5 Operational Resource Considerations
Section Overview
| Duration | Slides | Materials | Key Points |
|---|---|---|---|
| 90 min | Section 3 | Profit & Loss Sheet, videos on accounting basics. | Businesses depend on different resources to run their operations. Accounting basics help to track the operations of a business. |
This section helps participants list the operational resources they need, both within and outside their enterprise, to run their business. The types of resources covered in this section are ones external and internal to the company. A company may not be able to control external resources at all times, hence thinking carefully about what infrastructure, human resources and legal context exist matters for anyone interested in starting a business.
5.1 External Infrastructure, Equipment and Staff Required to Run the Business
Key logistics are those central to a business’ ability to perform its core functions. The training includes infrastructure, technology and human resources as key logistic types.
5.1.1 Infrastructure
The training highlights transport and storage infrastructure as the two types most relevant to ecopreneurs.
Transport infrastructure is closely tied to the distribution channels of an enterprise. The central question participants should answer at this point is: What do I need to transport how to whom?
When items are not being transported, they need to be stored somewhere. The storage infrastructure needs to fit the type of goods in size, temperature, humidity, and cost.
5.1.2 Technology
Technology includes all machines, tools and apparatuses used to produce the ecopreneurs goods or services. Participants should start a list of technology they will need. To be well prepared, this list should include the specific name and model the business intends to use. Instead of listing “A shovel”, the participants should try to concretize their choice “A broad shovel, Cost $$, manufactured by AmazingShovel Inc.”. Where a tool consumes resources, for example, fuel or electricity, the participants should think about the amount, type and cost of energy needed to operate the tool. The same applies to maintenance costs, what is needed to keep the technology in good condition? While maintenance comes with additional expenses in the short term, it is often cheaper to invest in upkeep than to replace broken technology later. But, even if a tool is carefully maintained, it will break down over time. Wear and tear will reduce the value of assets. Participants should be aware of this and that they need to take this depreciation into account.
Different accounting frameworks exist for depreciation, the easiest to understand might be straight line depreciation. Under straight line depreciation one estimates the number of years a technology might be used, and its value at the end of the usage period, the so called salvage value. From there, the initial cost minus the salvage value is divided by the usage years.
\[\text{Annual Depreciation Rate} = \frac{\text{(Asset Cost - Salvage Value)}}{\text{Estimated Usage Duration}}\]
The result is the annual depreciation rate, or the amount of value the asset uses each year. You can read more about depreciation in any introductory business book or at many sources online, like this one
This concept might be difficult to understand at first. Please make sure to adjust and tailor it to your audience, perhaps with a contextual example.
5.1.3 Human Resources
While it sounds instrumentalist to refer to human beings as a resource, the knowledge, skills and labor humans provide are important considerations for any business. Any business needs to keep track of the people it employs, both from a business and from a interpersonal perspective. On the business side it is important to ensure that an organization has the right amount of people equipped to carry out the necessary work. This equipment includes tools needed, but also knowledge and other skills. Plans need to be in place for how to manage people working in a business, especially as their numbers grow. The job of a good manager is to ensure that the people they work with have everything necessary to perform well in their jobs. This includes training, supervision, feedback, but also a safe work environment, breaks and good working conditions.
The people working for a business can be represented in an organigram, which shows who works with whom on what. Having an organigram can be practical both for internal use as well as to communicate your organization’s structure to others.
The case study is an opportunity to illustrate all of the above with examples. Please feel free to give your participants some time to develop their own list of infrastructure, technology and human resources needed.
5.2 Paperwork and Licenses
Running a business requires to follow laws and regulations. One important aspect to document that this is the case are licenses and other necessary paperwork.
Often permits are required to show that one has the rights to conduct business.
Highlight that it is best to be proactive and diligent in dealing with paperwork. A business needs to stay up to date with laws and regulations that might affect it. Failure to do so can have wide-ranging risks from fines to other punishment.
5.3 Accounting Basics
The training covers some basic accounting concepts. Depending on your audience, you may cover more or less of these concepts. The most important to understand are Balance Sheets and Income Statements. You should cover them in any case.
If you feel like your audience has an easy time following along with these accounting basics, then proceed to also cover Cash Flow. To fully understand how cash flows through a business, participants need to understand what depreciation, net income and assets mean and how to determine or at least identify them on the suggested exercise.
5.3.1 Business Establishment Costs
A business incurs a number of costs during its creation. The two slides titled “Business Establishment Costs” sensitize entrepreneurs for different establishment costs. The first are costs which have to be paid directly, while the second slide covers costs that a business establishment incurs from funds to cover unforeseen events. Each cost is described briefly on the slides and in the corresponding PowerPoint Notes.
5.3.2 Balance Sheets
This section is fairly advanced and complex. It will take a lot of explaining and likely your ecopreneurs do not need to know such extensive accounting basics when they begin their business. If there are easier accounting frameworks in your context, please refer to them instead.
The balance sheet is one of the core documents of accounting. Balance sheets are organized from the left to the right and from the top to the bottom. It shows how a company uses money, on the left of the balance sheet, and where that money comes from, on the right of the balance sheet. The assets (where the money is within the company) are organized from most difficult to most easily liquidated. Liabilities and equity on the right are organized from top to bottom by how much a company owns the money. Short term liabilities include payable accounts, such as outstanding bills and any debt that needs to be repaid within one year. Last on this side are equity positions, such as the companies own funds from past profit. In a way balance sheets therefore provide two perspectives on the question what a companies monetary resources are. Therefore, both sides must be exactly equal, or in other words, they must balance.
Balance sheets show the financial health of a business, because they make transparent how much debt exists and what the money is used for at the time point of the balance sheet.
5.3.3 Income Statements
Where balance sheets show where a business’ money comes from and where it is used, the income statement shows how a business uses its money. Income sheets are also known as profit and loss or P&L statements, as their result shows the profit, or loss made by an enterprise during the reporting period. Income statements help to analyze where a company should cut costs, or to find strategies for growth.
An income statement list how money was earned and how it was spent. Items on the income statement typically include:
5.3.4 Cash Flow Analysis
Cash flow analysis shows how money flows through a business. The important difference to income statements is that this analysis focuses on money only, accrual values – such as depreciation of assets, or outstanding receivable accounts – are not considered as income or expenses. This helps to answer if annual revenues suffice to cover annual costs, if money can be invested to replace investment like old machines, and how many years it will take to pay back investors. In short, analyzing cash flows helps to answer the basic question of: can we pay our bills from the money that we earn?
The video in the presentation goes through a cash flow analysis step by step. However, it uses a lot of technical language such as “accrual value” and is quite long. This is why we think it should be optional and you can use your judgement based on how the workshop progresses if you include this section.
For a comprehensive overview of financial analysis using cash flow please look at FAO Developing bankable business plans (pp. 45-55).