Sukkur IBA University

Airport road Sukkur, Sindh, Pakistan

CHIPBANA . EYE ON PREDICTING FINANCIAL FUTURE.

Bashir Ahmed Memon after getting retirement from State Bank of Pakistan as manager operation was
pondering about making some business investment at smaller level. He served for 38 years with
central bank of the Pakistan and in result of leaving his job he received a handsome compensation of
PKRs. 19, 110,000 and now he was looking for the options to invest quarter of his saving where he can
also engage his younger unemployed son Shafique Ahmed in that business by supporting him to
become self-sustainable in life. Shafique Ahmed did MBA from IQRA University Karachi and he has
been applying for the various middle management positions since last 2 years but he is unable to get
any. One day Bashir Ahmed took his son for evening walk while going to Public Park and started
showing his concern with son.

INTODUCTION

Pir Jo Goth is a small town located in Khairpur district. It Comprises of 0.75 million population.
Economically it is completely agrarian sustained town due to huge fertile lands and popular for many
crops production like mangoes, dates, sugarcane, cotton. Pir Jo Goth is accessible at 27 kilometers
from Sukkur, which is not only its divisional head quarter but an economic hub for interior Sindh and
southern Punjab. Its agriculture market has huge significance at national and local level while
connecting the three provinces of the country regarding agricultural supplies. On the Other hand it’s
17 kilometers away from Khairpur District as well, which is also considered as strong hub of
agriculture market at provincial level. Supply markets in close regions include the areas of Sukkur,
Khairpur, Pir Jo Goth and Larkana.

From 2003 to 2006 Export quality Banana production reached at its apex, and touched at those heights
of per capita income where none of the crop could ever reach in this locality. But soon afterwards an
incurable disease exposed in Banana crops which completely destroyed thousands of acres of Banana
crop production in the premises. So growers diverted themselves to wheat and rice production
sequentially, as both crops were not cash crops so those couldn’t bring positive impact on income
levels of growers, but somehow farmers managed their livelihood at less than substantial level. Again
gigantic flood and heavy rain exploded in respective years of 2010 and 2011 which had strongly hit
the area of interior Sindh region which left to face the local people with massive destruction of crops
and infrastructure.
DISCUSSION

Mr. Bashir: “ Shafique ! I have a regret in life, wish I could have developed a business rather than
serving whole life as an employee, though I got lot of perks and benefits from my past employer as it
was banker’s bank but if I had a business, like my brothers do. Neither you would remain unemployed
nor need you to start anything from a zero base. It’s a bit late but never too late. let me be honest to
express that you are young soul, having ample time, possess energy and excellent spirit to take any
good initiative that’s why I want to spare quarter of remittances received from state bank and
supposing you to open a small scale business rather than looking for those minor jobs so that you
wouldn’t be at my place in my age not to see your offspring worried about being unemployed while
looking for job.”

While listening his father Shafique gently raised his face with sparkling eyes and said: “That’s really I
wanted to tell you since so many days but couldn’t let my ideas to open in front of your presence, and
much frightened because of several job rejections, well Baba, I have a business idea and have been
working to develop its operational plan and financial feasibility since last three months. It’s about to
install a small level factory plant in our home town Pir Jo Goth to produce and launch a totally new
product that’s Banana Chips with brand Name of CHIPBANA. I had a detailed discussion with the
consultants from National Agriculture Research Council Islamabad about this idea from acquisition of
machinery, train the labor to sustain quality operations for the successful launch of new product. it is
much refined form now for putting it into the practice, parallel to that I have conducted various
market surveys and interviews with several producers and suppliers of raw material and the
distribution agents about market feasibility and distribution of product, Conclusively I have developed
various assumptions and scenarios to commence the production while managing a sustainable supply
chain.

Mr. Bashir exclaimed “Oh! That seems lucrative idea in this untapped market however it’s aligned
with some performance risks and complexities but can be put it into the practice so concluding your
research where will you manufacture this product and how you would pileup your operations for
CHIPBANA”

Shafique answered: Abbu as you know, beside our home there is our unutilized ancestral property
which is about 300 square yards, we shall construct a building on it. It will be enough space to install
the plant and machinery for manufacturing this product along with store room. Building construction
will cost almost PKRs. 4,000,000. We will have to import an automatic banana chips manufacturing
plant from Chinese Supplier Tsuenlee engineering group Pvt ltd with the consultation of PARC
referred agent at subsidized price. PARC has initiated national agri-prenurship program in
collaboration with SAARC, in which chairman has advanced a technical team to provide direct
training in order to strengthen local producers to add value to quality agro products through updated
machinery and technology which can give a boost to agrarian economy in order to that they have
dedicated few engineers of PARC who will be here for some days during thes pilot production to train
our employees how to install, operate and maintain that plant it will cost about PRs. 3.5 million, an
additional cost of furniture of about PRs. 0.5 million will be incurred to furnish the factory office .
Depreciation of the building and furniture will be through straight line method at 15% and 10%
respectively. However Depreciation of plant machine will be charged 15% at written down value.

They took a pause and set on a bench in the park and He took out a pen and small diary from his side
pocket and started sketching some illustrations “Now I want to brief you about operation and
production cycle of this product It will be consisting of some steps likewise followed by unloading
and washing of raw material firstly the slicing of bananas would be initialized from covered banana
bunch stem, than putting it into washing tub for washing & peeling of skin, thirdly it would lead
equally slicing of banana blanches and banana de-hydrating to chips by frying and terminally would
end at chips de-oiling. Once the chips come out after passing through plant chambers now fried chips
seasoning, picking and lastly chips packing is being done by labor. So, the whole process will produce
six to nine cartons of chips in an hour.

Mr. Bashir: Amazing work Lad! “I have few concerns regarding your investment scope, you might
have to face financial dearth between planned funds and provided funds by me so in concern how
would you bridge the financial gap of business? while another concern is as Banana is a seasonal fruit
although ripen banana is available throughout year but it has peak as well as low supply season so the
major issue is about availability of raw material if there is shortage of banana for few months like
May, June, July, August and September than how will you accommodate the production to fetch the
demand and supply gap?”

Shafique enthusiastically smiled after judging the anxieties of his father which were reflecting the
significance in his business plan. Now he was looking at diary and realized that few page was fetched
with depictions of his production process so he turned few leaves ahead of his diary to make
production and financial plan to more comprehensible to his father:

Absolutely Abu: “I would likely have to approach Allied bank for a loan financing by mortgaging
same property where the plant property so the additional required amount would be borrowed up to
1.5 million PKR at current rate of 19.5% per annum for four years and interest would be paid at the
end of each quarter, however it would take five to six months to process the loan due to prolonged
documentation, verification and bank formalities so possibly in the month of May we shall be able to
receive the funds, till that other option is it may be borrowed borrow from local vendor Raman Das
with least documentation and he would charge PKR 7000 per month per lac, Though its costly but
it’s a running resort. No sooner did our loan would be processed by the bank , amount borrowed from
Raman would be paid back, while as far as other concern I have incorporated those seasonal
variations in my production plan we will produce the 100% of sales in the same month whole year
except those few months you have mentioned , due to the dearth of raw materials in those months and
product has 5 months shelf life at normal room temp so in order to that half of sales of May, June,
July and August will be produced in advance in previous months as January , February, March and
April and 50% would carried out in their respective months. However in September farmers usually
start harvesting their new crop. So we would resume our production Capacity of September as full of
sales demanded”

Mr. Bashir: “Nice analysis beta! Let me know about financials of material acquisitions, what would
be your purchasing patterns for running your operations smoothly and what payment terms would be
decided with concerned growers.”

Shafique: As production process will take almost a week as a lead time to complete a batch that’s
why, we will purchase material equal to one quarter of one month’s desired production in previous
month and remaining in the same production month. Raw Material is not only consists of banana but
also it includes Sugar, spices, added flavors, Lemon, and cooking oil (Exhibit 1). Half of Payments
will be made 30 days after the purchases and remaining payment after 15 days of 1 st installment
because its normal duration of deferring payment of growers and growers usually collect the money
from fruit market commission agents and customers respectively at same delay.

Mr. Bashir: “good enough let me know about Sales Plan? Will you make credit sales if yes than its
alarming trend that people here take the goods first on credit happily while on other hand they are not
willing to pay your money back even though after realizing sales of your merchandize so in order how
would you portray the trust gap in your plan order to collect the outstanding amounts?”

Shafique: Dad, Sales will be low in initial years and slowly as let the market to get accepted with our
product and then growth would take the flight arithmetically ( Exhibit 2 ) .As you know this is totally
a new venture so market distributors might feel hesitant to purchase in cash, in order to that we have
to win trust of whole sellers and distributors we have to make all sales on credit but for cash
collecting patterns will be drafted according to credit policy for making credit sales and collections so
in this regards with 7% discount will be allowed to almost 35% of each months sales will be received
in same month and. 40% of each month sales will be received in the following month, 15 % in third
month and 7% will be received in the fourth month. Father, as it is a new project that’s why, sales
growth is slower and we will might have to speed up our recoverability and through there is an option
to our sales persons with certain extra margin of commission for collecting receivables collection can
be offered. So, there will be only chances of 3% of each month’s sales will be bad debts due to more
time spread in recovering amounts.

Mr. Bashir: “Well I have some of the reservations but these seem to be sorted out by discussion that
what you have planned about incurrence and payment patterns of indirect expenses of company?”

Shafique: Father “that’s rightly pointed although these expenses are nominal as an individual items
but they have material impact collectively in production as well as in financially, there will be
utilities and other variable overheads in consumption as per my estimates our whole production
process takes a deeper shadow of seasonality impact in order to that those all variables expenses will
be charged per carton basis at rate of PRs. 300 per carton for utilities and PRs 75 per carton for
miscellaneous over heads estimated on the basis of budgeted production. Both of those costs
payments series consists of 60% of total variable over heads will be paid in the mid of the following
month as it was incurred and billed by related utilities distribution companies while remaining 40% is
to be paid one month later after utilities payment. Another variable overhead will be packaging cost
which will be PRs. 100 per carton and payments terms of packaging material supplier are negotiated
and he agreed to be paid 75% in the month following the month it was incurred and 25% is to be paid
one month later.

Mr. Bashir deeply sighed: well your paper work has relieved much of my anxieties in my mind but
still core concern is acquisition, training and retaining the labor force and manger who are key drivers
of business and for this specialized nature work how would you locate and retain passionate
workforce in this small vicinity where turnover is very high because of competitive wages in parallel
jobs apparently.

Shafique: Father, eight of workers will be employed, who are previously working with local bakers
and they would be trained by Quality Engineers of Pakistan Agriculture Research Council while
installing the Plant as it’s already defined by PARC and their wages will be PRs.300 per carton
production and will be paid in cash within first week of next month in respect of previous month’s
earnings. There will be one supervisor who would inspect work quality and productivity of all
workers by walking around in processing lines of the production. His salary will be fixed about PRs.
35,000 per month. We will also employ one security guard and he will be paid fixed monthly salary of
PRs. 13,000. Supervisor and security guard’s salary will be paid at the start of next month incurred.
We will also hire a manager, who will look after on overall operations and financials of the business.
He will be paid a fixed salary of PRs. 45000.

Mr. Bashir: And what about initial startup cost for testing the plant and machinery?
Shafique: Father for all this initially it needs to spend about PRs. 450,000 for purchase of raw material
and supplies for the production commencement and the output will be added into sales in February
month.

Mr. Bashir: furnish me with the details How you will be able to capture the market from market
segmentation to managing the product distribution?

Shafique replied: We will set initial an average price PRs. 2,100 per carton for each type of carton 1st
type of carton contains of either 42 packets of 100g of chips with the tagged price of PRs. 50 per
packet, Other type of carton having 84 packs of 50g will be tagged with the price of PRs. 25 per
packet and 3rd category would consist of 124 packs of 25g with label of PRs. 13 for 25g pack. 4
experienced sales man will be hired from very start of business whose job is to receive orders, make
sales deliveries and cash collection from customers with the fixed salary PRs. 25,000 per month as
salary which will be paid in first week of next month. However We will spend different amounts in
each month for advertising and promotional activities our new product as shown in exhibit #3.

There is a fully untapped market for this product because first time, this sort of product is being
introduced in Pakistan. A huge market potential from purchase of raw material to sell of product is
quite accessible, the targeted markets for our product where product will be initially offered are the
markets of Sukkur, Larkana, Hyderabad, and Karachi city. We will sell product in shopping malls,
super market, small local markets, and individual shops, cafeteria and central canteens because it’s a
rich nutrient product which would be advertised as lunch replacement with time savings to potential
customers targeted kids, adults and seniors of schools, colleges, universities and Office workers who
are having age group of 10-40 years.

Mr. Bashir: Why people will prefer to use your product instead of eating fresh bananas?

Shafique: Dad, the people will like our product at mostly at lunch time. Because ripen banana is not
available in lunch time at every outlet except fruit shops while our target is make Chipbana available
at every grocery shop by mass distribution secondly ever person might not like to eat ripen bananas
that’s why by mixing differently added flavors may attract consumer to eat banana by having lesser
sweetness. It will provide less calories with same test of banana to the customers in absence of banana
fruit.

Mr. Bashir: How do you analyze market position of Pir-jo-goth a smaller town and growers of this
small area would remain consistent in banana production and won’t switch to other crops to fetch
your supply side keeping in view of all cropping trends and uncertainties?

Shafique pinned his ears: Listen Dad, since April 2012 local government banned rice production in
Khairpur district in order to mitigate the dearth of water supply in upper region of Sindh during
summer season because it caused salinity and water logging issues in winter season. It made farmers
in confused situation to rely on single crop and left no ground except Banana production. Many of
them are still reluctant to banana production due to threat of an undiagnosed viral disease which
caused billions of losses to local growers in the last time of production, many of them still couldn’t
recover because it takes almost two years to yield fruit along intensive care, cost and effort, however
some of them were convinced and started again banana production in small extent since 2013.

Mr. Bashir: I agree with the idea of “CHIPBANANA” production. Now, you should work more on it
and confirm me about the future position (financial and operational budgets) for each of the 12
months and aggregate of a year.

Exhibition #1

Ingredient Cost per Carton

Banana 160
Brown Sugar 80
Flavors and spices 126
Lemon 21
Cooking Oil 160
Total cost per Carton 547

Exhibit #2. Exhibit #3

Estimated sales of the first year. Marketing & Distribution Expenses.

Months Cartons PRs. Month PRs. Months PRs.

s
January Nil Nil
Jan 35000 July 45000
February 1280 2,688,000
Feb 120000 August 40000
March 1360 2,856,000
April 1415 2,971,500 March 95000 September 30000

May 1519 3,189,900 April 105000 October 60000

June 1680 3,528,000 May 85000 November 70000
July* 1718 3,607,800 June 60000 December 80000
August 1870 3,927,000
September 1970 7,077,000
October 2084 4,376,400
November 2273 4,773,300
December 2384 5,006,400