Preliminary appraisal and planning for survival of a private sector firm

As Kenya gears towards achieving Vision 2030, aiming to grow into an economy with a large mid-income population, greater employment, equal opportunities, better infrastructure and security, this expansion is only possible if barriers affecting expansion of the private sector are minimised.

Players in this segment have vital roles in creation of jobs and human capital development by promoting growth of trade, maintenance of infrastructure and services, expansion of businesses that address the inadequacies in the economy and much more.

The maiden MasterCard Middle East and Africa SME Confidence Index found through their survey that up to 61 per cent of SMEs are witnessing recovery and are confident of growth as the year comes to a close.

As per the research carried out in June 2021, following the dulling effects of Covid-19 pandemic on the Kenyan economy, confidence of small and medium enterprises is rising mainly attributed to access to funding, digitised business operations and better data insights.

Small and medium size businesses do not have extensive resources that major multi-million-dollar outfits have access to. While small, medium and large businesses have similar risks, SMEs are comparatively vulnerable and should be cautious with financial decision-making, employing calculated and careful mitigation strategies.

Now that the economy is gradually waking up from the effects of the pandemic, some successful private sector firms are planning expansion regionally while many budding entrepreneurs are testing their hand at business.

What steps should the management of organisations take when planning to expand into new markets/regions or entrepreneurs take, in order to set up an organisation locally?

Private sector project needs to be appraised mainly for profitability. Many new businesses fail within a short duration of initiation as management does not pay attention to some critical and apparent observations while lacking proper planning and strategy.

Preliminary screening

Once a project opportunity is conceived, and it is considered acceptable after preliminary screening, a detailed feasibility study must be undertaken covering marketing, technical, financial, and economic aspects of the project.

The study in the form of a detailed project report will contain fairly specific estimates of project cost, means of financing, schedules of implementation and benefits in terms of cash flows, debt servicing, capabilities of the project, the impact of the project and social profitability.

The ultimate decision whether to go for the project or not and how to finance it, is undertaken after the study which discloses whether the project is technically feasible, economically viable, and financially sound.

Appraisal of the business will help evaluate the costs and benefits arising from the project from a financial perspective to ascertain demand and supply of the product desired to be manufactured, and to find out whether it will be feasible to achieve the goal with constraints of limited resources.

Therefore the project requires the following appraisal before implementation; Market, technical, economic and financial evaluations. The financial appraisal would be by determining and testing the streams of cash flows (inflow and outflow) associated with the project to decide the viability of the project.

Before undertaking any project it is very important to know the market share and size of the product. If the market size is very large even a small share can be profitable but if the market is squeezed that even dominant position would not be an attractive proposition.

The analysis must be done to find out certain facts about demand for the product before undertaking it. These facts can be about; elasticity of the product, the threat of new competitors and consumers’ requirements. Other pertinent questions management can ask are; what has been the past demand for similar products? What is the expectation of prospective demand?

After considering available information, a forecast for the future demand is made using appropriate forecasting techniques. The next step would be to check on the technicality of whether raw materials would be available or not?

Whether enough power, fuel and other utilities would be available and how effectively? Legal and taxation aspects also have to be considered when setting up cross border. Is the organisation going to be using state-of-the-art technology or not? If the business is not using the latest technology, would it become obsolete and what is the impact on trade?

Emails

Technology helps small businesses improve their communication processes. Emails, texting, websites, and apps, for example, facilitate improved communication with consumers. Using several types of information technology communication methods enables companies to saturate the economic market with their message. During the pandemic situation, we have seen an increased demand for technical skills.

Generally, a project shall be accepted if social benefits outweigh social costs or the enterprise undertakes to make out the loss that has been caused to the society. It can do so by taking measures to restore the ecological balance by making repairs to the damage caused to the environment. It is worth considering whether or not the project will provide employment?

Will it tend to distribute the income uniformly in the society? Will the project increase savings and investments in the economy? Whenever a project is screened it will be taken up only if it is financially sound. The inflow of cash streams should be more than the outflows. It should be profitable for the entrepreneur and some value addition should be done.

This is a very careful study and a lot of future forecasts are required to be made keeping in mind at all times that the management should be adaptable to changing environments in order to ensure business survival and profitability for the owners/shareholders.

Ritesh Barot is a business and financial analyst, humanitarian, conservationist, occasional artist, recipient of OGW honor. [email protected]