Micro Credit Systems for Small Enterprises in Developing Countries - Practical guide (GTZ, 66 p.) 3. Business management training (introduction...) 3.1 Promotion and orientation meeting (introduction...) 3.1.1 Advisory Committee 3.1.2 General business aspects 3.2 Topics of the business management training (introduction...) 3.2.1 Connection to the practical work 3.2.2 Business management training as an ongoing course 3.2.3 Business checking, consultancy and monitoring 3.3 Additional skill training (introduction...) 3.3.1 Involvement of youth

Micro Credit Systems for Small Enterprises in Developing Countries - Practical guide (GTZ, 66 p.)

3. Business management training

Lack of business management knowledge and lack of working capital are identified as the greatest problems of survival for micro enterprises. Further constraints are lack of transport, lack of professional or technical skills and the economic and social responsibilities for the family in a society without a "social network". For example this means that there does not exist any insurance for accidents, the government does not pay for a stay in the hospital or any kind of medical treatments or school fees. Therefore, loans are easily misused in the event of illness, an accident or a funeral. Too many people live under the existence minimum. Therefore, relatives and friends often request food, money and credits which they have difficulty in paying back. It is quite difficult to run a business in such a poor society.

Existing credit schemes for small entrepreneurs fail due to mismanagement of funds, lack of training and follow-ups, high interest and inflation rates. It must be properly explained what it means to get a loan and what are the consequences if one does not repay the loan. Otherwise, it will be difficult for the people to take full responsibility for a loan.

All of this explains that an intensive business management training and business controls as well as monitoring are absolutely necessary for a successful credit scheme. Business management training is the basic aspect for the success of a micro enterprise support project.

3.1 Promotion and orientation meeting

In the promotion and orientation meeting, the whole credit system has to be explained properly and the sub-groups have to be formed. At the promotion and orientation meeting it is important to inform the participants right from the beginning that the final decision whether they can receive a loan or not will be made after the initial business management training of 8 weeks and their complete payment of the Loan Insurance Fund. It is possible to come into legal problems if the entrepreneur expects a loan for his business in the next weeks but in the end he does not receive a loan. At the end of the initial business management training course and the complete LIF payment the participants can formally apply for a loan (in the amount o 10 x of their LIF savings). They have to fill in the official project application form¹⁷.

¹⁷ See Appendix II: "Individual Loan Application and Approval" form.

3.1.1 Advisory Committee

The Project Director forms a so called "Advisory Committee". This consists of the chief of the area, a director of a bank (if possible), an independent and experienced person, the Extension Worker for this area and the Project Director. In addition it is desirable to have a lawyer.

The "Advisory Committee" checks all the application forms and the following factors before they decide who can finally receive a loan:

· Meeting attendance of the initial business management training
· Understanding of the trained topics
· Maintenance of business books
· Viability of the business
· Individual character
· Business behavior
· LIF saving behavior

At this point in time the group participants know each other much better and can decide once more if a member should receive a loan. Applicants who are not accepted to receive a loan after the initial business management training get their LIF paid immediately but without any interest as explained in chapter 2.3.1 "Sub-group saving".

3.1.2 General business aspects

After the promotion and orientation meeting another meeting for the whole group in the area has to be arranged. The chief of the area and the husband or wife of the chosen entrepreneur shall participate at this meeting. The following issues have to be discussed and explained:

The entrepreneurs have to pay their own salaries:

· Entrepreneurs have to learn to pay themselves for their labour so that they know how much money they can expect each month for their household.

· This salary which is taken out of their own business is coming in on a regular basis.

· One can not distinguish business money from household money if one does not pay one's own a salary.

· Without a salary payment entrepreneurs use their business money in an uncontrolled manner; every day they will use as much as possible for their household and unforeseen items. Therefore, they are never able to improve their business. Determining together with the entrepreneurs the huge amount of money they used in a month for household purposes, they are often very surprised. Several small entrepreneurs do not know how much they earn from their business because they spend their pofit daily for living circumstances.

Business money and goods have to be strictly divided from household money and goods:

· In fact, business money and household money has to be divided in different purses or boxes. Most of the people believe that it is enough to differentiate the two categories in their mind. In this way they do not realise that they mix the money. At the end the business is not growing because they use too much for uncontrolled shopping.

· Business money can not be used for household money or unforeseen circumstances like funerals or sicknesses. This is very difficult for the micro entrepreneurs. But they have to understand that if they use their business money for their households they will run into even more problems in the future. Their business will never run well and maybe it will even be destroyed. They will not improve their standards of living.

· It is not allowed for an entrepreneur to use his business goods like fish or clothes for his own private purpose without paying for it.

Household money has to be managed as well:

· The regular payment of a salary enables the entrepreneurs to calculate the household money.

· A plan for the household money makes it possible to spend the money for more items which are really needed and wanted.

· It is even possible to buy larger amounts and therefore cheaper packages.

· A household plan helps to reserve money for the running costs like payments for electricity or charcoal.

An entrepreneur should not sell more than 15 % of the stock on credit:

· Often relatives and friends expect to get a credit if the business of their friend is doing well. Furthermore, traditionally one has to give a credit and gifts to a relative who has less. These are the reasons why too many credits to friends and relatives are provided which are mostly paid back very slowly or not at all. In this case the business starts to stagnant until it is completely destroyed. In the end everybody will suffer more than before. The relatives have to understand that if they all depend on their friend's business and ask for too many credits or goods they will ruin the business. In the described project the entrepreneurs were thankful for the advice not to sell more than 15 % of the stock on credit. This was not a rule, but the entrepreneurs said to their customers that the project does not allow that they sell more than 15 % of the stock on credit. For the entrepreneur it was easier to say that a project rule does not allow this than to say "no" to more credit wishes.

· If too many people depend on an entrepreneur he will not profit the business will not grow and he will even not have a better living standard than the people who do not have work. In this case it can happen that the entrepreneur does not see a sense in keeping up the business any longer.

The extended family has to understand that they have to support a business person:

· A business can only exist for a long time if the relatives accept that an entrepreneur needs a lot of time for his business.

· The relatives have to understand that a business person can not use the business money for other things apart from the business.

· The relatives have to support that the profit will be partly reinvested in the business.

· The business can only lead to an improvement of the standard of living if it has time to stabilise and to grow slowly.

· The relatives have to support the business behaviour of the entrepreneur.

· The nearest relatives have to agree with the credit and training program.

Increasing business and profits:

· Even small entrepreneurs can increase their business slowly. One does not need large profits to increase the business.

· Profit must be invested for necessary reserves and to make provisions for the future.

· A portion of the business profit has to be reinvested in the business. For example in a sewing business some of the profit should be used to buy more material or for saving for further business investments like a second sewing-machine. The rest of the profit can be used to do non-business savings for example, for school fees or for unforeseen circumstances.

· As soon as the business is stable and is slowly growing the entrepreneurs can increase their salaries step by step. As a consequence their household money and standard of living will increase as well.

Characteristics of an entrepreneur:

· The entrepreneurs have to learn that a person who is doing business has not to think only on today but on the future as well.

· They have to plan and calculate their business.

· They must be able to say "No" for to credit requests.

· They have to work hard.

· To be a business person is not easy, it is very hard work.

· Not everybody can be a business person.

· Not everybody has a family who accepts the necessary strict behaviour of a business person.

Note: It is necessary that not only the supported entrepreneurs understand that a business can increase and what the reasons for the increase are, also the chief and other important persons who live in that area must understand how a business can grow. Furthermore, the people have to see that the project is for the well being of the whole area and not only for the supported enterprises. Otherwise, it can happen that the people get jealous or they possibly believe that witch craft is involved if a business increases significantly.

3.2 Topics of the business management training

The initial business management training can only start after the "Promotion and orientation meeting" and the "General business aspects" meeting have been held. Furthermore the group and the sub-groups have to be formed finally. The LIF saving starts simultaneously with the initial business management training which lasts 8 weeks.

Only the chosen entrepreneurs are allowed to participate. Otherwise there are too many participants. If the group is too big the Extension Worker who is conducting the business management training will not have enough time for the individual person. Most probably there would be too many disturbances and the quality and atmosphere of the training would suffer.

The teaching has to be done in a very simple way including pictures and practical work examples using experiences of the participating entrepreneurs.

The training topics are:

· Market Research and Identifying Business Opportunities
· Business Planning
· Record-Keeping
· Costing and Pricing
· Budgeting and Cash Management
· Buying
· Stock Control
· Marketing and Public Relations

There are a lot of good training books about the topics mentioned above. There is no need to produce another one. The book "Improve your business, Basics, Practical management for small businesses, International Labour Organisation (ILO)"¹⁸ can be recommended. These training books are easy to understand and they contain many pictures and examples. Forms about business planning, costing, buying and stock control are included.

¹⁸ International Labor Office (ILO), CH-1211 Geneva 22, Switzerland. Many main towns have an ILO office with a bibliotheque where they sell the training books and offer at the same time training courses about the above mentioned topics.

3.2.1 Connection to the practical work

Each week one topic should be taught. During the week the clients should already apply the new knowledge in their own business. Each client has to go through the whole training program and to put it into practice before he will get a loan. The training combined with the entrepreneur's own experiences and reflections about his business is ongoing during the period of loan repayment.

3.2.2 Business management training as an ongoing course

The training will be two hours per week. It starts with the initial business management training in which the topics mentioned above are trained before the loans are provided. After the participants received their loans the training continues for two hours per week until loan repayment is repayed. Before the training lessons loan collections will be done. This ongoing process of learning and practical application of the training topics is absolutely necessary for the sustainability of the business. The topics mentioned above are strange to the micro entrepreneurs. Therefore, they need a longer period than 8 weeks to assimilate the topics. It takes a long time for them to gain the confidence needed to put this new knowledge into practice and to operate their business effectively without further assistance.

3.2.3 Business checking, consultancy and monitoring

During the business management training the Extension Worker will monitor the progress of the assisted businesses and the status of LIF payment and loan repayment. In the event of any occurring business problems advice has to be given from the whole group. Physical business checks and individual business consultancy is done when ever it is necessary. The continuous and close contact between the Extension Worker and the entrepreneur will ensure profitable business performance as well as high loan repayment.

The Extension Worker has to write a participation list for each training course as a loan can only be given to entrepreneurs who regularly participated in the business management training. Before a loan will be paid out it has to be proven if each entrepreneur:

· Paid the LIF completely
· Signed that he agrees not to get interest on his LIF payments
· Attended all training lessons
· Filled in the formal application form completely

Furthermore, it has to be proved if the formal application forms are signed from each expected person and if the approval of the loan is signed. It needs at least another week to do all this check work. Usually the entrepreneurs want to have the loan as soon as possible but one should take enough time for all the necessary preparations. One should not be under time pressure to pay out the loan. It can bring the organization into legal problems if everything is not properly done. For example, to get a signature for something at a later stage, is always a problem.

The initial and orientation meeting, the business management training, the checking of businesses, the collections for the LIF savings and the final decision making process take a long time. Take this time! One will need all this time to be sure about a business. A training and a good business preparation is more important than a credit. By doing the training and the checking in a hurry one will not do a favor to the entrepreneurs.

The checking and training time is a good time to get acquainted with the entrepreneurs so that one is able to make a good selection. Borrowers who are really interested in business and hard work will accept this. Entrepreneurs who can not plan and who do not look into the future and who are just interested in today and the credit are bad examples to other borrowers. They often even fail to do their business and in the end they fail to repay their loan.

Certificates:

On successful completion of loan repayment of each group participant the group will get a certificate for the good performance of the group. Each entrepreneur who attended the business management training regularly and successfully gets an individual business management training certificate. Furthermore, each entrepreneur who repaid the full loan amount including the interest rate and administration fee receives a loan repayment certificate. If necessary these certificates can be used later to receive a loan from a bank.

One should organize a special function to hand over the above mentioned certificates in the area where the group stays. The important people of that area, public people, politicians as well as the press should be invited to the function. Such a function would be important because:

The project involves the whole area and it will be shown what good effect it has on the area. This is essential for the social acceptance.

· The function will be in the honor of the entrepreneurs for the good example they have given.
· The function makes the project well known.

3.3 Additional skill training

On top of the business management training which is compulsory for each entrepreneur, there can be some special skills training depending on the existing business. For example marketing and advertising for tailors, ornamental skills or chicken rearing courses can be offered. For instance, clients must attend a chicken rearing workshop before they can get a loan for chicken rearing. This significantly reduces the number of chickens dying in the first weeks. This training should be organized either through training institutions or by existing successful enterprises.

Checking of businesses:

The businesses of those entrepreneurs who wish to attend a skills training for expanding or diversifying to a more productive business have to be rechecked: Is there really a market for their business goal and is it profitable? If their business aim is appropriate a skills training can be provided as long as it is possible for the organization to organize and finance it.

3.3.1 Involvement of youth

Possibilities to assist the youth can be achieved by getting into contact with vocational training centers. The business management training could be combined with the curriculum at school. Another possibility could be together with the teachers to choose some young people with final degrees and to offer them an intensive business management training. Then they have to follow the same procedure as the other clients except that they do not have to pay a Loan Insurance Fund for the first loan. But before they can get a second loan they also have to pay a LIF.