View source for Assessing the Economic Viability of Business Ideas for Productive Use


= Overview<br/> =

For advance assessment of the economic viability of any business idea, experience from [http://www.technosol.de/Consult/Consult.htm Integrated South Africa Business Advisory (INSABA)] has shown that seasoned business consultants may be capable of qualitatively evaluating the viability of specific business ideas based on their in-depth understanding of local economic structures. Proper appraisal of a business idea’s viability requires extensive data collection and in-depth technological study to assess the idea’s feasibility under given socioeconomic conditions. If similar business ideas have already been implemented elsewhere in the region or country, those real cases can and should be analysed and possibly transferred and adapted to the location under study.

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== Feasibility<br/> ==

INSABA developed a sophisticated [[:File:Insaba_tools_(excel_sheets).xls|set of tools]] for assessing the feasibility of small businesses powered by electricity generated from renewable sources (see example below). These tools guide future entrepreneurs through a simple equation calculating the '''return on investment (ROI)''', a sensitivity analysis measuring changes in key business parameters as a function of changes in ROI, a competitiveness analysis, and a cash flow analysis.

<u>The following data are required for these calculations:</u>
*investment capital and lifespan
*production price per unit
*variable cost per unit
*cost of energy per unit
*amortisation per unit
*direct costs per unit
*gross margin per unit
*fixed cost per unit

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Since most micro and small businesses in rural environments might not be able to calculate or even estimate all these data, the INSABA approach provided the facilitating services of an '''interdisciplinary advisory team (IAT)'''. These experienced business advisors were trained in the methodology in a five-day INSABA toolkit seminar. They, in turn, trained local potential producers and suppliers of goods and services in how to obtain the necessary data and use the various tools. The methodology tends to be rather costly when considering small investment opportunities valued at less than USD 5,000.

The table below presents an INSABA business pre-assessment tool for calculating the ROI for a particular economic activity undertaken by a micro, '''small or medium-size enterprise (MSME)'''. The example chosen here is a fruit drying business that utilises a solar dryer. The same computational tool can be applied for calculating ROI in electrical equipment.

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== Calculation of Return on Investment (ROI)<br/> ==

{| cellspacing="0" cellpadding="0" border="1" style="width: 100%; width:100.0%"
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| style="white-space: nowrap; width: 100%; height: 17px; background-color: rgb(204, 204, 204)" colspan="5" | 
'''Calculation of ROI for a solar dryer used for drying fruit'''

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<br/>

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'''Apple dryer'''

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'''Determination of parameters'''

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'''Definitions'''

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'''Investment capital'''

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9,957

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Estimated, then computed for ROI0,3

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Total cost of technology investment

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'''Investment lifespan'''

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5

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Estimated for solar dryer

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Service life of the technology - i.e. period before it must be replaced

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| style="width:21.22%; height:24px" | 
'''Production'''

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520

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2 kg of dried apple chips sold daily 5 days per week for 52 weeks/year = 520 kg per annum

| style="width:36.78%; height:24px" | 
Units produced per year

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'''Price/unit'''

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19.50

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Current market price

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Sales price per unit produced and sold

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'''Revenue'''

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10,140

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Euro

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Sales price multiplied by number of units sold

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| style="width:21.22%; height:83px" | 
'''Variable cost/unit'''

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8.00

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Costs for fresh apples: 10 x €0.55/kg = €5.5/kg (sales price of €0.55/kg is relevant as this is the opportunity cost of the farmer); costs for packaging: €0.50/kg; costs for preparation: 10 kg fresh apples can be prepared in 15 minutes at an hourly wage of €8.00: 2.00 €/kg

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Cost per unit produced e.g. material, processing packaging

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'''Cost of energy/unit'''

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no other additional cost

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Costs of power and fuel added to variable cost

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| style="width:21.22%; height:24px" | 
'''Total fixed costs'''

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1,000

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Cost for display, handling

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Annual indirect costs such as rent, telephones and salaries

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'''Amortisation/unit'''

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3.83

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1,991

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<br/>

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Amount needed per unit to cover investment in lifetime

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'''Direct costs/unit'''

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11.83

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6,151

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Variable costs plus amortisation plus cost of energ

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'''Gross margin/unit'''

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7.67

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Sales price per unit less the direct costs per unit

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'''Fixed costs/unit'''

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1.92

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<br/>

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Total fixed costs divided by the number of units produced

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| style="width:21.22%; height:14px" | 
'''Total costs'''

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13.75

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7,151

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Direct costs plus fixed costs

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| style="width:21.22%; height:16px" | 
'''Net margin'''

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5.75

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'''2,989'''

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Revenue less total costs

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'''ROI'''

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'''30%'''

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Return on investment = net margin divided by capital investment

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| style="width:21.22%; height:36px" | 
'''Payback period in years'''

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'''2.00'''

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Capital investment divided by cash flow until initial expenses are compensated by the net margin

|}

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= Further Information<br/> =

*[[:File:Insaba_tools_(excel_sheets).xls|INSABA tool (excel sheet)]]<br/>
*[[:File:Insaba_business_planning_manual.pdf|Insaba business planning manual.pdf]]<br/>
*[[Portal:Productive Use|Productive Use Portal on energypedia]]
*[[Productive Use of Electricity|Productive Use of Electricity]]
*[http://www.insaba.org/ insaba.org]
*[[Portal:Financing and Funding|Financing and funding portal on energypedia]]<br/>

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= References<br/> =

<span lang="EN-GB">Good practice from the INSABA programme in Sub-Saharan Africa</span> Introduction

<references />

[[Category:Solar]]
[[Category:Botswana]]
[[Category:Zambia]]
[[Category:Namibia]]
[[Category:South_Africa]]
[[Category:Best_Practices]]
[[Category:Productive_Use]]
[[Category:Drying]]