CARRYING OUT A
An idea for a business is not a sufficient reason to begin
production straight away. It is essential to be aware of the different aspects involved in actually
running the business. To reduce the risk of failure, producers should first go through the following
aspects and finally develop a business plan.
1. Assess yourself as an entrepreneur
The success of any business depends largely on the entrepreneur’s personal characteristics, skills
and financial situation. To be a successful entrepreneur you need to:
• Have a strong commitment to your business
• Have strong motivation to own your business
• Be able to take considered risks and to make important decisions
• Have the support of your family and friends
• Have the necessary technical skills to produce the product of your business
• Have enough business management skills, such as selling, record keeping and costing, to
run a business of your own
• Have sufficient knowledge of your line of business
• Have sufficient personal funds.
2. Conduct a feasibility study
To reduce the risk of failure it is necessary to decide whether the idea is feasible. This involves
carrying out a short market survey and feasibility study. The following are the stages of a
1st stage: Market feasibility
Expected market size/share
2nd stage: Technical feasibility
Scale of production needed to meet
Equipment, materials, services and
labour needed for scale of
3rd stage: Financial feasibility
Cash-flow for one year (income and
Business development over three years
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Carrying out a Feasibility Study
The first stage is to collect as much information as possible on the potential market for the
products you intend to make. This is achieved by carrying out market research, usually in the
form of a market survey of the target population in the area you intend to sell the product.
Market research: the
necessary steps of market
research are as follows:
a. Work out the size of the potential
What is the potential market area?
Who will be the potential
What are the potential outlets?
Who will be the competitors?
How much of the product can be
sold? (what quantities of the
product are already sold and what
quantities of similar products are
What is the seasonality of demand?
What is market research?
Market research is the process of investigating a
market to find out the sales prospects for a product
and how to achieve success with it. It is the set of
activities necessary to obtain the information
required about the market. Market research activities
include the following:
Tasting tests to see if people accept the
product or which taste they prefer
Interviews with retailers and wholesalers.
Market research is important to avoid the failure of
food processing ventures.
b. Research consumer attitudes towards the new products:
What, where and when do consumers buy?
What are consumers’ preferences about tastes, smell, texture etc?
What is the consumers’ reaction to packaging and labelling?
c. Find out how the new products can be made attractive to consumers:
What are the size units and prices of competing products according to location?
Where are quality weaknesses of the competition?
Which containers are used for competing products?
Which labelling is used by competitors and what are the legal obligations regarding label
d. Identify the most appropriate option for distributing products:
Direct to consumers?
To suitable retailers in an area?
To supermarkets (if sufficient quantities can be delivered)?
To wholesalers (suitable for larger processors)?
To institutions and the catering trade?
e. The factors to be
considered in deciding on
the marketing channel to
Quantities processed and
quantities required by
distributors, transport and
margins and mark-ups
Notes on calculation to find the daily production rate
Estimated market size
Estimated share of market
Production required per month to meet 712 kg
Production required per day @ 20 days 35.6 kg
work per month
Minimum process throughput @ 8
hours per day
Carrying out a Feasibility Study
Estimate the proportion of the total market that the new business could expect to have (likely
Scale of Production
Once you have found information about
potential customers, their requirements
and the likely share of the market that
could be obtained for a new product, it
is necessary to calculate the monthly
and daily production required to meet
that demand (see example).
The figure for the daily production rate is central
to all following calculations of production
capacity and investment requirements and
therefore should be as accurate as possible.
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
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 labour 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;
Weights of raw materials and ingredients that should be scheduled for each day
Number and size of equipment required to achieve the planned throughput of
Number of packages that are required each day
Number of workers and their different jobs.
Weights of raw materials and ingredients
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 colour,
flavour, 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
• Experiment with different varieties of fruits and the particular process that is being used
to calculate the actual amount of losses (see also table showing typical losses during the
processing of fruits).
Carrying out a Feasibility Study
Calculate the amount of raw materials
and ingredients that are needed to
produce the required weight 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
Typical losses incurred while processing
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.
Number and type of workers
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.
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.
What is gross profit (or loss)?
Calculate your fixed and
This is the difference between the expected income and
variable operating costs in
the total operating costs over the first year, including any
load repayments. Income is calculated as follows:
advance based on the likely
Income = selling price per unit x number of units sold
market share. If a loan is
taken, the costs of
repayment should be included in the fixed costs.
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.
Carrying out a Feasibility Study
Setting the price of the product
What is the breakeven point?
The correct price is important to
This is the production level at which the total costs
be able to enter the market and to
will equal the total income if everything produced is
sell the product at a profit. There
sold. The breakeven point is calculated as follows:
are two approaches:
a. Base the price on production
Production level at
costs and set it to ensure that
Revenue – Variable costs
income exceeds the total
b. Take into account
competitor’s prices and set
the price of the new product
below the price of
similar products. Don’t forget to include the profit expected by the wholesaler or
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:
Compile a table (see example) showing
sales incomes and expenses on a
monthly basis for the first year. Work out
Cash beginning of the
when you have to spend money for
equipment, raw materials and employees
Cash in from sales
and when you can expect to be paid for
Any other cash in
TOTAL CASH IN
2. Calculate the monthly profit or loss by
Cash out for staff costs
subtracting the expenses from the
Cash out for operation
income. This will show when there are
profitable months or when a loss is
Any other cash out
expected and further loans are needed.
TOTAL CASH OUT
3. Prepare a similar table for the next two
Cash at end of month
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
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
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
If not, you are likely to have problems, even if
your earlier calculations have shown that the
business will be profitable.