|Food Chain No. 21 - July 1997 (ITDG, 1997, 20 p.)|
Running a business without sound finances, is like trying to drive a brand new car without engine oil. It will start making noises before it covers any meaningful distance.
In a previous edition of Food Chain (16), Garry Whitby and Ishmael Sunga wrote about a successful oil processing project in Zimbabwe run by Intermediate Technology. Mr P Parrafin of PIPA Enterprises, one of the entrepreneurs involved in that work, has written about the problems faced by entrepreneurs when setting up a successful food processing enterprise. This is a summary of the paper presented at The Small Scale Decentralised Agro-Industry Seminar, in Harare on 2829 November 1996.
The development of a small-scale oil processing business is a long and painful journey. There are hurdles to jump, mountains to climb and landmines to avoid. The risks are abundant and everywhere. The entrepreneur has to have the will to succeed against all odds. The amount of courage required is tremendous and the price of failure is high. There is a lot of psychological pressure to deal with: if what I am going to do fails, how will society around me, see me? The entrepreneur needs conviction and determination to focus ahead all the time, and to 'do business as business - which means taking care of the following issues.
Money is the life blood of a business. Running a business without sound finances, is like trying to drive a brand new car without engine oil. It will start making noises before it covers any meaningful distance. There is global acceptance that small businesses have the potential to solve employment problems in many countries, yet there is not enough attention and support provided for the development and sustenance of these small businesses. In my own experience it is nearly impossible to save money from employment earnings to finance a new business adequately. A loan from a credit organization is essential. Bank requirements appear simple at face value: balance sheets and accounts for two to three years, a cash flow for 12 months and collateral security in the form of immovable property or fixed deposit accounts. These simple requirements, in fact, become the first major hurdles in setting up the business. As a new venture, there are no balance sheets and accounts but only a business plan. The business plan is therefore based on research data, common sense and intuition. Agro industries, by their nature, are often located away from the cities. They are found at rural service centres. Even for the businesses that have well developed structures, the lack of title deeds of the land restricts their ability to provide acceptable collateral security required by the banks.
My own experience is that banks move slowly when looking at a business venture which is new to their experience. Banks take their time to study and evaluate the- proposals. They may want to compare data with an equivalent type of business they have handled, to satisfy themselves that they are backing a bankable project. The delays, though understandable from the banker's point of view, cause needless stress to the entrepreneur.
The entrepreneur must remember all the time, that he and the business are separate entities. The practice of dipping the hand into the till each time he runs out of pocket money spells disaster. He must only have a life style that his pay sustains.
The business must be located where there is an advantage for raw material procurement or there is a large market base. The costs of moving raw materials or the finished products to the market can affect the viability of the business. The decision of where the business is to be located must be on economic grounds, otherwise there will be problems.
Another challenge is the lack of suitable premises. Premises that become available for lease will have been built for specific business activities and in the majority of cases not suitable for agro-processing purposes, resulting in low productivity, the production costs increasing and the competitive advantage being lost.
The selection and engagement of personnel must be based on the best man for the job. The job description must come first and the applicant must fit the job. There is always constant pressure from relatives and friends to have their relatives employed. There may appear to be savings, but in the long term, the level of productivity may be reduced.
Price plays an important role in determining how the product performs. If it is too low, they may perceive the quality as inferior. If its high, they may say 'why bother buying what you don't know'.
The sourcing of good quality raw materials, in sufficient quantities to support uninterrupted production schedules, is another big challenge. For oil processing in Zimbabwe, sunflower seed is the major raw material and its availability depends on weather patterns. The first crop generally becomes available in April each year with bulk supplies becoming more readily available in June, July and August. The buying season extends at most to five months, ending in August each year, but the production of oil has to be sustained for the full twelve months of the year.
The long-established oil processors have the financial resources and structures that enable them to go into the countryside and buy large tonnages for cash. If the harvest is average, they have the capacity to virtually clean out the area and the small entrepreneur is left empty handed. The small-scale processor is at a disadvantage if he has no adequate funds to purchase sufficient stocks to cover the following seven to eight months of production. When you seek finance to acquire seven months stocks, people raise eyebrows and they think that you are crazy. It is difficult to gain support unless they fully understand that the raw material is very seasonal and is only available for a few months a year. The banks will explain that the stock holding costs will kill the business, with interest rates of 38-40 per cent. What is generally overlooked is the fact that the cost of seven months stock can be recovered within four to five months depending on the operation. Therefore the impact of interest and any other stockholding costs is over a five months period at most, and its impact on viability is only a small dent.
The next issue is that of product presentation. A product can succeed or fail because of its packaging. Once again, the question of finances raises its ugly head. You must order in large quantities, for cash in order to obtain competitively priced packaging material. One supplier of packaging material in Zimbabwe only begins to give discount after the first million units in the month
Customers know best what is good and what is not. Selling the first production batches is not easy. The customers will subject the oil to all sorts of tests. They will tell you how it smells, how it flows in the pan and how it messed up their baking. Pricing the product becomes a challenge of its own. Customers develop preferences for particular brands and need a lot of persuasion to change. Price plays an important role in determining how the product performs. If it is too low, they may perceive the quality as inferior. If its high, they may say why bother buying what you don't know'. Consumers in Zimbabwe have become quality conscious and want products that meet their expectations. A further dimension is the level of promotion to back the product and the cost of that whole exercise.
If all of these factors are taken into account, a successful business can be established which will provide benefits to the entrepreneur, the workers and the consumers of the product.
Mr P. Parrafin, PIPA Enterprises, Gokwe, Zimbabwe