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Your Business Plan Handbook

PREFACE
This handbook is prepared for both veterans and civilians who either want to start their own businesses, or who want to expand and improve their businesses. This is a very important aspect of business development and requires careful undertaking by both the trainer and trainee. This business plan handbook was developed in collaboration with a number of VOCA volunteers, partners and organizations. These include: Organizations and Partners. Soroti Catholic Diocese Integrated Development Organisation (SOCADIDO) Soroti District Association of NGOs Network (SODANN) Uganda Veterans Assistance Board Vision Terudo (Teso Rural Development Organisation) World Learning, Inc. World Vision, Soroti Project office US Peace Corps Volunteers Mr. Dave Hammond Prof. Surrendra Singh Mr. Clair Hein Ms Donna Kerner Mr. Bob Nottleman Thanks go to Dave Hammond whose TOT in January and February of 1996, provided the backbone to this handbook. His input during the workbook during the September/October, 1996. Pilot TOT for "Your Business Plan Handbook" and "Your Business Plan Workbook" were of valuable benefit in the development of the materials. Donna Kerner's field-testing of these materials during veterans training and subsequent feedback from the same, is also highly appreciated. Appreciation also goes to Bob Nottleman for his contribution to the materials during the January/February Grand TOTs. Our appreciation also goes to Mr. Clair Hein and Prof. Surrendra Singh who worked hand in hand with VOCA staff, Mr. Martin Owiny to develop "Your Business Plan Handbook" and "Your Business Plan Workbook" and the Trainers Guide to the two. Special thanks also go to VOCA staff Ms Elsie Mukasa for the development of the graphics, design and layout of these materials.

This handbook was funded by the United States Agency for International Development (USAID).

HOW TO USE THIS HANDBOOK
This handbook is designed to be studied and filled out by a trainee in conjunction with a trainer. You are therefore advised to go step by step through it with the help of your trainer. Do not rush through or try to understand it immediately, but allow your trainer to take you chapter by chapter, step by step, exercise by exercise. After completing this handbook, use your answers in the handbook to fill out your workbook. If you do this you will then have a business plan that you understand and which you can present to a lending institution. What is a business plan? In a business plan, you think about and work out what will happen in a business. This will help you put your business in order, plan how your business will grow and see the problems your business may face when it starts. A business plan has a number of parts to it. PARTS OF A BUSINESS PLAN - Title page - Summary - Goals - Management and organization - Marketing plan - Work plan - Start-up capital - Projected income statement - Cash flow plan - Break even analysis - Balance sheet - Profit and loss statement A business plan will help you: Understand your business better, Expand and improve your business, Decide whether to continue in business or not, Obtain financial assistance, Prepare for the future of your business. *You should revise your business plan every year.

CONTENTS
1. ASSESS YOURSELF IN BUSINESS........................................... 6 The character of a successful entrepreneur ...................................

Strengths, weaknesses, opportunities and threats ......................... Look at your business in detail ....................................................... 2. BY LAWS FOR YOUR GROUP ................................................. 15 Purpose of the business group ....................................................... Members of the group..................................................................... Leadership of the group.................................................................. The Executive Committee............................................................... Meetings ......................................................................................... Finances ......................................................................................... Noting ............................................................................................. GOALS FOR YOUR BUSINESS................................................ 22 The reason for your business ......................................................... Explain your achievements as a business or.................................. business group ............................................................................... MANAGEMENT AND ORGANIZATION .................................... 26 Identify the activities that need to be performed in your business ........................................................................ Identify the number of employees you will require in each activity .............................................................. Explain how you will obtain the employees for each task................................................................................... Explain how you will pay your employees ...................................... Explain the roles and strengths of your employees ........................ How to solve conflict ....................................................................... MARKETING PLAN ................................................................... 33 What is a market?........................................................................... What is marketing? ......................................................................... What is a marketing plan? .............................................................. The four Ps and two Cs of marketing ............................................. YOUR WORK PLAN .................................................................. 45 State the production goals for your business.................................. List the activities to be performed in your business ........................ Give the names or number of laborers who will perform each activity ........................................................... Estimate the material resources you need to perform each activity ............................................................. Estimate the cash required for each activity ................................... Fill out the work plan....................................................................... START-UP CAPITAL ................................................................. 50 Investments ....................................................................................

3.

4.

5.

6.

7.

Working capital ............................................................................... How to calculate working capital..................................................... How to calculate start-up capital..................................................... Sources of start-up capital .............................................................. 8. COSTING AND PRICING YOUR GOODS AND SERVICES ..... 56 Costs............................................................................................... Price................................................................................................ How to make a profit....................................................................... PROJECTED INCOME STATEMENT ....................................... 61 The components of the projected income statement...................... Projected income statement ...........................................................

9.

10. CASH FLOW PLAN ................................................................... 71 How to make a cash flow plan ........................................................ Your cash flow plan ........................................................................ Exercise .......................................................................................... Exercise .......................................................................................... 11. BREAK EVEN ANALYSIS ......................................................... 83 Break even point sales level ........................................................... Break even point price level............................................................ 12. YOUR BALANCE SHEET.......................................................... 89 Components of a balance sheet ..................................................... 13. PROFIT AND LOSS STATEMENT ............................................ 95 Profit and loss statement for ........................................................... 14. EXECUTIVE BUSINESS PLAN SUMMARY............................ 100 Loan requests .................................................................................

C H A

P T E R I ASSESS YOURSELF IN BUSINESS

CHAPTER ONE.
ASSESS YOURSELF IN BUSINESS.

Mr. Otim, was discharged from the Uganda army in 1991, on his return home he worked for other people in his community on several jobs. However he was not happy with the amount of money he was getting on those jobs, so he started his own business, which is a retail shop in the market of his home town which is called "Mbili". Mr. Otim wants his business to grow so he has decided to go for a business plan development training by an NGO in Mbili so that he can learn how to write a business plan. This will help him understand his business better, help his business to grow and find out how much money he needs for all this to happen. Mr. Otim has also found that he has the characteristics of a successful entrepreneur.

The character of a successful entrepreneur.
An entrepreneur refers to a business person who is running a business enterprise. This business person needs to have certain abilities, skills, and attitudes if his business is to succeed. These abilities, skills and attitudes are referred as the character of an entrepreneur. A business group will also need to have within itself people who have the character of a successful entrepreneur. To be a successful entrepreneur or business group you usually should have the following characteristics: You should be hardworking: This means that you should be ready to commit all the necessary energy, time, skills, and responsibilities necessary for your business to succeed and each task be well completed.

You should be determined: Being determined involves being committed to ensure that every task in the business once started is successfully completed. You should be a risk taker: A risk taker is some body who assumes responsibility and makes decisions after careful consideration of what he is doing even if they are not absolutely sure that it will work so long as it will be of benefit to the business. You should be ready to work as a team: Working as a team means that you are ready to listen from your workers and learn from them even as they listen from you and learn from you. This will ensure that every body in the business is respected and motivated. And be cause every contributes to the decisions being made, it is likely that the best decisions will be made. You should be able creative Being creative means that you are ready to come up with and carry out the ideas that you or your workers may have for the business. many

If an entrepreneur or group has these characteristics then their likely to be able to succeed in the business that they are running. Given that you are running a business you need to look at the strengths, weaknesses, opportunities and threats that you may be having in the business. These strengths, weaknesses and opportunities are referred to as S.W.O.T.

Strengths, weaknesses, opportunities and threats (S.W.O.T.)
If a business is to survive, it needs to continually look at it self to see what its strengths, weaknesses, opportunities are, and what threats it may be facing. strengths and weaknesses are internal issues in the business which the business may have control over while opportunities and threats are external factors to the business. Which the business does not have control over like taxation, government policy, inflation, floods, hailstones, etc. You need to assess your strengths and weaknesses in relevant aspects of your business. Your strengths indicate advantages you will have in business, which can be used to improve your business, while weaknesses indicate problem areas which need to be addressed so that your business can improve. You will also need to use the opportunities your business has as best you can and minimize the effects of the threats your business has as much as possible. In summary a business will need to: Build on its strengths Improve on its opportunities Select the best opportunities Minimize its threats.

You will now do a SWOT analysis on the business you are running. To help you do this, look at your strengths, weaknesses, opportunities and threats. In light of the product your selling, who your customers are, where they live, when and how they buy from you, what other things they buy, how much money they have to spend on products like yours, and who your competitors are.

STRENGTHS

WEAKNESSES

OPPORTUNITIES

THREATS

LOOK AT YOUR BUSINESS IN DETAIL
You may decide to go into business as an individual or as a group. At the end of the day whatever means you may choose, your success in business as a manager or as a group depends largely on your strengths in personal characteristics, business management, technical skills, knowledge of your line of business, and your financial position. When you start a business it is important that you have the skills to ensure that your business will survive and will be self sustaining once your business plan is complete. You will now go through a number of steps to help you determine your strengths and weaknesses in a number of areas relevant to your business.

STEP 1.
PERSONAL CHARACTERISTICS Here you should be looking at your characteristics, skills, capabilities and attitudes as an individual and as a group. You should be looking at you or your groups individual

commitment to business, self confidence, self motivation, decision making capabilities, ability to handle problems and take risks, your adaptability and flexibility in the business environment. You should ask yourself or your group whether you are opportunity takers and are able to see these opportunities. Having reviewed this, ask yourself the following questions: A) What are the strong points in your personal characteristics as an individual or as a group?

B)

What are the weak points in your personal characteristics as an individual or as a group?

C)

The weaknesses will be overcome in the following ways;

STEP 2.
BUSINESS MANAGEMENT SKILLS Business management refers to how you are able to handle money and the day to day running of the business. The handling of money involves arranging of the finances, keeping business records, the management of credit and the planning for financial success. While the day to day running of the business refers to how you are able to provide direction to workers and handle them. Ask yourself these two questions: A) What makes you or your group strong in business management?

B)

What makes you or your group weak in business management?

C)

The weaknesses will be overcome in the following ways;

STEP 3.
TECHNICAL SKILLS Technical skills refers to the things you need to know and be able to do in the business you are involved in. This knowledge and ability covers areas like purchase and use of equipment and machinery, knowledge of the production process, buying and selling of goods and services and provision of services. When you look at your technical skills ask yourself these questions; A) What are your or your groups strengths in technical skills?

B)

What are your or your groups weak points in technical skills?

C)

The weaknesses will be overcome in the following ways;

STEP 4.
EXPERIENCE IN THE LINE OF BUSINESS This refers to how you understand the different things that happen in the business you are involved in. This understanding may come from your involvement in the other businesses of the same kind. This also covers how you are able to direct business operations, and to effectively manage anything to do with the business, and set up rules and regulations for the business to run. Your or any other member of your group's experience in this kind of business will therefore be important. Following the above explanation answer the following questions; A) Have you or your group been involved in this line of business before?(Explain)

B)

In what areas is you or your group’s experience in this line of business strong?

C)

In what areas is you or your group’s experience in this line of business

weak?

D)

The weaknesses will be overcome in the following ways:

STEP 5.
FINANCIAL POSITION. In looking at your financial position, we are looking at your abilities to commit or access financial and material resources for the business that you want to start. The finances or resources obtained may be your own or could otherwise be sought from a relative, a financing institution or from any other source. Taking this into consideration you need to ask yourself: A) What are your strengths as far as the financial position of this business is concerned?

B)

What are your weaknesses as far as the financial position of this business is concerned?

C)

I will compensate for my weaknesses in the following ways:

The strengths that you have indicated above indicate advantages to your business. You should therefore use them as much as possible to improve the performance of your

business. The weaknesses indicate areas that you need to look into if you want your business to improve. If you are not able to compensate for or overcome these weaknesses you should look for external assistance to help you do this.

Mr. Otim assessed himself in business and found that he has a number of strengths which he needs to build on, however because of the weakness he has in record keeping and business management he decided to attend the business training by an NGO in Mbili. This will help him to run his lock up shop in the market better than he has been doing. He is also planning to take opportunity of the pick-up lorry transport to begin to take some of his goods to the market in the neighboring town.

C H A P T E R II YOUR GROUP AND YOUR BUSINESS

CHAPTER TWO.
YOUR GROUP AND YOUR BUSINESS.

Three male veterans and three female veterans from Mbili village have come together and formed a business group called "Pamoja". They have also got four civilians in the group so that there are a total of ten people in the group. As a group all members of "Pamoja" are growing groundnuts on four acres of land in Mbili village. They have a chairman, vice-chairman and treasurer who run the group according to the by-laws that they all wrote out. The reason for which they formed the business group was to earn some money to support their families and send their children to school, to improve their standard of living and to provide groundnuts for the community and the produce buyers who come to Mbili. You may be thinking of going into business as a group or as an individual. Should you be thinking of operating your business as a group, it is important that the history of your group and it’s future plans and prospects are well presented in your business plan. This will enable the members of the group to better understand each other and determine the direction of the group. Other people who may be interested in your business plan will also better understand your business and therefore be in a better position to consider assistance to your business. In this chapter you will go through seven steps that will help you better explain your business and your group.

STEP 1.

EXPLAIN THE BACKGROUND AND PURPOSE OF YOUR BUSINESS GROUP. A description of the background and purpose will help each group member to understand the purpose of the group and decide if they agree with it or not. Having a common understanding will help reduce conflict as the group grows. A) B) C) D) When was your group formed? Why was your group formed? Who was responsible for the formation of your group and how was the group formed? (Please give a list of their names) List the members of your group and indicate how many are veterans and or veterans wives.

STEP 2.
DESCRIBE THE BY-LAWS OF YOUR BUSINESS GROUP Your group will need to have by-laws which are rules and regulations by which the group will be run. These rules and regulations cover things like: The membership of your group. The attendance of meetings. This covers who will attend meetings and when. The duties of each person in the group. The leadership of the group. This covers the roles and responsibilities of leaders. The records that the group will keep. This can cover the records of meetings, these are called minutes. They also cover financial records which the group will keep. The rules for handling money. How decisions should be made in a group. How conflicts should be handled in a group. Any other areas deemed relevant to the group. The by-laws should all be written out by all the members of the group so that every body understands how the group should operate. Does your group have by-laws? Do you keep minutes of each meeting? What other records does your group keep? Do you have rules on handling money? If Yes please explain the rules for handling money in your group. Yes No Yes Yes No No

Do you have a bank account? If Yes, with which bank? E) F)

Yes

No

How many signatories do you have to the bank account and who are What actions will you take when members of your group? Do not attend meetings? Do not keep the by-laws? Misuse money?

they?

STEP 3.
DESCRIBE THE SET-UP OF YOUR BUSINESS GROUP This step is designed to help you explain the organizational set-up of your group. This refers to the leadership of the group, and the different roles and functions of the group. A healthy group will meet with its leaders as often as is necessary. Only when the group gets too big should the leaders meet on their own. A) Who are the leaders of your group?

B)

What positions do they hold?

C)

What are their duties?

D) E)

How often does your group meet? When do the leaders of your group meet?

STEP 4.
EXPLAIN HOW YOUR GROUP WILL MAKE DECISIONS.

Inside business you will need to make decisions and sometimes take risks in order to succeed. Some of the decisions will need to be taken quickly and decisively. While some of the more urgent decisions will need to be left to the leaders. In this step you will discuss how you will make decisions inside the group, in order to ensure business success. This will help reduce conflict within the group and enhance efficiency. A) B) How does your group make decisions? Who is involved in this and how are they involved?

STEP 5
IDENTIFY THE BUSINESS SKILLS AVAILABLE IN YOUR GROUP. It is further important to identify and use the skills, experience and training that is available within your group. Members of your group may have certain skills, experience and training that they acquired before or during the time that they were in your group. Inside this step you will identify where these potentials exist and how they can be used in business activity. A) What experience do members of your group have in producing the product or service in your business?

B)

What training have members of your group received and at what level was it?

C)

What other business skills do members of your group possess?

D)

How will these skills, experiences and training be used in the business?

STEP 6.
DESCRIBE THE WEAKNESSES OF YOUR GROUP. In spite of the fact that you may be able to identify a number of strengths in your group, it is important that you are as truthful as possible with yourself to also identify your groups weaknesses. This will help you to ensure that they are appropriately addressed. A) In what areas are the members of your group not doing well?

B)

What problems have your group encountered?

STEP 7.
EXPLAIN THE EXTERNAL ASSISTANCE REQUIRED BY YOUR GROUP. Having identified your strengths and your weaknesses it is important for you to identify the areas in which you will require external assistance and where you will obtain this assistance from. You may want to consider obtaining external assistance for the problem areas indicated in STEP 6. This assistance could be obtained from other businesses or groups like yours. Other sources of assistance can be obtained on Page . A) In which areas does your group require external assistance ?

B)

Where will your group obtain this assistance?

C)

What group do you know that you are helping and that is of help to you?

D)

What group do you know that you can help and can be of help to you? How will this happen?

The members of Pamoja decided that they will not mix personal problems with the business and everybody who works in the business will be paid for the work that they do. They do this so that their business will be able to grow without members causing loss by taking out money. They therefore come out with rules for handling money in the business and decided to open a bank account in the local commercial bank. The chairman of the group and the vice chairman will be the two signatories to the account. The members also decided that decisions for the group will be made at group meetings and all members of the group should try to attend all the meetings.

C H A P T E R III GOALS FOR YOUR BUSINESS
CHAPTER THREE.

GOALS FOR YOUR BUSINESS
WHAT YOUR BUSINESS HAS DONE AND WILL DO.
Before you expand or grow your business, you should write out a business plan. In a business plan you will think about and work out what will happen in your business. This helps you put everything in order, it also helps you plan how your business will grow and see the problems your business may face when it starts. A business plan may be written for a number of reasons as is listed below; It can be written to test how strong a business idea is. To help a lender know whether they should give you any money or assistance. It will help you see how the business will grow in the future. It will also help you see problems in the business before the problem starts.

Mr. Nsubuga has decided to go on a journey. He is walking from Luwero to Katikamu. This is like business because business is like a journey which a traveler decides to embark on, if a traveler is to be able to reach their destination, they must know where they are coming from and where they are going, otherwise they will get lost and not be able to reach their destination. In the same way inside business, you must know where you are coming from and where the business is going in order for you to realize benefits. This section is designed to help you clearly set out why you are in business, what you intend to achieve in business and what you have already achieved in business.

STEP 1.
THE REASON FOR YOUR BUSINESS.

To make a profit and money is the main reason why people go into business, but you may go into business for other personal reasons, for the benefit of your group or for the benefit of your community. A) What products or service do you plan to produce?

B)

What are your personal reasons for starting this business?

C)

For what reasons did your group start this business?

D)

How will your community benefit from this business?

STEP 2.
EXPLAIN YOUR ACHIEVEMENTS AS A BUSINESS OR BUSINESS GROUP. Over the period of time that your group has existed, your group should have worked closer and closer towards reaching the reasons why you started the business. Inside this section you write out what your group has done and find out if what you have done lines up with the reasons why you started the business, this will help you to know how far you have gone in your journey towards business success. A) What have you been able to do since your business began?

B)

What grants has your business received? When? From whom? How much was the grant? How was it used?

C) What loans has your group received? When? From whom? How much was the loan? How was it used? Has it been paid back? If it has not been paid back, when do you plan to pay it back? D) What are your other sources of funds?

E)

Why do you think your business has been successful?

F)

What problems has your business faced?

C H

A P T E R IV MANAGEMENT AND ORGANIZATION

CHAPTER FOUR
MANAGEMENT AND ORGANIZATION OF YOUR BUSINESS
The number of people working in the business can be divided into two groups of management and labor. Management

These are the people who direct the business and make decisions in the business. For a group, the management may be the executive of the group. While in other businesses the management may be the person or the people who started the business.

Labor The people who follow the direction of the management and are actually involved in producing the goods and services are actually called labor. These may be members of a group or people who are hired to do a particular job.

When starting a new business it is important that you consider the amount of labor you will require to efficiently operate the business. You will also need to know what kind of skills the labor should have, and where you will get the labor from, how much money you will pay them and how you will encourage them to perform well. The Managers will be responsible to direct the labor and keep them encouraged.

Follow the following steps to determine the requirements for management and organization in your business.

STEP 1.
IDENTIFY THE ACTIVITIES THAT NEED TO BE PERFORMED IN YOUR BUSINESS Every business has a number of activities which take place within the business to know how many people you need for labor, you need to know the activities that take place in the business. A) What are the activities in your business?

STEP 2.
IDENTIFY THE NUMBER OF EMPLOYEES YOU WILL REQUIRE IN EACH ACTIVITY Now that you have identified the activities in your business you will need to know how many people you will need to perform each activity. In this section you will identify the number of people you need to perform each activity in the business. It is important that you use labor as effectively as possible. Therefore one person can do more than one activity. Then you will be making the best use of the labor you have. A) Which activities can be done by one person?

B)

Which activities need to be done by more than one person?

C) D) E)

How many people will you need for each activity? How many of them will be hired? How many will be family members?

STEP 3.
EXPLAIN HOW YOU WILL OBTAIN THE EMPLOYEES FOR EACH TASK. When running a business you can use labor from your family or from your group. If you are not able to find skilled labor from your group you will have to hire labor. You therefore need to know how many people you need to hire and when you will get them from. A) How many people will your business need to hire?

B)

Where will you get them from?

STEP 4.
EXPLAIN HOW YOU WILL PAY YOUR EMPLOYEES When you use family or group labor you will need to pay them for the services that they perform. In order for you to calculate how much you should pay them it will be good for you to pay them the way you would pay an outsider doing the same job. How much will you pay your staff: a) Management b) Hired labor or group members c) Family labor d) What will you do to keep them happy and working hard?

STEP 5.

EXPLAIN THE ROLES AND STRENGTHS OF YOUR EMPLOYEES In order to ensure that you are using all the potentials of the management and labor in your business you will need to identify; The name or title of employee: It is necessary that even before you start a business you at least have an idea of the people that will work in the business. Should you not have an idea of who they will be you should at least know their title. Areas of Responsibility: This refers to the activities that an employee will carry out in the business. Inside a business both the management and the labor have roles to perform. Here you will identify the roles that each of them will do in the business. The skills of each employee: Here you are identifying the skills and training related to the business that different persons in the business have and their years of experience. You will also identify the strengths that they have in the business you are doing.
NAME AREAS OF RESPONSIBILITY SKILLS OF EMPLOYEE

Conflict

To avoid conflicts in the business and in their group the members of Pamela have come up with rules by which their business will operate. These rules are contained in their bylaws. Every member of the group knows exactly what activity they are to do and they are paid for it. When ever problems arise they refer to their by-laws to solve the problems. They also have rules to solve problems when they arise.

STEP 6
HOW TO SOLVE CONFLICT When you are running a business either as a group or as an individual a number of conflicts may arise in the business. Should this happen you will need to know how to deal with that conflict, so that your business will be able to continue to function properly. This means that if you are a group your by-laws will need to cater for conflicts. A) How will your group handle conflict?

B)

What have you done or are you doing to overcome these problems?

C)

Many groups develop problems trusting each other, what will each member your group do to increase trust in the group?

C H A P T E R

V MARKETING PLAN
CHAPTER FIVE.
YOUR MARKETING PLAN
In making a marketing plan it is important for you first to know what a market is. What is a Market? The word market has two different meanings; Market refers to the place where people meet to buy and sell goods and services. Like a municipal or village market where people meet to sell goods and services.

Mrs. Nsubuga needs to go to Mr. Otim's shop in the market to buy sugar and salt.

Market also means people or other businesses that want to buy your goods and services. Like people who want to use a boda boda (bicycle transport) for transport are the market for the boda boda.

Mr. Mugisha says that his market for the 'boda boda' are those shop-keepers in the market, like Mr. Otim, who want to transport their commodities from their supplier to their shops in the market. After knowing what a market is you now need to know what marketing is. What is Marketing? Marketing is the process where you get the right product or service, at the right price, at the right place and time to the right customer, informing and attracting them so that you make a profit. There are several steps before a product moves from producer to consumer.

Mr. Otim must provide the right product at the right price using the right place to the consumer, and at the same time inform and attract people to come to his business instead of other businesses. This is marketing. By doing quality marketing, he is doing better than his friend Mr. Musoke, who has a shop in the back streets of town, he does not provide the goods that customers want, his prices are also high and he does not treat customers well, therefore he does not have many people buying goods from his business.

EXERCISE. A) B) What makes Mr. Otim's business different from Mr. Musoke's business?

What did Mr. Musoke do wrong?

In order to develop an effective strategy every business needs to develop a marketing plan for its product. What is a Marketing lan? A marketing plan tells you what and how to market your product to your customers and who your competitors are. To develop a good marketing plan it is necessary to collect information about your market so that you can use it in your business this is called market research. To do market research you should look at the four parts of the market.

THE FOUR Ps AND THE TWO Cs OF MARKETING PART 1.

PRODUCT Mr. Otim provides his customers with PRODUCTS that they need and want. A product is a final commodity that your customer needs and wants.

Mr. Mulungi is a service operator because he provides services that his customers need and want. To provide a SERVICE, is to facilitate an activity for someone else for which a charge is made. A SERVICE can also be called a product. PRODUCT. To be successful in business you must have a product or service your customer wants and is willing and able to pay for it. A successful business finds out what customers want and what they need and provides the product or service to meet that need or want, even if it means changing the product or service, or starting a new business idea. Here is the information you need to collect on your PRODUCT or your SERVICE. A) What product or service does your business produce?

B)

What need or want of customers does your product or service meet?

C) C)

Who are your customers? What makes your goods or service different from goods or services offered by other businesses?

E)

Why should customers buy from you?

F)

How much of each product or service will be available each month?

MONTH .....................

PRODUCT .....................

AMOUNT ....................

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

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

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

PART 2.
PRICE. Price is the money people will pay to buy your product or service. The price must be right if you are to get customers to buy from you and for you to make a profit. A) How much does your product or service cost? (for answer refer to chapter IX )

B)

How much are your customers willing and able to pay? (Ask some people who might be your customers how high a price they would be willing to pay for your product or service.)

C)

What is the price that other businesses charge for providing similar products or services?

D)

What price do you charge for your product or service?

E)

Why did you set this price?

PART 3
PLACE Place means where your business will operate from. It also means how will you get your goods and services to your customers? You can choose to take your goods and services to your customers or you can choose to have your customers come to you, for the goods and services.

A)

Will you take your goods or services to your customer? Yes No

B)

Will your customer come to get the product from you? Yes No

C) D) E)

Where will the business operate from? How far are you from your suppliers? Where are your customers located?

F)

How can you find new or different customers?

PART 4.
PROMOTION.

Otim in his shop with many Customers in attendance, and some body advertising on a microphone 'new radios from China' and another giving handouts of the same.

Sales Promotion.

Informing and attracting customers to buy your product or service is called promotion. Promotion can be done through what is called advertising and sales promotion. This is everything you do to make customers buy more of your goods and services. You can make customers buy more from you by; Making your goods and services be easily seen Arranging your goods so that it looks like you have a lot of goods Being clean Selling products that go together like a torches and batteries.

WAYS OF DOING PROMOTION Using a sign post for your business

Giving handouts and posters for your business

Using the radio to tell people about your business

Using the newspaper to tell people about your business

Word of mouth

Displaying your goods or services

Improving the quality of your product

Advertising Advertising is simply spreading information to customers about your goods and services. Here you are informing customers and making them interested in your product. This can be done through; Word of mouth You can tell people about your business. Customers who like your business will also tell people about your business. If customers are happy with your goods and services, they will tell their friends, relatives and other people about how good your business is, the word about your business will then travel from person to person.

If your business is bad then bad words about your business will also travel from person to person. A) B) How will you inform people about your business? How will you attract people to come and buy more from your business?

THE TWO Cs OF MARKETING PART V
CUSTOMERS. The people who buy from your business are called CUSTOMERS. Before you start your business it is important that you know who your customers are. How to treat your customers. The sales of your business will depend on the way you talk to your customers and treat them. If you do not treat them in the right way your sales may go down. If you treat them well, they will want to come and buy from your business and will also tell other people about your business. What kind of customers will you have? Individual persons. These are people who buy your goods or services. They could be your relatives or friends or people from your village or town. As a business you need to know, who these people are, where they live, if they are men or women, how old they are, how much money they have, this will help you to always give them what they want and also know where to find them. Other businesses. Other businesses may also want to buy your goods and services. You need to know who they are and how much they are willing to pay for your goods or services. A) B) C) Are most of the people who buy from you men or women? Between what age are most of your customers? below 16 yrs. 16 - 25yrs. 26 - 35yrs. 36 - 40yrs. over 40yrs. Where do most of the people who buy from your business come from?

D)

How will you treat customers in your business?

PART VI
YOUR COMPETITION Other businesses trying to sell the same or similar goods and services as the ones you are selling are called your competitor. You need to ask yourself if your business is better than their’s or not, so that you can always improve yours. It is not good for your business, if customers go to other businesses and do not come to yours. A) Who else in your area is providing the same goods and services as your business? How many customers does your major competitor have? Are your competitors business getting bigger or smaller? Do you think you will be able to attract additional customers? Compare your business to that of your competitor and tick (√ ) the correct answer: Better Quality of your goods or services Easy for customers to reach your business Price of your goods and services Appearance of your business What customers say about your business Areas where you find that you are worse or the same as your competitor should show you the areas you need to improve or make changes, if your business is going to attract customers so that you can make a profit. F) you? What changes will you make to your business so that more people buy from Same Worse

B) C) D) E)

At the business workshop, Mr. Otim found out that he should pay attention to the four Ps and two Cs of marketing. He is now getting the products that customers want and need. He is also charging good prices and is well located in the market. People are talking well about Mr. Otim's business and are being attracted to his business because it is clean and well organized. He even has a sign on his lock-up shop. Mr. Otim is doing his best to make sure that does not lose any customers and that he attracts more people to buy from his business. One way he does this is by asking his customers what goods he should supply them with so that he can better serve them. Mr. Otim is different from his competitors in that he displays goods well, treats customers well, and has organized his shop very well.

C H A P T E R VI YOUR WORK PLAN

CHAPTER SIX.
YOUR WORK PLAN.

In any business there are a number of activities that need to be performed to produce a product or provide a service. For the business to function well, it must know, what these activities are, who will perform these activities and when these activities will be performed. Further to this it is important for the business to know what resources are required for each activity. To get all this information, a business will need to write up a work plan. STEPS IN PREPARING A WORK PLAN. The work plan will vary from business to business and will depend on what goods and services the business is providing and where the business wants to get to.

STEP 1.
STATE THE PRODUCTION GOALS FOR YOUR BUSINESS. You will need to clearly state what your business intends to achieve within a given time period. For example, your business may intend to make five thousand (5,000) bricks in one month or to supply five hundred (500) fish in a month. You should have specific targets in the short term that will help you meet the long term goals of your business. This means you should know where your business is going in the next six months or one year. A) Please write down how much your business will produce each month; AMOUNT PRODUCED

MONTH/WEEK

TOTAL

STEP 2.
LIST THE ACTIVITIES TO BE PERFORMED IN YOUR BUSINESS. After stating the goals of your business, you will need to list the activities to be performed in the business. The activities should be listed in order of the time periods in which they will take place. You will therefore have to list activities from the first activity to the last activity to take place in the business. All the steps necessary to complete an activity should be listed in this step.

A)

Please list the number of activities to be performed in your business; ACTIVITIES IN THE BUSINESS

STEP 3.
GIVE THE NAMES OR NUMBER OF LABORERS WHO WILL PERFORM EACH ACTIVITY. For each activity to be performed in your business, you will need to give the names of the employees to perform each activity. A) Please give either the name or number of laborers that will perform each activity NAME OF LABORER/ No. OF LABORER

ACTIVITY

STEP 4.
ESTIMATE THE MATERIAL RESOURCES YOU NEED TO PERFORM EACH ACTIVITY. After knowing what activities need to be carried out in your business and the laborers that need to perform each task, you need to estimate what material resources you need to perform each activity. To make sure that you have a complete list of resources, you will need to have completed STEP 2., in this step you will therefore need to estimate all the resources you need to complete each step of activity. A) Please give each activity and the amount of resources necessary to complete that activity.

ACTIVITY

MATERIAL RESOURCES

STEP 5.
ESTIMATE THE CASH REQUIRED FOR EACH ACTIVITY. From the amounts that you will pay the labor in your business and the amounts you will pay on material resources you can estimate the amount of cash you require for each activity. A) Please give the amount of cash you will need for each activity given estimate for labor and material resources; ACTIVITY LABOR MATERIAL RESOURCES CASH your

STEP 6.
FILL OUT THE WORK PLAN. Based on your answers to the five steps above you can proceed to fill out the work plan below. From the details that you fill into the work plan you will be able to know how much labor, material resources, cash and other necessities you will require in the business.
ACTIVITY MONTH/ WEEKS No. OF LABORERS MATERIAL RESOURCES CASH

TOTAL

The members of Pamoja have decided to cultivate four acres of land where they will plant groundnuts. To do this they will need to buy tools, seeds and higher oxen and a plough they also need to know how many laborers they need for each activity and how much each activity will cost.
ACTIVITY MONTH/ WEEKS No. OF LABORERS MATERIAL RESOURCES CASH

Clearing land Ploughing Buying seeds Ploughing Planting Spraying Weeding Harvesting

Week 1 Week 2 Week 3 Week 4 Week 5 Week 7 Week 13 Week 19/20
TOTAL

10 12 1 12 24 4 40 40

axes, pangas & hoes oxen & plough bicycle oxen & plough hoes & seeds pesticides & sprayer hoes sacks, basins & baskets

25,000/= 42,000/= 80,000/= 42,000/= 24,000/= 10,000/= 40,000/= 80,000/= 343,000/=

C H A

P T E R VII START-UP CAPITAL
CHAPTER SEVEN
START - UP CAPITAL.
The money that you need to start a business is called start-up capital. In this chapter you will find out how much it will cost you to start your business. If you are to start a business you will need money for what is called investments and working capital. INVESTMENTS: Investments are one-time costs of starting your business. This includes the money you spend on land, buildings, equipment, tools, furniture and other items needed when starting your business. These items usually have a high value and last for a long time. WORKING CAPITAL: Working capital is the money you need to produce goods or provide services before you start getting money from selling goods and services.

Somebody who is a manufacturer, for example a brick maker will need to buy raw materials and pay people who work for him before he can get money from selling bricks. The money he uses for making bricks and keeping the business going is called working capital. Somebody who is running an agribusiness for example a maize mill will need money to buy stock and pay people who work for him before he can get money from his maize mill. The money he uses to buy stock and keep his business in operation is called working capital. Somebody who is a retailer, for example a person selling second hand cloths or running a shop, will need money to buy stock and pay people working for him before he can get money from selling cloths. The money he uses for buying clothes and keeping the business going is called working capital. This means that some businesses may require working capital for three months, others six months, or one year depending on how long it will take before money starts coming in from the sale of goods and services. To find out how much working capital you need, look at how much you will spend on raw materials, finished goods, advertising, wages, rent, and other costs before your business starts selling. This means that you will need to look ahead to what is likely to happen in the future.

HOW TO CALCULATE WORKING CAPITAL. To calculate working capital you need to estimate how much you will spend on: A) RAW MATERIALS OR FINISHED GOODS. If you are a manufacturer you need to estimate how much raw material you need to buy before you start selling what you have made. If you are a retailer, selling second hand cloths or running a shop you need to estimate how much you will spend buying stock before you start selling. B) WAGES. Before you start selling in your business you will need to hire people to work for you and produce the goods and services. The money used to pay their wages is called start-up capital for wages.
= TOTAL WAGES IN A MONTH X NUMBER OF MONTHS BEFORE YOU START SELLING.

START UP CAPITAL (WAGES)

C)

RENT. The money you pay for renting the buildings or the land you use in your business will have to be paid right from the time you start your business.

This is calculated as start up capital for rent. This will apply only if you are renting a building or land.
START UP CAPITAL (RENT) = TOTAL RENT IN A MONTH X NUMBER OF MONTHS BEFORE YOU START SELLING.

D)

OTHER COSTS There will be a number of other costs to pay before you start selling in your business. You may need to pay for licenses, transport, stationary, electricity, advertisement and promotion etc. This is calculated as start up capital for other costs.
START UP CAPITAL (OTHER COSTS) = TOTAL OTHER COSTS IN A MONTH X NUMBER OF MONTHS BEFORE YOU START SELLING

E)

WORKING CAPITAL capital

To estimate your working capital you need to add up all your start up for raw materials or finished goods, wages, rent and other costs.
WORKING CAPITAL = START UP CAPITAL (RAW MATERIALS OR FINISHED GOODS) + START UP CAPITAL (WAGES) + START UP CAPITAL (RENT) + START UP CAPITAL (OTHER COSTS)

HOW TO CALCULATE START-UP CAPITAL SUMMARY OF START UP CAPITAL SHS A) INVESTMENT 1. TOTAL MONEY FOR LAND AND BUILDINGS + 2. TOTAL MONEY FOR EQUIPMENT, TOOLS AND FURNITURE etc. SUBTOTAL WORKING CAPITAL 1. TOTAL MONEY FOR RAW MATERIALS OR FINISHED GOODS + 2. TOTAL MONEY FOR WAGES + 3. TOTAL MONEY FOR RENT 4. TOTAL MONEY FOR OTHER COSTS + SUBTOTAL GRAND TOTAL TOTAL START UP CAPITAL

SOURCES OF START UP CAPITAL When you have estimated how much start up capital you need for your business, the next question is; where do I get the capital from? You can get your start up capital from; Personal or group savings Loans from banks, money lenders, relatives, friends and non governmental organizations. Grants from organizations willing to give you money for business purposes.

Before Mr. Otim could open his shop for business, he had to arrange money for renting the shop, buying stock, buying furniture and other fixture and for e promotion and advertising. He was able to get this money from loans given to him by his friends and relatives. Before he could start the business, Mr. Otim had to estimate his start-up capital for the first three months of the business before any money could start coming in from the sale of goods. The start-up capital he got on loan can be divided into two. First investment, this is the money he spent for acquiring furniture and fixtures and secondly the working capital, he used to buy stock and pay for the rent, electricity and pay for the wages of a shop assistant.

Mr. Otim's calculation for start-up capital looked like this; START-UP CAPITAL FOR OTIM AND SONS DESCRIPTIONS SHS A) INVESTMENT 1. TOTAL MONEY FOR LAND AND BUILDINGS 2. TOTAL MONEY FOR EQUIPMENT +100,000/= TOOLS AND FURNITURE Etc. SUB - TOTAL 100,000/=

B) 1. 2. 3. 4.

WORKING CAPITAL TOTAL MONEY FOR RAW MATERIAL OR FINISHED GOODS TOTAL MONEY FOR WAGES TOTAL MONEY FOR RENT TOTAL MONEY FOR OTHER COSTS +225,000/= +150,000/= +60,000/= 1,935,000/= 2,035,000/= 2,035,000/= 1,500,000/=

SUB-TOTAL GRAND-TOTAL TOTAL START-UP CAPITAL

Mr. Otim spent One hundred thousand shillings (100,000/=) to buy shelves, a stool and a table at the start of his business. For working capital he had to spend 1.5 million to buy stock for the business. Mr. Otim will pay his shop assistant UShs.30,000/= per month and himself UShs.45,000/= per month, he therefore needs a total of 75,000/= per month to pay wages. His working capital. For the first three months the business will need Ushs.225,000/= to pay for wages. 75,000 x 3 = 225,000/=

He therefore needs UShs.225,000/=. Working capital for wages, in the first three months. Mr. Otim is renting a small lock-up shop in the market for UShs.50,000/= per month, he therefore needs a total of;

50,000/=

x

3

=

150,000/=

UShs.150,000/= as working capital for rent in the first three months of the business. He will also need to pay some money to buy a sign board to advertise his business to pay for electricity, as well as make transport available. Otim will spend UShs.60,000/= on this in the first three months of the business. This brings his total start-up capital for this business to UShs. 2,035,000/=.

C H A P T E R VIII

COSTING AND PRICING YOUR GOODS AND SERVICES
CHAPTER EIGHT
COSTING AND PRICING YOUR GOODS AND SERVICES. PART 1
COSTS Costs are all the money your business spends to produce a good or a service. COSTING This is the way you calculate all the costs of making a good or providing a service. Costing is important to your business, because it helps you to; Set prices of your goods and services Reduce costs Control costs Plan for the future. TYPES OF COSTS Total cost is made up of two types of costs; Direct costs Indirect costs Total cost = Direct cost + Indirect cost

You must understand the different types of costs to be able to calculate the cost of your goods or services. DIRECT COSTS Costs of items which become part of the product that you produce or are directly related to the product is on service what is called DIRECT COSTS.

There are two types of DIRECT COSTS. Direct material costs Direct labor costs. Direct cost = Direct material cost + Direct labor cost

Direct material cost. Direct material cost are the costs of all materials used in making your goods or services. Direct labor cost. Is the money your business spends on the salaries and wages of your workers who directly produce your goods and services. The labor working in the office or shop like shop supervisors, secretaries, clerks is not direct labor but it is an indirect cost. INDIRECT COSTS These are the costs of all other items except direct costs that you need to run a business. This includes costs of renting land and buildings, electricity, water, salaries of workers that do not directly produce a good or service, office costs, interest on loans, taxes etc. TOTAL COSTS Total cost = Direct material cost + Direct labor cost + Indirect cost

PART 2.
PRICE Price is the amount charged for your good or service. PRICING Pricing is the setting of right prices to charge for your goods or service. Before you set prices of your product you need to: Know if you are making a profit. Know the cost of producing your product or service. Know if you are making a profit. Know your competitors prices. Know how much your customers are willing and able to pay.

HOW TO MAKE A PROFIT. MARK-UP Retailers and wholesalers have to add a little to the prices of the goods they buy before they sell the goods to customers. This is called adding a mark-up to the goods. The extra money collected goes toward the profits and the running of the business. Mark-up is usually a percentage of the cost of the good. MARGIN All business owners add a mark up in order to make a profit. In others words, they need a trade margin so that they can cover their costs. The margin is usually stated as a percentage of the selling price. EXAMPLE

If Mr. Otim paid Ushs.450/= for a package of tea, and he wants to sell it at Ushs.500/=. COST 450 + + MARK-UP 50 (11%) = = SELLING PRICE 500

The DIRECT MATERIAL COST for a business like Otim and Son's is the stock that they buy for resale. This includes the sugar, salt, cooking oil, torches, batteries, fixtures and the furniture in the business. Otim and Sons does not have any direct labor costs because they are not directly involved in production. They simply take the product from the supplier to the customer, but they have indirect costs. These costs are the costs of rent, electricity, water, stationery, transport and salaries in the business.

Mr. Otim is always looking for ways to cut the costs of operating his shop. In the Business Training workshop, he learned that there are two types of costs. These are Direct Costs and Indirect Costs. He looks for ways to cut them by lowering the cost of wages, by negotiating prices of the goods he buys from his suppliers, and by reducing waste. When setting his prices Otim considers his costs of buying goods, competitors' prices and the amount of profit he wants to make on each item. EXERCISE A) What are the Direct Costs of the "Pamoja" business group? Direct Material Costs? ___________________________________________ ______________________________________________________________ ______________________________________________________________ Direct Labor Costs ____________________________________________ ______________________________________________________________ ______________________________________________________________ B) What are the Indirect Costs for the "Pamoja" business group? ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

C H A P T E R IX PROJECTED INCOME STATEMENT

CHAPTER NINE.
PROJECTED INCOME STATEMENT.
This statement tells you how much, revenue, expenses and profit you can expect from your business. A projected income statement is your "projection" of what you expect your revenue, expenses and profit to be in the future. It must cover a specific period of time. GROSS PROFIT Gross profit is calculated by subtracting direct costs from your total sales. NET PROFIT Net profit is calculated by subtracting your indirect costs from your gross profit. This is the amount you would earn from your business after paying for all your labor and expenses. It is also called net income.

THE COMPONENTS OF THE PROJECTED INCOME STATEMENT.
SALES Sales is the money you expect to receive from the sale of goods and services. In the projected income statement, you estimate your future sales as follows:

SALES

=

NUMBER OF ITEMS SOLD x PRICE OF EACH ITEM. PRICE OF ITEM NUMBER OF ITEMS SOLD TOTAL SALES

ITEM SOLD 1. 2. 3. 4. TOTAL SALES IN A MONTH

DIRECT MATERIAL COSTS (DMC) Direct material costs are the costs of all materials used in making your goods or services.
QUANTITY OF EACH MATERIAL USED X COST OF EACH UNIT USED = DIRECT MATERIAL COSTS

NAME OF MATERIAL 1. 2. 3. 4. 5. 6. 7. 8. TOTAL DIRECT MATERIAL COSTS IN A MONTH

QUANTITY USED

COST USED

OF

EACH

UNIT

TOTAL DIRECT MATERIAL COSTS

DIRECT LABOR COSTS. Direct labor costs is the money your business spends on the salaries and wages of your workers who directly produce your goods or services. To calculate direct labor costs use the following table:
No. 1. 2. 3. 4. 5. 6. 7. 8. TOTAL DIRECT LABOR COST IN A MONTH NAME OF EMPLOYEE/ACTIVITY PAY PER MONTH

INDIRECT COSTS Indirect costs are the costs of all items except direct costs used to run a business. This includes costs of renting land and buildings, electricity, water, salaries of workers that do

not directly produce a product or service such as managers and secretaries, office costs like stationery and furniture, interest on loans, taxes etc. Use this table to calculate your indirect cost.
ITEM Rent for land Rent of building Electricity Water Owner's salary Worker's salary Stationery Furniture Loan interest Tax AMOUNT USED PRICE OF EACH ITEM TOTAL INDIRECT COST

Depreciation

Others TOTAL INDIRECT COSTS IN A MONTH

DEPRECIATION. Business assets like buildings and equipment have a long useful life. If the entire use of these items was reported on the income statement in the year they were purchased, it would make the profit for the year look much lower than it really was. To avoid this, the cost of these items is spread over the number of years they will be useful to the business. The process of allocating the cost to the different years is called "Depreciating on the asset" and the amount allocated to each year is the "Depreciation" for that year.

HOW TO CALCULATE DEPRECIATION
AMOUNT OF DEPRECIATION EVERY YEAR TOTAL COST OF ITEM NUMBER OF YEARS OF EXPECTED LIFE

=

AMOUNT OF DEPRECIATION EVERY MONTH

=

DEPRECIATION FOR A YEAR NUMBER OF MONTHS IN A YEAR (12)

EXAMPLE For example if Mr. Otim paid 501,000/= for his shop furniture and its expected life is five (5) years depreciation will be: 500,000/= 5 Years = 100,000/= Per year

Amount of depreciation per month:

100,000/= 12 Months

=

8333/= Per Month

PROJECTED INCOME STATEMENT FOR OTIM AND SONS FOR THE PERIOD OF JANUARY - MARCH 1996 Months DETAILS JAN FEB MARCH SALES 500,000 550,000 650,000 Less DIRECT 400,000 400,000 450,000 MATERIAL COSTS Less DIRECT 0 0 0 LABOR

TOTAL 1,700,000 1,250,000 0

COSTS 100,000 GROSS PROFIT INDIRECT COSTS Rent for land Rent for building Electricity Water Worker’s salary Owner’s salary Stationary Furniture Loan Interest Tax Depreciation Others TOTAL INDIRECT COSTS NET PROFIT
(Gross profit minus Total)

150,000

200,000

450,000

50,000

50,000

50,000

150,000

20,000 50,000 25,000

20,000 50,000 25,000

20,000 50,000 25,000

60,000 150,000 75,000

145,833

145,833

145,833

437,499

(45,833)

4,167

54,167

12,501

Mr. Otim has developed a projected income statement for 3 months, he estimates that all his indirect costs covering renting of land, electricity, workers' salary, owners' salary and depreciation will remain constant for the three months. He plans to start by charging low prices in January increasing a little in February and March so that his sales revenue will increase. However, he thinks he will sell the same amounts of goods in January and February so that his direct material costs will remain constant for the two months. However, in March, his direct material costs will increase because he expects to sell more than in the previous months. His total net profit for the three months is 12,501/=. Mr. Otim calculated depreciation based on the cost of the furniture he bought at 50,000/= when starting the business (ref. page 49 of Your Business Plan Handbook).

The following form can be used to make your projected income statement: PROJECTED INCOME STATEMENT FOR………………………………………………….. For the Period beginning ---------------------------------------------- and ending ---------------Details Months Jan. Sales Feb. Mar. Apr. May June
Sub Total

Less DIRECT MATERIAL COSTS

Less DIRECT LABOR COSTS GROSS PROFIT

INDIRECT COSTS Rent for land

Rent of Building

Electricity Water Worker’s salary Owner’s salary Stationary Furniture Loan Interest Tax Depreciation Others Total Indirect Costs

NET PROFIT (Gross profit minus Total

Indirect Costs

PROJECTED INCOME STATEMENT Details JUL. Sales
Less DIRECT MATERIAL COSTS

Months AUG SEP OCT NOV DEC
TOTAL

Less DIRECT LABOR COSTS GROSS PROFIT

INDIRECT COSTS Rent for land

Rent of Building

Electricity Water Worker’s salary Owner’s salary Stationary Furniture Loan Interest

Tax Depreciation Others Total Indirect Costs

NET PROFIT (Gross profit minus Total Indirect Costs

C H A

P T E R X CASH FLOW PLAN

CHAPTER TEN.
CASH FLOW PLAN.
A cash flow plan shows you how much money you can expect to flow into your business (cash receipts) and how much money you can expect to flow out (cash payments) during a given period of time. It is commonly prepared month by month, but it can be week by week if that is convenient for your business. A cash flow plan enables you to be sure that your business will always have enough money to pay for any needs that may arise. It will show you if there are any money

shortages that could arise in the future. It also shows you where you will get your money from and where you will use it. Therefore, a cash flow tells you when there are surpluses or short-falls of cash to pay expenses in your business. You will then know how much money is flowing in and flowing out. THE DIFFERENCE BETWEEN A CASH FLOW PLAN AND A PROJECTED INCOME STATEMENT A cash flow plan is used to show how much cash is available from time to time. It includes all cash receipts and payments in the business. While an income statement is used to show whether the business is making or losing money and whether it is profitable. HOW TO MAKE A CASH FLOW PLAN To make a cash flow you should estimate the following; A) 1. Sources of cash. CASH AT THE START OF THE MONTH. This is cash that was left in your business from the last month. This is the money you have in your cash box or bank account at the beginning of the month. It is therefore carried over from one month to the next. It is zero at the beginning of the first month. CASH IN FROM SALES This is the cash in from sales of goods and services in your business.
TOTAL SALES = NUMBER OF ITEMS SOLD X PRICE OF THE ITEMS

2.

3.

CASH FROM MEMBERS AND OWNERS This is all the cash you receive from members of your business group or your partners, as a contribution to the business. CASH RECEIVED FROM DEBTORS This is money received from debtors, that is people who owe your business money. Commonly these will be cash payments from customers for previous credit sales. CASH LOAN RECEIVED This refers to all the money you receive that is lent to the business. Loans will need to be paid back by the business. CASH GRANT RECEIVED This refers to all the money you receive as a donation. This money will not need to be paid back.

4.

5.

6.

7.

OTHER CASH IN This is any other money received which does not fall into any of the above categories. TOTAL CASH IN
TOTAL CASH IN = CASH IN FROM SALES + CASH IN FROM ALL OTHER SOURCES (Sum of No.2 through No.7)

8.

To make a cash flow you will also need to estimate the payments that your business will make. B) 9. This includes all the money that will go out of the business. CASH OUT FOR DIRECT MATERIAL COST (DMC)

Cash out for direct material costs are the costs of all materials used in making your goods or providing your services.
QUANTITY USED X COST OF EACH UNIT USED = DIRECT MATERIAL COSTS

10.

CASH OUT FOR DIRECT LABOR COST (DLC) Cash out for direct labor cost is all the money your business spends on the salaries and wages of your workers who directly produce your goods or services. CASH OUT FOR INDIRECT COSTS (IC) Cash out for Indirect costs are the costs of all other items except direct costs that you need to run a business. This includes costs of renting land and buildings, electricity, water, salaries of workers that do not directly produce a good or service such as managers and secretaries, office costs like stationery and supplies, interest on loans, taxes etc. Indirect costs may occur even when a product is not being made or a service not being performed.

11.

12. 13

CASH OUT FOR PLANNED INVESTMENT IN EQUIPMENT This refers to money that you will spend buying equipment and furniture. CASH OUT TO THE MEMBERS OR OWNERS This refers to money you will be paying out to the owners or members, as a distribution of profit or return on investment. It does not include salaries, wages or allowances. LOAN PRINCIPAL REPAID

14.

This refers to the amount of money you will be paying back each month to repay money lent to you. 15. LOAN INTEREST PAID This refers to the interest you will pay each month to the individual or institution that lent you money. This is paid based on the amount of money you received as loan. OTHER CASH OUT This refers to any other money that you will pay out of your business which does not fall into the above categories. TOTAL CASH OUT THIS IS THE SUM OF ALL CASH PAID OUT OF THE BUSINESS
CASH OUT FOR DIRECT MATERIAL COST + CASH OUT FOR DIRECT LABOR COST + CASH OUT FOR PLANNED INVESTMENT IN EQUIPMENT + CASH OUT TO MEMBERS OR OWNERS + LOAN PRINCIPAL REPAID + LOAN INTEREST PAID + OTHER CASH OUT

16.

17.

=

TOTAL CASH OUT

18.

MONTHLY NET
TOTAL CASH IN - TOTAL CASH OUT =

MONTHLY NET

This indicates whether more cash moved into the business than out. A negative amount for "monthly net" indicates a serious problem for the business. It means there was not enough cash available during the month to pay the costs you expected. To solve the problem, you will have to find a way to increase cash in or reduce cash out. 19. CASH AT THE END OF THE MONTH

CASH AT THE BEGINNING OF THE MONTH

+

MONTHLY NET

CASH FLOW PLANS

YOUR CASH FLOW PLAN.
CASH FLOW PLAN JAN SOURCES OF CASH 1. CASH AT THE START OF THE MONTH 2. CASH IN FROM SALES 3. CASH FROM MEMBERS 4. MONEY RECEIVED FROM DEBTORS 5. CASH LOAN RECEIVED 6. CASH GRANT RECEIVED 7. ANY OTHER CASH IN 8. TOTAL CASH IN (SUM OF
NO.2 THROUGH NO.7)

MONTHS FEB MAR APRIL MAY JUNE

USES OF CASH 9. CASH OUT FOR DIRECT MATERIAL COSTS 10. CASH OUT FOR

DIRECT LABOR COSTS

11. CASH OUT FOR INDIRECT COSTS 12. CASH OUT FOR PLANNED INVESTMENT IN EQUIPMENT 13. CASH OUT TO MEMBERS 14. LOAN PRINCIPAL REPAID 15. LOAN INTEREST PAID 16. ANY OTHER CASH OUT 17. TOTAL CASH OUT 18. MONTHLY NET (No. 8 N0. 17) 19. CASH AT THE END OF THE MONTH (No. 1 - No. 18)

CASH FLOW PLAN JUL SOURCES OF CASH 1. CASH AT THE START OF THE MONTH 2. CASH IN FROM SALES 3. CASH FROM MEMBERS 4. MONEY RECEIVED FROM DEBTORS 5. CASH LOAN RECEIVED 6. CASH GRANT RECEIVED 7. ANY OTHER CASH IN 8. TOTAL CASH IN (SUM OF
NO.2 THROUGH NO.7)

MONTHS AUG SEP OCT NOV DEC

USES OF CASH 9. CASH OUT FOR DIRECT MATERIAL COSTS 10. CASH OUT FOR

DIRECT LABOR COSTS 11. CASH OUT FOR

INDIRECT COSTS 12. CASH OUT FOR PLANNED INVESTMENT IN EQUIPMENT 13. CASH OUT TO MEMBERS 14. LOAN PRINCIPAL REPAID 15. LOAN INTEREST PAID 16. ANY OTHER CASH OUT 17. TOTAL CASH OUT 18. MONTHLY NET (No. 8 N0. 17) 19. CASH AT THE END OF THE MONTH (No. 1 - No. 18)

“This is my cash flow. I write it out in months because that is more useful to my business.”

EXERCISE
With reference to the projected income statement for Otim and Sons in the previous chapter (page 59), comment on the details of the cash flow plan for Otim and Sons from October 1995 to March 1996. ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ _ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________

CASH FLOW FOR OTIM AND SONS

DETAIL S Cash at the start of the month SALES Loans Other Total cash in
Materials

OCT. 0

NOV. 1,655,00

MONTHS DEC. 1,155,000

JAN. 500,000

FEB. 650,000

MAR.

TOTAL

500,000 2,035,000 2,035,000 200,000 25,000 75,000 50,000 30,000 380,000 0 300,000 25,000 75,000 50,000 50,000 500,000 500,000 1,000,000 75,000 50,000 30,000 1,155,000

550,000

650,000

550,000 400,000 75,000 50,000 20,000 545,000

650,000 400,000 75,000 50,000 20,000 545,000

0 450,000 75,000 50,000 20,000 595,000

Equip. Labor Rent Other Total

Cash Out Monthly Net Cash at end of month

1,655,000 1,655,000

(500,000) 0 1,155,000 500,000

45,000 505,000

40,000 610,000

(595,000) 15,000

PAMOJA CASH FLOW
Weeks Cash on hand start of week Cash sales Cash from members Loan Other Total cash in Production costs Principal payment Interest payment Cash to Members Other Total cash out Monthly 25,000 42,000 80,000 42,000 24,000 0 10,000 40,000 80,000 518,320 18,320 400,000 25,000 42,000 80,000 42,000 24,000 0 10,000 40,000 80,000 100,000 100,000 220,000 0 0 0 0 0 0 180,000 800,000 100,000 220,000 180,000 800,000 1 2 3 4 5 131,000 6 107,000 7 107,000 13 97,000 20 21 0 75,000 253,000 173,000 57,000 157,000

Net Cash on hand end of week

75,000 178,000 (80,000) (42,000)

(24,000)

0 (10,000) (40,000)

100,000 281,680

75,000 253,000 173,000 131,000

107,000

107,000

97,000

57,000

157,000 438,680

The interest is calculated as follows: 220,000 borrowed in week 2 and repaid in week 21 220,000 x .004 interest per week x 20 weeks = 17,600

180,000 borrowed in week 20 and repaid in week 21 180,000 x .004 interest per week x 1 week = 720

Total interest cost is

18,320

This is our cash flow. We write it out in weeks because that is more useful to our business.

Pamoja members at one of their monthly meetings. EXERCISE Question: What will be done with the cash on hand at the end of the project? ______________________________________________________________________

______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ _ (for answer refer to page 98)

C H A P T E R

XI BREAK EVEN ANALYSIS

CHAPTER ELEVEN.
BREAKEVEN ANALYSIS.
There are two ways to think of the Break Even Point analysis. One is referred to as the break even sales level. This refers to the amount of sales you need to make in order to cover your costs in the business. The second, is a break even point price level. This refers to the price you need to charge in order to cover your total cost on a particular product. HOW TO CALCULATE THE BREAK EVEN POINT Step one of this chapter will cover the Break Even Point sales Level. It is to be used by people who are providing many products, while step two will cover the Break Even Point Price Level. It is to be used by people who are supplying a single product.

STEP 1.
BREAK EVEN POINT SALES LEVEL This level tells you how many goods or services you need to sell to cover your total costs at a given price. At the Break Even Point your sales will exactly cover your total costs. At this point there is no loss and there is no profit. It is the point where the business sales and the business expenses are equal to each other. If you sell more than the break even point sales level you will make a net profit and If you sell less you will make a net loss. Knowing how much of the product you need to sell in order to cover your costs is very important in planning and budgeting your cash.

Below, you will see how to calculate your break even point sales level. To know how to calculate your sales, total direct costs and indirect costs, refer to CHAPTER SIX on costing and pricing your goods and services, however, gross margin is defined as follows: Gross Margin - is also known as gross profit on sales. It is the difference between the amount of total sales and the cost of goods sold. The formula to calculate it is: GROSS PROFIT TOTAL SALES = GROSS MARGIN

Use the table on the following page to calculate your own Break Even Point Sales Level. BREAK EVEN POINT SALES LEVEL BREAK EVEN SALES LEVEL FOR ____________________________________

I. CALCULATE GROSS PROFIT TOTAL SALES IN YOUR BUSINESS Less TOTAL DIRECT COSTS (DIRECT MATERIAL COSTS AND DIRECT LABOR COSTS) GROSS PROFITS II. CALCULATE GROSS MARGIN GROSS MARGIN = GROSS PROFIT TOTAL SALES GROSS MARGIN

SHS. /= SHS SHS

0

--------------------III. CALCULATE TOTAL INDIRECT COST INDIRECT COSTS Rent for land Rent of building Electricity Water Workers' salary Stationery Furniture Loan interest Tax Depreciation

TOTAL INDIRECT COST

IV. BREAK EVEN POINT SALES LEVEL
TOTAL INDIRECT COSTS GROSS MARGIN BREAK EVEN POINT SALES LEVEL

Mr. Otim needs total sales of 1,682,688.46/= to cover all his costs to break even. Any sales over this amount would ensure a profit.

Mr. Otim calculated his break even point sales level for the months of January to March 1996. He calculated a break even point sales level because he run a retail store. He therefore supplied many products and calculated his break even point sales level.

I. CALCULATE GROSS PROFIT TOTAL SALES IN YOUR BUSINESS Less TOTAL DIRECT COSTS (DIRECT MATERIAL COSTS AND DIRECT LABOR COSTS) GROSS PROFITS II. CALCULATE GROSS MARGIN GROSS MARGIN = GROSS PROFIT TOTAL SALES GROSS MARGIN

SHS.

1,7000,000

SHS 1,250,000 SHS 450,000

450,000 -----------1,700,000 = 0.26 or 26%

--------------------III. CALCULATE TOTAL INDIRECT COST INDIRECT COSTS Rent for land Rent of building Electricity Water Workers' salary Owner’s Salary Stationery Furniture Loan interest Tax Depreciation TOTAL INDIRECT COST

150,000 0 60,000 0 150,000 75,000 0 0 0 0 2,499 437,499

IV. BREAK EVEN POINT SALES LEVEL

TOTAL INDIRECT COSTS GROSS MARGIN BREAK EVEN POINT SALES LEVEL

437,499 .0.26 1,682,688.46

STEP 2.
BREAK EVEN POINT PRICE LEVEL

Break even price level is the price which exactly equals the cost of producing the product. It is used for a single product so a producer knows what price they should charge for the product. This cannot be used for a retail store or somebody producing many products. BREAK EVEN PRICE LEVEL
I. CALCULATE TOTAL COST

TOTAL COST
TOTAL COST

=

DIRECT COST + INDIRECT COST

II. CALCULATE TOTAL YIELD

TOTAL YIELD

= NUMBER OF PRODUCTS PRODUCED IN THEIR UNITS OF MEASUREMENT e.g. Kg.

TOTAL YIELD

=

III. CALCULATE BREAK EVEN POINT PRICE LEVEL

BREAK EVEN POINT PRICE LEVEL (TOTAL COST OF
MANUFACTURING A GOOD

____________________________

_____________________________ __
TOTAL YIELD OR TOTAL PRODUCTION OF THE GOOD)

C H A P T E R XII THE BALANCE SHEET

CHAPTER TWELVE
YOUR BALANCE SHEET
The balance sheet is a statement that tells you the financial position of your business on a specific date. YOUR BALANCE SHEET CONSISTS OF THREE PARTS: Assets - Things you own Liabilities - Money you owe others Owners Equity - Assets minus liabilities, the new worth of the business. It is the monetary (money) picture of your business at a given time. A balance sheet will therefore list the assets and liabilities of your business.

COMPONENTS OF A BALANCE SHEET.
PART 1
ASSETS. An asset is anything owned by the business that has value. Assets must be owned, not rented by the business. The assets of a small business normally include: 1. Cash 2. Items in the store 3. Land 4. Buildings 5. Equipment 6. Furniture and fixtures 7. Money other people owe to the business. ASSETS can be divided into two categories, based on how quickly they will be turned into cash in the course of business. CURRENT ASSETS. Current assets are cash or any other item that would become cash within one year from the date of the balance sheet. These include: 1. Cash 2. Items in the store 3. Money other people owe to your business. FIXED ASSETS.

Fixed assets are items in your business which will not become cash within one year. They are usually purchased for long term use. These include; 1. Land 2. Buildings 3. Equipment 4. Furniture and fixtures

BALANCE SHEET FOR .........................................................

ASSETS
CURRENT ASSETS
1. 2. 3. Cash Items in the store Money other people owe to your business SHILLINGS + + +

TOTAL CURRENT ASSETS

FIXED ASSETS
1. 2. 3. 4. 5. 6. Land Buildings Machinery Tools Equipment Furniture + + + + +

TOTAL FIXED ASSETS

TOTAL ASSETS (TOTAL CURRENT + TOTAL
FIXED)

LIABILITIES
CURRENT LIABILITIES
1. 2. 3. 4. Interest on short term loans, long term loans Taxes Wages and salaries earned but not paid Money owed to other businesses for goods purchased on credit

SHILLINGS

+ + + +

TOTAL CURRENT LIABILITIES LONG TERM LIABILITY
1. 2. 3. 4. Loans incurred to buy land Loans incurred to buy buildings Loans incurred to buy equipment Loans incurred to start a business + + + +

TOTAL LONG TERM LIABILITY

TOTAL LIABILITY (TOTAL CURRENT +
TOTAL LONG TERM)

OWNERS EQUITY
(TOTAL ASSETS - TOTAL LIABILITY)

SHILLINGS +

TOTAL LIABILITY PLUS OWNERS EQUITY

BALANCE SHEET FOR OTIM AND SONS AS ON MARCH 31, 1996

ASSETS
CURRENT ASSETS
Cash Items in the store Money other people owe to your business TOTAL CURRENT ASSETS SHILLINGS 15,000/= 1,500,000/=

+0 1,515,000/=

FIXED ASSETS
Land Buildings Machinery Tools Equipment Furniture TOTAL FIXED ASSETS 0 0 0 50,000/= 0 2,499/=

47,501/= +1,562,501

TOTAL ASSETS (TOTAL CURRENT + TOTAL
FIXED)

LIABILITIES
CURRENT LIABILITIES
Interest on short term loans, long term loans Taxes Wages and salaries earned but not paid Money owed to other businesses for goods purchased on credit

SHILLINGS

0

0 0 0 0 +1,000,000/= 0 0 0 +1,000,000/= +1,000,000/=
SHILLINGS

TOTAL CURRENT LIABILITIES LONG TERM LIABILITY
Loans incurred to buy land Loans incurred to buy buildings Loans incurred to buy equipment Loans incurred to start a business TOTAL LONG TERM LIABILITY

TOTAL LIABILITY (TOTAL CURRENT +
TOTAL LONG TERM)

OWNERS EQUITY
START UP OWNERS CAPITAL

+1,000,000/=

LESS OCTOBER-DECEMBER NET LOSS PLUS JANUARY-MARCH PROFIT BALANCE OF OWNERS EQUITY

TOTAL LIABILITY PLUS OWNERS EQUITY

-485,000/= +12,501/= 562,501 1,562,501

PART 2
LIABILITIES. Liabilities are debts that your business owes to other people. Liabilities can also be divided into two categories, based on how long they will be paid. CURRENT LIABILITIES. These are debts that your business must pay within one year from the date of the balance sheet. These can include: 1. Short-term loans 2. Interest on long term loans 3. Taxes 4. Wages and salaries earned but not paid. 5. Money owed to other businesses for goods purchased on credit. LONG TERM LIABILITIES. These are debts which are not due within one year. These can include: 1. Loans to start a business 2. Loans incurred to buy land 3. Loans incurred to buy buildings 4. Loans incurred to buy equipment.

PART 3. OWNERS EQUITY.
Owners equity is the difference between assets and liabilities. Owners equity will be equal to: Owner's original investment in the business Any later investments in the business by the owner Plus profits earned by the business Less losses suffered by the business Less withdrawals from the business by owners.

C H A P T E R XIII PROFIT AND LOSS STATEMENT
CHAPTER THIRTEEN.
PROFIT AND LOSS STATEMENT.

This statement will show the income and expenses of a business over a given period of time. It will help you to calculate if your business is making a profit or making a loss. The profit and loss statement gives a picture of a business over a given period of time. Basically the profit and loss statement shows revenue minus expenses which gives you your profit. From the profit and loss account you can see: whether your profits have increased or decreased whether your sales have increased or decreased • whether your costs have increased or decreased You can then take the necessary action to help your business As a business you should do a profit and loss statement at the end of every month. A profit and loss statement should include the following; TOTAL SALES This will tell you your total sales in a month. This is calculated by;
NUMBER OF ITEMS SOLD X PRICE OF THE ITEM = TOTAL SALES.

TOTAL DIRECT COST This will tell you your total direct cost in a month.
DIRECT MATERIAL COST + DIRECT LABOR COST = TOTAL DIRECT COST

GROSS PROFIT Your gross profit must be high enough to cover all the costs in your business.
GROSS PROFIT = SALES - DIRECT COSTS.

NET PROFIT This will show you the total result of your business. It will tell you how well or how badly your business is doing. NET PROFIT = GROSS PROFIT – INDIRECT COSTS. PROFIT AND LOSS STATEMENT ................................................... TOTAL SALES Less Less MATERIAL COSTS DIRECT LABOR COSTS

GROSS PROFIT

Less

INDIRECT COSTS Rent for land Rent of building Electricity Water Workers salary Stationary Furniture Loan interest Tax Depreciation Others

TOTAL INDIRECT COSTS NET PROFIT

THIS IS PROFIT AND LOSS STATEMENT FOR OTIM AND SONS FOR THE MONTH OF MARCH 1996 TOTAL SALES Less Less MATERIAL COSTS DIRECT LABOR COSTS 650,000 450,000 0

TOTAL DIRECT COSTS OF GOODS SOLD

GROSS PROFIT Less INDIRECT COSTS Rent for land Rent of building Electricity Water Workers salary Owners salary Stationary Furniture Loan interest Tax Depreciation Others TOTAL INDIRECT COSTS NET PROFIT

200,000

50,000 0 20,000 0 50,000 25,000 0 0 0 0 833 0 145,833 54,167

“This is my profit and loss statement for the month of March 1996.”

Mr. Otim finds that his business Otim & Sons is making a profit in the month of March, 1996. He is making a net profit of UShs.54,167 and above is his profit and loss statement for the period March 31, 1996.

C H A

P T E R XIV EXECUTIVE BUSINESS PLAN SUMMARY
CHAPTER FOURTEEN.
EXECUTIVE SUMMARY The executive summary is a brief statement of the most important points in your business plan. It is very important because many people who may be interested in your business may not have time to read your whole business plan. To get a quick picture of your business, they will read the executive summary. It is therefore important that the executive summary is well presented and contains all essential information. The group ___________________________ located in ______________________ It was formed for the following purposes _________________________________ ______________________________________________________________________

Since we were formed we have accomplished _____________________________ ______________________________________________________________________ In the next year, we plan to _____________________________________________ ______________________________________________________________________ We produce (or render service) _________________________________________ ______________________________________________________________________ We sell our products or services to ______________________________________ ______________________________________________________________________ We have a plan of activities to produce our product/service outlined in the following Business plan. Decisions are made by _________________________________________________ We expect to make a profit of __________________ during __________________ We will use the profit to ________________________________________________ ______________________________________________________________________ If the activity goes as planned the benefit to the group and the community will be ___________________________________________________________________ ______________________________________________________________________ _ Our cash flow analysis shows that we will have enough money to pay our bills on the requested loan of ________________________ which will be used to ______________________________________________________________________ We will repay the loan by__________ with money from the sales of ________ ______________________________________________________________________

LOAN REQUEST (Complete only if seeking a loan) Business (Group) _____________________________________________________ How large a loan do you need? ________________________________________

______________________________________________________________________ When will you need the money?________________________________________ ______________________________________________________________________ How will the money from the loan be used? _____________________________ ______________________________________________________________________ ______________________________________________________________________ ___ How will the loan help you make a profit? _______________________________ ______________________________________________________________________ ______________________________________________________________________ What security do you have to guarantee the loan? ________________________ ______________________________________________________________________ ______________________________________________________________________ When will you repay the loan? _________________________________________ ______________________________________________________________________ How will you be able to repay the loan? Where will you get the money to repay the loan? ______________________________________________________________________ ______________________________________________________________________ __ Why do you think you should receive the loan? __________________________ ______________________________________________________________________ ______________________________________________________________________

Answers to Exercise one on page 77. That is for the group to decide. Options include: using it to plant more ground nuts without having to borrow; divide it among the members divide part of it among members and use part to plant more groundnuts; some other use they decide upon.