MINISTRY OF LIVESTOCK DEVELOPMENT

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1 MINISTRY OF LIVESTOCK DEVELOPMENT SMALLHOLDER DAIRY COMMERCIALIZATION PROGRAMME (SDCP) DAIRY ENTERPRISE DEVELOPMENT TRAINING MANUAL

2 PREFACE Farming as a business is a relatively new concept for small-scale farmers who have traditionally farmed as a way of life to provide for their subsistence needs. The current approach involves a deliberate choice of farm enterprises with an aim of maximizing on the benefits that they can gain from their activities. It requires a change in the way smallholder farming is perceived. This is because farming is a profitable venture which provides gainful employment and a source of livelihood to many people. Like farmers, extension officers have to deal with this relatively new concept. Most livestock extension officers have a background in Animal Science or other Agriculture-related courses. This limits their knowledge and skills in business related subjects. To address this Smallholder Dairy Commercialization Programme (SDCP) trained some of the implementing officers in Farming as a business at the Agricultural Information Resource Centre (AIRC). The five-day course was broad in the areas covered. However it was not possible to exhaustively cover all the necessary content although the training provided a good foundation. These guidelines are intended to assist programme implementers involved in training of farmers in farming as a business. They outline the objectives for the respective sessions and propose the approach that can be adopted. It must be emphasized that adult learning principles must be followed during the sessions. Similarly action points should be indicated for all training sessions to facilitate follow up and effectiveness of the training. The content of the training will depend on the level of the group in the Market Oriented Dairy Enterprise (MODE) process. The training needs of the group should also be considered when determining the issues to be covered in the session. This manual has been compiled by the Dairy Enterprise Development Officer, SDCP. It has incorporated the contribution of District Dairy Officers and Divisional Livestock Extension Officers during the professional group meeting in held in May The contribution of Bernard Kimoro, the Dairy Production Officer in providing livestock records and Jeff Otieno, the Assistant Monitoring and Evaluation Officer in providing images and illustrations is acknowledged. Lorna Mbatia Dairy Enterprise Development Officer Smallholder Dairy Commercialization Programme June 2010

3 TABLE OF CONTENTS PREFACE... ii TABLE OF CONTENTS... iii INTRODUCTION... 1 Lesson 1: INTRODUCTION TO FARMING AS A BUSINESS... 3 Lesson 2: MY FARM BUSINESS... 6 Gross margin analysis... 6 Break even analysis... 9 FARM LEVEL DAIRY ENTERPRISE PLAN Lesson 3: RECORD KEEPING Lesson 4: FINANCIAL MANAGEMENT MONEY SAVING INVESTMENT CREDIT PROPOSAL WRITING Lesson 5: BUSINESS PLANNING Lesson 6: MARKETING Lesson 7: NEGOTIATION SKILLS Lesson 8: CONTRACTS Lesson 9: CONFLICT RESOLUTION iii

4 INTRODUCTION The list below provides an outline of the content on business related training to be covered by target beneficiaries both farmers and traders. Training areas for farmers Introduction to farming as a business Enterprise analysis and feasibility studies Optimizing returns from farming Farm planning Farm records Farm management Financial management: o sources of finance (merry-go-round, groups, njaa marufuku, NGOs, micro-finance institutions, other financial institutions) o cash-flow management o managing default Negotiation skills Development of supply contracts and agreements The law and the dairy farmer Auditing for groups Corporate governance issues in groups Proposal writing Training for milk traders/shop/bar operators Record keeping Optimizing returns Business planning Business management Financial management Business ethics Negotiation skills Contract development and writing of agreements Legal issues in milk trade Corporate governance in groups, marketing associations/cooperative societies 1

5 The training content to be covered will vary according to the stage of the group in the MODE process. The suggested content for the respective MODE steps is as follows: Training aspects for various levels of the MODE process Step I Introduction to farming as a business o Characteristics of a business o Important aspects in business: marketing, finance, ethics Basic record keeping for dairy farmers Basic enterprise analysis (gross margin, profit analysis, opportunity cost) Step II Optimizing returns from farming Farm/business planning Basic management o Farm management o Basic accounts Basic financial management o sources of finance (merry-go-round, groups, njaa marufuku, NGOs, micro-finance institutions, other financial institutions) o cash-flow management o managing loans o managing default Basic negotiation skills The law and the commercial dairy farmer Laws governing trade in milk Basics in the law of contract as it touches on the dairy farmer Step III Preparation of investment plans and bankable proposals Advanced negotiation skills Contracts and agreements Profit maximization Revenue maximization e.g. through value addition Loss reduction identification of causes, areas where highest costs are incurred, identifying interventions to address the same 2

6 Lesson 1: INTRODUCTION TO FARMING AS A BUSINESS Objectives The lesson is intended to introduce the concept of farming as a business By the end of the lesson participants should be able to appreciate that farming is similar to other businesses in their locality and can be run as a profitable venture Approach Training sessions should be interactive with limited use of lecture method. The facilitator will pose questions to the participants and guide their discussions. Local examples should be used to illustrate the lessons as much as possible. Content 1. What is a business? (Ask participants the question) A business is defined as an organization that buys or sells products or services for money It can also be defined as an activity in which a person earns a profit from providing a service or from supplying goods 2. What are the key features of a business? Buying Selling Product or service Money as a means of exchange Profit as the motive for doing business Profit is the amount left after subtracting the cost of giving a service or supplying goods from the amount paid for the service or goods 3. What are the similarities between farming and other businesses? (Let the participants give their views) Investment in inputs investment in land (including leasing), seeds/planting material, labour, feeds, livestock 3

7 Operational activities feeding, milking, cleaning, dipping/spraying, deworming Marketing activities transporting milk to selling point, value addition, selling Seasonality rain-fed farming follows rain patterns, tailoring follows patterns e.g. school uniform at beginning of the year or school term, Christmas, etc. Objectives: earning income and ultimately meeting the needs of the business operator and his/her family 4. Why is a business important? Employment creation Generation of income Meeting the needs of the community through providing goods and services Economic development and promoting the welfare of the community Curbing rural-urban migration (List as many as the participants can identify in the context of their area) 5. Importance of farming as a business Small-scale farmers have largely been subsistence farmers focusing on producing enough for their families consumption. Farming as a business entails carrying out farming with the aim of making profit It involves planning and analyzing the risks and returns of a proposed activity so that the farmer can select the enterprises which will enable him meet the desired objectives Farming as a business enables more efficient use of resources as they are applied to activities which will yield good returns 6. Implications of changing from farming as a way of life to farming as a business 4

8 Analysis of enterprises to identify those that are feasible in the area and the profitability of each Deliberate choice of enterprises that will give the best returns Having the market in mind when making decisions about what and when to produce Investment to maximize the returns: e.g. in good quality animals, A.I., better feeding, good husbandry practices, value addition, etc Record keeping as a regular business practice Informed decision making the farmer will need to seek information on the opportunities available and how best to carry out his business so that he can get the greatest return. He will also use information from his records for decision making 7. Action points: Are our farms operating as businesses? Discuss the reasons why you think the farms are operating like businesses and why they are not operating as businesses. (A debate session with proponents and opponents of the motion can be used to capture the opinions of participants) YES NO If the farms are not running as successful businesses, what are we going to do to turn them into competitive enterprises? 5

9 Lesson 2: MY FARM BUSINESS Objective The objective of the lesson is to assist individual farmers conceptualize their farming activities as business activities whose purpose is to maximize their earnings. Approach During the lesson participants will assess their current performance and identify some measures to be taken to improve it. Content The lesson will begin with a recap of Lesson 1. This will be followed by a simple income and expenditure analysis with each farmer writing down the sales volumes, revenue, costs and profit/loss. Gross margin analysis This involves summarizing the income earned from an enterprise and the expenses incurred directly on the enterprise within a given period e.g. one year and calculating the difference of income above the expenses. The difference between the value of sales and the total variable costs is the gross margin of the enterprise. Example: Sotet farm is on a 3 acre plot and has 2 cows which are in milk and a calf. One of the cows produces an average of 20 litres and the other 18 litres per day. Sotet Farm Income and expenditure of dairy enterprise for the year 2007 Kshs. Kshs. Income Sale of milk to New KCC (30 21/-*300 days) 189,000 Sale of yoghurt (5 days) 72,000 Sale of manure (24 600/-) 14,400 Milk consumed at home (3 lts*365 days*21/-)* 22,995 Gross Income 298,395 6

10 Expenditure Labour (1 farm hand paid 2,500 monthly) 30,000 Dairy meal (6Kg*2cows*300days/90kg*1,800/-) 72,000 Minerals (100g x 365 x2)/1000g*100/- 7,300 Hay (3 bales*120days*200/-) 72,000 AI services (4 *900/-) 3,600 Veterinary costs 12,000 Calf milk intake ( Early weaner pellets Young stock pencils Concentrates Minerals (for calf) Dipping charges (15/- per head per week) 2,340 Milking salve 1,200 Deworming 1,000 Transport for milk to New KCC (3/- per litre) 36,000 Total expenditure 230,140 Gross Profit for the year 68,255 Although the gross profit is Kshs.68,255 the farmers gets Kshs.45,260 from sale of milk. The 22,995 is the value of milk consumed at home and which the farmer would otherwise have bought. Only variable costs have been included in the above example. There are other costs that are related to the enterprise indirectly such as stationery for keeping records, management costs and depreciation. These are deducted so that the net profit can be determined. It is important that the level of profit is high enough to meet the expenses of the enterprise, provide for replacement of stock and equipment and leave surplus for the business owner. Exercise: 7

11 The facilitator will guide participants in a simple illustration that reflects common practices and level of production in the area so that each farmer can reflect on the performance of their farms. Are the farms operating at a profit or at a loss? What can we do to address this? In order to increase profit we can i. Increase revenue without raising costs at the same magnitude ii. Maintain the same level of revenue while reducing the costs iii. Increase revenue and reduce cost at the same time List measures that can be taken to increase revenue (reference should be made to the gross margin analysis and examples that are relevant to the context of participants used) i. Increasing the volume of milk sold increasing milk production, reducing milk losses ii. Selling where we can obtain higher prices. The farmers can identify alternative markets that can pay higher prices without them incurring transport costs that are equal or in excess of additional income to be earned at the alternative market iii. Preparing and selling high value products e.g. mala and yoghurt iv. Selling by-products e.g. in the above example the farmer is selling manure. Farmers can produce surplus hay which they can sell during the dry season when animal feed is in high demand and fetching high prices. Exercise 1. List measures to reduce cost. 2. Identify the respective costs and what can be done to reduce them without reducing the level of milk production. In the above example the farmer can reduce costs by formulating feeds on the farm to reduce the expenditure on dairy meal. He can also conserve feeds to avoid buying hay in the dry season. If he does not have sufficient land to plant fodder he could buy hay when 8

12 there is plenty of feed because the prices are significantly lower and store it for the dry season. Timely heat detection can be used to reduce the number of repeats in AI service. Similarly improved husbandry practices can lower the incidence of management diseases and thus reduce the cost of veterinary services. Transport costs could be reduced by bulking the milk with other farmers and using economies of scale as a means of reducing the transport cost per litre of milk. Break even analysis Income Expenses A break-even point indicates the output and price at which there is no profit or loss because the costs are equal to the income. It is important because it shows the minimum output that should be sold for the farm not to operate at a loss. It therefore gives information to be used in production and pricing decisions. In the above example if the price of milk is 21/- per litre and the fixed costs are 24,000/- the total costs will be Kshs.254,140. The least number of litres of milk the farmer should sell is 12,102 (254,140 21) translating to 34 litres per day (12, ) if he sells milk all the days of the year. This amount is what will meet the costs without leaving any surplus. If he requires that the enterprise gives him a surplus he will have to raise the income without raising costs by the same margin. This can be improved by increasing milk production and sales. If there is a market for yoghurt more of it can be produced and sold because it gives higher returns than fresh milk. Action points: 9

13 1. What are the specific measures each farmer will take on his/her farm as a follow up of the lesson? Let each participant list the actions to take. These should be used to develop the farm specific dairy enterprise plan 2. Group level action points Let participants discuss and identify the activities they shall undertake together as a group to improve their earnings e.g. areas of common interest for training that will help them increase their earnings, fodder bulking to help them access quality planting material that will help them increase milk yields, demonstrations on how to plant fodder, training on processing of milk products, collective marketing and any other activity they may carry out as a group to increase their incomes. The next session should be used to concretize the way forward for the farmers by facilitating the development of farm specific plans. A draft outline is given next: 10

14 FARM LEVEL DAIRY ENTERPRISE PLAN BACKGROUND INFORMATION Name of farmer: Date:.. District DCA Location Dairy group Farm size Gender: M/F. Description of general features of the farm: Structures Farmer s house Housing for cattle Fencing Paddocks Water harvesting and storage Slope Soils Water availability Farm sketch (current) Existing enterprises Enterprise Unit No. of units Gross margin 1 Dairy Cow 2 3 Opportunities identified for improvement of dairy enterprise (refer to lesson 2) Measures to increase income

15 Measures to reduce costs and cut losses Proposed activities Opportunity Action Resources required Cost Source of the resources Time frame Remarks Proposed farm sketch Expected/target performance following interventions Enterprise Unit No. of units Gross margin Remarks 1 Dairy Cow ANNEXES 1. Gross margin analysis of enterprises on the farm 2. Cash-flow projections 3. Income and expenditure statement 4. Balance sheet 12

16 Lesson 3: RECORD KEEPING Lesson objectives The objectives of this lesson are to: 1. Explain the importance of record keeping to the business 2. Help participants appreciate and adopt the practice 3. Equip participants with skills to keep basic records that provide information for decision making and facilitate access to financial and other support services. By the end of the lesson participants should 1. Appreciate the importance of keeping records 2. Be able to keep basic records on their farms/businesses Lesson Recording keeping is an important practice for any business. 1. What are records? They are written information about transactions e.g. what has been done, bought, sold, etc 2. Why are records important? They help us to stay in control of resources They help us in decision making They help in monitoring performance They communicate about the farm business to other parties. When we are dealing with other parties they may require information and evidence from records kept e.g. when seeking business development assistance or when we approach financial institutions for a loan. Our minds cannot store all the important information which we may need to refer to later. We may also not remember all the important information instantly as and when required even if we have a good memory. It is therefore necessary to document information for reference by the farmer and other parties who work with him. 3. What records should the farmer keep? 13

17 a. Farm plan showing - Homestead - Partitions for various enterprises - Unused land - Pathways -Other developments b. Milk production records Date Morning Evening Total Calf consumption Home consumption Sales Price Value c. Inputs such as feeds and drugs, showing the quantity, value, usage, date of purchased Input purchase record Date Input description Quantity Value d. Breeding and calving records Cow identification: Date of last calving: Lactation no: Dates on heat Service dates AI/Bull Breed Pregnancy test: Date and result Date to dry Date to calve 14

18 e. Animal health records Date Illness/events Treatment Cost Remarks Deworming record TREATMENT (DEWORMER) DATE DATE DATE Vaccination record Date vaccinated Date due Date vaccinated Date due Vaccine type f. Income and expenditure records Date Description Receipts (Kshs) (Cash In) Payments (Kshs) (Cash out) Balance g. Activity record Activity Start date Completion date Resources used Cost Remarks There are other records which a farmer can keep to aid him in obtaining information about his business, making decisions, assessing performance and obtaining external assistance. These records provide information which is used to generate financial statements such as income and expenditure account and balance sheet. 15

19 Lesson 4: FINANCIAL MANAGEMENT The objective of this lesson is to introduce participants to basic financial management By the end of the lesson participants should 1. Appreciate the importance of saving 2. Understand what credit is 3. Know where they can go for financial services 4. Understand what investing is and identify some possible investments in their area The lesson may be carried out in two sessions two hour sessions. The first session will cover the concepts of money, saving and investment. The second session can be focused on credit and related issues. MONEY 1. What is money? Let the participants discuss Money is a medium of exchange. Before money was used as the medium of exchange there was barter trade where parties exchanged the commodities they needed. Money is preferred as a medium of exchange for several reasons: It is widely acceptable It can be held in various denominations making it divisible It is portable It facilitates trade in different areas and commodities 2. Why is money important? Discuss 3. How do we get money? Sale of farm produce, sale of assets, trading, employment, dividends, interest income, borrowing, etc (Discuss how group members can mobilize resources as individuals and as a group) Njaa Marufuku Kenya a programme under the Ministry of Agriculture, CDF, Youth Enterprise Fund and Women Enterprise Fund are some of the government programmes that can be approached for funds by the groups. The Youth Enterprise Fund and Women 16

20 Enterprise Fund are loans at subsidized interest rates. Njaa Marufuku Kenya gives grants to approved agricultural projects that contribute to food security in the country. 4. How do we use money? Consumption e.g. food, clothes, shelter, paying for utilities such as telephone credit and other necessities of life Investment e.g. plots of land, in shares, dairy cows, business, rental houses Saving SAVING Purpose of saving 1. Daily financial management: to manage and deal with day-to day expenses and occurrences as well as emergencies 2. Consumption smoothing: dealing with seasonality by holding over income from one period to another 3. Accumulation: building up savings to meet large future expenses such as purchase of land, equipment, payment of school fees, etc 4. Insurance: building up savings to deal with irregular events such as illness, burials, marriage, ceremonies, How do we save? Discuss how group members can save individually and as a group. Savings may be in the form of money or in kind e.g. livestock, foodstuff in granary, etc What are the advantages and disadvantages of the modes of saving discussed? How and where should we save based on the advantages and disadvantages we have identified? How frequently should we save? Discuss How can we increase our savings? Some of the features that clients look for when identifying a savings facility are: Safety Ease of withdrawal when they need to access their money Proximity 17

21 High interest rates/returns on their savings Informality of procedures and simplicity to cater for the illiterate/semi-literate members INVESTMENT 1. What is investment? It is putting aside money in something that will increase the value of assets or increase the ability to earn additional income in future 2. Why do we invest? Discuss To increase income so that one is able to meet future needs and aspirations Wealth and employment creation Security for old age and to create a reserve for use in times of emergencies Leaving inheritance for our children 3. How can we invest? Discuss There is need to consider the feasibility of an investment. Do not put your hard earned money in a venture which will not generate sufficient returns just because your neighbour has invested in the same. Get-rich-quick schemes such as the pyramid schemes can make you lose money. You should therefore invest in a business which you understand and with people who you can trust. Consider whether you want the investment to generate income for you in the short term, medium term or long term so that you can invest in what suits your requirements. Exercise 1. Discuss some of the investment opportunities and classify them according to whether they are short, medium or long term 2. There is need to consider the risk involved and diversify the enterprises so that you may spread the risk. Discuss the risks involved in the enterprises listed above. What other enterprises can be combined or how can the risks be managed? E.g. a farmer investing in dairy farming can reduce risk of failure due to drought and inadequate feed by harvesting water and conserving feeds. Action points 18

22 1. What are some of the opportunities available for us to invest in as a group? E.g. milk marketing to address the problem of market access and to help us generate additional income. (This session can be followed by training in business planning or proposal writing) 2. Ask the group members to consider some of the investments they can make as individuals. CREDIT This is one of the sources of money for the business. It is money given by one party to another for a time with the understanding that the party which has received it will pay it back at a later date according to the terms agreed on. Why do people take loans? Discuss Investment e.g. in business, plots of land, livestock, etc Consumption purposes e.g. to buy food or household items, pay school fees, etc Attending to emergencies e.g. illness Where do people borrow from? Discuss Sources of loan funds (Identify service providers in your area to give relevant examples) 1. Banks e.g. Cooperative bank (maziwa loan), Equity bank (mifugo loan) 2. Savings and credit cooperative societies (SACCO) 3. Groups merry go round or rotating savings and credit associations (ROSCAS), accumulating savings and credit associations (ASCAS) 4. Micro Finance Institutions (MFI) e.g. Faulu Kenya, Kenya Women Finance Trust (KWFT) 5. Agricultural Finance Corporation (AFC) 6. Youth Enterprise Fund 7. Women Enterprise Fund 8. Traders 19

23 What are the advantages and disadvantages of borrowing from the different sources listed? Discuss Features of a loan Principal: This is the amount of money borrowed Interest: refers to the cost of the loan which is calculated as a percentage of the principal. Interest may be charged on a fixed amount or on a reducing balance. This will affect the total amount paid on the loan (illustrate) Grace period: This is the duration between the time a loan is disbursed and the time that repayment commences Repayment period: refers to the time given for the loan and interest to be paid in full Instalment: Payments are divided into amounts to be paid periodically. The amounts comprise a portion of the principal and interest Security/collateral: Usually the lender requires an asset that can be sold in event of the borrower s failure to repay the loan. The type and value of the security depends on the loan amount and the policy of the lender. Land title deeds, motor vehicle logbooks, equipment, warehouse receipts and group guarantee are some of the forms of security which are commonly used Preliminary expenses e.g. application fees, agreement fees When one takes a loan he should realize that it is not free money. It is money that comes at a cost and which must be repaid at a future date. Failure to repay may have legally enforceable consequences resulting in loss to the borrower. Borrowing money as a group There are different financial products available for different purposes such as development, school fees, purchase of shares, purchase of household items, purchase of dairy cows, construction of farm structures and purchase of farm equipment. Loans are available to individuals and to groups. A group may have a proposed investment project but may lack sufficient funds to implement it. They may opt to finance the project using a loan. Members are responsible for repaying the loan. 20

24 Group guarantee is one of the ways of securing money advanced to group members. Under this method members commit themselves to repay funds owed to the lender when the borrower defaults. The method is increasingly becoming common as some of the borrowers lack title deeds, motor vehicle log books or other forms of security. Managing default When a borrower fails to pay money owed on the specified date as agreed with the lender he is said to have defaulted. The reasons for failure to repay on time are diverse. Discuss some of the reasons. What are the consequences of defaulting? Discuss 1. The lender may sell the asset pledged as security resulting in loss to the borrower 2. The borrower may be sued 3. Where members of the group have committed themselves as guarantors they will put pressure on the defaulter to force him to repay. In the event that he still does not repay they may take his possessions so that they are sold and money obtained to cover the outstanding amount. 4. The defaulter may lose credibility depending on the reasons for default. The guarantors may not want to guarantee him in future while to the lender the credit rating will be negative making it difficult to access credit in future What should we do so that we do not default? When we borrow we should remember that the money belongs to someone else. We should therefore be good stewards and use it for productive purposes and repay it as agreed with the lender. If it becomes difficult to raise the instalments as agreed the borrower can consider the options available to him including negotiating with the lender to accept lower instalments or extending the loan period. With the many possible sources of credit a borrower may find himself over-burdened with loans. While professional ethics may hinder formal institutions from lending to clients with too many loans it is still possible for borrowers to access multiple loans. The borrower should therefore protect himself by making sure that he is not over-exposed. When taking a loan 1. Make sure that you borrow an amount that you are able to repay 21

25 2. Consider the cost of the loan. The investment being funded by borrowed funds should yield a higher return than the amount you pay for borrowing in the form of interest, application fees, processing fees and other costs associated with using borrowed funds 3. Consider the expected cash-flows and whether they will meet the requirements for payment of repayment instalments and leave a surplus that justifies taking the loan 4. Know the terms and conditions of the loan. Are you ready to abide by them? The 5 C s of credit When a lender is analyzing a loan application there are keys issues considered when assessing the creditworthiness of the intending borrower. These are summarized in 5Cs namely: 1. Capacity sufficient cash-flow to service the repayment obligations as they fall due 2. Collateral assets used as security for the debt 3. Character integrity, indication of trustworthiness to repay the loan 4. Capital networth of the borrower and the money that the borrower has put in personally in the business 5. Conditions of the borrower and the overall economy PROPOSAL WRITING Another way of mobilizing resources is through soliciting for funds from donors or lenders. A proposal is a tool used for this purpose. In this lesson we shall learn the basics of writing a proposal. Lesson objectives 1. To explain the concept of proposal writing 2. To equip participants with skills to write proposals that will help them access assistance whether financial or non-financial in their development initiatives By the end of the session participants should be able to 1. Describe what a project proposal is 2. Prepare a simple project proposal to address problems in their area or initiate development interventions 22

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