Communicating the viability of your business (5)
By Goke Ilesanmi
Last week, we further discussed technical feasibility, another segment of a feasibility study. We examined other sub-segments such as equipment required; packaging and staffing levels, etc. We explained that the weight of food that should be processed at each stage is normally calculated in kg per hour. We said this information then allows the processor to decide what equipment piece is required and the size (or “scale” or “throughput”) that is needed. We added that in doing this, decisions need to be taken on the relative benefits of employing a larger number of workers or buying machinery to do a particular job.
We explained that in some enterprise development programmes, there may be wider social objectives of employment creation which may influence such decisions. We added that the decisions on equipment requirements are also influenced by: the cost and availability of machinery; availability of people who are skilled in maintenance and repair; availability and cost of spare parts; and possibilities of local equipment fabrication.
As regards the sub-segment of packaging, we said similar considerations apply when ordering packaging materials as there is a very wide range available and there are a number of considerations that should be taken into account by the producer. We said these include the technical requirements of the product for protection against light, crushing, air, moisture, etc.; the promotional and marketing requirements and the relative cost and availability of different types of packaging.
We explained that selection of packaging materials frequently causes the largest problems for small producers and is often the main cause of delay in getting a business established. We said professional advice should be sought from a food technologist or in some countries, packaging specialists or agents of packaging manufacturers.
On staffing, we explained that decisions on the number and types of workers required to operate the proposed business are taken in conjunction with decisions on equipment procurement. We said it is possible to break down the production into different stages and then decide the number of people that will be needed for each stage of the process. We added that it is important also to include work such as store management, quality assurance and book-keeping when planning employment levels.
Financial feasibility
As regards financial feasibility, the sub-concepts such as start-up costs, operating costs, income and profit, financial planning, etc. will be considered here. Having completed the study of technical feasibility, the entrepreneur should then have sufficient information to determine the costs that are likely to be involved in production.
Additionally, the market survey will have supplied information about the sale price that could be achieved for the new product. The entrepreneur is therefore in a position to calculate the expected income and expenditure and hence the gross profit that can be achieved.
Start-up costs
When a new fruit and vegetable processing business has started, it is likely that money will be required to buy or convert a building and buy equipment to start production. Additionally, it is necessary to buy a stock of packaging materials and the initial raw materials and ingredients.
The start-up capital is the amount of money that is needed to buy the facilities and equipment, to register and license the business and get the necessary certificates.
Working capital includes the costs of raw materials, packaging, staff training, product promotion etc. that have to be made before the business begins to generate income from sale of the product. The requirement for working capital also continues as the business develops. Fruit and vegetable processing has relatively high requirements for working capital compared to other types of food processing.
This is because of the seasonal nature of crop production and the need to buy several months of supply of crops during the season and part-process them so that production can continue for a larger part of the year.
Financial experts educate that the start-up capital and initial working capital are calculated to determine whether the entrepreneur’s savings (known as the owner’s equity) will be sufficient to start the business without a loan.
Operating costs
There are two types of operating (or production) costs: those expenses that have to be paid even if no production takes place and those that depend on the amount of food that is produced. The first type is known as fixed costs and the second type is called variable costs. Labour is a fixed cost if workers are permanently employed as full-time staff, but it is described as a variable cost if people are only employed when production takes place.
Income and profit
From the market survey, the estimated market size and share enable the expected sales to be calculated. According to financial experts, the gross profit (or gross loss) is the difference between the expected income and the total operating costs over the first year, including any loan repayments. Income is therefore calculated as follows: Income = selling price per unit times number of units sold.
The income clearly depends on both the price of a product and the amount that is sold. Financial experts say when selecting a price for a product, two approaches can be taken: first the price can be based on production costs and it is set to ensure that income exceeds the total costs.
This, however, does not take account of competitors’ prices and to be successful, the new product should be priced at or below the price of other similar products. The second approach is therefore to set the price to compare favourably with existing products and calculate the likely profit at the planned scale of production.
Concluded
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GOKE ILESANMI (FIIM, FIMC, CMC), CEO of Gokmar Communication Consulting, is an International Platinum Columnist, Professional Public Speaker, Career Mgt Coach and Certified Mgt Consultant. He is also a Book Reviewer, Biographer and Editorial Consultant.
Tel: 08055068773; 08187499425
Email: [email protected]
Website: www.gokeilesanmi.com.ng
