Toolkit on how to Start and Improve your Business - Information Seeking

Financial Analysis

 

 

 

   

 

In manufacturing, you need capital for tools and equipment, raw materials stock, goods-in-process, labourers' wage and money to bring the finished goods to the market. However, having money and making profit are two different things. You as a business operator should know how to use money to make more money. You also need to know how you are efficient enough in managing it. Be sure that money is a real problem for you to start and run your business and not only for the sake of having it. There are several cases where lack of money is not a problem by itself, but the result of many other factors behind it. The following diagram is presented to show you the possible causes for lack of finance.

 

 

                    Financial needs of business start-ups

Business enterprises, mainly manufacturing enterprises, need finance for:

  • Renting premises/workshops;

  • Purchasing/leasing machinery, tools and equipment;

  • Purchasing furniture and fixtures;

  • Purchasing supplies and covering other pre-operating costs;

  • Covering the first six months of the business exercise.

 

              Loan requirements

With regards to finance, you should give attention to questions such as:

  • What is my total capital requirement?

  • Do I need a loan? What will be my equity contribution? How much is my additional loan requirement?

  • Where do I get a loan fund from? What are the loan conditions?

  • What type of security (collateral) am I required to present to lending institutions such as to micro finance institutions and other conventional banks?

  • What are the loan terms and conditions, grace period, interest rate, repayment schedule, etc.?

  • What is the project feasibility? Is my business feasible enough to generate profit and pay loans back within the specified loan term?

  • What is the break-even point?

 

Total capital refers to initial (investment) capital and working (operating) capital that is required to cover 'take-off' costs of the business. Capital investment is when you buy an asset for the business that has a high value and lasts for a longer period of time. Some businesses can be started with low level of investment while others must invest a lot. It is wise to keep the required investment to a minimum. Working capital is the money you need to pay for purchase of raw materials, production, promotions, wages, rent and salaries before you start selling your products. 

 

Research on financing conditions

Inform yourself on the loan conditions of Ethiopian financial institutions, notably commercial banks and micro finance institutions and:

  • Refer to the publication on “Loan Conditions of Commercial Banks and Micro Finance Institutions in Ethiopia”, published by EBDSN;

  • Contact appropriate financial institutions until your loan request is addressed;

  • Identify and contact appropriate government and donor programs that assist businesses;

  • Be sure that you have a financial control system that helps you keep accounts in acceptable standards. External auditors should also audit your financial statements. Audited financial statements increase the credibility of your business. Financial institutions, in particular, are interested in looking at your financial statements before they issue loans for your business;

  • In case you do not have the necessary skills to keep your accounts in good order, you should either attend short-term training in accounting or try to get assistance from others.
     

Access to finance

In Ethiopia currently there are three commercial and development banks: Construction and Business Bank (CBB), Commercial Bank of Ethiopia (CBE) and Development Bank of Ethiopia (DBE). Each bank has its own loan conditions and target clients. Lending policies such as interest rates, loan terms or repayment time and loan size may vary from one bank to the other. From the private sector, there are about six banks working more or less with similar procedures.

However, it has been considered by many that these banks are not fully responding to the needs of the micro and small enterprise operators, particularly for new business start-ups, as they are not their ultimate target clients.

Absence of working capital is one of the major problems for new business start-ups. The government of Ethiopia, through the National Bank of Ethiopia, created a conducive policy environment for the establishment of Micro Finance Institutions (MFIs) that serve rural farmers and urban entrepreneurs. Currently there are 23 MFIs operating in most parts of the country. Those MFIs established by regional governments have mainly targeted rural parts of the country, where the majority of the people reside.

 

Institutions involved

  • Commercial banks and micro finance institutions;

  • Governmental institutions with business support programs;

  • Donor programs involved in private sector development;

  • Accounting consultants;

  • Accounting training centres.

 

Market   I   Supply  I   Infrastructure  I   Business management  I  Finance

Business registration  I  Taxes/Customs  I  Tenders  I   Summary

 

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