenarios: Scenario 1: There are frequent out breaks of Newcastle disease in the village and since farmers hardly ever vaccinate their local birds, the groups expect to lose 30% of the birds during such outbreaks. However, the supply of eggs under such situations rapidly declines and the group will be able to get a higher farm-gate price of shs.3,000 per tray of eggs. Scenario 2: Poultry has been selected as one of the priority enterprises in Bwanswa Sub County and a number of groups have taken up poultry production. It is envisaged that there will be an excess supply of eggs and the farm-gate price of eggs is likely to drop to only shs. 2,400 per tray. (Note: In either case the costs of production are assumed to remain unchanged). Assignment 1. List all the key inputs and activities required by the poultry enterprise and costs 2. Using the estimated outputs (eggs and sale of off-layers), compute the expected income or revenue. 3. Compute the expected gross margin 4. Carry out a risk analysis under scenarios 1&2 for each of the enterprises 5. Accordingly advice the group whether or not to proceed with the poultry enterprise

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Profitability Analysis for Sorghum Enterprise Table 5: Gross Margin Analysis for 1 acre of Epuripur Sorghum
Input/ Activity Hire garden Bush clearing Ploughing (x2) Seed Planting Weeding (x2) Harvesting Transporting home Drying/threshing Gunny bags Product promotion Transport to market Market dues Total costs Total costs 15,000 5,000 30,000 8,000 5,000 30,000 15,000 6,000 15,000 5,000 5,000 5,000 3,000 152,000 Total returns = Area x yield x market price = 1 acre x 1,000 Kgs x 300 =Shs 300,000 Gross margin = Total returns less Total cost = Shs.300,000 Shs 152,000 = Shs 148,000 Quantity 1 acre 1 acre 1 acre 4 kg/acre 1 acre 10 man-days/ acre 10 man-days/acre 2 ox-days 3 man-days x 5 days 10 10 bags 15 bags Unit cost 15,000 5,000 15,000 2,000 5,000 1,500 1,500 3,000 1,000 500 500 200

At this stage of analysis the enterprise looks quite profitable and ideally the group would have no reservations on taking on the enterprise. However when subjected to a risk analysis, the situation may not look as promising as is shown in the analysis below. Table 6: Risk analysis for Sorghum
Scenario 1: A decrease in yield to 700 Kg/ha and a rise in market price to Shs. 400/Kg Parameter Product Quantity Market price (Shs) Expected revenue Sorghum 1 acre x 700 kg/acre 400 Total costs (Remain unchanged) Gross margin = Total revenue Total costs Scenario 2: An increase in yield to 1,200 Kg/ha and a fall in price to shs.200/kg Parameter Product Quantity Expected revenue Sorghum 1 acre x 1,200/ha Total costs (Remain unchanged) Gross margin = Total revenue Total costs Total (Shs) 280,000 152,000 128,000

Market price (Shs) 200

Total (Shs) 240,000 152,000 88,000

It can be seen that under scenario 1 above that a decrease in yield accompanied by a rise in price will not significantly affect the profitability of the enterprise. However, under scenario 2 a fall in market price will drastically reduce the profitability of the enterprise even though the yields increased. However, in both cases, the gross margins remain positive and quite substantial. The group would be advised to go ahead with the enterprise but need to take more care about the many competing groups growing the same crop. The above example also shows that a fall in market price has far reaching effect on gross margin than the fall in yields.

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Profitability Analysis on Poultry (layers) Enterprise Table 7: Gross Margin Analysis for 100 layers
Input/Activity Poultry house Feeders, waterers, litter Day-old chicks Vet drugs/treatment Feed (chick, growers and layers full meal) Incidentals (wages, water, lighting etc). Total Costs Expected Returns Quantity Local materials (assorted) 100 birds 100 birds 100 birds Eggs: 90 layers x 280 eggs x Shs. 90/egg Off-layers90 x Shs. 4,000 each Unit cost 1,500 1,000 15,000 Total cost 120,000 40,000 150,000 100,000 1,500,000 300,000 2,210,000 2,268,000 360,000 2,628,000 418,000

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

The enterprise looks very promising and the group would have little reservations in going ahead with the enterprise. However, risk analysis under two scenarios below shows that the enterprise is quite risky for the group. Table 8: Risk Analysis for layers
Scenario 1:(Disease out break leading to 30% loss in birds, but rise of price of egg to Shs.100 Parameter Product Quantity Market price (Shs) Expected revenue Eggs 70 birds x 280 eggs per laying cycle 100 Off-layers 70 4,000 Total revenue Total costs (Remain unchanged) Gross margin = Total revenue Total costs Scenario 2: Too many poultry farmers, excess supply of eggs leading to price fall to Shs. 80 Parameter Product Quantity Market price Expected revenue Eggs 90 birds x 280 eggs per laying 80 cycle Off-layers 90 4,000 Total revenue Total costs (Remain unchanged) Gross margin = Total revenue Total costs Total (Shs) 1,960,000 280,000 2,240,000 2,210,000 30,000

Total 2,016,000 360,000 2,376,000 2,210,000 166,000

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

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Profitability analysis: This is a process through which the enterprise, which is finally selected, is tested not only for viability, but profitability as well. A typical profitability analysis includes two closely linked steps. The first step involves the gross margin analysis while the second step is the risk or sensitivity analysis. Gross margin analysis matches the costs (production and marketing) against the expected benefits or returns from the enterprise. Risk or sensitivity analysis on the other hand is aimed at finding out how changes in the three key determinants of gross margin affect the overall profitability of the enterprise namely: Changes in costs of production Changes in output or yields Changes in market prices Any sharp rise in costs of production will render the enterprise less or even unprofitable while a sudden fall in output/yields and market prices too will reduce the profitability of the enterprise. This is common with rain-fed agricultural related enterprises, which are frequently subject to vagaries such as drought, water logging, pest and diseases and poor access to productivity enhancing technologies. All groups should therefore endeavor to carry out both gross margin analysis and risk analysis. Gross margin analysis The key steps in carrying out gross margin analysis include the following: List and quantify all inputs that are required to run the enterprise. This will include: Land, labour (group/hired), hand tools, implements, seed, structures, agro-chemicals, advisory/technical services, wages, processing equipment, promotion/advertising costs and actual marketing costs. Establish the unit cost (price) of each input Estimate the total costs of production for the enterprise by multiplying the total quantity of inputs by the cost price of each input. Estimate the total output or yield of the enterprise. Establish the projected market price for the end product (this information could be obtained from a market survey or sources of marketing information) Compute expected returns by multiplying output/yield by the market price per unit of output. Subtract projected total costs from expected returns to get the gross margin i.e. Gross margin = Expected Total Returns Estimated Total costs The Gross margin must be positive to a reasonable margin for the enterprise to be profitable. (Note that it is always better to use average yields and prices in determining expected returns, as current market prices are often misleading) Risk /sensitivity analysis Risk analysis looks at scenarios involving changes in costs of production, yields and market prices and how they affect the profitability of the enterprise. The key steps include: Compute changes in projected gross margins arising from specified increases in the costs of production, usually 5% -10%. Similarly compute changes in gross margins due to 5% -10% fall in yields/ output. Do the same with a fall in market prices Determine the % change at which each key determinant of profitability (or combination of) leads to zero or negative gross margin. If is less than 5% then this enterprise should be considered risky and should be carefully reviewed. It is important to note that although the group can cut on costs of production and/or increase output by use of productivity enhancing technologies, this can hardly influence market prices. Market price is therefore in most cases the most critical factor determining the overall profitability of the enterprise.

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Session 5: Preparing a Business Plan Learning Objective: By the end of the session, participants will be able to: 1. Define a business plan 2. Explain the importance of business planning 3. List and explain the key components of a business plan 4. Prepare business plans for their enterprises Time: 3 hrs Methods: Group discussions, presentations in plenary, practical exercises Training Materials: Flip Chart Paper, Marker Pens, Masking Tape, Manila Cards, Scripts of the exercises Procedure 1. Introduce the session and learning objectives 2. Participants brainstorm and define a business plan and its importance. Using participants contributions, agree on a working definition of a business plan and its importance 3. Explain the key aspects of business planning which include the following: Defining the business Activities Deciding scale of the business Inputs required Quantities required Cost estimation (fixed and operational costs) Sources of funding Assigning of roles and responsibilities Setting of rules and regulations Day-to-day management Record keeping/ financial accounts Marketing. 4. In groups, participants critically analyze two selected enterprises in session 4 and come up with a business plan. Focus should be on the key aspects of business planning discussed in no.3 above. 5. Invite groups to make the presentation to the plenary for discussions. The facilitator guides the discussion ensuring that the key elements of a business plan are all included. 6. Wrap up the session by emphasizing the importance of making a business plan as a guide to a successful business /enterprise.

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Learning points: Preparing a Business Plan


What is business planning? Business planning involves setting objectives, defining the scale/size of the business, preparing and organizing all resources (human and material), which are required to run the business. It ensures that time and other resources are optimally utilized and costs are minimized. For small individual/group enterprises 5 key steps have to be undertaken in the planning process and these include: Deciding on the scale or size of the business Computing start-up and operating costs Mobilizing resources to start the business Assigning roles and responsibilities among members Agreeing on rules and regulations governing the running of the business Writing out a simple work plan Getting started Computing start-up and operating costs The group needs to know the costs to be met before anything can be produced (fixed costs). These may include: cost of land, buildings and cost of initial inputs. A group intending to start a poultry enterprise for example will have to construct a poultry house, it has to purchase feed/ water troughs. Once the group has established the fixed costs, the group also needs to compute the running or operating costs (variable costs). For a poultry enterprise these will include: costs of feed, vaccines, kerosene for lighting, veterinary drugs, labour, transport to the market and market dues. As with any business the group must ensure that cost estimates are realistic and kept to a minimum.

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

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Assigning roles and responsibilities At the time of choosing the business, group will have established whether or not it has the skills needed to run the business. At this stage the group decide exactly what role each group member has to play in running the group business. The group also needs to identify which member will have responsibility for coordinating each set of activities (coordinators). This also applies to individuals. Main areas of responsibility in small group businesses include: Input supply to be coordinated by supply coordinator Production/processing to be coordinated by production coordinator Accessing advisory services to be coordinated by the group advisor Record keeping/treasurer to be coordinated by accountant Marketing/sales to be coordinated by marketing coordinator General management to be coordinated by business manager Apart from identifying the coordinators, the group also needs to assign individual members to the respective teams. Usually 1-2 members are assigned to work under each of the coordinators. Roles should be assigned to members who are knowledgeable, preferably with experience for the tasks assigned to them. However it is important to note that the main purpose of assigning roles and responsibilities is to ensure that all group members actively participate in the various enterprise operations. Like leadership, coordinating positions should be regularly rotated so that all members get opportunity to practice different roles. This ensures that knowledge is broadly shared and capacity built among all members and not focused on just one or two individuals. It also ensures that if a coordinator is sick or leaves the group, other members are able to step in and ably perform his/her duties.

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

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Agreeing on rules and regulations It is often difficult toget members to devote equal time and contributions to the group business. It is therefore often necessary to make rules and regulations guiding the group business. In particular the rules/regulations should guide the following: What new members must contribute in order to join the group business What benefits members will receive in case they wish to leave the group How much time each member should devote to the group activities How profits will be shared How losses (if any) will be shared How much of the profits will be reinvested in the business How arguments or conflicts will be resolved It is however, important to note that only when rules are enforced, will they be of any use to the group. Some form of disciplinary measures need to be imposed on offenders while well performing members should be rewarded. Deciding on the scale or size of the business The size of the business is primarily determined by number of potential customers who will buy the product (size of the market) and the individual/groups ability to meet the required start-up costs (fixed capital) and management. A simple market survey before starting the enterprise is recommended. Such a survey should address the following issues: How many potential customers exist? What are the product demand levels and their stability throughout the year? Are the resources sufficient to meet start-up costs? Are there competitors or other firms making similar products? What is the possibility for future expansion? However, the rule of the thumb is that it is usually better to start small and subsequently grow Drawing up the work plan It is important that the individual/group draws up a work plan before commencing business. The work plan should specify the key activities to be implemented, where they will be carried out, when they will be carried out, who will be responsible for each set of activities, the key resources required and the expected outputs for each activity. This will not only lead to timely operations, but will also ease supervision and monitoring of enterprise activities. Once the group has developed a work plan it ought to ensure that it sticks to it and alter it only when it is absolutely necessary.

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

Getting started Once the group/individual decide on the scale of the business, start up operations have to be organized, some of which may be implemented at the same time hence a need for coordination. Key operations may include: Securing funds for the business. e.g. Individual/members contributions, group savings, loan e.t.c. It is however, recommended that most financing for operations comes from individual or group fund. In case of a group enterprise, enough land should be secured, as lack of group land is usually the main constraint to running group enterprises. The group can rely on the good will of one of its members, but it would be better off hiring land and or outright purchase of its own land. Finding premises in which the business will operate. The premises can either be owned or hired by the individual/group depending on finances available Getting equipment and supplies that are needed to kick-start the business. The equipment depends on the type of enterprise e.g. a poultry enterprise requires the following: litter, feed and water troughs, lamps, feed and vet drugs, while a crop enterprise will require seed, agro-chemicals etc. Preparations for selling include identifying a location for selling the products, which, could be a market stall, a roadside kiosk or a retail shop. Preparation for marketing also includes advertising the product on signposts or billboard, radio and newspapers. This is always the most neglected aspect of enterprise development and needs to be addressed at the planning stage. The sub-committee on marketing should try to link up with sources of marketing information and as much as possible try to promote the group products.

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An example of a business plan for a group bean enterprise All groups should endeavor to prepare a simple business plan for their enterprises. A typical business plan should indicate the group name, its location, type of enterprise, the overall business objective, specific objectives, estimated start up costs, sources of funding, scale of enterprise, members roles/responsibilities, rules/regulations and a simplified work plan. This will ease management and monitoring of the business. An example of a simple business plan is given here below. Group Name: Umoja Location: Kikoota Parish Olio S/county Soroti.. District Group Enterprise: Beans.. Overall objective: To maximize the groups income through commercial production of beans Specific Objectives To maximize yield through use of improved bean varieties To minimize costs through use of group labour To get premium prices by selling high quality beans during off-season Estimated start up costs: Shs. 250,000 Sources of Funding Members contributions, Shs. 150,000 Group Fund, Shs. 100,000 Scale of enterprise Start with 2 acres during 1st rains of 2004 and expand to 4 acres in the 2nd rains. Members Roles and Responsibilities 4 working committees under the leadership of a coordinator Purchases committee (3 members) Production committee (4 members) Finance committee (Treasurer and 3 members) Marketing committee (3 members) Rules and regulations All members to pay contribution of Shs. 10,000 each All members to work on group garden at least once a week A fine of Shs. 1,500 for absenting from group work All members to carry out monthly monitoring visits Work plan
Activity Ploughing Seed purchases Planting Weeding Harvesting Drying and threshing Sorting and bagging Marketing When February 04 February 04 March 04 May 04 June 04 June 04 July 04 September 04 Where Group plot UNFFE stores Group plot Group plot Group plot Chairmans home Chairmans home Soroti town Responsible person Production coordinator Purchases coordinator All members All members All members All members Marketing coordinator Marketing coordinator Resources Oxen, plough Cash, seed Group labour Group labour Group labour Hired labour Hired labour Transport Expected output Ploughed field Seed purchased Crop planted Crop weeded Crop harvested Clean crop High quality beans High income

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Session 6: Managing the Enterprise Learning Objectives: By the end of this session, participants will be able to: 1. Define enterprise management and its importance 2. Describe key management functions Time: 3 hrs Methods: Brainstorming, role play, discussions, presentations in plenary Training Materials: Flip Chart Paper, Marker Pens, Masking Tapes, Script of Role Play, Note Books, Pens Procedure 1. Introduce the session and the learning objectives 2. In a brainstorming session, participants define management and explain its importance. Harmonise and agree on the definition and the importance. 3. The facilitator discusses the key management functions 4. The facilitator introduces two role-plays to be acted in two groups. One on Kihumuro Fish Farming enterprise, the other on AWAFA Groundnut enterprise and requests volunteers to participate. (Note to the facilitator: Encourage all participants especially women to participate) 4. The facilitator goes through the role plays with the volunteers; The volunteers assign themselves the various roles, rehearse and act to the rest of the participants. 5. After the role plays, guide participants to discuss and document lessons learnt on management of group enterprises 6. Wrap up the session by emphasizing that proper management of resources (human, financial,
land) with proper record keeping are some of the most important management functions in business.

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Role play: Kihumiro Fish Farming Enterprise After successfully making their business plan, the Kihumiro group embarks on their fish farming enterprise. At the last planning meeting, it was agreed that all the members would participate in digging the ponds. Five working committees each under a coordinator were identified. The first committee under the supply coordinator would be responsible for identifying and purchasing of all the inputs required such as hand tools, improved fish fry and nets. The second committee under the production coordinator would be responsible for day-to-day maintenance of the ponds and feeding the fish. The third committee led by the advisor would be responsible for linking the group to service providers for the necessary technical information. The fourth committee under the accountant will be responsible for day-to-day management with specific emphasis on record keeping, maintaining business accounts and group finances. The fifth committee led by the marketing coordinator will be responsible for accessing marketing information, promoting of the group products and carrying out actual marketing. They will also be responsible for equitable sharing of the benefits of the group business. It was agreed that all members would actively participate in monthly planning meetings and in monitoring progress of the project.

Role play: AWAFA Upland Rice Enterprise AWAFA group in Kasilo County, Soroti district has embarked on an Upland rice enterprise. They have identified a high demand for SUPERICA 2, one of the high yielding improved varieties of Upland Rice. At the last planning meeting, four working committees each under a coordinator were identified. The whole group under guidance from the production coordinator would be responsible for the key production activities notably; opening up of land, ploughing, planting, weeding pest/disease control, harvesting, drying/threshing and storage. The first committee under the supply coordinator would be responsible for sourcing and purchase the improved seed, which, is currently in short supply. It will also be responsible for purchase o other inputs such as hand tools and implements. The second committee led by the advisor would be responsible for linking the group to service providers and other sources of technical information. The third committee under the accountant will be responsible for day-to-day management with specific emphasis on recording keeping, maintaining business accounts and handling group finances. The fourth committee led by the marketing coordinator will be responsible for accessing marketing information, promoting of the group products and carrying out actual marketing. They will also be responsible for equitable sharing of the benefits of the group business. It was also agreed that all members under the leadership of the chairperson, would actively participate in monthly planning meetings and in monitoring progress of the project.

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Learning points: Managing the Enterprises


What is management? Management is making best use of the human, financial and material resources in order to achieve business objectives. The key business objectives usually include: efficient use of productive resources, minimizing costs and above all maximizing profits. In order to maximize profits, one must aim at producing at low costs, increasing output or yields through use of productivity enhancing technologies such as improved crop varieties, improved livestock breeds and labour saving techniques, selling at high market prices by producing during off-season; storing and selling when supply is low and/or through adding value/processing. In groups, members themselves assume the management functions by allocating business roles and responsibilities among members. If roles and responsibilities are not clearly defined or if some members show reluctance in performing their assigned tasks the group business is unlikely to succeed. The roles include among others: sourcing and purchasing inputs, production/processing, accounts/record keeping, promotion/marketing and overall supervision/management Proper management of funds and assets together with proper record keeping are some of the most important management functions in business and should be assigned to literate, dedicated and trustworthy persons. Assigning of managerial functions Input supply to be coordinated by supply coordinator Production/processing to be coordinated by production coordinator Accessing advisory services/technical information to be coordinated by the advisor Record keeping/accounts to be coordinated by the treasurer Marketing/sales to be coordinated by marketing coordinator General management to be coordinated by business manager or chairperson The purpose of assigning roles and responsibilities is to ensure that all members actively participate in the business operations. Coordinators in particular ought to realize that their roles are to coordinate and work with other members, but not to give orders to others. Like all leadership roles the coordinating positions should be regularly rotated.

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

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Session 7: Financial Records Learning objective: By the end of the session, participants will be able to: 1. Define financial records 2. Describe the importance of keeping financial records 3. Prepare key financial records Time: 2 hrs 30 mins Methods: Brainstorming, practical exercises, plenary presentations and discussions Procedure 1. Introduce session and learning objectives 2. Through brainstorming, participants define and discuss the importance and the different financial records kept. The facilitator records the responses on a flip chart paper. 3. The facilitator basing on the contributions from participants explains the types of business records kept with practical examples on how to make them. 4. In groups, participants study the case study on successful Awoja Tomato project and discuss the various records kept, prepare a balance sheet, a profit and loss account and a cash flow statement. 5. The groups record their deliberations on flipchart paper and present to the plenary. The presentations are discussed and under the guidance of the facilitator, necessary modifications are made. 6. Wrap up the session by clarifying issues not clearly understood by the participants. Point out that, financial record keeping, including maintenance of accounts, is usually poor in
most businesses and is considered difficult and time consuming. One must therefore decide which records to keep (not too many) and who would be responsible. In addition, basic accounts (balance sheets, profit/loss accounts and cash flow statements) must always be presented in simplified form.
Case study: Successful Awoja Tomato Project Five members of Awoja Youth Group in Soroti District decided to embark on tomato production. They were able to produce tomatoes all year around because of the readily available water at Awoja River. There was also ready market for tomatoes in Soroti town 5 Km away. After carrying out a feasibility study, they found out that tomato production was profitable. According to their business plan, they required capital of Shs. 100,000, to start with. Each of them contributed Shs. 20,000 and this money was banked in their account in Stanbic Bank, Soroti. During their planning meeting it was decided that the money be used as follows: Hire land (Shs.10, 000), tomato seeds (Shs.5, 000), Hand tools (Shs15, 000), Sprayer/chemicals (Shs.40, 000), hiring a market stall (Shs. 5,000), transport to market (Shs.5, 000) and reserve at bank (Shs.20, 000). Land was hired in January, while tomato seeds and hand tools were bought in February. The sprayer/chemical were bought in March. The stall was rented in June, and likewise, transport expenses were incurred in June. By the end of the marketing season, the group had harvested 60 Kg of tomatoes and sold it at a price of Shs. 2, 500 per kg, realising a total of Shs. 150,000 from their sales. Shs. 50,000 was shared out equally among members and the rest was banked in the group account in preparation for the next season. Assignment Identify which business records the group needed to keep Prepare a simplified balance sheet Prepare a simplified profit and loss accounts and A cash flow statement for the group business

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Learning points: Enterprise Financial Records


Financial record keeping is writing down in a chronological order all transactions involving money coming into and money going out of the group business. Money mainly comes into the business through members contributions, group fund, loans and the sale of group products. Money goes out of the business through purchases of inputs such as seed, hand tools/implements, payment for labour etc. A group can only determine the profitability of the enterprise through accurate record keeping. To determine the profitability, the group therefore needs to know exactly how much money went into production and what was realized through sales of group products. Purpose of financial records They provide a history of what has happened in the group business Aid in management decisions Provide figures for planning and budgeting Show the profitability of the business Show the financial standing (ownings and owings of the business) Are useful for taxation purposes Key financial records The cashbook Good record keeping requires that all transactions be recorded in an orderly manner. There must be written proof of transactions in form of receipts of purchases and copies of receipts issued to its customers. A cashbook gives a summary of the money, which came into the group business, and money that went out of the business. A simple cashbook can be made from an ordinary exercise book. The money that came in is recorded on the left hand side while money that went out is recorded on the right hand side. For a farmers group the main sources of income will include: Members contributions, group fund, grants from NGOs and loans from lending institutions such as MFIs and banks. The main expenditure items include: Seed purchases, hand tools, implements, hired labour, transport etc.
Money In (+) From which source the money came Income from sales Group savings Loan Grants from NGOs etc. Money Out (-) What money was spent on Seed Hand tools Implements Hired labour Transport costs etc.

A cashbook should show the dates money was received or given out, the source of the money and the amounts. Entries usually cover a period of one month at which totals and balances are made as shown in table 9 below. Total money in less total money out of the business gives the balance of funds in the group business. Information from the cashbook is essential for writing other records such as the balance sheet and profit and loss accounts.
Table 9: Cash Book
Date Money In Amount Date Money Out Amount

Total Balance

Total

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

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The Balance Sheet The balance sheet shows where the funds for the business came from and how it has been used. This money could be from own contributions, from the group fund and/or a loan from the bank or other lenders such as NGOs or micro-finance institutions. The money is normally spent on purchase of inputs; pay labour, meet transport costs and/or banked. It is called a balance sheet because all money collected must equal to the money used plus any that is at hand or in the bank. The balance sheet for the example earlier given (Awoja Tomato Enterprise) would look like in table 10 below: Table 10: Balance sheet for Awoja Tomato Enterprise
The money came from: Akol Opio Edwaru Emudong Ameru Total 20,000 20,000 20,000 20,000 20,000 100,000 The money was used like this: Hire land Tomato seeds Hand tools Sprayer/ chemicals Hiring stall Transport costs Bank Account Total 10,000 5,000 15,000 40,000 5,000 5,000 20,000 100,000

Profit and Loss Accounts Profit and loss accounts are used to determine the profitability of the enterprise. It matches the expenses against income in order to establish whether the business made a profit or a loss. In a profit and loss account, one should be able to work out the following: - What it cost to produce the product - The key ingredients of costs namely; fixed costs and operational costs - How much they got from selling their product - Key components of returns e.g. size of enterprise, output or yield and market price per unit of product Once these parameters are clearly understood then one should be able to compute the profits.

The profit and loss account for Awoja Tomato enterprise would look like table 11 below:
Table 11: Profit and loss account for Awoja Tomato Enterprise
Cost of production Hire land Tomato seeds Hand tools Sprayer/chemicals Hiring stall Bus transport Total 10,000 5,000 15,000 40,000 5,000 5,000 80,000 Sales of vegetables Tomato sales 150,000

Profit

150,000 70,000

The difference between the total sales and the total costs of production show whether the group made a profit or a loss. In this case the tomato enterprise made a profit of Shs. 70,000. The calculations should be made at the end of a production cycle as follows: At the end of the cropping season for annual crops (3-6 months) At the end of the laying cycle for poultry (1 year) At the end of the lactation period for dairy cows (1 year) After the sale of stock such as steers, pigs, broilers and small ruminants At the end of the financial year (June/Dec) for service enterprises

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Cash flow Statement A cash flow statement shows when money flows into the business (inflows) and when money flows out of the business (outflows). It helps one keep track of daily cash transactions (cash in and cash out) and also helps ensure that there is always enough cash to meet current and future expenses. It provides opportunity to verify all cash transactions and helps confirm the cash at hand any time. It assists one make informed decisions. For example, where the net inflow is negative one either has to seek additional funds from the reserve; request for members contributions; borrow from the bank or Micro Finance Institutions (MFIs).

A simplified cash flow statement for Awoja Tomato Enterprise would look like table10 below.
Table 12: A monthly cash flow statement for Awoja Tomato enterprise Period Land hire Seed Hand tools Sprayer/chemicals Hire stall Transport Jan - 10,000 - 5, 000 - 15,000 - 40,000 - 5,000 - 5,000 Feb March April Expenses May June

Income Tomato sales + 150,000 Total - 10,000 - 20,000 - 40,000 +140,000 Net cash flow (Inflow Outflow) = Shs. 70,000 (Note that if correct entries are made in the cash flow statement, then the net cash flow should be equal to the profit obtained in the profit/loss accounts)

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

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