After calculating the scale of production needed to supply the estimated likely share of the market. It is necessary to assess whether production at this scale is technically feasible. The following steps have to be taken:
- Identify the raw material supply, their quality and buying costs
- Identify production location and product quality
- Identify price and price seasonality
- Research sources and costs of services (fuel, water, electricity etc) and other processing inputs
- Identify sources and costs of packaging and label design
- Identify distribution procedures to retailers or other sellers
- Research availability of information and expertise to ensure that products are always made at the required quality
- Research availability and costs of the equipment needed
- Research availability of maintenance and repair costs of the equipment needed
- Clarify labor requirements, costs and availability.
To plan the different aspects of the production process, first put together a modified process chart showing the scale of operation and daily requirements for production (see the example at the end of the brief). This chart is used to identify the following;
1. Weights of raw materials and ingredients that should be scheduled for each day
- The different steps to identify the weights of raw materials and ingredients are as follows:
- Experiment with different mixes of ingredients to produce a product that has the color, flavor, appearance etc that the consumers like. Weigh each ingredient carefully and record all weights for each formulation tried.
- Develop a successful formulation. Take care that it is always made in exactly the same way.
- Experiment with different varieties of fruits and the particular process that is being used to calculate the actual amount of losses.
- Calculate the amount of raw materials and ingredients that are needed to produce the required weight of product each day.
2. Number and size of equipment required to achieve the planned throughput of product
- Calculate the weight of food that should be processed at each stage (in kg per hour) using the process chart. Then decide on the type and size of equipment required. It is preferable to buy equipment from local suppliers because servicing and obtaining of spare parts should be faster and easier.
3. Number of packages that are required each day
- Decide on the type of packaging material and calculate the number of packages that are needed daily. Take into account the technical requirements of the product for protection against lights, crushing, air, moisture etc, the marketing requirements and the relative cost and availability.
4. Number of workers and their different jobs.
- Use the process chart to break down the production into different stages and then decide on the number of people need for each stage of the process. Include tasks such as store management, quality assurance and book-keeping.
- Each day’s work will initially involve preparation of the raw materials and then move through processing and packaging. You can have all workers doing the same type of activity throughout the day but it is often more efficient to distribute different jobs to each worker as the day progresses.
After completing the technical feasibility study, you should have sufficient information to determine the costs involved in production. Additionally, the market survey will have supplied information about the sale price that could be achieved for the new product. You can now calculate the expected income and expenditure and the gross profit that can be achieved.
1. Start-up costs – Calculate the start-up capital and initial working capital to determine whether your savings (also known as equity) will be sufficient to start the business. If not, a loan may be needed from a bank or other lender.
2. Operating costs – Calculate your fixed and variable operating costs in advance based on the likely market share. If a loan is taken, the costs of repayment should be included in the fixed costs.
3. Income and profit – Calculate the expected sales and income using information from the market survey. The income depends on both the price of a product and the amount that is sold.
Setting the price of the product
The correct price is important to be able to enter the market and to sell the product at a profit. There are two approaches:
- a. Base the price on production costs and set it to ensure that income exceeds the total costs
- b. Take into account competitor’s prices and set the price of the new product at or below the price of similar products. Don’t forget to include the profit expected by the wholesaler or retailer.
If the gross profit indicates that the proposed business venture is likely to be successful, you still need to carry out a cash-flow analysis:
1. Compile a table (see example) showing sales incomes and expenses on a monthly basis for the first year. Work out when you have to spend money for equipment, raw materials and employees and when you can expect to be paid for your deliveries.
2. Calculate the monthly profit or loss by subtracting the expenses from the income. This will show when there are profitable months or when a loss is expected and further loans are needed.
3. Prepare a similar table for the next two years, taking into account increases in price, changes in sales and the action of competitors.
The production level should be above the ‘breakeven point’ for the business to be profitable. If this is not the case, you should examine the data to see if production costs can be reduced. If not, you should forget the idea and start again with a different product.
It is important to carry out a cash-flow analysis to ensure that the cash you plan to put into the business will be enough to meet your needs on a continuing basis.
- Will you spend all your available cash before you are earning any revenue?
- Will you be able to pay your bills?
- Will you be able to buy raw materials and ingredients?
If not, you are likely to have problems, even if your earlier calculations have shown that the business will be profitable.
Preparation of a Business Plan
Once the feasibility study has been completed, a business plan can be prepared. The business plan is a useful tool to help you manage, run and expand the business. It is essential if you want to borrow money from a bank or building society as they will ask to see your business plan before offering to lend you money.
Write down the results of the feasibility study. This helps to clarify and focus your ideas and to make the mistakes on paper rather than during the operation of the business. The information in the business plan will help you make decisions on the following:
- Whether the business will work successfully
- The demand for the product
- The resources available to produce the product at the right quality and for the right price
- Whether the business will be profitable
- Whether a loan is needed and if so, how much and when
A well prepared business plan will also help you to get a loan.
How to Write a Business Plan
The results of the feasibility study need to be written down in a simple, concise way to show bankers or other lending agencies that the business is carefully planned. The different steps are as follows:
- Introduction: Summarize what the product is, who the customers are and why the business is a good idea.
- Basic information: name and address of the business, the owners, their qualifications and experience.
- Information on the product: details of the raw materials, the production process, quality assurance, packaging etc. What is special about your product?
- Market: potential customers and where they are located, size and value of the market, expected market share, likely expansion (or contraction) of the market, number and types of competitors, their strengths and weaknesses and their expected reactions to a new product.
- Selling plan: distribution and sales methods, planned promotion, product cost.
- Premises/equipment needed: location of the business, building to be used and services needed, steps taken to meet health and hygiene laws, equipment and its costs.
- Finance: amount needed for start-up and initial operation, profit and loss statement and cash-flow forecast for three years, own resources that will be used, size of loan required and what it is for, security on the loan.
- Plans for the future: objectives of the business and expectations for the next 3-5 years.
source: practicalaction.org, photo from .net