Description
In terms of methodology, the units are organized in such a way as to give you the opportunity to discover each unit's specific course content and the skills you will attain. Included in the conceptual content of this module are a few procedures and attitudes that will help you to make the most of what you learn and to apply it to the day-to-day reality of your agribusiness.
Business management
for small-scale
agro-industries
Editors
Pilar Santacoloma
Alexandra Röttger
and
Florence Tartanac
FAO Agriculture Management, Marketing and
Finance Service
Rural Infrastructure and Agro-Industries Division
FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS
Rome, 2009
TRAINING
MATERIALS FOR
AGRICULTURAL
MANAGEMENT,
MARKETING
AND FINANCE
8
The mention or omission of specific companies, their products or brand names does not
imply any endorsement or judgement by the Food and Agriculture Organization of the
United Nations.
The designations employed and the presentation of material in this information
product do not imply the expression of any opinion whatsoever on the part
of the Food and Agriculture Organization of the United Nations concerning the
legal or development status of any country, territory, city or area or of its authorities,
or concerning the delimitation of its frontiers or boundaries.
All rights reserved. Reproduction and dissemination of material in this information
product for educational or other non-commercial purposes are authorized without
any prior written permission from the copyright holders provided the source is fully
acknowledged. Reproduction of material in this information product for resale or other
commercial purposes is prohibited without written permission of the copyright holders.
Applications for such permission should be addressed to:
Chief
Electronic Publishing Policy and Support Branch
Communication Division
FAO
Viale delle Terme di Caracalla, 00153 Rome, Italy
or by e-mail to:
[email protected]
© FAO 2009
iii
Contents
Acknowledgments vi
Acronyms and abbreviations vii
Introduction 1
General study guidelines 3
Managing finance in small-scale agro-industries 5
List of topics 5
Setting the context 6
Case study: Business Management –Situation of
Cassava Starch and Panela Plants in North Cauca,
Colombia 8
Case study analysis 10
Calculating costs 10
Calculating the price for products 12
Record keeping 14
Financial statements 16
Managing working capital 20
Conclusions on the case study 21
Group exercise 22
Summary 23
Unit assessment 24
Managing people in small-scale agro-industries 25
List of topics 25
Setting the context 26
Case study: An Asian food processing firm faces
new challenges in Kenya 28
Case study analysis 29
Recruitment 30
Training and staff motivation 31
Staff management 32
Health and safety 33
Staff records 34
Conclusions on the case study 35
iv
Group exercise 36
Summary 36
Unit assessment 38
Managing equipment in small-scale agro-industries 39
List of topics 39
Setting the context 40
Case study: From Dairy Farming to Manufacturing:
The Osia Ice Cream Company, Denmark 41
Case study analysis 42
Choosing equipment 43
Calculating the correct size of equipment 43
Sources of equipment 46
Equipment maintenance 47
Depreciation for equipment 49
Conclusions on the case study 51
Group exercise 52
Summary 52
Unit assessment 54
Managing exports in small-scale agro-industries 55
List of topics 55
Setting the context 56
Case study: The Haarlem Honeybush Producer
Group, South Africa 57
Case study analysis 59
Researching export markets 60
Export options 60
Finding partners and making legal agreements 63
Pricing, delivery terms, and documentation 65
Getting paid 67
Export insurance 68
Conclusions on the case study 71
Group exercise 72
Summary 72
Unit assessment 74
v
Quality assurance and management in small-
scale agro-industries 75
List of topics 75
Setting the context 76
Case study: Managing Quality in Food Retailing.
Tesco, United Kingdom 78
Case study analysis 79
Total quality management 80
Quality standards and assurance schemes 82
Traceability and due diligence 84
HACCP system 87
Conclusions on the case study 92
Group exercise 93
Summary 93
Unit assessment 95
Glossary 97
Bibliography 101
vi
List of figures
1. The break-even analysis 19
List of tables
1. Use of a process chart to calculate the equipment
needed to produce 52 kg of biscuits per day 45
2. Maintenance and repair records 48
3. Linear or straight line method of depreciation 49
vii
Acronyms and abbreviations
CETEC Corporation for Interdisciplinary Studies and Technical
Assistance
CHT Cape Honeybush Teas
CIAT: International Center for Tropical Agriculture
CIRAD-SAR French Agricultural Research Centre for International
Development- Agri-food and rural systems department
EAN European Article Number
EU European Union
HACCP Hazard Analysis Critical Control Point
HNP Honeybush Natural Products
IDRC International Development Research Centre of Canada
INCOTERMS International Commercial Sales Terms
ISO International Organization for Standardization
kg kilogram
P.A.Y.E: Pay-as-you-earn
SSCC Serial Shipping Container Code
WHO World Health Organization
WTO World Trade Organization
viii
Acknowledgments
We wish to thank Margarita Baquero, FAO Consultant, for the adaptation of the
FAO AGSF Working Document No. 7: Business management for small-scale agro-
processors by Peter Fellows and Alexandra Röttger, FAO 2005.
Credit goes to Pilar Santacoloma (AGSF) for all cover photographs.
Special thanks also go to Malcolm Hall, FAO Consultant, for proofreading and
Lynette Chalk, FAO Consultant, for layout and desktop publishing.
1
Introduction
The purpose of this publication is to present leaders of associations with several
of the business management techniques.
It has the following objectives:
ÿTo assess the importance of finance management techniques as tools that
help us to know if the enterprise is really winning or how profitable a new
business can be.
ÿ To discover the real importance of modern managing staff techniques which
perceive people as the most important resource of any business.
ÿ To understand how buying the right equipment in terms of size, price,
availability of spare parts, and plan its maintenance permit the processor to
save money.
ÿ To recognize that exporting is not an easy thing and that many issues have to
be considered before initiating this process.
ÿ To learn that quality assurance has begun to focus not only on safety, which
is expected, but also to increasingly higher demands for consistently better
quality.
To this end, the conceptual content of this module has been organized into five
units:
ÿ Unit 1 – Managing finance in small-scale agro-industries.
ÿ Unit 2 – Managing people in small-scale agro-industries.
ÿ Unit 3 – Managing equipment in small-scale agro-industries.
ÿ Unit 4 – Managing exports in small-scale agro-industries.
ÿ Unit 5 – Quality assurance and management in small-scale agro-industries.
In terms of methodology, the units are organized in such a way as to give you
the opportunity to discover each unit’s specific course content and the skills you
will attain. Included in the conceptual content of this module are a few procedures
and attitudes that will help you to make the most of what you learn and to apply
it to the day-to-day reality of your agribusiness.
Each unit is structured to help you to identify in advance your prior experience
and interests and to enable you to combine your existing knowledge with the
proposed course content to optimum effect. The aim is to build capacities by
accumulating new knowledge in a pro-active and participative way.
Business management for small-scale agro-industries 2
In terms of assessment, we start from the principle that assessment is of most
value when it is used to take decisions for improving the teaching/learning process.
With this in mind, we have included three phases:
ÿ Initial assessment: this will enable facilitators or tutors to analyse and predict
your real capacity for learning. At the same time, it will give you an idea of
what each unit is about and what it aims to achieve in terms of increasing
your motivation, updating your existing knowledge and preconceptions, and
planning your own learning process fully.
ÿ Formative assessment: this will enable facilitators to take decisions to
improve the teaching/learning process (regulation) and will enable you to
take decisions to improve your own learning process (self-regulation).
ÿ Summary assessment: this will enable you to link together the key ideas,
to find out what progress you have achieved and to see where you stand as
regards a new learning process.
Furthermore, the assessment instruments in this manual can be supplemented
with any others that facilitators may consider appropriate to ensure that assessment
also becomes a group process and that progress is made with the different types
of course content (concepts, procedures and attitudes). At the same time, the
assessment instruments are designed to allow you to offer your constructive critical
assessment of the validity of the course material and the way in which it is taught.
Accordingly, the manual contains the following sections:
Particular attention is drawn to the glossary, which helps to clarify a few
concepts not explained in the text. The terms figuring in the glossary are
marked with an asterisk (*) the first time they appear in the text.
Section Aim
ÿGeneral guidelines Promote the learning-to-learn process
ÿList of topics To present the specific content of each unit
ÿPoints to remember To memorize what you have learned. Initial assessment
ÿKey competencies To detail the key competencies you will learn
ÿSetting the context To put into context the subject to be discussed, and update thinking
on it
ÿCase study To remember prior knowledge. Initial and formative assessment
ÿExplaining key issues To present the priority course content and analyse it in detail
ÿConclusions on the case study To provoke thought on the real issues. Formative assessment
ÿPractice exercises To put into practice the proposed course content
ÿUnit assessment To provide an opportunity for self-assessment of the material learnt
ÿSummary To help to link, integrate and memorize the key ideas
ÿGlossary To clarify ideas on the meaning of selected terms and acronyms
ÿBibliography To provide information for personal research
3
General study guidelines
To help you make optimum use of this material, below are a few hints and
suggestions for planning and managing your own learning process:
ÿ Organize your time in such a way as to allow you to complete the proposed
assignments by the appointed deadline. You are advised to study for at least
two hours every day to optimize the teaching/learning process.
ÿ Before starting work on a unit, try to remember what you already know
about the subject, as this will help you to link new knowledge with your
existing knowledge and will allow you to recognize the added value of
everything you learn for your personal development.
ÿ Complete the self-assessments, as well as the topics and proposed case
studies, as they will help you to understand the course material and reinforce
your learning.
ÿ You may underline, construct graphic organizers, write summaries or use
any other method to help you to understand the course material fully.
ÿ You will get a chance to ask questions and request clarifications to enable
you to exchange views with your fellow students and with the facilitator. An
opportunity will be provided for airing different points of view. The aim is
not for us all to think exactly the same.
ÿ Do your own research. The proposed bibliography is only a guide. Do
not forget that you can also find instant, up-to-date information on the
Internet.
ÿ Use the objectives and competencies of each unit to develop your own
assessment instruments. Taking control of your own learning process will
allow you to make decisions to improve it.
ÿ Although studying is challenging and you will come across obstacles, in the
end all the effort, sacrifice and time will be rewarded with greater knowledge
and enhanced skills, aptitudes and abilities.
ÿ As you are the key player in the teaching/learning process, you will need
sound arguments and in-depth thinking to carry out the proposed activities,
coupled with strong motivation and critical and analytical abilities.
ÿ You will find the definitions for words marked with an asterisk (*) in the
glossary.
You can do anything you set your mind to.
Get started now, and have fun.
5
Managing finance in
small-scale agro-industries
LIST OF TOPICS
1. Setting the context
2. Case study: Business Management –Situation of Cassava Starch and Panela
Plants in North Cauca, Colombia
3. Case study analysis
4. Calculating costs
5. Calculating the price for products
6. Record keeping
7. Financial statements
8. Managing working capital
9. Conclusions on the case study
10. Group exercise
11. Summary
12. Unit assessment
Simple finance management techniques have been developed to help small
entrepreneurs manage their business. These techniques will help the small-scale
processor to calculate the costs of production that arise during operation of the
agro industry and to determine income from the sale of the products.
Do you know that de?cient ?nancial management causes some of the
most common and serious problems for small scale-processors? Are
you aware that ?nance management techniques inform us whether
our association is pro?table? Do you know how to calculate the cost
and price of your products? Is your enterprise keeping records of
income and expenditure? Do you know why keeping records is
important? Do you know what a break-even analysis is and what is
the importance of it? Have your considered the importance of
managing working capital?
Points to remember
UNIT ONE
Business management for small-scale agro-industries 6
$ Identify from your own experience finance
management activities that your associative enterprise
has implemented or should implement.
$ Gauge the economic implications of poor finance
managing.
$ Learn to calculate costs, and determine the price for the
products.
$ Recognize the importance of record keeping and which records are necessary to
keep.
$ Appreciate the importance of managing working capital and break-even analysis.
Before the industrial revolution finance management was not considered so
important for business organizations. Because methods of productions were very
simple, labour was more important than capital and finance at that time. So these
things did not create any problems.
Yet, after industrial revolution, when methods of productions were introduced,
the finance got much importance. Nowadays finance management is considered as
the life blood of every business and achieved the most important place in today’s
business. The businesses whether large-scale or small-scale require finance for its
operations. Money is a universal lubricant for any enterprise, man and machine
work.
Agro-industries as one very important industry branch and part of modern
agrifood systems are characterized by their strong backward and forward linkages
among agricultural enterprises, strong synergies between domestic and export
sectors, and perhaps most importantly high production and service value addition
relative to primary production.
As any other business, agro-industries good performance depends on a number
of parameters in order to be profitable. These parameters are related to production
By the time you complete this unit
you will be able to:
Setting the context
Unit 1 – Managing finance in small-scale agro-industries 7
and finance management. Deficient financial management causes some of the most
common and serious problems for many small-scale processors. Causes of failure
include:
ÿ over-spending;
ÿ treating profits as personal income;
ÿ incorrect costing of inputs and/or pricing of products;
ÿ poor record keeping;
ÿ high debts or negative cash flow*.
Finance management techniques help us know if the enterprise is really
winning or how profitable a new business can be. In this context there are two
types of finance needed. The first is required before a business is set up and while
the processing unit is being established. This is known as investment* finance.
The second type is required to meet the costs that arise during operation of the
processing unit, and this is met by income from sales of products. In this course
we will treat the second type related to routine financial management.
Business management for small-scale agro-industries 8
INTRODUCTION
1
Two types of rural agro-industries are typically found in the Department of
North Cauca, Colombia: small sugar-crushing plants, which produce panela*,
and cassava- processing plants, which produce both sour and sweet starch. Panela
plants are generally too small, dispersed and seasonal in operation to estimate the
number of families dependent on them as a major source of income. However,
most of the starch plants are small family enterprises, which provide direct
employment to approximately 300 families.
It is estimated that 80 percent of sour starch production in Colombia is
concentrated in North Cauca and that 90 percent of the 60 000 tonnes/year of
cassava roots produced in the region are processed into starch. Although many
institutions, public and private, have worked on various fronts with these small
agro-enterprises, their impact was unknown as was the degree to which new
technology had been adopted. Also, a comprehensive understanding of the
principal problems of these agro-industries was not available to formulate effective
support programs.
DISCUSSION
Taking into consideration the above, the Carvajal Foundation and CORPOTUNIA
planned a study focused on gathering and analyzing the needed information.
Other institutions with a particular interest in the information gathering exercise
and who participated in various ways were CIAT, CIRAD-SAR, the Corporation
for Interdisciplinary Studies and Technical Assistance (CETEC), PRODAR, and
IDRC.
The objectives of the study included better knowledge of the management
and administration of panela and cassava starch enterprises as a basis on which
to formulate strategies for strengthening their administrative structures and
business consolidation. To achieve this purpose, various aspects of enterprise
management were addressed, such as personnel management, accounting practices
and inventory* control, costs of production and sales, product marketing* and
prices, quality control, and legal aspects and administrative structure.
The researchers began by conducting a thorough review of secondary information
about the starch plants followed by each participating institution compiling a matrix
Case study: Business Management - Situation of Cassava Starch
and Panela Plants in North Cauca, Colombia
1
IDRC-CRDI. 1997. Rural Agro-industry in Latin America. An evaluation of the PRODAR
Network.http://www.idrc.ca/fr/ev-31725-201-1-DO_TOPIC.html
Unit 1 – Managing finance in small-scale agro-industries 9
of information they possessed not already captured. Based on this information, a
field instrument was designed; pilot tested and administered to starch and panela
plant operators. When the fieldwork was completed, the data was coded, organized
and analysed by a selected inter-institutional team of analysts.
CONCLUSION
The results of the study may me summarized as follows: Of the 210 starch plants
inventoried, 146 were in operation, three were under construction, 30 were
temporarily idle, and 28 were abandoned. Most were family operations, and two
were owned by organizations. Twelve percent of the work force are women,
and less than one percent are children. Lack of working capital, shortage of raw
material, great variation in price and marketing of products and by-products were
the main reasons indicated for a 68 percent underutilization of installed capacity.
Other problems included scarcity of water, lack of drying floors and frequent cuts
in electric energy supply.
About 22 percent of the plants had received some administrative training
and 77 percent of these kept a register of their purchases and sales. The plants
with higher technology levels usually kept records while the oldest and most
experienced operators were least likely to do so.
Turning to the results of the panela plant survey it is estimated that, in 1990,
about 900 000 tonnes of panela was produced in Colombia in 30 000 plants
generating 120 000 permanent jobs. Of the 60 plants surveyed, 89 percent were in
operation and the rest either lacked cane to process or were abandoned. Seventeen
percent of the plants belong to producer associations and the rest to individuals
or family groups. Up to five women were found working in 78 percent of the
plants. Less than half had completed primary education. Administratively, 94
percent of the plants had minimal or no administrative and management structure
or distribution of tasks among workers and only 5 percent kept inventories. Most
did not know what their costs of production and returns were.
In general, comparing panela and starch plants, the panela plants are family
enterprises with little working capital and poor or nonexistent administration.
Most are ignorant about determining costs of production, do not keep records
and have no idea of their costs and returns. The starch producers, on the other
hand, are generally better endowed in these enterprise areas. Women’s labour, and
in some cases that of children, is an important factor in both types of enterprise
but especially in panela where returns are lower. Those who belonged to grouping
organizations exhibited better management practices and both technical and
management training appeared as an important tool in improving these small
enterprises. These administrative factors left them at a disadvantage in negotiating
with intermediaries who set prices at will.
Business management for small-scale agro-industries 10
The first step to introduce finance management is calculating costs. Many small-
scale processors do not attempt to find out what their production costs are,
because they believe that it is too complicated or too difficult. As a result they
have no idea whether they are making a profit or how much it is. However, when
the different costs in a business are understood, it is a relatively straightforward
procedure to calculate them.
Case study analysis
Based on your personal experience, consider the following questions on
the proposed case:
1. According to the case study which are the main problems of panela* and starch
plants in Colombia? Which of these problems related to the lack of money or
to scarce financial management? Explain.
2. In your opinion, why do you think that most of the studied enterprises do
not keep records of costs of production and have no idea of their costs and
returns? How do you think these practices affect the business?
3. In your opinion and according to the case, which are the principal management
finance practices that starch and panela enterprises are not following?
4. What should be the attitude of the panela and cassava enterprise owners who
are being included in training and enterprise development projects in order to
improve their administrative skills?
Bear in mind that at the end of the unit you will be asked to answer the
same questions in the light of the new knowledge you will have acquired.
Calculating costs
Unit 1 – Managing finance in small-scale agro-industries 11
The costs incurred before production begins are known as ‘start-up’ costs. The
costs of buildings, machinery and other equipment are known as ‘capital costs’, and
the costs that arise during processing and selling the products are ‘operating costs’.
Operating costs are categorized into two types: ‘fixed’ and ‘variable’. Fixed
costs* (also known as ‘overheads’) are those that do not change if there is an
increase or decrease in the amount of production. Examples include:
ÿ salaries;
ÿ rent;
ÿ utilities (service charges for telephone, water and electricity);
ÿ interest paid on loans;
ÿ some types of taxes;
ÿ depreciation* of equipment.
Variable costs* change according to the volume of production. Examples
include:
ÿ raw materials and ingredients;
ÿ packaging materials;
ÿ salaries for operational staff;
ÿ electricity, gas and water charges;
ÿ fuel for vehicles;
ÿ office materials.
Operating costs can also be described as ‘direct’ and ‘indirect’ costs. Direct
costs are those that arise directly from the production process (e.g. materials and
labour costs for production workers), whereas indirect costs include salaries for
office staff and delivery drivers, vehicle costs, etc.
Where the time and materials required to produce and sell different products
are similar, it may be reasonable to split indirect costs equally between them. If
however, the overheads for one product are higher, or the production and sales are
more diverse and complex, or the competition is stronger, it may be beneficial to
use ‘activity-based costing’. This more accurately assess the true level of indirect
costs and involves identifying all of the indirect activities needed to make and sell
each product and allocates an accurate cost for each. These costs are then added
together.
The calculations can also show which products are the most profitable and
how expansion of their production would benefit the business. For a business to
operate successfully, it must be profitable over the long term. This means that the
income must be greater than the total expenditure.
Business management for small-scale agro-industries 12
There are two basic ways to maximize gross profits. The first is to reduce
expenditure, and to do this a processor must first identify where costs occur in
the business. The second is to increase income, either by increasing the price of
products, increasing sales of products, or by finding buyers for by-products that
were previously discarded.
The price charged for a product should ensure that the income meets all of the costs
and generates sufficient profit. The simplest method to determine the correct price
for a product is to add up all the costs of production and then add on a percentage
profit (mark-up pricing). Profit margins of 20–30 percent are possible, although
many processors achieve less. Conversely, if a product has little competition and/
or a high demand*, a higher profit margin may be possible.
This pricing strategy does not include the capital costs of the equipment used
nor does it allow for the fact that the price of a product depends largely on what
the market will accept and the price that competitors are charging. A judgment
must therefore be made about how much a product can be sold for in a particular
market and whether the costs of making it will produce an acceptable profit.
The following principles assist in setting a price:
a. produce products for which there is a strong demand;
b. be aware of current market prices and conditions and how these translate
into product prices;
Gross profit = income – expenditure before taxes are paid
Calculating the price for products
Example: Calculating the price of a product
Total production costs per kg cheese = US$4.44
Add 23 percent profit margin = US$1.02
Selling price (US$/kg) = US$4.44 + US$1.02 = US$5.46/kg
Unit 1 – Managing finance in small-scale agro-industries 13
c. know the break-even cost of production and marketing.
The following formula provides a more complex calculation of selling price
that relates production costs, invested capital, the amount of food sold and profit
required:
Some processors underestimate the importance of price setting and simply try
to undercut their competitors. However, prices that are too low make little or
no profit, and poor pricing can result in no money being available for effective
marketing.
Selling price: P = v + F/Q + r K/Q
where P = selling price ; v = unit variable cost of the product; F
= fixed costs; Q = quantity produced and sold; r = interest rate;
K= invested capital
Business management for small-scale agro-industries 14
Example of a page from an invoice book
INVOICE No. …………………..…… Date: ……………….…
To: …………………..…………………..………………………………..……
Address: …………………..…………………..………………………………..…
Order No. : ……….
Quantity Products US$
………. ………………………… …………………..……
Please settle this account within 30 days.
Signed ………………………
Manager
Record keeping
To manage finances successfully, processors must have a good idea of how cash
comes into a business, where it is at any time and where it goes. This requires
financial records. Processing enterprises at all scales of operation need to keep
financial records in order to know how much income from sales has been received,
how much has been spent and for what purpose. Depending on the size and type
of business, processors may also keep records of production, stocks*, sales, staff,
equipment maintenance, quality assurance and cleaning schedules. Copies of
all records should be made, usually by using carbon paper under the page of a
duplicate record book.
The benefits of keeping records include:
ÿ being able to analyse business finances to reduce costs;
ÿ knowing how much profit/loss is made and whether a product range should
be expanded or reduced;
ÿ conforming to tax laws;
ÿ knowing which customers* owe money and how much;
ÿ knowing who are the creditors of the business;
ÿ detecting fraud or theft.
The following are the most common records used in different businesses.
Records of income
When a customer buys products on credit (i.e. they do not pay immediately), the
processor should give an invoice* that has an individual number, the customer’s
name, the products that were bought and how much is owed.
Unit 1 – Managing finance in small-scale agro-industries 15
A delivery note signed by the customer can also be used to prove that items
have been delivered in good condition. When the customer pays the bill, a receipt*
should be issued.
A cashbook is used to record all transactions that are made in cash.
Records of expenditure
Order* books have an individual number for each purchase, and together with
cashbooks are used to record all expenditure made by the processing company.
When goods have been paid for, the receipts should be kept in date order in a
separate file.
Records of purchases taken from the cash and order books are compiled each
week or month and entered into an expenditure book to show how much money
the processor has spent on materials, services or salaries.
Example of a page from a receipt book
RECEIPT No.: …………………...……. Date: …………………...…...
Address: …………………………………………………………...............……..…
Received from: …………………...…….
The sum of US$: …………………...……
Being payment for: …………………………………………………………………
US$ Cash: ………………………............. Check No. …………………
Signed: ………………............…..........……
Manager
Example of a page from a cashbook
Cash income Cash expenditure
Date Amount
received
Customer Products
sold
Date Amount
spent
Seller Materials
bought
2.6.05 24.50 JC Stores Pineapple
juice
3.6.03 2.56 Mohammed
stationery
Paper
6.6.05 12.00 Star shop Tomato
sauce
6.6.03 10.45 Market Plastic
bags
Business management for small-scale agro-industries 16
Record keeping in micro- and small-scale enterprises often involves a simple
single-entry recording system. This is based on a sales and expenditure book in
which the date of a transaction, its nature, and the amount of money involved are
recorded in different columns. Larger businesses use a double-entry system as
described above.
Other financial statements used in a business include:
ÿ bank statements to show bank account transactions;
Example of a page from an order book
Order No.: ………………………….………… Date: ……………….
To: ………………………….………………………….……………………
Address: ………………………….………………………….……………………
Please supply the following items and charge our account, quoting our order
number in your invoice.
Amount Goods Cost (US$)
…………………………. ……………………. ………………………….
Signed: ………………………
Manager
Example of a page from an expenditure book
Expenditure for the year: 2003
Month: May
Amount: US$ ......................
Date Order
No.
Check
No.
Cash Raw
material
Ingredient Office
materials
Vehicle Staff
costs
Miscella-
neous*
2.5.03 00232 00394 21.30
2.5.03 00233 10.25 10.25
15.5.03 15.00
* Miscellaneous entries can include purchases that are made infrequently, such as machinery, office
furniture etc.
Financial statements
Unit 1 – Managing finance in small-scale agro-industries 17
ÿ balance sheet statements, which show the financial position at a particular
time;
ÿ cash flow statements, which show the increase or decrease in available cash at
a particular time;
ÿ profit and loss accounts;
ÿ break-even analysis.
The financial position of a business is presented in a balance sheet and the
operating results are displayed in a profit and loss statement. These financial
statements show the past performance of the business and are used to project what
might happen in the future.
There are two categories of accounting information:
¸ financial accounting for the public, shareholders, customers, suppliers,
creditors, regulatory bodies or tax authorities which includes the financial
position, liquidity and profitability* of an enterprise;
¸ managerial accounting for internal use within the business which this
includes the relationship between production costs, profits and sales volumes,
productivity*, pricing decisions, capital budgets, etc.
A balance sheet shows the company’s value, providing information about its
assets, liabilities, and owners’ equity* at a particular time. Assets can be current
assets (those that the owner could convert into cash) and include products in
stock, cash and any short-term investments; or fixed assets. These include land,
buildings, machinery, vehicles, furniture, and fixtures. They also include patents
and trademarks.
Liabilities are obligations to others, including creditors and employees.
Current liabilities are those that the owner expects to pay within a short time,
including salaries, taxes, short-term loans and money owed to suppliers. Long-
Example of balance sheet
Assets Amount (US$) Liabilities (US$) Amount (US$)
Cash
Debtors
Stocks
Machinery
Less:
prepaid expenses
Creditors
Loan
Dividends
Taxes owed
Total assets
Total liabilities
Business management for small-scale agro-industries 18
term liabilities are debts such as long-term loans. When a business is operated by
a single owner or as a partnership, the balance sheet may show the amount of each
owner’s equity. When shareholders own the business, the balance sheet shows
the amount originally invested by the shareholders, and the amount reinvested
from income (i.e. retained earnings that are not distributed to shareholders as
dividends).
A cash flow statement shows the movement of money in an out of a business.
It is the cycle of cash inflows and outflows that determine a business’ solvency.
A break-even analysis (Figure 1) is used to determine the production level at
which revenues* are equal to the costs incurred. i.e. the business is neither making
a profit nor loss. The level of production should always be above this level to
ensure that the business is profitable.
Example of a cash flow statement
Month 1 2 3 4 5
Cash inflow
Balance b/f*
Sales
Equity
Total income
2 500
2 500
(350)
2 000
1 650
(200)
2 350
2 150
400
1 800
2 200
550
2 000
2 550
Cash outflow
Investment
Expenditure
Rent
Labour
Stock
Total
Expenditure
1000
950
200
200
500
2 850
950
200
200
500
1 850
950
200
200
400
1 750
950
200
200
300
1 650
950
200
200
200
1 550
Net cash flow (350) (200) 400 550 1 000
*b/f = brought forward
Break-even point* (no. of units) = Total fixed costs
Unit selling price - Unit variable costs
Unit 1 – Managing finance in small-scale agro-industries 19
Income
Total costs
Variable costs
Fixed costs
Scale of production Break-even point
US$
FIGURE 1
The break-even analysis
Example: Calculating the break-even point
A business sells a pack of bacon for US$4.95 and the total fixed costs are calculated
at US$260 per day. The unit variable cost is US$2.65 per pack. The break-even point
= US$260/day / US$4.95/pack-US$2.65/pack) = 113 packs per day. The maximum
bacon production level is 350 packs per day, and the break-even point expressed as a
percentage of the volume of production is therefore = (113/350) x 100 =32 percent.
Business management for small-scale agro-industries 20
Many small businesses concentrate on maximizing profits by increasing sales and
reducing production costs and overheads. However, too few companies consider
the importance of managing working capital. This can make the difference between
business survival and failure. Many profitable processors fail because they are not
able to pay the bills. Working Capital (or ‘net current assets’) includes:
ÿ stocks of raw materials, part-processed foods and finished products awaiting
sale;
ÿ amounts owed to the business by customers for sales made on credit;
ÿ cash in the bank.
Strategies to improve working capital include:
ÿ increase credit lines with suppliers i.e. amounts owed by the business to
suppliers of raw materials and services;
ÿ set budgets and monitor actual expenditure against them;
ÿ control stock levels and minimize the amounts of materials held as stock;
ÿ check the credit worthiness of customers and improve credit control methods
e.g. follow up debtors* regularly to shorten payment times and restrict the
amount of credit that is offered to customers.
Managing working capital
Unit 1 – Managing finance in small-scale agro-industries 21
Having compared your prior knowledge with the subject content of the
unit, answer the following questions making optimum use of the new
knowledge you have acquired.
1. According to the case study which are the main problems of panela and starch
plants in Colombia? Are most of these problems related to the lack of money
or to scarce financial management? Explain your answer.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. In your opinion, why do you think that most of the studied enterprises don’t
keep records of costs of production and have no idea of their costs and
returns? How do you think these practices affect the business?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
3. In your opinion and according to the case, which are the principal management
finance practices that starch and panela enterprises are not following?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
4. What should be the attitude of the panela and cassava enterprise owners who
are being included in training and enterprise development projects in order to
improve their administrative skills?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
Conclusions on the case study
Business management for small-scale agro-industries 22
Group exercise
As you remember Chiang Mai Agribusiness sells fresh broccoli to several supermarket
chains. Now, this enterprise is looking forward to produce chilled broccoli for
export markets.
a. Calculate the direct costs of one kilogram of fresh broccoli using the following
table and information. Consider that the Cooperative has four workers and
one supervisor. The working week is 48 hours and processing takes place for
45 weeks per year. 200 kg of chilled broccoli is produced in an average 8-hour
day.
b. Calculate the indirect costs and the total cost of producing chilled broccoli
(US$/kg). Use the following table and consider this information:
ÿ Rent for dairy = US$750 per year
ÿ Telephone = an average of US$40 per month
ÿ Utilities = US$ per month
ÿ Delivery vehicle = US$95 per month
ÿ Maintenance and depreciation = US$29 per month
ÿ Interest on loan = US$14 per month
ÿ Taxes = US$720 per year
Direct costs Calculation US$
Salaries for 4 workers (US$75 per month each)
Salary for one supervisor (US$120 per month)
Total salary cost (4 worker salaries + supervisor salary)
Number of hours worked per year
Labour cost per hour
Direct labour cost per kg chilled broccoli
Direct material costs (broccoli and packaging = US$20
per day). Therefore direct fuel/power costs per kg
chilled broccoli.
Direct power costs per day are US$20. Therefore direct
fuel/ power costs per kg broccoli
Total direct costs per kg cheese
Indirect costs Calculation US$
Total indirect costs per day (US$)
Total indirect costs per kg chilled broccoli
Total fixed costs per kg broccoli (Labour and indirect
costs)
Total variable costs per kg broccoli (Materials and
power costs)
Total cost of producing chilled broccoli (US$/kg)
Unit 1 – Managing finance in small-scale agro-industries 23
Summary
ÿ The first step to introduce finance management is calculating costs.
ÿ Operating costs are categorized into two types: ‘fixed’ and ‘variable’.
ÿ Fixed costs (also known as ‘overheads’) are those that do not change if there
is an increase or decrease in the amount of production.
ÿ Variable costs change according to the volume of production. Examples
include:
ÿ Operating costs can also be described as ‘direct’ and ‘indirect’ costs.
ÿ For a business to operate successfully, it must be profitable over the long term.
This means that the income must be greater than the total expenditure.
ÿ There are two basic ways to maximize gross profits. The first is to reduce
expenditure, and to do this a processor must first identify where costs occur
in the business.
ÿ The simplest method to determine the correct price for a product is to add
up all the costs of production and then add on a percentage profit (markup
pricing).
ÿ To manage finances successfully, processors must have a good idea of how
cash comes into a business, where it is at any time and where it goes. This
requires financial records.
ÿ The most common records are: records of income, and records of
expenditure.
ÿ Financial statements used in a business include: bank statements, balance
sheet statements, cash flow statements, profit and loss accounts and break-
even analysis.
ÿ Working Capital (or ‘net current assets’) includes: stocks of raw materials,
part-processed foods and finished products awaiting sale; amounts owed to
the business by customers for sales made on credit; cash in the bank.
Business management for small-scale agro-industries 24
Answer the following questions on additional sheets of paper:
1. What is the real importance of finance management? Mention some causes of
failure related to deficient management.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. Do you know if your association is really profitable? How do you calculate
costs of your products and how do you determine their prices?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
3. Which finance management techniques does your association use?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
4. What is the importance of keeping records in an enterprise? Which records
are kept by your enterprise?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
If when attempting to answer these questions you have any doubts or
feel that you do not have sufficient information for the analysis, take
another look at the manual, consult the student’s handbook or contact the
facilitator.
Unit assessment
25
Managing people in small-
scale agro-industries
LIST OF TOPICS
1. Setting the context
2. Case study: An Asian food processing firm faces new challenges in Kenya
3. Case study analysis
4. Recruitment
5. Training and staff motivation
6. Staff management
7. Health and safety
8. Staff records
9. Conclusions on the case study
10. Group exercise
11. Summary
12. Unit assessment
Nowadays modern managing staff techniques have been developed, and include
different measures such as involving employees in business decisions, relating pay
to an employee’s performance, and motivating and training staff to achieve their
performance.
Do you know why of all different resources of a small
scale-enterprise, staff is the most important? Are you aware that
training and staff motivation are essential for the proper
performance of the business? Do you know which some of the
modern staff management techniques are? Is your enterprise
keeping records on employees and their jobs? Do you know that
the cost of preventing illness or injuries at work are smaller than
the cost of damage to equipment, medical or legal fees, increased
insurance premiums among other things?
Points to remember
UNIT TWO
Business management for small-scale agro-industries 26
$ Identify from your own experience staff management
activities that your association has implemented or
should implement.
$ Gauge the economic implications of not preventing illness
or injuries of staff at work.
$ Learn to recruit people and to prepare a job description
for each job.
$ Recognize the importance of training and staff motivation.
$ Appreciate the importance of staff management new techniques.
Of all the different resources needed to operate a small processing enterprise,
the staff are the most important because they have unlimited potential if they are
properly trained, managed and motivated. However, owners of small businesses
frequently overlook this and they recruit friends, relations or neighbours to work
in the business.
This may be because owners feel that these people are more trustworthy, but
they may not have the best skills for the jobs that need doing. Likewise, many small
business owners refuse to train their staff because they think that a more skilled
worker will ask for higher pay, or they will be tempted away by a competitor.
Both attitudes are short-sighted, and the correct selection of staff and investment*
in their development are keys to the success of a small processing business.
Human resource planning or staff planning refers to methods used to decide
the numbers and types of staff that are needed to run a processing enterprise.
This is first based on the intended production volumes and an assessment of
which parts of the process are mechanized and which require manual operation.
A processor can use the same methods to decide when it is time to bring in more
workers by analysing the workloads of existing workers and comparing them to
new production targets.
Setting the context
By the time you complete this unit
you will be able to:
Unit 2 – Managing people in small-scale agro-industries 27
The numbers of staff required for other types of work, including sales, deliveries
to retailers, accounts or record keeping and quality assurance are then considered.
A convenient way of planning this is to draw an activity chart, which shows the
type of work to be done, the number of people involved and the sequence of work
that individuals do during the day.
When the total number of employees has been decided, the business owner
should then set about recruiting, training and managing suitable staff in a
systematic way. This requires the owner to develop policies and employment
conditions that attract and keep competent staff.
Business management for small-scale agro-industries 28
INTRODUCTION
Competition has become much more intense in the last ten years in Kenya; with
no less than nine local firms competing in some of the same lines where earlier
there was a virtual monopoly.
In addition there has been an increase in imports of certain food lines from
Europe and even from food diverted from emergency aid. And there has been
the new freedom from competitors to import directly from the Middle East,
South Africa and Europe. In total, this new competitive environment has actually
resulted in the closure of one entire factory and the sale of another.
DISCUSSION
These pressures have been very intense in the last three years, and have reduced
the workforce in this food-processing firm from some 500 to 250 in that period;
and retrenchment is expected to continue. All the usual elements have been
outsourced to reduce administrative costs. And there is even talk of outsourcing
accounts, but not the sales department. The skills profile of employees includes 50
percent unskilled (including casuals); 20 percent semi-skilled; 20 percent skilled
(mechanics and technicians); and 10 percent supervisory and management.
CONCLUSION
Training has taken a series of cuts along lines with which we are becoming
familiar. In the late 1990s, apprentices that were linked to long term training in
polytechnics and universities were stopped and, instead, qualified and experienced
recruits were selected in the market which is allegedly flooded with young people
looking for jobs.
External, full time training has been cut, and has been replaced by internal
training, supplemented by the use of training videos. The levy-grant system
continues to operate, but with the reduction in long term apprentice and other
training there are no longer any refunds.
Case study: An Asian food processing firm faces new
challenges in Kenya
1
1
ITC-ILO. 2002. Enterprise-bases training in Africa. Case studies from Kenya and Zambia. Turin,
Italy.http://www.itcilo.org/spanish/bureau/turin/whatisnew/flyers/EBT in Kenya
and%20Zambia.pdf
Unit 2 – Managing people in small-scale agro-industries 29
Case study analysis
Based on your personal experience, consider the following questions on
the proposed case:
1. What have been the implications of liberalisation, more imports, and greater
global competition on the workforce in the firm? Has this happened in your
business?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. What measures have been taken that directly affect the workforce? How do
you think these measures affect staff’s motivation?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
3. How is this agro-industry handling training? In your opinion what are the
strengths and weaknesses of this model?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
4. What does the future perspective look like for this agro-industry?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
Bear in mind that at the end of the unit you will be asked to answer the
same questions in the light of the new knowledge you will have acquired.
Business management for small-scale agro-industries 30
Before starting to recruit new staff, it is important that the processor prepares a
job description for each job. This helps in deciding exactly what type of work the
new person will be expected to do, and what skills, qualifications or experience are
needed to do the job. This can be written simply as a ‘person profile’.
Jobs are then advertised in newspapers, radio, by public notices, by
recommendation of friends or through other employees. The owner then
compares applications with the criteria in the person profile and selects potentially
suitable people for interview. Business owners should also operate a policy of
not discriminating against applicants because of their sex, religion, race or age.
Interviews are useful for a number of reasons: they help show the personality,
communication skills and any hidden abilities of the applicant; they can be used
to reveal decision-making or technical skills; and they give the applicant a chance
to understand the job and what will be required of them.
After an applicant has been selected, a letter should be sent, confirming the
appointment and when the person should start work. The new employee should
be given an employment contract, containing the job description and details of
the salary and other benefits (e.g. holidays, assistance with transport to work,
etc.). For most countries, the law requires a medical examination for workers
who handle foods to ensure that they have no illness that could be passed on to
consumers* and cause food poisoning.
Recruitment
Example of a person profile used in recruitment* of new staff
Person Profile Date: ……………….
Job: Sales Assistant
Essential requirements:
ÿ education to Standard 6;
ÿ good arithmetic skills (without calculator);
ÿ friendly disposition and good communicator.
Desirable requirements:
ÿ two years’ experience in retail sales;
ÿ flexibility in working hours.
Unit 2 – Managing people in small-scale agro-industries 31
It is important to introduce new employees to the business, so that they get to
know the workplace and other staff, and quickly become productive. This can
either be done formally using an induction course, or less formally by a supervisor
or owner taking them around the factory to introduce them to fellow workers and
to explain the work. New staff should also be given any company literature such
as promotion* leaflets or advertisements, and samples of products.
Many small-scale processors prefer to recruit staff that are relatively
inexperienced, and then train them in the particular methods that are used in
their process. They believe that this is not only cheaper (because inexperienced
workers are paid a lower salary than experienced ones), but also because they can
be trained from the beginning to do their job in the way that the owner wants it
to be done. However, it is important that training is planned, so that the correct
skills, attitudes and techniques are built up in a systematic way.
‘On the job’ training is popular with small-scale processors because new
employees are working and producing products while they are being trained by
more experienced staff. Specialist courses are available from college or university
departments and from some international development agencies. There are often
subsidies or grants available to small enterprises from government institutions or
development agencies for training and staff development*.
A characteristic of successful businesses of any size is that they have workers
who are willing to work for the company because they feel that they have a future
with it – in other words the staff is motivated. As a minimum, the owner should
ensure that the staff is reasonably paid, their salaries are paid on time, and that
there are good working conditions.
However, an even more important motivating factor is that staff can see what
their part is in the business, and how their own individual activities can help the
enterprise achieve success. When staff is supported in their work by the enterprise
owner, they are more likely to be motivated and improve their productivity. Other
benefits that keep workers motivated include:
ÿ housing, travel or medical allowances;
ÿ a contribution to the cost of educating their children or medical bills;
ÿ subsidized meals or the ability to buy products at a reduced cost;
ÿ reasonable working hours with time off to attend special family occasions or
visit health centres.
Training and staff motivation
Business management for small-scale agro-industries 32
The relationship between the owner and workers in micro- and small-scale
businesses is frequently based on instruction and command, with the managers
having an authoritarian role within a defined hierarchy. Union membership is
uncommon and individual employees are notified of their salaries and working
conditions by the owner or manager. More recent management methods are more
participative and open. The aim is to promote cooperative relations between the
management and staff and to avoid the often adversarial behaviour in traditional
industrial relations. If successful, employees become more committed to their
long-term future with the business. Modern staff management requires different
measures including:
ÿ involving employees in business decisions;
ÿ relating pay to an employee’s performance;
ÿ carefully recruiting and training, as well as fair treatment;
ÿ integrating staff management policies with other policies such as production,
marketing, and sales.
Good management involves motivating staff to achieve their best performance.
This means giving employees a clear understanding of the aims of the business
and how each person can help to achieve company goals. Providing necessary
tools, skills and working conditions and resources to enable workers to do their
jobs properly is also essential. The owner can do this by setting clear targets for
the amount of work and the quality standards that employees are expected to
achieve, by assessing performance fairly, by giving constructive criticism when
improvements are needed, and by rewarding successful employees with increased
responsibilities.
Some tips on good management style are:
ÿ involve staff in decisions on any changes to their work and consult regularly
with them;
ÿ enforce discipline firmly but fairly;
ÿ set achievable deadlines or targets, and check on progress regularly;
ÿ give credit for initiative and intelligence, and show appreciation for a job that
is well done;
ÿ discuss weaknesses with individual staff members and make suggestions on
how to improve.
Staff management
Unit 2 – Managing people in small-scale agro-industries 33
Relating pay to performance is another way of motivating people. Although
some small-scale businesses offer overtime payments or pay staff on a piecework
basis (i.e. workers are paid per pack of food produced), more commonly it is a
fixed rate of pay for a particular job. In newer management methods, the pay varies
according to an individual’s performance and/or the profitability of the business.
This involves a regular appraisal of each employee’s performance and development
of a clear profit-sharing scheme. Everyone should know how he or she would
benefit from bonus pay arising from an improvement in the performance of the
business. An alternative for limited companies is to offer employees shares in the
company, which should be held for several years.
These help bind the staff to the long-term development of the company.
Both profit sharing and employee share schemes mean that the workers are also
sharing some of the risks in the operation of the company with its owner. Modern
staff management methods are also known as human resource management
(HRM). Methods aim to employ people who can operate flexibly and adapt to
different jobs or changing work arrangements, instead of having rigidly defined
job descriptions. Also in larger businesses, employee relations become the
responsibility of all managers, not just personnel managers. Personnel matters are
usually integrated with other areas of the company, including marketing, sales,
production and others.
Experience has shown that businesses with modern staff management methods
have higher productivity than those with authoritarian-style staff management.
All processors have a responsibility to provide safe and healthy working conditions
for their staff to prevent illness or injuries at work. This is a legal responsibility
in some countries, but even if laws do not exist, it is in the processor’s interest to
avoid accidents or poor working conditions. The costs of prevention are smaller
than the cost of damage to equipment, medical or legal fees, increased insurance
premiums, or losing skilled staff due to permanent disability arising from injuries.
Also, a safe and healthy working environment enhances the public image of the
business. The main dangers in food processing are burns from equipment operated
at high temperatures, cuts from moving blades, injuries caused by powered
machinery, and an unhealthy environment caused by dust, fumes or smoke.
Part of an owner’s responsibility is to ensure that machinery operates safely
and that guards are in place, equipment is regularly maintained, and that staff are
properly trained in its use.
Health and safety
Business management for small-scale agro-industries 34
Different types of records are needed to keep information on employees and
their jobs. Personnel files are records of the performance of individual employees
at work, their salaries, promotions, holidays, correspondences from labour
ministries or income tax offices, P.A.Y.E contributions, etc. Register books are
used in some larger businesses to record attendance and time keeping, but these
are rarely needed for small-scale operations.
Staff records
Unit 2 – Managing people in small-scale agro-industries 35
Conclusions on the case study
Having compared your prior knowledge with the subject content of the
unit, answer the following questions making optimum use of the new
knowledge you have acquired.
1. What have been the implications of liberalisation, more imports, and greater
global competition on the workforce in the firm? Has something similar
happened in your business?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. What measures have been taken that directly affect the workforce? How do
you think these measures affect staff motivation?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
3. How is this agro-industry handling training? In your opinion what are the
strengths and weaknesses of this model?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
4. What does the future perspective look like for this agro-industry?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
Business management for small-scale agro-industries 36
Group exercise
We return to the example of the Chiang Mai Agribusiness in Module No 3.
Now the agro industry is expanding and therefore looking to hire new staff for the
chilled broccoli processing plant.
1. Elaborate person profiles for recruitment of the following staff:
a. One plant supervisor
b. One quality assurance supervisor
c. One worker related to cleaning facilities
d. One worker for the raw material reception
Use the proposed format.
2. What will be the principal themes that a training manual for new workers (in
processing areas) in a chilled broccoli plant should have? Elaborate a table of
contents for the manual.
3. Mention at least four measures that should be taken in order to prevent
accidents in the processing areas.
Summary
ÿ Staff are the most important resources needed to operate a small processing
enterprise, because they have unlimited potential if they are properly trained,
managed and motivated.
ÿ Before starting to recruit new staff, it is important that the processor prepares
a job description for each job. This can be written simply as a ‘person
profile’.
ÿ Jobs are then advertised in newspapers, radio, by public notices, by
recommendation of friends or through other employees. The owner then
Unit 2 – Managing people in small-scale agro-industries 37
compares applications with the criteria in the person profile and selects
potentially suitable people for interview.
ÿ After an applicant has been selected, a letter should be sent, confirming the
appointment and when the person should start work. The new employee
should be given an employment contract, containing the job description
and details of the salary and other benefits (e.g. holidays, assistance with
transport to work etc.).
ÿ It is important to introduce new employees to the business, so that they get
to know the workplace and other staff, and quickly become productive. New
staff should also be given any company literature such as promotion leaflets
or advertisements, and samples of products.
ÿ A characteristic of successful businesses of any size is that they have workers
who are willing to work for the company because they feel that they have
a future with it – in other words the staff is motivated. As a minimum, the
owner should ensure that staff is reasonably paid, their salaries are paid on
time, and that there are good working conditions.
ÿ When staff is supported in their work by the enterprise owner, they are more
likely to be motivated and improve their productivity.
ÿ More recent management methods are more participative and open. The aim
is to promote cooperative relations between the management and staff and to
avoid the often adversarial behaviour in traditional industrial relations.
ÿ Providing necessary tools, skills and working conditions and resources to
enable workers to do their jobs properly is also essential.
ÿ Experience has shown that businesses with modern staff management
methods have higher productivity than those with authoritarian-style staff
management.
ÿ All processors have a responsibility to provide safe and healthy working
conditions for their staff to prevent illness or injuries at work. This is a legal
responsibility in some countries, but even if laws do not exist, it is in the
processor’s interest to avoid accidents or poor working conditions.
ÿ Different types of records are needed to keep information on employees
and their jobs. Personnel files are records of the performance of individual
employees at work, their salaries, promotions, holidays, correspondences
from labour ministries or income tax offices, P.A.Y.E contributions, etc.
Business management for small-scale agro-industries 38
Answer the following questions on additional sheets of paper:
1. In your opinion, why are human resources the most important resources in
small scale processing enterprise? Which values should be prized in the people
that work for your small-scale processing business?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. Explain what “recruitment” is, and the steps that should be taken in order to
hire new personnel.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
3. Mention at lest five benefits that may motivate workers, and explain how
these may keep the staff encouraged.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
4. In your opinion and after reading this unit, explain the importance of
providing safe and healthy conditions for the staff.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
If when attempting to answer these questions you have any doubts or feel
that you do not have sufficient information for the analysis, take another look
at the manual, consult the student’s handbook or contact the facilitator.
Unit assessment
39
Managing equipment in
small-scale agro-industries
LIST OF TOPICS
1. Setting the context
2. Case study: From Dairy Farming to Manufacturing: The Osia Ice Cream
Company, Denmark
3. Case study analysis
4. Choosing equipment
5. Calculating the correct size of equipment
6. Sources of equipment
7. Equipment maintenance
8. Depreciation for equipment
9. Conclusions on the case study
10. Group exercise
11. Summary
12. Unit assessment
Buying the right equipment in terms of size, price, availability of spare parts, and
plan its maintenance permit the processor to save money.
UNIT THREE
Do you know that proper maintenance ensures that machinery
operates correctly, safely and for longer time? Are you aware
that before buying equipment it is necessary to calculate the size
required? Do you know what considerations should be taken in
order to decide where to buy equipment? Is your enterprise
planning the maintenance of its machinery? Do you know that
equipment gradually wears out when it is used, and that
depreciation method allows the processor to accumulate funds to
buy a replacement?
Points to remember
Business management for small-scale agro-industries 40
$ Identify from your own experience the challenges and
opportunities in managing equipment.
$ Gauge the economic implications of having poorly
maintained machines and equipment.
$ Learn to calculate the correct size of equipment before
buying.
$ Recognize sources of equipment.
$ Appreciate the importance of planned maintenance* of equipment.
Poorly maintained machines are a potential hazard to operators; they produce
substandard products and can contaminate products with harmful fragments.
Proper maintenance ensures that machinery operates correctly and safely and
prolongs its life, thus reducing capital and operating expenditure. A common
reason for lost production is delays caused by equipment breakdowns and waiting
for spare parts. This causes a processing unit to operate at below planned capacity
and reduces its profitability.
Most small-scale producers do not keep a stock of spare parts because of the
cost, but few producers have compared the cost of keeping a stock of spares with
the cost of delayed production. This is especially important if delivery times for
spare parts (e.g. for imported equipment) are several weeks. In most processes, a
few items of equipment are likely to wear out more quickly than others (e.g. cutter
blades, motors or bearings, heating elements, etc.). The processor should identify
these priority spares for each process, and ensure that a spare component is always
kept in stock. A spares record is useful to keep track of expenditure on spares in
larger businesses.
Similarly, many small-scale processors do not have a programme of planned
maintenance* to replace parts before they wear out. They believe that it is cheaper
to continue using a machine until it breaks down and then repair it.
Setting the context
By the time you complete this unit
you will be able to:
Unit 3 – Managing equipment in small-scale agro-industries 41
INTRODUCTION
1
The Osia ice cream company was formed by a private dairy farmer in 1994. As
the amount of milk produced on the farm began to grow the farm had increasing
difficulties in selling it in a fresh condition, particularly during the summer. The
farmer looked at options for processing the milk in order to extend its life and
visited a number of small cheese and ice cream producing companies for ideas on
the markets and technologies required.
The farmer identified more than 40 companies producing such products in the
Copenhagen area. However by talking to consumers and distributors of ice cream
they found that only 3 were producing to high and consistent standards. Two of
the distributors said they would consider selling products on behalf of the farm if
they were able to produce reliable qualities with a good taste.
DISCUSSION
The farmer researched in detail how to make ice cream and identified Italian made
machinery as being suitable for his requirements. The cost however was extremely
high. In order to purchase the equipment he agreed a loan with a partner and the
business was registered as a partnership. However soon after beginning production
it became apparent that it would be impossible to repay the loan. The equipment
was sold and the partnership stopped.
However the farmer persisted and purchased second hand equipment as
a second attempt, producing two varieties of ice cream (coffee and vanilla) in
traditional tubs. The farmer worked hard to keep good relations with his two
distributors who ensured that it was stocked in local stores. Since his equipment
was not new, he designed a programme of planned maintenance* for the equipment
which included the replacement of parts before they wear out.
CONCLUSION
Sales have grown consistently and today the company produces three tonnes of ice
cream per day and employs 10 persons. At present the company do not advertise
Case study: From Dairy Farming to Manufacturing: The
Osia Ice Cream Company, Denmark
1
Adapted from: FAO. Agribusiness management for small and medium sized businesses in Bulgaria.
Part II Training approaches, case studies and exercises.
Business management for small-scale agro-industries 42
and depend largely on their agents and the quality of their products to increase
their sales.
Even so the company has plans to expand, through up dating their technologies
and by producing a wider variety of products. They are considering taking another
loan and are preparing a business plan. The company would also like to carry
out more detailed research as to why customers buy products. They anticipate
increasing competition in the future particularly from imports and intend to be
prepared.
Case study analysis
Based on your personal experience, consider the following questions on
the proposed case:
1. Explain the reasons why the company failed in its first attempt of making ice
cream.
2. Do you believe that the farmer made a depreciation calculus before he
purchased the first equipment? Explain your answer using information from
the case and including your opinion.
3. What are the advantages and disadvantages of buying second hand equipment?
Mention at least three.
4. What do you think are the reasons why the farmer designed a programme of
planned maintenance for the equipment he bought?
Bear in mind that at the end of the unit you will be asked to answer the
same questions in the light of the new knowledge you will have acquired
Unit 3 – Managing equipment in small-scale agro-industries 43
The main decisions in relation to buying equipment are:
ÿ which parts of a process require mechanization and which can be done
manually;
ÿ the correct size of the equipment (its capacity or throughput) for the intended
scale of production to ensure that all equipment has a similar throughput;
ÿ whether to buy equipment from a local engineering company or to import it.
MECHANIZED VERSUS MANUAL PROCESSING
Some processes, such as edible oil extraction from seeds and nuts, or milling
cereal grains are difficult and time-consuming to perform manually and product
yields* are low. They are usually mechanized and these processes therefore require
greater start-up capital than most other types of agro-processing. The reliance on
machinery also means that the management of maintenance and a spares inventory
are important aspects of operating these types of business. Staff numbers are
smaller than some types of agro-processing, but training is required to correctly
operate and adjust machines to achieve maximum yields and productivity.
When planning production, a processor should therefore compare the costs
of employing workers to do a particular job with the investment* of buying a
machine.
A common mistake is made when processors buy the only equipment that is
locally available, without considering whether it is suitably sized for the likely
sales volumes. The processor should plan the throughput that is required, research
sources of equipment, and select a supplier that can provide a suitable machine.
SALES FORECAST
The first stage in deciding the size of equipment is to make an accurate assessment
of likely sales. For a new business this is done as part of a feasibility study*. An
existing business can collect these data by adding daily sales records to produce
monthly totals. This information can be used to plan for additional equipment or
Choosing equipment
Calculating the correct size of equipment
Business management for small-scale agro-industries 44
more staff where sales are increasing, or where sales are falling, the need for more
product promotion or development of new products*.
PRODUCTION RATE
Sales information can be used to find the daily production rate employing the
formula below. The production rate is then used to plan the amounts of raw
materials, ingredients and packaging that have to be ordered.
For example, if broiler feed sales are 24 tonnes per month and a feed mill works
six days a week, then one tonne of feed has to be produced every day.
PRODUCT THROUGHPUT
The average amount of production per hour is known as the ‘product throughput’,
and is calculated to help finding the required size of equipment.
The calculation of throughput enables the processor to decide the size and
number of pieces of equipment required. This type of calculation is shown in the
following examples:
Production rate (kg/day) = Amount of product produced per month (kg)
No of days of production per month
Throughput (units/hour) = Amount of product sold per month (units)
No. of days of production per month x No. hours worked per day
Example: Calculation of throughput
Using the production rate data above, and assuming that 2 hours per day are available
for the staff to mix the feed, then the average throughput of the mixer is:
= 1 tonne per day / 2 hours per day
= 0.5 tonne/hour
If the feed mixer takes 30 min to mix a batch of feed, then two batches per hour
are possible and a mixer with a capacity of 0.5/2 = 0.250 tonne is suitable (i.e. a
capacity of 300 kg to avoid over-filling).
Unit 3 – Managing equipment in small-scale agro-industries 45
Example: Calculation of throughput (continued)
Modified calculation of throughput
Because of load shedding, the feed mill cannot operate electric mixers on Mondays
and Thursdays each week. To achieve the production levels needed to meet planned
sales targets, the production rate must therefore be increased on the four days that
mixing can take place: i.e. = 24 tonnes/month /16 days/month = 1.5 tonnes/day.
Then the average throughput of the mixer needs to be: = 1.5 tonnes/day/ 2h/day
= 0.750 tonnes/hour.
A mixer with a capacity of 0.750 tonnes/hour/2 = 0.475 tonnes is required (a
bowl capacity of 500 kg).
Example: Choosing the size of equipment
If 3 hours are available to boil 36 kg of jam per day, the throughput for the boiling
stage is:
36/3 = 12 kg per hour.
A batch of jam should be boiled within approximately 15 minutes to maintain
the quality of the product, and a maximum of three batches per hour are possible.
The processor therefore has a number of choices: 1.) To buy a single, large (e.g. 15-20
litre) stainless steel pan and a large burner to heat one 12 kg batch of product within
15 minutes. This is the most expensive option, but production is straightforward and
requires the least organization. 2.) Process two batches of 6 kg using a smaller (e.g.
10 litre capacity) boiling pan and a smaller burner. 3.) Process three batches of 4 kg
each using a smaller (e.g. 6 litre capacity) boiling pan and a smaller burner. This is
the cheapest level of investment but requires more complex work organization, staff
skills and production planning*.
MATCHING EQUIPMENT THROUGHPUTS
In agro-processing there is usually a short delay between the different stages in a
process, and to avoid bottlenecks* it is important that all equipment has a similar
throughput. To calculate the requirements for all equipment in a process, the
Business management for small-scale agro-industries 46
process should be written down as a chart, showing the weights of food at each
stage that are needed to achieve the planned production rate (Table 1).
It is preferable to buy equipment from local suppliers or engineering companies
because they are close by to service or repair the equipment. The purchasing price
is often lower than imported equipment and spare parts can be obtained faster
and more easily. However, the quality of workmanship and the willingness or
capacity of engineering companies to provide a repair service needs to be taken
into consideration before choosing a particular type of equipment.
Process stage Equipment required Calculation/assumptions
Ingredient weighing By hand -
Dough mixing Mixer bowl with 15 Kg
capacity
Mixer needs 20 minutes to mix each batch –i.e.
2 batches per hour. 2 hours mixing requires
capacity of 26/2 = 13 Kg (capacity of 15 kg to
avoid overfilling).
Biscuit forming Forming machine capacity
1500 pieces per hour
52 Kg dough formed into 10 g pieces (5 200
pieces). 3 ½ hours for forming.
Baking Oven with 8 trays each
capable of holding 50
biscuits
Baking time = 15 minutes –i.e. 3 batches per hour
(1 200 biscuits per hour). Total 4.3 hours baking.
Cooling Rack having 24 shelves 8 trays per hour with one tray per shelf.
Temporary storage of biscuits for 3 hours before
packing.
Packing in film Manual filling. Heat sealer
capable of 100 packs per
hour.
20 biscuits per pack = 260 per day. Packing for
2.6 hours.
Packing in cartons By hand 20 packs per carton = 13 cartons per day.
TABLE 1
Use of a process chart to calculate the equipment needed to produce 52 kg of biscuits per
day
Sources of equipment
When importing equipment the main difficulties are finding information on the
available types of equipment, the willingness of overseas suppliers to meet small
orders for equipment, and the higher costs (freight and clearing charges, import
duties and the capital cost). Information on types of equipment, specifications
and costs is increasingly available on the Internet (see further readings), and
processors may be able to gain access to the Internet, or seek advice and assistance
from offices of development agencies, Chambers of Commerce, university food
science and technology departments, manufacturers’ associations, or at embassies
of exporting countries. When ordering equipment, it is necessary to:
ÿ specify exactly what is required (many manufacturers have a range of similar
products);
Unit 3 – Managing equipment in small-scale agro-industries 47
ÿ describe the throughput required in kg or litres per hour and the type of food
to be processed;
ÿ give other information such as model number of machine, single or three-
phase power, number and types of spares required.
Decisions regarding the costs and benefits of planned maintenance* depend on
the speed at which repairs can be done, the value of the spares that have to be
held in stock and the value of lost production caused by stoppages. Processors
should monitor the equipment, and as their experience of the rate of failure
accumulates, they should service the machine before a replacement part is needed.
Arrangements can be made with a local mechanic to repair equipment as a priority,
if the processor pays an annual service fee or guarantees that they will handle all
such work.
A maintenance schedule shows how often a machine should be serviced, gives
details of what should be done during the service, and how the machine should
be dismantled and re-assembled. Management of maintenance therefore involves
identifying the priority equipment and preparing a maintenance budget in order
to implement the maintenance schedule.
Staff should be trained to routinely check machinery during operation, and
to undertake the maintenance schedule. The results should be written down
so that the cost can be evaluated and to check whether the schedule prevents
breakdowns.
Equipment maintenance
Example of planned maintenance* in a flourmill
W
E
E
K
L
Y
Mechanical
¸ check and grease bearings, replace if faulty;
¸ check pulley wheels for cracks or chips and replace if necessary to avoid damaging belts;
¸ check bolts and nuts for tightness;
¸ check the oil level in diesel engines and top up with the correct oil if required;
¸ remove flour dust from equipment each day. A build-up of dust causes rust to develop and
on electrical equipment it causes moving parts to jam.
Electrical
¸ clean flour dust off motors and other electrical equipment;
¸ for machines not in use, switch off mains power. This is very important when power cuts
occur, because when power returns a machine that has been left on can injure an operator
or cause a fire.
Business management for small-scale agro-industries 48
Example of planned maintenance* in a flourmill (Continued)
M
O
N
T
H
L
Y
Housekeeping
¸ store tools and equipment in pre-determined places so they are easy to find and it will be
noticed if they go missing;
¸ always keep walkways clear of tools and equipment;
¸ clean diesel engine cooling fins every day to prevent dust settling and causing the engine
to overheat and eventually seize;
¸ store tools and equipment in pre-determined places so they are easy to find and it will be
noticed if they go missing;
¸ always keep walkways clear of tools and equipment;
¸ clean diesel engine cooling fins every day to prevent dust settling and causing the engine
to overheat and eventually seize;
¸ when re-fuelling diesel engines, pour the fuel through a filter to prevent rust deposits in
the fuel drum getting mixed with the fuel and damaging the engine;
¸ clean the machinery and floor;
¸ check hammers for wear and replace if necessary;
¸ check the shaft (especially if locally manufactured machines are not tested for strength or
alignment);
¸ check that locking nuts on the shaft are tight;
¸ check that fan bolts and nuts are tight. If they work loose, the fan becomes very
dangerous;
¸ check the bearing mountings as this area is prone to cracking;
¸ check the engine oil and oil filter on diesel engines and change them every 160 working
hours; change the fuel filter every 320 working hours.
¸ check the body casting and welds for cracks;
¸ tighten floor nuts and look for any cracks in the mill foundation;
¸ check the fan key and make sure that the fan is a slide fit on the shaft for easy removal. If
the blades are worn always replace with the correct thickness of steel, and then check for
balance;
¸ check that cables are secured and there is no obvious sign of insulation breakdown;
¸ check the acid level in batteries that are used to start diesel engines. Keep the terminals
clean.
MAINTENANCE RECORDS
Maintenance and repair records provide information on the performance of
equipment, and maintenance costs that are included in calculations of operating
costs (Table 2).
Date Work carried out Time spent Cost of labour Parts used Cost of parts
TABLE 2
Maintenance and repair records
Unit 3 – Managing equipment in small-scale agro-industries 49
Equipment gradually wears out when it is used, and depreciation is a method
to accumulate sufficient funds to buy a replacement at the end of its working
life. When a machine, a vehicle or office equipment is purchased, the processor
should estimate the number of years that it is expected to last before it requires
replacement (or its expected working life). The value of the equipment is then
divided by this time, and the depreciation figure is included in the annual company
accounts.
LINEAR OR STRAIGHT LINE METHOD OF DEPRECIATION
Linear or straight line method of depreciation are shown in Table 3.
REDUCING BALANCE METHOD
In this method, the depreciation in the early years of an asset’s life is higher than
in later years and the asset is written off using the same percentage each year. It
can be expressed as a formula:
Depreciation for equipment
Equipment Value
(US$)
Expected working life
(years)
Depreciation per year
(US$)
Delivery vehicle 15 000 10 1 500
Bowl chopper 8 000 15 533
Refrigerator 2 500 15 167
Stainless steel tables 500 25 20
Hand tools (knives,
sharpeners, etc.)
120 5 24
Sausage stuffer 1 500 15 100
Mixer 1 200 15 80
Office furniture and
equipment
400 25 16
Total 29 220 2 440
TABLE 3
Linear or straight line method of depreciation
A new delivery van is bought for US$21 000. It is estimated to have a life of 5
years with a residual value of US$2 000. Using the straight-line method, the annual
depreciation is:
US$21 000 - US$2 000 = US$19 000/5 = US$3 800 per annum. The balance sheet
value of the vehicle would be reduced by the same amount each year.
Business management for small-scale agro-industries 50
SUM OF DIGITS METHOD
This is a variation of the reducing balance method and also charges higher
depreciation in the first years of the asset’s life.
Depreciation ( percent) = (1 – n R/C) x 100
where:
n = life of the asset in years;
R = residual value of the asset;
C = cost of the asset
Example: Reducing balance depreciation
A machine is bought for US$8 000 and has a life of 4 years. A 40 percent charge
is made each year, so in the first year the depreciation is 40 percent of US$8 000
(US$3 200), which reduces its book value to US$4 800 (8 000–3 200). In the second
year the depreciation is 40 percent of the book value (US$4 800 x 40 percent) - i.e.
US$1 920 – and so on over 4 years.
Example: Sum of digits method
If a machine is bought for US$12 000 and has a US$1 000 residual value after
4 years.
Sum of digits: 4 years + 3 years + 2 years + 1 year = 10
Year 1: 4/10 x (12 000-1 000) = US$ 4 400 Cumulative charge = US$ 4 400
Year 2: 3/10 x (12 000-1 000) = US$ 3 300 = US$ 7 700
Year 3: 2/10 x (12 000-1 000) = US$ 2 200 = US$ 9 900
Year 4: 1/10 x (12 000-1 000) = US$ 1 100 = US$11 000
Unit 3 – Managing equipment in small-scale agro-industries 51
Conclusions on the case study
Having compared your prior knowledge with the subject content of the
unit, answer the following questions making optimum use of the new
knowledge you have acquired.
1. Explain the reasons why the company failed in its first attempt of making ice
cream.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. Do you believe that the farmer made a depreciation calculus before he
purchased the first equipment? Explain your answer using information from
the case and including your opinion.
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
3. What are the advantages and disadvantages of buying second hand equipment?
Mention at least three.
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
4. What do you think are the reasons why the farmer designed a programme of
planned maintenance for the equipment he bought?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
Business management for small-scale agro-industries 52
Group exercise
We return to the example of the Chiang Mai Agribusiness in Module No 3. The
enterprise need to purchase new computerised equipment for the chilling process of
broccoli. The equipment is bought for US$1 000 000.00. It is estimated to have a life
of 10 years with a residual value of US$50 000.00. Calculate the annual depreciation
using the straight-line method.
Investigate the process stage and equipment required to produce chilled broccoli.
Use a process chart to calculate the size of the equipment needed to produce 1 tonne
of chilled broccoli per day.
Summary
ÿ Proper maintenance ensures that machinery operates correctly and safely and
prolongs its life, thus reducing capital and operating expenditure.
ÿ The reliance on machinery also means that the management of maintenance
and a spares inventory are important aspects of operating these types of
business.
ÿ The processor should plan the throughput that is required, research sources
of equipment, and select a supplier that can provide a suitable machine.
ÿ The first stage in deciding the size of equipment is to make an accurate
assessment of likely sales. For a new business this is done as part of a
feasibility study. An existing business can collect these data by adding daily
sales records to produce monthly totals.
ÿ The average amount of production per hour is known as the ‘product
throughput’, and is calculated to help finding the required size of
equipment.
ÿ To calculate the requirements for all equipment in a process, the process
should be written down as a chart, showing the weights of food at each stage
that are needed to achieve the planned production rate.
Unit 3 – Managing equipment in small-scale agro-industries 53
ÿ It is preferable to buy equipment from local suppliers or engineering
companies because they are close by to service or repair the equipment. The
purchasing price is often lower than imported equipment and spare parts can
be obtained faster and more easily.
ÿ Decisions regarding the costs and benefits of planned maintenance depend on
the speed at which repairs can be done, the value of the spares that have to be
held in stock and the value of lost production caused by stoppages.
ÿ Management of maintenance therefore involves identifying the priority
equipment and preparing a maintenance budget in order to implement the
maintenance schedule.
ÿ Equipment gradually wears out when it is used, and depreciation is a method
to accumulate sufficient funds to buy a replacement at the end of its working
life.
ÿ When a machine, a vehicle or office equipment is purchased, the processor
should estimate its expected working life. The value of the equipment is then
divided by this time in years, and the depreciation figure is included in the
annual company accounts.
ÿ There are three methods to calculate depreciation: linear or straight line
method, reducing balance method, and sum of digits method.
Business management for small-scale agro-industries 54
Answer the following questions on additional sheets of paper:
1. Mention some decisions that have to be taken in relation to choosing
equipment.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. Explain the importance of calculating the correct size of equipment, and
mention the stages in deciding it.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
3. What are some benefits of planned maintenance?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
4. What is the use of calculating depreciation of equipments? Mention 3
methods.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
If when attempting to answer these questions you have any doubts or
feel that you do not have sufficient information for the analysis, take
another look at the manual, consult the student’s handbook or contact the
facilitator.
Unit assessment
55
Managing exports in
small-scale agro-industries
LIST OF TOPICS
1. Setting the context
2. Case study: The Haarlem Honeybush Producer Group, South Africa
3. Case study analysis
4. Researching export markets
5. Export options
6. Finding partners and making legal agreements
7. Pricing, delivery terms, and documentation
8. Getting paid
9. Export insurance
10. Conclusions on the case study
11. Group exercise
12. Summary
13. Unit assessment
Exporting needs to be taken seriously and is not a means to ship out surplus
production. Top management commitment to export is essential for success.
UNIT FOUR
Before exporting some issues have to be analysed and some
questions have to be answered. Are you aware that research into
export markets is necessary to reduce the risk of failure? Do you
know that for those companies who feel that dealing with overseas
markets is well beyond their capability there are other export
options? If your enterprise planning to export to the EU, do you know
which regulations to follow? Do you know that in international trade
there are a number of de?ned and codi?ed terms and several
necessary trade documents?
Points to remember
Business management for small-scale agro-industries 56
$ Identify new opportunities to export your products by
yourself or with the help of others.
$ Gauge the economic implications of not getting paid on
time.
$ Learn terms and documentation required in international
trade.
$ Recognize other export options.
$ Appreciate the importance of export insurance.
Globalization offers businesses many opportunities. New opportunities arise as
trade barriers are reduced. This allows countries and companies to increasingly
specialize in areas of best opportunity and more efficiently allocate resources.
However there are numerous additional challenges and opportunities in exporting.
There are differences between countries with regard to currency, language and
culture, technologies, business practices, legislation, buyer needs and politics. No
business can afford to embark on a new venture unless it is reasonably assured
that adequate financial returns will result. Before contemplating to export the
following questions need to be answered:
ÿ What is the reason for entering export markets?
ÿ What products can be exported?
ÿ Who would be the overseas buyer?
ÿ How can the goods be best exported?
ÿ Is exporting profitable?
ÿ How can possible failure be avoided?
Whilst there are many good reasons for exporting, there are also perfectly
valid arguments against, such as fluctuations in the exchange rates, the costs of
modifications to the product for export; the need to assign financial, management
and other resources, or additional complexities that arise from entering into export
contracts. Any decision to export must be based on opportunities available.
Setting the context
By the time you complete this unit
you will be able to:
Unit 4 – Managing exports in small-scale agro-industries 57
INTRODUCTION
1
Honeybush (Cyclopia spp) is a perennial woody fynbos shrub, unique to South
Africa, whose leaves and stems are used to make an herbal, caffeine-free tea with
acclaimed medicinal properties which are gaining credibility from emerging
scientific research. Historically honeybush has been harvested in the wild.
However, as the honeybush market grows and formalizes, wild harvesting becomes
increasingly inefficient from an economical point of view and unsustainable
from an environmental point of view. A shift from wild harvesting to cultivated
production was the logical next step, especially if new international markets are
being opened. In 2001, amongst the first to engage in such honeybush cultivation
was the Haarlem farming communities.
Haarlem is a community of subsistence farmers located in the midst of large-
scale commercial fruit (apple) growers in the Langkloof valley near the Western
Cape –Eastern Cape border. The community consists of approximately 3 500
mostly colored people in 900 households with great diversity in social status.
Wild harvesting of honeybush has traditionally been another important source
of income for Haarlem’s households. In order to address the growing economical
and ecological concerns, the Haarlem community started to shift away from wild
harvest to cultivation, establishing the first honeybush plantation in 2001. One of
the reasons of taking this decision had to do with Haarlem’s interest to export the
product.
DISCUSSION
Although consumed by households in South Africa since at least the 1700s,
honeybush tea has been marketed and supply chains have emerged only since
the 1960s for the local market and since the 1990s for the export market. As
a consequence, the honeybush consumer market is growing fast. Demand for
honeybush is growing at more than 30 percent per year on average (from 30MT in
1997 to 220MT in 2004). Most of the plantation production is organic. Producers
opted for this kind of production mainly because it supports the healthy image of
Honeybush tea, especially in exports markets where the tea is marketed to health
conscious consumers.
Case study: The Haarlem Honeybush Producer Group,
South Africa
1
Adapted from: Neven, Goliath, Reardom, Hopkins. 2005. Case studies of organizations linking
to dynamic markets in South Africa: The Haarlem and Erikaville honeybush producers in South
Africa.http://www.pfid.msu.edu/SACaseHaarlemandEricaville.pdf. Some facts have been modified
for training purposes.
Business management for small-scale agro-industries 58
Honeybush processing consists of six steps: cutting, oxidation, drying, sieving,
sterilization and packaging. There are eight honeybush processors in South
Africa. The largest processors are Honeybush Natural Products (HNP), and
Cape Honeybush Teas (CHT). Together these two companies present roughly
66 percent of the processed honeybush market. The two companies use similar
processing technologies and have implemented HACCP systems; both are organic
certified. Whereas HNP is partially integrated backward into production only,
CHT is fully integrated along the supply chain from nursery to finished, shelf-
ready product.
While most of the tea produced is conventional fully fermented (“black”) tea,
HNP also produces organic honeybush (15 percent of output) as well as small
batches of green honeybush (
In terms of methodology, the units are organized in such a way as to give you the opportunity to discover each unit's specific course content and the skills you will attain. Included in the conceptual content of this module are a few procedures and attitudes that will help you to make the most of what you learn and to apply it to the day-to-day reality of your agribusiness.
Business management
for small-scale
agro-industries
Editors
Pilar Santacoloma
Alexandra Röttger
and
Florence Tartanac
FAO Agriculture Management, Marketing and
Finance Service
Rural Infrastructure and Agro-Industries Division
FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS
Rome, 2009
TRAINING
MATERIALS FOR
AGRICULTURAL
MANAGEMENT,
MARKETING
AND FINANCE
8
The mention or omission of specific companies, their products or brand names does not
imply any endorsement or judgement by the Food and Agriculture Organization of the
United Nations.
The designations employed and the presentation of material in this information
product do not imply the expression of any opinion whatsoever on the part
of the Food and Agriculture Organization of the United Nations concerning the
legal or development status of any country, territory, city or area or of its authorities,
or concerning the delimitation of its frontiers or boundaries.
All rights reserved. Reproduction and dissemination of material in this information
product for educational or other non-commercial purposes are authorized without
any prior written permission from the copyright holders provided the source is fully
acknowledged. Reproduction of material in this information product for resale or other
commercial purposes is prohibited without written permission of the copyright holders.
Applications for such permission should be addressed to:
Chief
Electronic Publishing Policy and Support Branch
Communication Division
FAO
Viale delle Terme di Caracalla, 00153 Rome, Italy
or by e-mail to:
[email protected]
© FAO 2009
iii
Contents
Acknowledgments vi
Acronyms and abbreviations vii
Introduction 1
General study guidelines 3
Managing finance in small-scale agro-industries 5
List of topics 5
Setting the context 6
Case study: Business Management –Situation of
Cassava Starch and Panela Plants in North Cauca,
Colombia 8
Case study analysis 10
Calculating costs 10
Calculating the price for products 12
Record keeping 14
Financial statements 16
Managing working capital 20
Conclusions on the case study 21
Group exercise 22
Summary 23
Unit assessment 24
Managing people in small-scale agro-industries 25
List of topics 25
Setting the context 26
Case study: An Asian food processing firm faces
new challenges in Kenya 28
Case study analysis 29
Recruitment 30
Training and staff motivation 31
Staff management 32
Health and safety 33
Staff records 34
Conclusions on the case study 35
iv
Group exercise 36
Summary 36
Unit assessment 38
Managing equipment in small-scale agro-industries 39
List of topics 39
Setting the context 40
Case study: From Dairy Farming to Manufacturing:
The Osia Ice Cream Company, Denmark 41
Case study analysis 42
Choosing equipment 43
Calculating the correct size of equipment 43
Sources of equipment 46
Equipment maintenance 47
Depreciation for equipment 49
Conclusions on the case study 51
Group exercise 52
Summary 52
Unit assessment 54
Managing exports in small-scale agro-industries 55
List of topics 55
Setting the context 56
Case study: The Haarlem Honeybush Producer
Group, South Africa 57
Case study analysis 59
Researching export markets 60
Export options 60
Finding partners and making legal agreements 63
Pricing, delivery terms, and documentation 65
Getting paid 67
Export insurance 68
Conclusions on the case study 71
Group exercise 72
Summary 72
Unit assessment 74
v
Quality assurance and management in small-
scale agro-industries 75
List of topics 75
Setting the context 76
Case study: Managing Quality in Food Retailing.
Tesco, United Kingdom 78
Case study analysis 79
Total quality management 80
Quality standards and assurance schemes 82
Traceability and due diligence 84
HACCP system 87
Conclusions on the case study 92
Group exercise 93
Summary 93
Unit assessment 95
Glossary 97
Bibliography 101
vi
List of figures
1. The break-even analysis 19
List of tables
1. Use of a process chart to calculate the equipment
needed to produce 52 kg of biscuits per day 45
2. Maintenance and repair records 48
3. Linear or straight line method of depreciation 49
vii
Acronyms and abbreviations
CETEC Corporation for Interdisciplinary Studies and Technical
Assistance
CHT Cape Honeybush Teas
CIAT: International Center for Tropical Agriculture
CIRAD-SAR French Agricultural Research Centre for International
Development- Agri-food and rural systems department
EAN European Article Number
EU European Union
HACCP Hazard Analysis Critical Control Point
HNP Honeybush Natural Products
IDRC International Development Research Centre of Canada
INCOTERMS International Commercial Sales Terms
ISO International Organization for Standardization
kg kilogram
P.A.Y.E: Pay-as-you-earn
SSCC Serial Shipping Container Code
WHO World Health Organization
WTO World Trade Organization
viii
Acknowledgments
We wish to thank Margarita Baquero, FAO Consultant, for the adaptation of the
FAO AGSF Working Document No. 7: Business management for small-scale agro-
processors by Peter Fellows and Alexandra Röttger, FAO 2005.
Credit goes to Pilar Santacoloma (AGSF) for all cover photographs.
Special thanks also go to Malcolm Hall, FAO Consultant, for proofreading and
Lynette Chalk, FAO Consultant, for layout and desktop publishing.
1
Introduction
The purpose of this publication is to present leaders of associations with several
of the business management techniques.
It has the following objectives:
ÿTo assess the importance of finance management techniques as tools that
help us to know if the enterprise is really winning or how profitable a new
business can be.
ÿ To discover the real importance of modern managing staff techniques which
perceive people as the most important resource of any business.
ÿ To understand how buying the right equipment in terms of size, price,
availability of spare parts, and plan its maintenance permit the processor to
save money.
ÿ To recognize that exporting is not an easy thing and that many issues have to
be considered before initiating this process.
ÿ To learn that quality assurance has begun to focus not only on safety, which
is expected, but also to increasingly higher demands for consistently better
quality.
To this end, the conceptual content of this module has been organized into five
units:
ÿ Unit 1 – Managing finance in small-scale agro-industries.
ÿ Unit 2 – Managing people in small-scale agro-industries.
ÿ Unit 3 – Managing equipment in small-scale agro-industries.
ÿ Unit 4 – Managing exports in small-scale agro-industries.
ÿ Unit 5 – Quality assurance and management in small-scale agro-industries.
In terms of methodology, the units are organized in such a way as to give you
the opportunity to discover each unit’s specific course content and the skills you
will attain. Included in the conceptual content of this module are a few procedures
and attitudes that will help you to make the most of what you learn and to apply
it to the day-to-day reality of your agribusiness.
Each unit is structured to help you to identify in advance your prior experience
and interests and to enable you to combine your existing knowledge with the
proposed course content to optimum effect. The aim is to build capacities by
accumulating new knowledge in a pro-active and participative way.
Business management for small-scale agro-industries 2
In terms of assessment, we start from the principle that assessment is of most
value when it is used to take decisions for improving the teaching/learning process.
With this in mind, we have included three phases:
ÿ Initial assessment: this will enable facilitators or tutors to analyse and predict
your real capacity for learning. At the same time, it will give you an idea of
what each unit is about and what it aims to achieve in terms of increasing
your motivation, updating your existing knowledge and preconceptions, and
planning your own learning process fully.
ÿ Formative assessment: this will enable facilitators to take decisions to
improve the teaching/learning process (regulation) and will enable you to
take decisions to improve your own learning process (self-regulation).
ÿ Summary assessment: this will enable you to link together the key ideas,
to find out what progress you have achieved and to see where you stand as
regards a new learning process.
Furthermore, the assessment instruments in this manual can be supplemented
with any others that facilitators may consider appropriate to ensure that assessment
also becomes a group process and that progress is made with the different types
of course content (concepts, procedures and attitudes). At the same time, the
assessment instruments are designed to allow you to offer your constructive critical
assessment of the validity of the course material and the way in which it is taught.
Accordingly, the manual contains the following sections:
Particular attention is drawn to the glossary, which helps to clarify a few
concepts not explained in the text. The terms figuring in the glossary are
marked with an asterisk (*) the first time they appear in the text.
Section Aim
ÿGeneral guidelines Promote the learning-to-learn process
ÿList of topics To present the specific content of each unit
ÿPoints to remember To memorize what you have learned. Initial assessment
ÿKey competencies To detail the key competencies you will learn
ÿSetting the context To put into context the subject to be discussed, and update thinking
on it
ÿCase study To remember prior knowledge. Initial and formative assessment
ÿExplaining key issues To present the priority course content and analyse it in detail
ÿConclusions on the case study To provoke thought on the real issues. Formative assessment
ÿPractice exercises To put into practice the proposed course content
ÿUnit assessment To provide an opportunity for self-assessment of the material learnt
ÿSummary To help to link, integrate and memorize the key ideas
ÿGlossary To clarify ideas on the meaning of selected terms and acronyms
ÿBibliography To provide information for personal research
3
General study guidelines
To help you make optimum use of this material, below are a few hints and
suggestions for planning and managing your own learning process:
ÿ Organize your time in such a way as to allow you to complete the proposed
assignments by the appointed deadline. You are advised to study for at least
two hours every day to optimize the teaching/learning process.
ÿ Before starting work on a unit, try to remember what you already know
about the subject, as this will help you to link new knowledge with your
existing knowledge and will allow you to recognize the added value of
everything you learn for your personal development.
ÿ Complete the self-assessments, as well as the topics and proposed case
studies, as they will help you to understand the course material and reinforce
your learning.
ÿ You may underline, construct graphic organizers, write summaries or use
any other method to help you to understand the course material fully.
ÿ You will get a chance to ask questions and request clarifications to enable
you to exchange views with your fellow students and with the facilitator. An
opportunity will be provided for airing different points of view. The aim is
not for us all to think exactly the same.
ÿ Do your own research. The proposed bibliography is only a guide. Do
not forget that you can also find instant, up-to-date information on the
Internet.
ÿ Use the objectives and competencies of each unit to develop your own
assessment instruments. Taking control of your own learning process will
allow you to make decisions to improve it.
ÿ Although studying is challenging and you will come across obstacles, in the
end all the effort, sacrifice and time will be rewarded with greater knowledge
and enhanced skills, aptitudes and abilities.
ÿ As you are the key player in the teaching/learning process, you will need
sound arguments and in-depth thinking to carry out the proposed activities,
coupled with strong motivation and critical and analytical abilities.
ÿ You will find the definitions for words marked with an asterisk (*) in the
glossary.
You can do anything you set your mind to.
Get started now, and have fun.
5
Managing finance in
small-scale agro-industries
LIST OF TOPICS
1. Setting the context
2. Case study: Business Management –Situation of Cassava Starch and Panela
Plants in North Cauca, Colombia
3. Case study analysis
4. Calculating costs
5. Calculating the price for products
6. Record keeping
7. Financial statements
8. Managing working capital
9. Conclusions on the case study
10. Group exercise
11. Summary
12. Unit assessment
Simple finance management techniques have been developed to help small
entrepreneurs manage their business. These techniques will help the small-scale
processor to calculate the costs of production that arise during operation of the
agro industry and to determine income from the sale of the products.
Do you know that de?cient ?nancial management causes some of the
most common and serious problems for small scale-processors? Are
you aware that ?nance management techniques inform us whether
our association is pro?table? Do you know how to calculate the cost
and price of your products? Is your enterprise keeping records of
income and expenditure? Do you know why keeping records is
important? Do you know what a break-even analysis is and what is
the importance of it? Have your considered the importance of
managing working capital?
Points to remember
UNIT ONE
Business management for small-scale agro-industries 6
$ Identify from your own experience finance
management activities that your associative enterprise
has implemented or should implement.
$ Gauge the economic implications of poor finance
managing.
$ Learn to calculate costs, and determine the price for the
products.
$ Recognize the importance of record keeping and which records are necessary to
keep.
$ Appreciate the importance of managing working capital and break-even analysis.
Before the industrial revolution finance management was not considered so
important for business organizations. Because methods of productions were very
simple, labour was more important than capital and finance at that time. So these
things did not create any problems.
Yet, after industrial revolution, when methods of productions were introduced,
the finance got much importance. Nowadays finance management is considered as
the life blood of every business and achieved the most important place in today’s
business. The businesses whether large-scale or small-scale require finance for its
operations. Money is a universal lubricant for any enterprise, man and machine
work.
Agro-industries as one very important industry branch and part of modern
agrifood systems are characterized by their strong backward and forward linkages
among agricultural enterprises, strong synergies between domestic and export
sectors, and perhaps most importantly high production and service value addition
relative to primary production.
As any other business, agro-industries good performance depends on a number
of parameters in order to be profitable. These parameters are related to production
By the time you complete this unit
you will be able to:
Setting the context
Unit 1 – Managing finance in small-scale agro-industries 7
and finance management. Deficient financial management causes some of the most
common and serious problems for many small-scale processors. Causes of failure
include:
ÿ over-spending;
ÿ treating profits as personal income;
ÿ incorrect costing of inputs and/or pricing of products;
ÿ poor record keeping;
ÿ high debts or negative cash flow*.
Finance management techniques help us know if the enterprise is really
winning or how profitable a new business can be. In this context there are two
types of finance needed. The first is required before a business is set up and while
the processing unit is being established. This is known as investment* finance.
The second type is required to meet the costs that arise during operation of the
processing unit, and this is met by income from sales of products. In this course
we will treat the second type related to routine financial management.
Business management for small-scale agro-industries 8
INTRODUCTION
1
Two types of rural agro-industries are typically found in the Department of
North Cauca, Colombia: small sugar-crushing plants, which produce panela*,
and cassava- processing plants, which produce both sour and sweet starch. Panela
plants are generally too small, dispersed and seasonal in operation to estimate the
number of families dependent on them as a major source of income. However,
most of the starch plants are small family enterprises, which provide direct
employment to approximately 300 families.
It is estimated that 80 percent of sour starch production in Colombia is
concentrated in North Cauca and that 90 percent of the 60 000 tonnes/year of
cassava roots produced in the region are processed into starch. Although many
institutions, public and private, have worked on various fronts with these small
agro-enterprises, their impact was unknown as was the degree to which new
technology had been adopted. Also, a comprehensive understanding of the
principal problems of these agro-industries was not available to formulate effective
support programs.
DISCUSSION
Taking into consideration the above, the Carvajal Foundation and CORPOTUNIA
planned a study focused on gathering and analyzing the needed information.
Other institutions with a particular interest in the information gathering exercise
and who participated in various ways were CIAT, CIRAD-SAR, the Corporation
for Interdisciplinary Studies and Technical Assistance (CETEC), PRODAR, and
IDRC.
The objectives of the study included better knowledge of the management
and administration of panela and cassava starch enterprises as a basis on which
to formulate strategies for strengthening their administrative structures and
business consolidation. To achieve this purpose, various aspects of enterprise
management were addressed, such as personnel management, accounting practices
and inventory* control, costs of production and sales, product marketing* and
prices, quality control, and legal aspects and administrative structure.
The researchers began by conducting a thorough review of secondary information
about the starch plants followed by each participating institution compiling a matrix
Case study: Business Management - Situation of Cassava Starch
and Panela Plants in North Cauca, Colombia
1
IDRC-CRDI. 1997. Rural Agro-industry in Latin America. An evaluation of the PRODAR
Network.http://www.idrc.ca/fr/ev-31725-201-1-DO_TOPIC.html
Unit 1 – Managing finance in small-scale agro-industries 9
of information they possessed not already captured. Based on this information, a
field instrument was designed; pilot tested and administered to starch and panela
plant operators. When the fieldwork was completed, the data was coded, organized
and analysed by a selected inter-institutional team of analysts.
CONCLUSION
The results of the study may me summarized as follows: Of the 210 starch plants
inventoried, 146 were in operation, three were under construction, 30 were
temporarily idle, and 28 were abandoned. Most were family operations, and two
were owned by organizations. Twelve percent of the work force are women,
and less than one percent are children. Lack of working capital, shortage of raw
material, great variation in price and marketing of products and by-products were
the main reasons indicated for a 68 percent underutilization of installed capacity.
Other problems included scarcity of water, lack of drying floors and frequent cuts
in electric energy supply.
About 22 percent of the plants had received some administrative training
and 77 percent of these kept a register of their purchases and sales. The plants
with higher technology levels usually kept records while the oldest and most
experienced operators were least likely to do so.
Turning to the results of the panela plant survey it is estimated that, in 1990,
about 900 000 tonnes of panela was produced in Colombia in 30 000 plants
generating 120 000 permanent jobs. Of the 60 plants surveyed, 89 percent were in
operation and the rest either lacked cane to process or were abandoned. Seventeen
percent of the plants belong to producer associations and the rest to individuals
or family groups. Up to five women were found working in 78 percent of the
plants. Less than half had completed primary education. Administratively, 94
percent of the plants had minimal or no administrative and management structure
or distribution of tasks among workers and only 5 percent kept inventories. Most
did not know what their costs of production and returns were.
In general, comparing panela and starch plants, the panela plants are family
enterprises with little working capital and poor or nonexistent administration.
Most are ignorant about determining costs of production, do not keep records
and have no idea of their costs and returns. The starch producers, on the other
hand, are generally better endowed in these enterprise areas. Women’s labour, and
in some cases that of children, is an important factor in both types of enterprise
but especially in panela where returns are lower. Those who belonged to grouping
organizations exhibited better management practices and both technical and
management training appeared as an important tool in improving these small
enterprises. These administrative factors left them at a disadvantage in negotiating
with intermediaries who set prices at will.
Business management for small-scale agro-industries 10
The first step to introduce finance management is calculating costs. Many small-
scale processors do not attempt to find out what their production costs are,
because they believe that it is too complicated or too difficult. As a result they
have no idea whether they are making a profit or how much it is. However, when
the different costs in a business are understood, it is a relatively straightforward
procedure to calculate them.
Case study analysis
Based on your personal experience, consider the following questions on
the proposed case:
1. According to the case study which are the main problems of panela* and starch
plants in Colombia? Which of these problems related to the lack of money or
to scarce financial management? Explain.
2. In your opinion, why do you think that most of the studied enterprises do
not keep records of costs of production and have no idea of their costs and
returns? How do you think these practices affect the business?
3. In your opinion and according to the case, which are the principal management
finance practices that starch and panela enterprises are not following?
4. What should be the attitude of the panela and cassava enterprise owners who
are being included in training and enterprise development projects in order to
improve their administrative skills?
Bear in mind that at the end of the unit you will be asked to answer the
same questions in the light of the new knowledge you will have acquired.
Calculating costs
Unit 1 – Managing finance in small-scale agro-industries 11
The costs incurred before production begins are known as ‘start-up’ costs. The
costs of buildings, machinery and other equipment are known as ‘capital costs’, and
the costs that arise during processing and selling the products are ‘operating costs’.
Operating costs are categorized into two types: ‘fixed’ and ‘variable’. Fixed
costs* (also known as ‘overheads’) are those that do not change if there is an
increase or decrease in the amount of production. Examples include:
ÿ salaries;
ÿ rent;
ÿ utilities (service charges for telephone, water and electricity);
ÿ interest paid on loans;
ÿ some types of taxes;
ÿ depreciation* of equipment.
Variable costs* change according to the volume of production. Examples
include:
ÿ raw materials and ingredients;
ÿ packaging materials;
ÿ salaries for operational staff;
ÿ electricity, gas and water charges;
ÿ fuel for vehicles;
ÿ office materials.
Operating costs can also be described as ‘direct’ and ‘indirect’ costs. Direct
costs are those that arise directly from the production process (e.g. materials and
labour costs for production workers), whereas indirect costs include salaries for
office staff and delivery drivers, vehicle costs, etc.
Where the time and materials required to produce and sell different products
are similar, it may be reasonable to split indirect costs equally between them. If
however, the overheads for one product are higher, or the production and sales are
more diverse and complex, or the competition is stronger, it may be beneficial to
use ‘activity-based costing’. This more accurately assess the true level of indirect
costs and involves identifying all of the indirect activities needed to make and sell
each product and allocates an accurate cost for each. These costs are then added
together.
The calculations can also show which products are the most profitable and
how expansion of their production would benefit the business. For a business to
operate successfully, it must be profitable over the long term. This means that the
income must be greater than the total expenditure.
Business management for small-scale agro-industries 12
There are two basic ways to maximize gross profits. The first is to reduce
expenditure, and to do this a processor must first identify where costs occur in
the business. The second is to increase income, either by increasing the price of
products, increasing sales of products, or by finding buyers for by-products that
were previously discarded.
The price charged for a product should ensure that the income meets all of the costs
and generates sufficient profit. The simplest method to determine the correct price
for a product is to add up all the costs of production and then add on a percentage
profit (mark-up pricing). Profit margins of 20–30 percent are possible, although
many processors achieve less. Conversely, if a product has little competition and/
or a high demand*, a higher profit margin may be possible.
This pricing strategy does not include the capital costs of the equipment used
nor does it allow for the fact that the price of a product depends largely on what
the market will accept and the price that competitors are charging. A judgment
must therefore be made about how much a product can be sold for in a particular
market and whether the costs of making it will produce an acceptable profit.
The following principles assist in setting a price:
a. produce products for which there is a strong demand;
b. be aware of current market prices and conditions and how these translate
into product prices;
Gross profit = income – expenditure before taxes are paid
Calculating the price for products
Example: Calculating the price of a product
Total production costs per kg cheese = US$4.44
Add 23 percent profit margin = US$1.02
Selling price (US$/kg) = US$4.44 + US$1.02 = US$5.46/kg
Unit 1 – Managing finance in small-scale agro-industries 13
c. know the break-even cost of production and marketing.
The following formula provides a more complex calculation of selling price
that relates production costs, invested capital, the amount of food sold and profit
required:
Some processors underestimate the importance of price setting and simply try
to undercut their competitors. However, prices that are too low make little or
no profit, and poor pricing can result in no money being available for effective
marketing.
Selling price: P = v + F/Q + r K/Q
where P = selling price ; v = unit variable cost of the product; F
= fixed costs; Q = quantity produced and sold; r = interest rate;
K= invested capital
Business management for small-scale agro-industries 14
Example of a page from an invoice book
INVOICE No. …………………..…… Date: ……………….…
To: …………………..…………………..………………………………..……
Address: …………………..…………………..………………………………..…
Order No. : ……….
Quantity Products US$
………. ………………………… …………………..……
Please settle this account within 30 days.
Signed ………………………
Manager
Record keeping
To manage finances successfully, processors must have a good idea of how cash
comes into a business, where it is at any time and where it goes. This requires
financial records. Processing enterprises at all scales of operation need to keep
financial records in order to know how much income from sales has been received,
how much has been spent and for what purpose. Depending on the size and type
of business, processors may also keep records of production, stocks*, sales, staff,
equipment maintenance, quality assurance and cleaning schedules. Copies of
all records should be made, usually by using carbon paper under the page of a
duplicate record book.
The benefits of keeping records include:
ÿ being able to analyse business finances to reduce costs;
ÿ knowing how much profit/loss is made and whether a product range should
be expanded or reduced;
ÿ conforming to tax laws;
ÿ knowing which customers* owe money and how much;
ÿ knowing who are the creditors of the business;
ÿ detecting fraud or theft.
The following are the most common records used in different businesses.
Records of income
When a customer buys products on credit (i.e. they do not pay immediately), the
processor should give an invoice* that has an individual number, the customer’s
name, the products that were bought and how much is owed.
Unit 1 – Managing finance in small-scale agro-industries 15
A delivery note signed by the customer can also be used to prove that items
have been delivered in good condition. When the customer pays the bill, a receipt*
should be issued.
A cashbook is used to record all transactions that are made in cash.
Records of expenditure
Order* books have an individual number for each purchase, and together with
cashbooks are used to record all expenditure made by the processing company.
When goods have been paid for, the receipts should be kept in date order in a
separate file.
Records of purchases taken from the cash and order books are compiled each
week or month and entered into an expenditure book to show how much money
the processor has spent on materials, services or salaries.
Example of a page from a receipt book
RECEIPT No.: …………………...……. Date: …………………...…...
Address: …………………………………………………………...............……..…
Received from: …………………...…….
The sum of US$: …………………...……
Being payment for: …………………………………………………………………
US$ Cash: ………………………............. Check No. …………………
Signed: ………………............…..........……
Manager
Example of a page from a cashbook
Cash income Cash expenditure
Date Amount
received
Customer Products
sold
Date Amount
spent
Seller Materials
bought
2.6.05 24.50 JC Stores Pineapple
juice
3.6.03 2.56 Mohammed
stationery
Paper
6.6.05 12.00 Star shop Tomato
sauce
6.6.03 10.45 Market Plastic
bags
Business management for small-scale agro-industries 16
Record keeping in micro- and small-scale enterprises often involves a simple
single-entry recording system. This is based on a sales and expenditure book in
which the date of a transaction, its nature, and the amount of money involved are
recorded in different columns. Larger businesses use a double-entry system as
described above.
Other financial statements used in a business include:
ÿ bank statements to show bank account transactions;
Example of a page from an order book
Order No.: ………………………….………… Date: ……………….
To: ………………………….………………………….……………………
Address: ………………………….………………………….……………………
Please supply the following items and charge our account, quoting our order
number in your invoice.
Amount Goods Cost (US$)
…………………………. ……………………. ………………………….
Signed: ………………………
Manager
Example of a page from an expenditure book
Expenditure for the year: 2003
Month: May
Amount: US$ ......................
Date Order
No.
Check
No.
Cash Raw
material
Ingredient Office
materials
Vehicle Staff
costs
Miscella-
neous*
2.5.03 00232 00394 21.30
2.5.03 00233 10.25 10.25
15.5.03 15.00
* Miscellaneous entries can include purchases that are made infrequently, such as machinery, office
furniture etc.
Financial statements
Unit 1 – Managing finance in small-scale agro-industries 17
ÿ balance sheet statements, which show the financial position at a particular
time;
ÿ cash flow statements, which show the increase or decrease in available cash at
a particular time;
ÿ profit and loss accounts;
ÿ break-even analysis.
The financial position of a business is presented in a balance sheet and the
operating results are displayed in a profit and loss statement. These financial
statements show the past performance of the business and are used to project what
might happen in the future.
There are two categories of accounting information:
¸ financial accounting for the public, shareholders, customers, suppliers,
creditors, regulatory bodies or tax authorities which includes the financial
position, liquidity and profitability* of an enterprise;
¸ managerial accounting for internal use within the business which this
includes the relationship between production costs, profits and sales volumes,
productivity*, pricing decisions, capital budgets, etc.
A balance sheet shows the company’s value, providing information about its
assets, liabilities, and owners’ equity* at a particular time. Assets can be current
assets (those that the owner could convert into cash) and include products in
stock, cash and any short-term investments; or fixed assets. These include land,
buildings, machinery, vehicles, furniture, and fixtures. They also include patents
and trademarks.
Liabilities are obligations to others, including creditors and employees.
Current liabilities are those that the owner expects to pay within a short time,
including salaries, taxes, short-term loans and money owed to suppliers. Long-
Example of balance sheet
Assets Amount (US$) Liabilities (US$) Amount (US$)
Cash
Debtors
Stocks
Machinery
Less:
prepaid expenses
Creditors
Loan
Dividends
Taxes owed
Total assets
Total liabilities
Business management for small-scale agro-industries 18
term liabilities are debts such as long-term loans. When a business is operated by
a single owner or as a partnership, the balance sheet may show the amount of each
owner’s equity. When shareholders own the business, the balance sheet shows
the amount originally invested by the shareholders, and the amount reinvested
from income (i.e. retained earnings that are not distributed to shareholders as
dividends).
A cash flow statement shows the movement of money in an out of a business.
It is the cycle of cash inflows and outflows that determine a business’ solvency.
A break-even analysis (Figure 1) is used to determine the production level at
which revenues* are equal to the costs incurred. i.e. the business is neither making
a profit nor loss. The level of production should always be above this level to
ensure that the business is profitable.
Example of a cash flow statement
Month 1 2 3 4 5
Cash inflow
Balance b/f*
Sales
Equity
Total income
2 500
2 500
(350)
2 000
1 650
(200)
2 350
2 150
400
1 800
2 200
550
2 000
2 550
Cash outflow
Investment
Expenditure
Rent
Labour
Stock
Total
Expenditure
1000
950
200
200
500
2 850
950
200
200
500
1 850
950
200
200
400
1 750
950
200
200
300
1 650
950
200
200
200
1 550
Net cash flow (350) (200) 400 550 1 000
*b/f = brought forward
Break-even point* (no. of units) = Total fixed costs
Unit selling price - Unit variable costs
Unit 1 – Managing finance in small-scale agro-industries 19
Income
Total costs
Variable costs
Fixed costs
Scale of production Break-even point
US$
FIGURE 1
The break-even analysis
Example: Calculating the break-even point
A business sells a pack of bacon for US$4.95 and the total fixed costs are calculated
at US$260 per day. The unit variable cost is US$2.65 per pack. The break-even point
= US$260/day / US$4.95/pack-US$2.65/pack) = 113 packs per day. The maximum
bacon production level is 350 packs per day, and the break-even point expressed as a
percentage of the volume of production is therefore = (113/350) x 100 =32 percent.
Business management for small-scale agro-industries 20
Many small businesses concentrate on maximizing profits by increasing sales and
reducing production costs and overheads. However, too few companies consider
the importance of managing working capital. This can make the difference between
business survival and failure. Many profitable processors fail because they are not
able to pay the bills. Working Capital (or ‘net current assets’) includes:
ÿ stocks of raw materials, part-processed foods and finished products awaiting
sale;
ÿ amounts owed to the business by customers for sales made on credit;
ÿ cash in the bank.
Strategies to improve working capital include:
ÿ increase credit lines with suppliers i.e. amounts owed by the business to
suppliers of raw materials and services;
ÿ set budgets and monitor actual expenditure against them;
ÿ control stock levels and minimize the amounts of materials held as stock;
ÿ check the credit worthiness of customers and improve credit control methods
e.g. follow up debtors* regularly to shorten payment times and restrict the
amount of credit that is offered to customers.
Managing working capital
Unit 1 – Managing finance in small-scale agro-industries 21
Having compared your prior knowledge with the subject content of the
unit, answer the following questions making optimum use of the new
knowledge you have acquired.
1. According to the case study which are the main problems of panela and starch
plants in Colombia? Are most of these problems related to the lack of money
or to scarce financial management? Explain your answer.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. In your opinion, why do you think that most of the studied enterprises don’t
keep records of costs of production and have no idea of their costs and
returns? How do you think these practices affect the business?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
3. In your opinion and according to the case, which are the principal management
finance practices that starch and panela enterprises are not following?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
4. What should be the attitude of the panela and cassava enterprise owners who
are being included in training and enterprise development projects in order to
improve their administrative skills?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
Conclusions on the case study
Business management for small-scale agro-industries 22
Group exercise
As you remember Chiang Mai Agribusiness sells fresh broccoli to several supermarket
chains. Now, this enterprise is looking forward to produce chilled broccoli for
export markets.
a. Calculate the direct costs of one kilogram of fresh broccoli using the following
table and information. Consider that the Cooperative has four workers and
one supervisor. The working week is 48 hours and processing takes place for
45 weeks per year. 200 kg of chilled broccoli is produced in an average 8-hour
day.
b. Calculate the indirect costs and the total cost of producing chilled broccoli
(US$/kg). Use the following table and consider this information:
ÿ Rent for dairy = US$750 per year
ÿ Telephone = an average of US$40 per month
ÿ Utilities = US$ per month
ÿ Delivery vehicle = US$95 per month
ÿ Maintenance and depreciation = US$29 per month
ÿ Interest on loan = US$14 per month
ÿ Taxes = US$720 per year
Direct costs Calculation US$
Salaries for 4 workers (US$75 per month each)
Salary for one supervisor (US$120 per month)
Total salary cost (4 worker salaries + supervisor salary)
Number of hours worked per year
Labour cost per hour
Direct labour cost per kg chilled broccoli
Direct material costs (broccoli and packaging = US$20
per day). Therefore direct fuel/power costs per kg
chilled broccoli.
Direct power costs per day are US$20. Therefore direct
fuel/ power costs per kg broccoli
Total direct costs per kg cheese
Indirect costs Calculation US$
Total indirect costs per day (US$)
Total indirect costs per kg chilled broccoli
Total fixed costs per kg broccoli (Labour and indirect
costs)
Total variable costs per kg broccoli (Materials and
power costs)
Total cost of producing chilled broccoli (US$/kg)
Unit 1 – Managing finance in small-scale agro-industries 23
Summary
ÿ The first step to introduce finance management is calculating costs.
ÿ Operating costs are categorized into two types: ‘fixed’ and ‘variable’.
ÿ Fixed costs (also known as ‘overheads’) are those that do not change if there
is an increase or decrease in the amount of production.
ÿ Variable costs change according to the volume of production. Examples
include:
ÿ Operating costs can also be described as ‘direct’ and ‘indirect’ costs.
ÿ For a business to operate successfully, it must be profitable over the long term.
This means that the income must be greater than the total expenditure.
ÿ There are two basic ways to maximize gross profits. The first is to reduce
expenditure, and to do this a processor must first identify where costs occur
in the business.
ÿ The simplest method to determine the correct price for a product is to add
up all the costs of production and then add on a percentage profit (markup
pricing).
ÿ To manage finances successfully, processors must have a good idea of how
cash comes into a business, where it is at any time and where it goes. This
requires financial records.
ÿ The most common records are: records of income, and records of
expenditure.
ÿ Financial statements used in a business include: bank statements, balance
sheet statements, cash flow statements, profit and loss accounts and break-
even analysis.
ÿ Working Capital (or ‘net current assets’) includes: stocks of raw materials,
part-processed foods and finished products awaiting sale; amounts owed to
the business by customers for sales made on credit; cash in the bank.
Business management for small-scale agro-industries 24
Answer the following questions on additional sheets of paper:
1. What is the real importance of finance management? Mention some causes of
failure related to deficient management.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. Do you know if your association is really profitable? How do you calculate
costs of your products and how do you determine their prices?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
3. Which finance management techniques does your association use?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
4. What is the importance of keeping records in an enterprise? Which records
are kept by your enterprise?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
If when attempting to answer these questions you have any doubts or
feel that you do not have sufficient information for the analysis, take
another look at the manual, consult the student’s handbook or contact the
facilitator.
Unit assessment
25
Managing people in small-
scale agro-industries
LIST OF TOPICS
1. Setting the context
2. Case study: An Asian food processing firm faces new challenges in Kenya
3. Case study analysis
4. Recruitment
5. Training and staff motivation
6. Staff management
7. Health and safety
8. Staff records
9. Conclusions on the case study
10. Group exercise
11. Summary
12. Unit assessment
Nowadays modern managing staff techniques have been developed, and include
different measures such as involving employees in business decisions, relating pay
to an employee’s performance, and motivating and training staff to achieve their
performance.
Do you know why of all different resources of a small
scale-enterprise, staff is the most important? Are you aware that
training and staff motivation are essential for the proper
performance of the business? Do you know which some of the
modern staff management techniques are? Is your enterprise
keeping records on employees and their jobs? Do you know that
the cost of preventing illness or injuries at work are smaller than
the cost of damage to equipment, medical or legal fees, increased
insurance premiums among other things?
Points to remember
UNIT TWO
Business management for small-scale agro-industries 26
$ Identify from your own experience staff management
activities that your association has implemented or
should implement.
$ Gauge the economic implications of not preventing illness
or injuries of staff at work.
$ Learn to recruit people and to prepare a job description
for each job.
$ Recognize the importance of training and staff motivation.
$ Appreciate the importance of staff management new techniques.
Of all the different resources needed to operate a small processing enterprise,
the staff are the most important because they have unlimited potential if they are
properly trained, managed and motivated. However, owners of small businesses
frequently overlook this and they recruit friends, relations or neighbours to work
in the business.
This may be because owners feel that these people are more trustworthy, but
they may not have the best skills for the jobs that need doing. Likewise, many small
business owners refuse to train their staff because they think that a more skilled
worker will ask for higher pay, or they will be tempted away by a competitor.
Both attitudes are short-sighted, and the correct selection of staff and investment*
in their development are keys to the success of a small processing business.
Human resource planning or staff planning refers to methods used to decide
the numbers and types of staff that are needed to run a processing enterprise.
This is first based on the intended production volumes and an assessment of
which parts of the process are mechanized and which require manual operation.
A processor can use the same methods to decide when it is time to bring in more
workers by analysing the workloads of existing workers and comparing them to
new production targets.
Setting the context
By the time you complete this unit
you will be able to:
Unit 2 – Managing people in small-scale agro-industries 27
The numbers of staff required for other types of work, including sales, deliveries
to retailers, accounts or record keeping and quality assurance are then considered.
A convenient way of planning this is to draw an activity chart, which shows the
type of work to be done, the number of people involved and the sequence of work
that individuals do during the day.
When the total number of employees has been decided, the business owner
should then set about recruiting, training and managing suitable staff in a
systematic way. This requires the owner to develop policies and employment
conditions that attract and keep competent staff.
Business management for small-scale agro-industries 28
INTRODUCTION
Competition has become much more intense in the last ten years in Kenya; with
no less than nine local firms competing in some of the same lines where earlier
there was a virtual monopoly.
In addition there has been an increase in imports of certain food lines from
Europe and even from food diverted from emergency aid. And there has been
the new freedom from competitors to import directly from the Middle East,
South Africa and Europe. In total, this new competitive environment has actually
resulted in the closure of one entire factory and the sale of another.
DISCUSSION
These pressures have been very intense in the last three years, and have reduced
the workforce in this food-processing firm from some 500 to 250 in that period;
and retrenchment is expected to continue. All the usual elements have been
outsourced to reduce administrative costs. And there is even talk of outsourcing
accounts, but not the sales department. The skills profile of employees includes 50
percent unskilled (including casuals); 20 percent semi-skilled; 20 percent skilled
(mechanics and technicians); and 10 percent supervisory and management.
CONCLUSION
Training has taken a series of cuts along lines with which we are becoming
familiar. In the late 1990s, apprentices that were linked to long term training in
polytechnics and universities were stopped and, instead, qualified and experienced
recruits were selected in the market which is allegedly flooded with young people
looking for jobs.
External, full time training has been cut, and has been replaced by internal
training, supplemented by the use of training videos. The levy-grant system
continues to operate, but with the reduction in long term apprentice and other
training there are no longer any refunds.
Case study: An Asian food processing firm faces new
challenges in Kenya
1
1
ITC-ILO. 2002. Enterprise-bases training in Africa. Case studies from Kenya and Zambia. Turin,
Italy.http://www.itcilo.org/spanish/bureau/turin/whatisnew/flyers/EBT in Kenya
and%20Zambia.pdf
Unit 2 – Managing people in small-scale agro-industries 29
Case study analysis
Based on your personal experience, consider the following questions on
the proposed case:
1. What have been the implications of liberalisation, more imports, and greater
global competition on the workforce in the firm? Has this happened in your
business?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. What measures have been taken that directly affect the workforce? How do
you think these measures affect staff’s motivation?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
3. How is this agro-industry handling training? In your opinion what are the
strengths and weaknesses of this model?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
4. What does the future perspective look like for this agro-industry?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
Bear in mind that at the end of the unit you will be asked to answer the
same questions in the light of the new knowledge you will have acquired.
Business management for small-scale agro-industries 30
Before starting to recruit new staff, it is important that the processor prepares a
job description for each job. This helps in deciding exactly what type of work the
new person will be expected to do, and what skills, qualifications or experience are
needed to do the job. This can be written simply as a ‘person profile’.
Jobs are then advertised in newspapers, radio, by public notices, by
recommendation of friends or through other employees. The owner then
compares applications with the criteria in the person profile and selects potentially
suitable people for interview. Business owners should also operate a policy of
not discriminating against applicants because of their sex, religion, race or age.
Interviews are useful for a number of reasons: they help show the personality,
communication skills and any hidden abilities of the applicant; they can be used
to reveal decision-making or technical skills; and they give the applicant a chance
to understand the job and what will be required of them.
After an applicant has been selected, a letter should be sent, confirming the
appointment and when the person should start work. The new employee should
be given an employment contract, containing the job description and details of
the salary and other benefits (e.g. holidays, assistance with transport to work,
etc.). For most countries, the law requires a medical examination for workers
who handle foods to ensure that they have no illness that could be passed on to
consumers* and cause food poisoning.
Recruitment
Example of a person profile used in recruitment* of new staff
Person Profile Date: ……………….
Job: Sales Assistant
Essential requirements:
ÿ education to Standard 6;
ÿ good arithmetic skills (without calculator);
ÿ friendly disposition and good communicator.
Desirable requirements:
ÿ two years’ experience in retail sales;
ÿ flexibility in working hours.
Unit 2 – Managing people in small-scale agro-industries 31
It is important to introduce new employees to the business, so that they get to
know the workplace and other staff, and quickly become productive. This can
either be done formally using an induction course, or less formally by a supervisor
or owner taking them around the factory to introduce them to fellow workers and
to explain the work. New staff should also be given any company literature such
as promotion* leaflets or advertisements, and samples of products.
Many small-scale processors prefer to recruit staff that are relatively
inexperienced, and then train them in the particular methods that are used in
their process. They believe that this is not only cheaper (because inexperienced
workers are paid a lower salary than experienced ones), but also because they can
be trained from the beginning to do their job in the way that the owner wants it
to be done. However, it is important that training is planned, so that the correct
skills, attitudes and techniques are built up in a systematic way.
‘On the job’ training is popular with small-scale processors because new
employees are working and producing products while they are being trained by
more experienced staff. Specialist courses are available from college or university
departments and from some international development agencies. There are often
subsidies or grants available to small enterprises from government institutions or
development agencies for training and staff development*.
A characteristic of successful businesses of any size is that they have workers
who are willing to work for the company because they feel that they have a future
with it – in other words the staff is motivated. As a minimum, the owner should
ensure that the staff is reasonably paid, their salaries are paid on time, and that
there are good working conditions.
However, an even more important motivating factor is that staff can see what
their part is in the business, and how their own individual activities can help the
enterprise achieve success. When staff is supported in their work by the enterprise
owner, they are more likely to be motivated and improve their productivity. Other
benefits that keep workers motivated include:
ÿ housing, travel or medical allowances;
ÿ a contribution to the cost of educating their children or medical bills;
ÿ subsidized meals or the ability to buy products at a reduced cost;
ÿ reasonable working hours with time off to attend special family occasions or
visit health centres.
Training and staff motivation
Business management for small-scale agro-industries 32
The relationship between the owner and workers in micro- and small-scale
businesses is frequently based on instruction and command, with the managers
having an authoritarian role within a defined hierarchy. Union membership is
uncommon and individual employees are notified of their salaries and working
conditions by the owner or manager. More recent management methods are more
participative and open. The aim is to promote cooperative relations between the
management and staff and to avoid the often adversarial behaviour in traditional
industrial relations. If successful, employees become more committed to their
long-term future with the business. Modern staff management requires different
measures including:
ÿ involving employees in business decisions;
ÿ relating pay to an employee’s performance;
ÿ carefully recruiting and training, as well as fair treatment;
ÿ integrating staff management policies with other policies such as production,
marketing, and sales.
Good management involves motivating staff to achieve their best performance.
This means giving employees a clear understanding of the aims of the business
and how each person can help to achieve company goals. Providing necessary
tools, skills and working conditions and resources to enable workers to do their
jobs properly is also essential. The owner can do this by setting clear targets for
the amount of work and the quality standards that employees are expected to
achieve, by assessing performance fairly, by giving constructive criticism when
improvements are needed, and by rewarding successful employees with increased
responsibilities.
Some tips on good management style are:
ÿ involve staff in decisions on any changes to their work and consult regularly
with them;
ÿ enforce discipline firmly but fairly;
ÿ set achievable deadlines or targets, and check on progress regularly;
ÿ give credit for initiative and intelligence, and show appreciation for a job that
is well done;
ÿ discuss weaknesses with individual staff members and make suggestions on
how to improve.
Staff management
Unit 2 – Managing people in small-scale agro-industries 33
Relating pay to performance is another way of motivating people. Although
some small-scale businesses offer overtime payments or pay staff on a piecework
basis (i.e. workers are paid per pack of food produced), more commonly it is a
fixed rate of pay for a particular job. In newer management methods, the pay varies
according to an individual’s performance and/or the profitability of the business.
This involves a regular appraisal of each employee’s performance and development
of a clear profit-sharing scheme. Everyone should know how he or she would
benefit from bonus pay arising from an improvement in the performance of the
business. An alternative for limited companies is to offer employees shares in the
company, which should be held for several years.
These help bind the staff to the long-term development of the company.
Both profit sharing and employee share schemes mean that the workers are also
sharing some of the risks in the operation of the company with its owner. Modern
staff management methods are also known as human resource management
(HRM). Methods aim to employ people who can operate flexibly and adapt to
different jobs or changing work arrangements, instead of having rigidly defined
job descriptions. Also in larger businesses, employee relations become the
responsibility of all managers, not just personnel managers. Personnel matters are
usually integrated with other areas of the company, including marketing, sales,
production and others.
Experience has shown that businesses with modern staff management methods
have higher productivity than those with authoritarian-style staff management.
All processors have a responsibility to provide safe and healthy working conditions
for their staff to prevent illness or injuries at work. This is a legal responsibility
in some countries, but even if laws do not exist, it is in the processor’s interest to
avoid accidents or poor working conditions. The costs of prevention are smaller
than the cost of damage to equipment, medical or legal fees, increased insurance
premiums, or losing skilled staff due to permanent disability arising from injuries.
Also, a safe and healthy working environment enhances the public image of the
business. The main dangers in food processing are burns from equipment operated
at high temperatures, cuts from moving blades, injuries caused by powered
machinery, and an unhealthy environment caused by dust, fumes or smoke.
Part of an owner’s responsibility is to ensure that machinery operates safely
and that guards are in place, equipment is regularly maintained, and that staff are
properly trained in its use.
Health and safety
Business management for small-scale agro-industries 34
Different types of records are needed to keep information on employees and
their jobs. Personnel files are records of the performance of individual employees
at work, their salaries, promotions, holidays, correspondences from labour
ministries or income tax offices, P.A.Y.E contributions, etc. Register books are
used in some larger businesses to record attendance and time keeping, but these
are rarely needed for small-scale operations.
Staff records
Unit 2 – Managing people in small-scale agro-industries 35
Conclusions on the case study
Having compared your prior knowledge with the subject content of the
unit, answer the following questions making optimum use of the new
knowledge you have acquired.
1. What have been the implications of liberalisation, more imports, and greater
global competition on the workforce in the firm? Has something similar
happened in your business?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. What measures have been taken that directly affect the workforce? How do
you think these measures affect staff motivation?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
3. How is this agro-industry handling training? In your opinion what are the
strengths and weaknesses of this model?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
4. What does the future perspective look like for this agro-industry?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
Business management for small-scale agro-industries 36
Group exercise
We return to the example of the Chiang Mai Agribusiness in Module No 3.
Now the agro industry is expanding and therefore looking to hire new staff for the
chilled broccoli processing plant.
1. Elaborate person profiles for recruitment of the following staff:
a. One plant supervisor
b. One quality assurance supervisor
c. One worker related to cleaning facilities
d. One worker for the raw material reception
Use the proposed format.
2. What will be the principal themes that a training manual for new workers (in
processing areas) in a chilled broccoli plant should have? Elaborate a table of
contents for the manual.
3. Mention at least four measures that should be taken in order to prevent
accidents in the processing areas.
Summary
ÿ Staff are the most important resources needed to operate a small processing
enterprise, because they have unlimited potential if they are properly trained,
managed and motivated.
ÿ Before starting to recruit new staff, it is important that the processor prepares
a job description for each job. This can be written simply as a ‘person
profile’.
ÿ Jobs are then advertised in newspapers, radio, by public notices, by
recommendation of friends or through other employees. The owner then
Unit 2 – Managing people in small-scale agro-industries 37
compares applications with the criteria in the person profile and selects
potentially suitable people for interview.
ÿ After an applicant has been selected, a letter should be sent, confirming the
appointment and when the person should start work. The new employee
should be given an employment contract, containing the job description
and details of the salary and other benefits (e.g. holidays, assistance with
transport to work etc.).
ÿ It is important to introduce new employees to the business, so that they get
to know the workplace and other staff, and quickly become productive. New
staff should also be given any company literature such as promotion leaflets
or advertisements, and samples of products.
ÿ A characteristic of successful businesses of any size is that they have workers
who are willing to work for the company because they feel that they have
a future with it – in other words the staff is motivated. As a minimum, the
owner should ensure that staff is reasonably paid, their salaries are paid on
time, and that there are good working conditions.
ÿ When staff is supported in their work by the enterprise owner, they are more
likely to be motivated and improve their productivity.
ÿ More recent management methods are more participative and open. The aim
is to promote cooperative relations between the management and staff and to
avoid the often adversarial behaviour in traditional industrial relations.
ÿ Providing necessary tools, skills and working conditions and resources to
enable workers to do their jobs properly is also essential.
ÿ Experience has shown that businesses with modern staff management
methods have higher productivity than those with authoritarian-style staff
management.
ÿ All processors have a responsibility to provide safe and healthy working
conditions for their staff to prevent illness or injuries at work. This is a legal
responsibility in some countries, but even if laws do not exist, it is in the
processor’s interest to avoid accidents or poor working conditions.
ÿ Different types of records are needed to keep information on employees
and their jobs. Personnel files are records of the performance of individual
employees at work, their salaries, promotions, holidays, correspondences
from labour ministries or income tax offices, P.A.Y.E contributions, etc.
Business management for small-scale agro-industries 38
Answer the following questions on additional sheets of paper:
1. In your opinion, why are human resources the most important resources in
small scale processing enterprise? Which values should be prized in the people
that work for your small-scale processing business?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. Explain what “recruitment” is, and the steps that should be taken in order to
hire new personnel.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
3. Mention at lest five benefits that may motivate workers, and explain how
these may keep the staff encouraged.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
4. In your opinion and after reading this unit, explain the importance of
providing safe and healthy conditions for the staff.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
If when attempting to answer these questions you have any doubts or feel
that you do not have sufficient information for the analysis, take another look
at the manual, consult the student’s handbook or contact the facilitator.
Unit assessment
39
Managing equipment in
small-scale agro-industries
LIST OF TOPICS
1. Setting the context
2. Case study: From Dairy Farming to Manufacturing: The Osia Ice Cream
Company, Denmark
3. Case study analysis
4. Choosing equipment
5. Calculating the correct size of equipment
6. Sources of equipment
7. Equipment maintenance
8. Depreciation for equipment
9. Conclusions on the case study
10. Group exercise
11. Summary
12. Unit assessment
Buying the right equipment in terms of size, price, availability of spare parts, and
plan its maintenance permit the processor to save money.
UNIT THREE
Do you know that proper maintenance ensures that machinery
operates correctly, safely and for longer time? Are you aware
that before buying equipment it is necessary to calculate the size
required? Do you know what considerations should be taken in
order to decide where to buy equipment? Is your enterprise
planning the maintenance of its machinery? Do you know that
equipment gradually wears out when it is used, and that
depreciation method allows the processor to accumulate funds to
buy a replacement?
Points to remember
Business management for small-scale agro-industries 40
$ Identify from your own experience the challenges and
opportunities in managing equipment.
$ Gauge the economic implications of having poorly
maintained machines and equipment.
$ Learn to calculate the correct size of equipment before
buying.
$ Recognize sources of equipment.
$ Appreciate the importance of planned maintenance* of equipment.
Poorly maintained machines are a potential hazard to operators; they produce
substandard products and can contaminate products with harmful fragments.
Proper maintenance ensures that machinery operates correctly and safely and
prolongs its life, thus reducing capital and operating expenditure. A common
reason for lost production is delays caused by equipment breakdowns and waiting
for spare parts. This causes a processing unit to operate at below planned capacity
and reduces its profitability.
Most small-scale producers do not keep a stock of spare parts because of the
cost, but few producers have compared the cost of keeping a stock of spares with
the cost of delayed production. This is especially important if delivery times for
spare parts (e.g. for imported equipment) are several weeks. In most processes, a
few items of equipment are likely to wear out more quickly than others (e.g. cutter
blades, motors or bearings, heating elements, etc.). The processor should identify
these priority spares for each process, and ensure that a spare component is always
kept in stock. A spares record is useful to keep track of expenditure on spares in
larger businesses.
Similarly, many small-scale processors do not have a programme of planned
maintenance* to replace parts before they wear out. They believe that it is cheaper
to continue using a machine until it breaks down and then repair it.
Setting the context
By the time you complete this unit
you will be able to:
Unit 3 – Managing equipment in small-scale agro-industries 41
INTRODUCTION
1
The Osia ice cream company was formed by a private dairy farmer in 1994. As
the amount of milk produced on the farm began to grow the farm had increasing
difficulties in selling it in a fresh condition, particularly during the summer. The
farmer looked at options for processing the milk in order to extend its life and
visited a number of small cheese and ice cream producing companies for ideas on
the markets and technologies required.
The farmer identified more than 40 companies producing such products in the
Copenhagen area. However by talking to consumers and distributors of ice cream
they found that only 3 were producing to high and consistent standards. Two of
the distributors said they would consider selling products on behalf of the farm if
they were able to produce reliable qualities with a good taste.
DISCUSSION
The farmer researched in detail how to make ice cream and identified Italian made
machinery as being suitable for his requirements. The cost however was extremely
high. In order to purchase the equipment he agreed a loan with a partner and the
business was registered as a partnership. However soon after beginning production
it became apparent that it would be impossible to repay the loan. The equipment
was sold and the partnership stopped.
However the farmer persisted and purchased second hand equipment as
a second attempt, producing two varieties of ice cream (coffee and vanilla) in
traditional tubs. The farmer worked hard to keep good relations with his two
distributors who ensured that it was stocked in local stores. Since his equipment
was not new, he designed a programme of planned maintenance* for the equipment
which included the replacement of parts before they wear out.
CONCLUSION
Sales have grown consistently and today the company produces three tonnes of ice
cream per day and employs 10 persons. At present the company do not advertise
Case study: From Dairy Farming to Manufacturing: The
Osia Ice Cream Company, Denmark
1
Adapted from: FAO. Agribusiness management for small and medium sized businesses in Bulgaria.
Part II Training approaches, case studies and exercises.
Business management for small-scale agro-industries 42
and depend largely on their agents and the quality of their products to increase
their sales.
Even so the company has plans to expand, through up dating their technologies
and by producing a wider variety of products. They are considering taking another
loan and are preparing a business plan. The company would also like to carry
out more detailed research as to why customers buy products. They anticipate
increasing competition in the future particularly from imports and intend to be
prepared.
Case study analysis
Based on your personal experience, consider the following questions on
the proposed case:
1. Explain the reasons why the company failed in its first attempt of making ice
cream.
2. Do you believe that the farmer made a depreciation calculus before he
purchased the first equipment? Explain your answer using information from
the case and including your opinion.
3. What are the advantages and disadvantages of buying second hand equipment?
Mention at least three.
4. What do you think are the reasons why the farmer designed a programme of
planned maintenance for the equipment he bought?
Bear in mind that at the end of the unit you will be asked to answer the
same questions in the light of the new knowledge you will have acquired
Unit 3 – Managing equipment in small-scale agro-industries 43
The main decisions in relation to buying equipment are:
ÿ which parts of a process require mechanization and which can be done
manually;
ÿ the correct size of the equipment (its capacity or throughput) for the intended
scale of production to ensure that all equipment has a similar throughput;
ÿ whether to buy equipment from a local engineering company or to import it.
MECHANIZED VERSUS MANUAL PROCESSING
Some processes, such as edible oil extraction from seeds and nuts, or milling
cereal grains are difficult and time-consuming to perform manually and product
yields* are low. They are usually mechanized and these processes therefore require
greater start-up capital than most other types of agro-processing. The reliance on
machinery also means that the management of maintenance and a spares inventory
are important aspects of operating these types of business. Staff numbers are
smaller than some types of agro-processing, but training is required to correctly
operate and adjust machines to achieve maximum yields and productivity.
When planning production, a processor should therefore compare the costs
of employing workers to do a particular job with the investment* of buying a
machine.
A common mistake is made when processors buy the only equipment that is
locally available, without considering whether it is suitably sized for the likely
sales volumes. The processor should plan the throughput that is required, research
sources of equipment, and select a supplier that can provide a suitable machine.
SALES FORECAST
The first stage in deciding the size of equipment is to make an accurate assessment
of likely sales. For a new business this is done as part of a feasibility study*. An
existing business can collect these data by adding daily sales records to produce
monthly totals. This information can be used to plan for additional equipment or
Choosing equipment
Calculating the correct size of equipment
Business management for small-scale agro-industries 44
more staff where sales are increasing, or where sales are falling, the need for more
product promotion or development of new products*.
PRODUCTION RATE
Sales information can be used to find the daily production rate employing the
formula below. The production rate is then used to plan the amounts of raw
materials, ingredients and packaging that have to be ordered.
For example, if broiler feed sales are 24 tonnes per month and a feed mill works
six days a week, then one tonne of feed has to be produced every day.
PRODUCT THROUGHPUT
The average amount of production per hour is known as the ‘product throughput’,
and is calculated to help finding the required size of equipment.
The calculation of throughput enables the processor to decide the size and
number of pieces of equipment required. This type of calculation is shown in the
following examples:
Production rate (kg/day) = Amount of product produced per month (kg)
No of days of production per month
Throughput (units/hour) = Amount of product sold per month (units)
No. of days of production per month x No. hours worked per day
Example: Calculation of throughput
Using the production rate data above, and assuming that 2 hours per day are available
for the staff to mix the feed, then the average throughput of the mixer is:
= 1 tonne per day / 2 hours per day
= 0.5 tonne/hour
If the feed mixer takes 30 min to mix a batch of feed, then two batches per hour
are possible and a mixer with a capacity of 0.5/2 = 0.250 tonne is suitable (i.e. a
capacity of 300 kg to avoid over-filling).
Unit 3 – Managing equipment in small-scale agro-industries 45
Example: Calculation of throughput (continued)
Modified calculation of throughput
Because of load shedding, the feed mill cannot operate electric mixers on Mondays
and Thursdays each week. To achieve the production levels needed to meet planned
sales targets, the production rate must therefore be increased on the four days that
mixing can take place: i.e. = 24 tonnes/month /16 days/month = 1.5 tonnes/day.
Then the average throughput of the mixer needs to be: = 1.5 tonnes/day/ 2h/day
= 0.750 tonnes/hour.
A mixer with a capacity of 0.750 tonnes/hour/2 = 0.475 tonnes is required (a
bowl capacity of 500 kg).
Example: Choosing the size of equipment
If 3 hours are available to boil 36 kg of jam per day, the throughput for the boiling
stage is:
36/3 = 12 kg per hour.
A batch of jam should be boiled within approximately 15 minutes to maintain
the quality of the product, and a maximum of three batches per hour are possible.
The processor therefore has a number of choices: 1.) To buy a single, large (e.g. 15-20
litre) stainless steel pan and a large burner to heat one 12 kg batch of product within
15 minutes. This is the most expensive option, but production is straightforward and
requires the least organization. 2.) Process two batches of 6 kg using a smaller (e.g.
10 litre capacity) boiling pan and a smaller burner. 3.) Process three batches of 4 kg
each using a smaller (e.g. 6 litre capacity) boiling pan and a smaller burner. This is
the cheapest level of investment but requires more complex work organization, staff
skills and production planning*.
MATCHING EQUIPMENT THROUGHPUTS
In agro-processing there is usually a short delay between the different stages in a
process, and to avoid bottlenecks* it is important that all equipment has a similar
throughput. To calculate the requirements for all equipment in a process, the
Business management for small-scale agro-industries 46
process should be written down as a chart, showing the weights of food at each
stage that are needed to achieve the planned production rate (Table 1).
It is preferable to buy equipment from local suppliers or engineering companies
because they are close by to service or repair the equipment. The purchasing price
is often lower than imported equipment and spare parts can be obtained faster
and more easily. However, the quality of workmanship and the willingness or
capacity of engineering companies to provide a repair service needs to be taken
into consideration before choosing a particular type of equipment.
Process stage Equipment required Calculation/assumptions
Ingredient weighing By hand -
Dough mixing Mixer bowl with 15 Kg
capacity
Mixer needs 20 minutes to mix each batch –i.e.
2 batches per hour. 2 hours mixing requires
capacity of 26/2 = 13 Kg (capacity of 15 kg to
avoid overfilling).
Biscuit forming Forming machine capacity
1500 pieces per hour
52 Kg dough formed into 10 g pieces (5 200
pieces). 3 ½ hours for forming.
Baking Oven with 8 trays each
capable of holding 50
biscuits
Baking time = 15 minutes –i.e. 3 batches per hour
(1 200 biscuits per hour). Total 4.3 hours baking.
Cooling Rack having 24 shelves 8 trays per hour with one tray per shelf.
Temporary storage of biscuits for 3 hours before
packing.
Packing in film Manual filling. Heat sealer
capable of 100 packs per
hour.
20 biscuits per pack = 260 per day. Packing for
2.6 hours.
Packing in cartons By hand 20 packs per carton = 13 cartons per day.
TABLE 1
Use of a process chart to calculate the equipment needed to produce 52 kg of biscuits per
day
Sources of equipment
When importing equipment the main difficulties are finding information on the
available types of equipment, the willingness of overseas suppliers to meet small
orders for equipment, and the higher costs (freight and clearing charges, import
duties and the capital cost). Information on types of equipment, specifications
and costs is increasingly available on the Internet (see further readings), and
processors may be able to gain access to the Internet, or seek advice and assistance
from offices of development agencies, Chambers of Commerce, university food
science and technology departments, manufacturers’ associations, or at embassies
of exporting countries. When ordering equipment, it is necessary to:
ÿ specify exactly what is required (many manufacturers have a range of similar
products);
Unit 3 – Managing equipment in small-scale agro-industries 47
ÿ describe the throughput required in kg or litres per hour and the type of food
to be processed;
ÿ give other information such as model number of machine, single or three-
phase power, number and types of spares required.
Decisions regarding the costs and benefits of planned maintenance* depend on
the speed at which repairs can be done, the value of the spares that have to be
held in stock and the value of lost production caused by stoppages. Processors
should monitor the equipment, and as their experience of the rate of failure
accumulates, they should service the machine before a replacement part is needed.
Arrangements can be made with a local mechanic to repair equipment as a priority,
if the processor pays an annual service fee or guarantees that they will handle all
such work.
A maintenance schedule shows how often a machine should be serviced, gives
details of what should be done during the service, and how the machine should
be dismantled and re-assembled. Management of maintenance therefore involves
identifying the priority equipment and preparing a maintenance budget in order
to implement the maintenance schedule.
Staff should be trained to routinely check machinery during operation, and
to undertake the maintenance schedule. The results should be written down
so that the cost can be evaluated and to check whether the schedule prevents
breakdowns.
Equipment maintenance
Example of planned maintenance* in a flourmill
W
E
E
K
L
Y
Mechanical
¸ check and grease bearings, replace if faulty;
¸ check pulley wheels for cracks or chips and replace if necessary to avoid damaging belts;
¸ check bolts and nuts for tightness;
¸ check the oil level in diesel engines and top up with the correct oil if required;
¸ remove flour dust from equipment each day. A build-up of dust causes rust to develop and
on electrical equipment it causes moving parts to jam.
Electrical
¸ clean flour dust off motors and other electrical equipment;
¸ for machines not in use, switch off mains power. This is very important when power cuts
occur, because when power returns a machine that has been left on can injure an operator
or cause a fire.
Business management for small-scale agro-industries 48
Example of planned maintenance* in a flourmill (Continued)
M
O
N
T
H
L
Y
Housekeeping
¸ store tools and equipment in pre-determined places so they are easy to find and it will be
noticed if they go missing;
¸ always keep walkways clear of tools and equipment;
¸ clean diesel engine cooling fins every day to prevent dust settling and causing the engine
to overheat and eventually seize;
¸ store tools and equipment in pre-determined places so they are easy to find and it will be
noticed if they go missing;
¸ always keep walkways clear of tools and equipment;
¸ clean diesel engine cooling fins every day to prevent dust settling and causing the engine
to overheat and eventually seize;
¸ when re-fuelling diesel engines, pour the fuel through a filter to prevent rust deposits in
the fuel drum getting mixed with the fuel and damaging the engine;
¸ clean the machinery and floor;
¸ check hammers for wear and replace if necessary;
¸ check the shaft (especially if locally manufactured machines are not tested for strength or
alignment);
¸ check that locking nuts on the shaft are tight;
¸ check that fan bolts and nuts are tight. If they work loose, the fan becomes very
dangerous;
¸ check the bearing mountings as this area is prone to cracking;
¸ check the engine oil and oil filter on diesel engines and change them every 160 working
hours; change the fuel filter every 320 working hours.
¸ check the body casting and welds for cracks;
¸ tighten floor nuts and look for any cracks in the mill foundation;
¸ check the fan key and make sure that the fan is a slide fit on the shaft for easy removal. If
the blades are worn always replace with the correct thickness of steel, and then check for
balance;
¸ check that cables are secured and there is no obvious sign of insulation breakdown;
¸ check the acid level in batteries that are used to start diesel engines. Keep the terminals
clean.
MAINTENANCE RECORDS
Maintenance and repair records provide information on the performance of
equipment, and maintenance costs that are included in calculations of operating
costs (Table 2).
Date Work carried out Time spent Cost of labour Parts used Cost of parts
TABLE 2
Maintenance and repair records
Unit 3 – Managing equipment in small-scale agro-industries 49
Equipment gradually wears out when it is used, and depreciation is a method
to accumulate sufficient funds to buy a replacement at the end of its working
life. When a machine, a vehicle or office equipment is purchased, the processor
should estimate the number of years that it is expected to last before it requires
replacement (or its expected working life). The value of the equipment is then
divided by this time, and the depreciation figure is included in the annual company
accounts.
LINEAR OR STRAIGHT LINE METHOD OF DEPRECIATION
Linear or straight line method of depreciation are shown in Table 3.
REDUCING BALANCE METHOD
In this method, the depreciation in the early years of an asset’s life is higher than
in later years and the asset is written off using the same percentage each year. It
can be expressed as a formula:
Depreciation for equipment
Equipment Value
(US$)
Expected working life
(years)
Depreciation per year
(US$)
Delivery vehicle 15 000 10 1 500
Bowl chopper 8 000 15 533
Refrigerator 2 500 15 167
Stainless steel tables 500 25 20
Hand tools (knives,
sharpeners, etc.)
120 5 24
Sausage stuffer 1 500 15 100
Mixer 1 200 15 80
Office furniture and
equipment
400 25 16
Total 29 220 2 440
TABLE 3
Linear or straight line method of depreciation
A new delivery van is bought for US$21 000. It is estimated to have a life of 5
years with a residual value of US$2 000. Using the straight-line method, the annual
depreciation is:
US$21 000 - US$2 000 = US$19 000/5 = US$3 800 per annum. The balance sheet
value of the vehicle would be reduced by the same amount each year.
Business management for small-scale agro-industries 50
SUM OF DIGITS METHOD
This is a variation of the reducing balance method and also charges higher
depreciation in the first years of the asset’s life.
Depreciation ( percent) = (1 – n R/C) x 100
where:
n = life of the asset in years;
R = residual value of the asset;
C = cost of the asset
Example: Reducing balance depreciation
A machine is bought for US$8 000 and has a life of 4 years. A 40 percent charge
is made each year, so in the first year the depreciation is 40 percent of US$8 000
(US$3 200), which reduces its book value to US$4 800 (8 000–3 200). In the second
year the depreciation is 40 percent of the book value (US$4 800 x 40 percent) - i.e.
US$1 920 – and so on over 4 years.
Example: Sum of digits method
If a machine is bought for US$12 000 and has a US$1 000 residual value after
4 years.
Sum of digits: 4 years + 3 years + 2 years + 1 year = 10
Year 1: 4/10 x (12 000-1 000) = US$ 4 400 Cumulative charge = US$ 4 400
Year 2: 3/10 x (12 000-1 000) = US$ 3 300 = US$ 7 700
Year 3: 2/10 x (12 000-1 000) = US$ 2 200 = US$ 9 900
Year 4: 1/10 x (12 000-1 000) = US$ 1 100 = US$11 000
Unit 3 – Managing equipment in small-scale agro-industries 51
Conclusions on the case study
Having compared your prior knowledge with the subject content of the
unit, answer the following questions making optimum use of the new
knowledge you have acquired.
1. Explain the reasons why the company failed in its first attempt of making ice
cream.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. Do you believe that the farmer made a depreciation calculus before he
purchased the first equipment? Explain your answer using information from
the case and including your opinion.
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
3. What are the advantages and disadvantages of buying second hand equipment?
Mention at least three.
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
4. What do you think are the reasons why the farmer designed a programme of
planned maintenance for the equipment he bought?
……………………………………………………………………………………
…………...…………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
Business management for small-scale agro-industries 52
Group exercise
We return to the example of the Chiang Mai Agribusiness in Module No 3. The
enterprise need to purchase new computerised equipment for the chilling process of
broccoli. The equipment is bought for US$1 000 000.00. It is estimated to have a life
of 10 years with a residual value of US$50 000.00. Calculate the annual depreciation
using the straight-line method.
Investigate the process stage and equipment required to produce chilled broccoli.
Use a process chart to calculate the size of the equipment needed to produce 1 tonne
of chilled broccoli per day.
Summary
ÿ Proper maintenance ensures that machinery operates correctly and safely and
prolongs its life, thus reducing capital and operating expenditure.
ÿ The reliance on machinery also means that the management of maintenance
and a spares inventory are important aspects of operating these types of
business.
ÿ The processor should plan the throughput that is required, research sources
of equipment, and select a supplier that can provide a suitable machine.
ÿ The first stage in deciding the size of equipment is to make an accurate
assessment of likely sales. For a new business this is done as part of a
feasibility study. An existing business can collect these data by adding daily
sales records to produce monthly totals.
ÿ The average amount of production per hour is known as the ‘product
throughput’, and is calculated to help finding the required size of
equipment.
ÿ To calculate the requirements for all equipment in a process, the process
should be written down as a chart, showing the weights of food at each stage
that are needed to achieve the planned production rate.
Unit 3 – Managing equipment in small-scale agro-industries 53
ÿ It is preferable to buy equipment from local suppliers or engineering
companies because they are close by to service or repair the equipment. The
purchasing price is often lower than imported equipment and spare parts can
be obtained faster and more easily.
ÿ Decisions regarding the costs and benefits of planned maintenance depend on
the speed at which repairs can be done, the value of the spares that have to be
held in stock and the value of lost production caused by stoppages.
ÿ Management of maintenance therefore involves identifying the priority
equipment and preparing a maintenance budget in order to implement the
maintenance schedule.
ÿ Equipment gradually wears out when it is used, and depreciation is a method
to accumulate sufficient funds to buy a replacement at the end of its working
life.
ÿ When a machine, a vehicle or office equipment is purchased, the processor
should estimate its expected working life. The value of the equipment is then
divided by this time in years, and the depreciation figure is included in the
annual company accounts.
ÿ There are three methods to calculate depreciation: linear or straight line
method, reducing balance method, and sum of digits method.
Business management for small-scale agro-industries 54
Answer the following questions on additional sheets of paper:
1. Mention some decisions that have to be taken in relation to choosing
equipment.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
2. Explain the importance of calculating the correct size of equipment, and
mention the stages in deciding it.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
3. What are some benefits of planned maintenance?
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
4. What is the use of calculating depreciation of equipments? Mention 3
methods.
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
……………………………………………………………………………………
If when attempting to answer these questions you have any doubts or
feel that you do not have sufficient information for the analysis, take
another look at the manual, consult the student’s handbook or contact the
facilitator.
Unit assessment
55
Managing exports in
small-scale agro-industries
LIST OF TOPICS
1. Setting the context
2. Case study: The Haarlem Honeybush Producer Group, South Africa
3. Case study analysis
4. Researching export markets
5. Export options
6. Finding partners and making legal agreements
7. Pricing, delivery terms, and documentation
8. Getting paid
9. Export insurance
10. Conclusions on the case study
11. Group exercise
12. Summary
13. Unit assessment
Exporting needs to be taken seriously and is not a means to ship out surplus
production. Top management commitment to export is essential for success.
UNIT FOUR
Before exporting some issues have to be analysed and some
questions have to be answered. Are you aware that research into
export markets is necessary to reduce the risk of failure? Do you
know that for those companies who feel that dealing with overseas
markets is well beyond their capability there are other export
options? If your enterprise planning to export to the EU, do you know
which regulations to follow? Do you know that in international trade
there are a number of de?ned and codi?ed terms and several
necessary trade documents?
Points to remember
Business management for small-scale agro-industries 56
$ Identify new opportunities to export your products by
yourself or with the help of others.
$ Gauge the economic implications of not getting paid on
time.
$ Learn terms and documentation required in international
trade.
$ Recognize other export options.
$ Appreciate the importance of export insurance.
Globalization offers businesses many opportunities. New opportunities arise as
trade barriers are reduced. This allows countries and companies to increasingly
specialize in areas of best opportunity and more efficiently allocate resources.
However there are numerous additional challenges and opportunities in exporting.
There are differences between countries with regard to currency, language and
culture, technologies, business practices, legislation, buyer needs and politics. No
business can afford to embark on a new venture unless it is reasonably assured
that adequate financial returns will result. Before contemplating to export the
following questions need to be answered:
ÿ What is the reason for entering export markets?
ÿ What products can be exported?
ÿ Who would be the overseas buyer?
ÿ How can the goods be best exported?
ÿ Is exporting profitable?
ÿ How can possible failure be avoided?
Whilst there are many good reasons for exporting, there are also perfectly
valid arguments against, such as fluctuations in the exchange rates, the costs of
modifications to the product for export; the need to assign financial, management
and other resources, or additional complexities that arise from entering into export
contracts. Any decision to export must be based on opportunities available.
Setting the context
By the time you complete this unit
you will be able to:
Unit 4 – Managing exports in small-scale agro-industries 57
INTRODUCTION
1
Honeybush (Cyclopia spp) is a perennial woody fynbos shrub, unique to South
Africa, whose leaves and stems are used to make an herbal, caffeine-free tea with
acclaimed medicinal properties which are gaining credibility from emerging
scientific research. Historically honeybush has been harvested in the wild.
However, as the honeybush market grows and formalizes, wild harvesting becomes
increasingly inefficient from an economical point of view and unsustainable
from an environmental point of view. A shift from wild harvesting to cultivated
production was the logical next step, especially if new international markets are
being opened. In 2001, amongst the first to engage in such honeybush cultivation
was the Haarlem farming communities.
Haarlem is a community of subsistence farmers located in the midst of large-
scale commercial fruit (apple) growers in the Langkloof valley near the Western
Cape –Eastern Cape border. The community consists of approximately 3 500
mostly colored people in 900 households with great diversity in social status.
Wild harvesting of honeybush has traditionally been another important source
of income for Haarlem’s households. In order to address the growing economical
and ecological concerns, the Haarlem community started to shift away from wild
harvest to cultivation, establishing the first honeybush plantation in 2001. One of
the reasons of taking this decision had to do with Haarlem’s interest to export the
product.
DISCUSSION
Although consumed by households in South Africa since at least the 1700s,
honeybush tea has been marketed and supply chains have emerged only since
the 1960s for the local market and since the 1990s for the export market. As
a consequence, the honeybush consumer market is growing fast. Demand for
honeybush is growing at more than 30 percent per year on average (from 30MT in
1997 to 220MT in 2004). Most of the plantation production is organic. Producers
opted for this kind of production mainly because it supports the healthy image of
Honeybush tea, especially in exports markets where the tea is marketed to health
conscious consumers.
Case study: The Haarlem Honeybush Producer Group,
South Africa
1
Adapted from: Neven, Goliath, Reardom, Hopkins. 2005. Case studies of organizations linking
to dynamic markets in South Africa: The Haarlem and Erikaville honeybush producers in South
Africa.http://www.pfid.msu.edu/SACaseHaarlemandEricaville.pdf. Some facts have been modified
for training purposes.
Business management for small-scale agro-industries 58
Honeybush processing consists of six steps: cutting, oxidation, drying, sieving,
sterilization and packaging. There are eight honeybush processors in South
Africa. The largest processors are Honeybush Natural Products (HNP), and
Cape Honeybush Teas (CHT). Together these two companies present roughly
66 percent of the processed honeybush market. The two companies use similar
processing technologies and have implemented HACCP systems; both are organic
certified. Whereas HNP is partially integrated backward into production only,
CHT is fully integrated along the supply chain from nursery to finished, shelf-
ready product.
While most of the tea produced is conventional fully fermented (“black”) tea,
HNP also produces organic honeybush (15 percent of output) as well as small
batches of green honeybush (