DAI-WEDP Profile of Key Ethiopian Small Businesses (Dec2015)

PROFILE OF KEY ETHIOPIAN BUSINESSES Developed based on sample data from WEDP borrowers across 12 MFIs

DAI/WEDP December, 2015

1|Page

Table of Contents Methodology.................................................................................................................................... 3 Goals and Challenges ................................................................................................................... 3 About the WEDP Program and DAI/PEPE .................................................................................... 4 Advertising, Printing and Secretarial .............................................................................................. 5 Bakeries............................................................................................................................................ 6 Beauty Salons ................................................................................................................................... 7 Boutiques ......................................................................................................................................... 8 Brick Manufacturing........................................................................................................................ 9 Building Materials .......................................................................................................................... 10 Cafes and Restaurants ................................................................................................................... 11 Construction and Machinery Rental .............................................................................................. 12 Baltena/ Food Processing .............................................................................................................. 13 Hotels with bars and Restaurants .................................................................................................. 14 Import/Export ................................................................................................................................ 15 Retail Shops.................................................................................................................................... 16 Stationary Shops ............................................................................................................................ 17 Tailoring and Weaving ................................................................................................................... 18 Wholesalers – Grain, Vegetables and Fruits .................................................................................. 19 Wood and Metal Work .................................................................................................................. 20

2|Page

Methodology This report was taken from an analysis 2,275 out of 3,288 women-owned micro and small enterprises (MSEs) who received loans from the WEDP program from January 2014 to September 2015. Types of businesses selected were based on count. The reliability of these ratios is based on the number of records included in the business type. The more records, the higher the quality and lower the standard deviation. For this reason, we required at least 50 instances of loans made to a particular business type to include it in the survey. However, due to the focus given to the manufacturing sector, we have included two additional businesses with a count of less than 50 in the manufacturing sector: Weaving/Tailoring and Brick Manufacturing. Normally, a survey of this sort would focus only on good-quality loans. However, the data was collected at the start of the loan term, it has not been segmented based on loan quality. At the time of this writing, PAR30 was under two percent. However, it should be noted that most loans go bad toward the end of the term, and these loans haven’t had time to encounter any repayment problems.

Goals and Challenges The report has two goals: 1. First, to start developing MSEs industry benchmarks for the Ethiopian business sectors. 2. Second, to provide loan officers, credit analysts, managers, and credit committees with insights into key types of small businesses and their financing needs, simplifying loan analysis. For loan officers to successfully conduct ratio analysis of Ethiopian small businesses, they must have baselines.

Analyzing this type of data presents several challenges:  Income and expenses are primarily self-reported by borrowers, who understand that reporting high profits will lead to larger loan sizes. At times, there is also a tendency to overstate expenses if they think the information might be shared with the tax authority. As a result, the gross profit margins reported may be overstated or understated. Several instances of unusually high margins are noted in the report.  The loan terms, regardless of sector, are uniformly around 36 months. This appears to be due more to MFIs’ “comfort level” with the three-year term rather than basing on cash flow analysis. From the data, we understand that loan terms are fixed by considering the loan sizes, and with no or little emphasis on the nature of the business, its cash flow generating capacities, or cash flow patterns. Otherwise, there should be more variation in terms. Therefore, the loan terms listed should appear more as a warning than as a model for loan officers to follow. 3|Page

About the WEDP Program and DAI/PEPE DAI Europe, together with consortium partners First Consult, ITAD, Triodos Facet, and Business Creation and Development (BCaD) Management Consultancy, is delivering the Private Enterprise Program Ethiopia (PEPE) in Ethiopia on behalf of the UK’s Department for International Development (DfID). A seven year project running from 2013-2020, PEPE aims to create more than 40,000 jobs (of which 75% will be for women), raise the incomes of more than 40,000 households by 20%, and support saving by 350,000 new customers of micro-finance institutions. The program has three technical components, or pillars. The Women Entrepreneurship Development Program, or WEDP, supports 12 microfinance institutions (MFIs) and the Development Bank of Ethiopia (DBE) with technical assistance and $45.9 million in lending capital to facilitate lending to individuals. The Women Entrepreneurship Development Program (WEDP) is a World Bank-funded project and one of its sub-components (i.e. the technical assistance to MFIs participating in the line of credit for individual women entrepreneurs) is funded under the DFID Ethiopia (DFID-E)’s Private Enterprise Program Ethiopia (PEPE). PEPE aims to support private sector development, through (1) improving firms’ access to finance (the “access to finance” pillar), (2) addressing market and government failures in identified priority sectors (the “priority sectors” pillar) and (3) supporting women entrepreneurs to access microfinance products, particularly business loans. The goal of WEDP is to assist its 12 MFI partners through needs-based technical assistance (TA), to upscale and be able to provide financial products on a commercially sustainable basis to a client segment that is above their traditional (e.g. group-based lending) client base. Particularly, WEDP facilitates the development and refinement of a micro and small-enterprise (MSE) loan product targeting women through 12 MFIs in six major urban areas across four regions of Mekele in Tigray, Bahar Dar in Amhara, Hawassa in SNNP and Adama in Oromiya and two chartered cities of Addis Ababa and Dire Dawa. In addition to the TA, a World Bank financed line of credit is available to the MFIs, administered through the DBE as part of the larger World Bank WEDP activities. TA to the MFIs is a mandatory condition of the loan from DBE.

Some of the MFI partners have been lending since January 2014. Note: All monetary values are in ETB.

4|Page

Advertising, Printing and Secretarial An average business in this category has the following characteristics: 









 



General profile: These firms provide advertising print Advertising, Average Min Max services in the form of banners, bill boards, brochures, Printing & business cards, etc. Some of the businesses also Secretarial (59 publish books, magazines, newspaper, and other Records) Years Operating 4.62 1 21 forms of print media. Additionally, they may provide some secretarial assistance (writing letters, film Loan size 260,467 30,000 800,000 scripts, and some documents (mostly from hard copy disbursed to a soft copy) and translating documents to different languages). Loan term 33.27 24 36 Nature of business: High initial setup cost since # Employees 5.4 0 82 significant fixed asset purchases are required. Ongoing Before loan cost is mainly cost of supplies, rent, HR cost and Monthly Sales 204,875 6,000 1,200,000 utilities. Investment requirements/fixed asset: Computers, Profit margin 0.47 0.03 0.96 printers of different size, photocopy machines, laminating machines, binding machine, furniture, etc. Total Assets 820,668 12,000 7,226,000 Working capital requirement: For paying rent, buying supplies including papers, banners, stickers, ink and cartilage, paying staff salary, paying utilities, etc. Inventory Value 139,125 1,000 1,587,825 Loan size: Expansion normally requires substantial investment as it goes to fixed asset purchases. It Debt to Assets 0.32 2.5 0.11 averages around 260,000 for the sample assessed. Loan term: Averages 34 months, which seems high given the nature of the business, it is characterized by high sales turnover and hence such long loan period may not be required. Profitability: This type of business is among the high margin businesses, with average profit margin of 47%. Such firms are only constrained by initial capital requirements and expansion. Once they stabilize, the profit margin is quite attractive. Appraising Advertising, Print & Secretarial business: o Sales turnover: assess by dividing into different categories: review printing orders as one category, day to day small secretarial and printing as second category and internet services as third category. o Consider number of machines, their capacities and number of manpower available to execute orders. o Check for regularity of maintenance services for the machines as the business highly depends on functionality of machines. o Challenges to consider: electricity-do they have backup generators? Connectivity-what options do they have to ensure connectivity(alternatives), promotional activities and efforts, repeat customer base, number of walk-ins in a day. o Location of business: is it close to main market-ex. universities, government offices, center of town or in residential area? Are there market linkages?

5|Page

Bakeries An average bakery has the following characteristics: 









  

Bakery (55) Average Min Max General profile: Bakeries are businesses engaged in making Years 2.96 0.5 7 breads, cookies and cakes, which they produce and sell at Operating that same place/shop. The businesses involve mass Loan size 302,172 50,000 1,801,440 production and supplying to retail shops, restaurants, and or disbursed cafes on the one hand and also retailing at the shop itself. Loan term 33.52 12 48 Investment requirements/fixed asset: Starting up a bakery requires a high initial investment to acquire the necessary # Employees 5.19 0 15 machines. These include stoves, mixers, steamers, cutters, Before loan furniture, etc. Monthly 196,341 17,500 1,138,542 Working capital requirement/inventory: An established Sales bakery requires working capital to buy raw material/inputs, Profit 0.29 0.03 0.94 mainly the flour (about 90%). Others include yeast, bread margin improvers, sugar, butter, creamers, salt, packaging materials, Total Assets 703,944 37,480 5,349,000 etc. Loan term: Bakery is a high turnover business. The products Inventory 100,109 1,000 950,000 are sold immediately to end users or retailers. There is Value limited stocking of inventories of finished products, except Debt to 0.5 0.33 0.56 for cookies. Hence, if a loan is given for working capital, the Assets loan terms should be for a short time, i.e., less than a year. However, if the purpose of loan is to finance purchase of new machineries, the term could go higher. However, one should determine the payback period based on the cash flow analysis of the business. Loan size: Loan size also depends on the purpose of the loan, i.e. whether it is for investment or working capital. An average stove costs between 25,000 and 60,000, a mixer up to 90,000, and a steamer up to 25,000. If the business is expanding, loan requirement could go up to 1.8 Million as seen in the sample, while average stands at about 300,000. Staffing: An average bakery employs between 3-5 staff, including one main baker, assistant baker, sales person/cashier, and perhaps one distributor. Staff levels should grow with the size of the bakery. Profitability: Profit margins average around 30%, but could go close to 100%. These depend on volume of operation, location, market linkages and availability of inputs to maximize economics of scale. Appraising Bakery-critical areas to review: What is important in appraising a bakery is capacity of production (check capacities of all machineries involved), standing orders from retailers, restaurants or shops, check daily estimated production against sales records, and availability of enough inputs, etc.

6|Page

Beauty Salons An average Beauty Salon has the following characteristics: 













General Profile: Beauty salons are businesses engaged Beauty Salon Average Min Max (140) in providing various hair styling services, manicures and Years 4.06 0.5 26 pedicures, and rarely also proving other spa services Operating including sauna and steam baths and massages. Investment requirements/fixed assets: Most loans are Loan size 208,879 25,000 800,000 used to purchase salon equipment, including chairs, disbursed hair dryers, various styling equipment, cosmetics, and Loan term 32.36 6 60 remodeling/expansion of workspace. Working capital requirement/inventory: Inventory # Employees 3.55 0 20 typically represents a small portion (less than 10%) of a Before loan beauty salon’s assets. At 13%, the average inventory to total assets for those beauty salons surveyed appears Monthly Sales 73,956 3,125 1,200,000 within the appropriate range. Profitability: Beauty salons are a high-margin business, Profit margin 0.47 0.03 0.96 likely due to low labor costs and minimal inventory required. It averaged 47% in the assessed businesses. Total Assets 291,639 10,000 2,301,400 Loan size: As this is a labor intensive service using various equipment, there is a low need for working Inventory 38,556 300 300,000 capital. Hence, the loan is often taken for expansion of Value the business by buying additional equipment and furniture, and renovating the shop. A small percentage may go toward working capital. Loan term: Loan terms go as high as 60 months in the businesses assessed, which is very long for this type of business. It is a high-return business with cash flow generating capacity and should be able to repay the loan in relatively shorter period. Appraising Beauty Salons - critical areas to review: When judging the level of sales in a beauty parlor, loan officers should consider the customer traffic witnessed within the store, taking into account seasonality issues, cleanliness and attractiveness of the shop, current and/or potential competition depending on the location of the shops and the number of hair cutting/styling chairs for clients, as well as availability of styling facilities, competence and customer handling skills of the workers. It is also worth noting that loan officers should try to verify all information obtained by checking against different documentations (e.g. books of accounts) and conduct their own estimates with objective/reliable evidences. Typically, the purpose of the loan is to renovate and furnish the salon, purchase equipment, and expand by increasing number of styling chairs and providing additional spa services. Accordingly, most of the loan is for investment instead of working capital.

7|Page

Boutiques An average Boutique has the following characteristics: 





 

 

Boutique Min Max General Profile: Boutiques are generally defined as stores (347) Average selling clothing and goods for children. Boutiques are high Years 4.42 0.5 31 turnover businesses, with the bulk of their assets in Operating inventory. The most common loan use for boutiques, therefore, is to increase inventory, though in rare cases Loan size 199,595 19,000 800,000 loans may be used for renovation and expansion. disbursed Investment requirements/fixed asset: A boutique is a Loan term 32.95 3 60 buying and selling business without adding value. Hence, investment is limited to renovation of shops and initial # Employees 1.85 0 31 investment in shelves, displays and other furniture. Before loan Working capital requirement/inventory: Inventory is a key asset for a boutique and averaged 32% of boutique’ total Monthly 208,792 5,750 5,160,000 assets. Sales Loan size: Loans are mostly used for increasing stock and Profit margin 0.33 0.03 0.98 diversifying items offered. Loan Term: The average loan terms from the data appear excessive. They should be shorter, as most loans will be Total Assets 479,397 26,980 5,174,200 used to purchase working capital. Boutiques should turn over their inventory fairly quickly, and the long terms Inventory 155,836 1,600 1,000,000 granted by MFIs are likely a product of habit rather than an Value analysis of the business’s cash flow. Terms should likely be in the one to two year range, rather than the three-year terms habitually provided by Ethiopian MFIs. Profitability: Boutiques are medium margin businesses, depending on the location and size of the business. It averaged about 33% for the businesses reviewed. Appraising boutiques-critical areas to review: When evaluating a boutique, loan officers should inquire about the mark-up on goods sold. The mark-up must cover the boutique’s expenses and, therefore, should be higher than the profit margin reported. Inventory level, location of business, and level of competition in the area are important issues to review. Once again, the seasonality of business should be noted and information obtained should be verified. Loan officers should make sure that borrowers are not projecting an excessive increase in inventory, a more frequently observed tendency. The location of the stores and variety of items has strong impact in projecting the cash flow.

8|Page

Brick Manufacturing An average Brick Manufacturing Business has the following characteristics: 









 

General description: These are businesses engaged in Brick Average Min Max Manufacturing manufacturing bricks. It is a labor intensive business using (37) simple machines. These firms normally make bricks for Years 3.91 1.00 10.00 building houses and stoves-charcoal/electric. The main Operating inputs are sand/clay, gravels, and cement. Investment requirements: Start-up requires machines for Loan size 277,083 60,000 800,000 making bricks, stoves, and acquisition of a working place. disbursed In most cases, the working places are rented, and the owners may be required to pay an advance of three to six Loan term 33.33 24 48 months’ rent. Working capital requirement: After initial investment in machines, the working capital required is typically for # Employees 8.12 0 30.00 purchase of the major inputs (sand, gravels, cement, clay, Before loan etc.) and for paying utilities, rent and staff salaries. Loan term: In the sample taken, the average loan term Monthly Sales 175,240 16,600 900,000 averaged 33 months. However, since in the WEDP program, startups are not financed, most of the loans went to working capital and expansion by buying Profit margin 0.29 0.07 0.57 additional machines. In this respect, the average of 33 months is at the high end and should be shorter to match Total Assets 757,700 95,354 7,620,000 the cash flows. Loan size: An average brick-making business requires a loan of up to 800,000 ETB, depending on the purpose. If Inventory 99,324 5,000 539,000 the MFI finances a startup brick-making business, the Value financing need may be double or triple of the currently reported maximum loan size. Profitability: Average profit margin for a brick-making business ranges from 29 to 50%. This is highly affected by price volatility for the raw materials as well as for the final product. Appraising brick making business-critical areas to review: The sales and cash flow generating capacity of the business is determined by the number and capacity of the machines they own. Loan officers should attempt to understand the daily production capacity of each machine and to determine the maximum production capacity, given no supply/utility constraints. As this is a manufacturing business, assess if there are any supply agreements with wholesalers. It is worth assessing the supply of inputs, as this depends on regularly of inputs. Therefore, stability /reliability of supply is a critical issue to assess.

9|Page

Building Materials An average building materials shop has the following characteristics:















Building Materials Shop (97) Years Operating

Average

Min

Max

General description: These are retail shops specializing in selling construction materials (cement, 3.84 0 20 pipes, iron bars, etc.) including finishing materials like tiles, paints, bath tabs, washbasins, etc. Investment requirements: For this type of business, Loan size 319,247 50,000 920,000 fixed investment is relatively minimal as it involves disbursed buying the materials and selling them with no value adding process. Loan term 34.67 18 60 Working capital requirement: Inventory may account for a significant portion of the asset, as this is a retail type of business. Hence, financing is # Employees 3.34 0 15 normally required to increase inventory level and Before loan generate more sales. Monthly Sales 439,679 1,923,000 Loan term: Despite the nature of the business with its high sales turnover, the loan term is normally expected to be lower than the average calculated Profit margin 0.28 0.09 0.87 from the sample, which is 35 months. Loan size: Loan size is relatively bigger as the costs of the materials are normally higher. The average loan Total Assets 877,810 40,500 8,540,000 size ranges from 50,000 to 900,000 ETB, averaging about 300,000 ETB. Profitability: Profit margin ranges from 9 to 87%, Inventory 278,107 5,000 2,000,000 depending on the items sold. This type of business is Value highly affected by location, also determining the margin. Appraising building material shop-critical areas to review: In appraisal of this business, appropriateness of location, ice, whether or not there is construction occurring near the shop or whether or not it is in a known place for the purchase of such materials.

10 | P a g e

Cafes and Restaurants An average cafe and restaurant has the following characteristics: 













General Profile: These are businesses involved in Café & Average Min Max providing hot and cold beverages and food services. The Restaurants (263) businesses are at different stages in terms of size. 4.71 0.5 40 Investment requirements/ fixed asset: Fixed investments Years Operating for cafés and restaurants go to the purchase of furniture Loan size 237,201 10,000 1,800,000 (chairs and tables) and kitchen equipment. Fixed assets disbursed will typically represent 80-90% of a restaurant’s assets. Loan term 34.13 12 44 When evaluating the appropriate level of fixed assets, loan officers should consider these factors: # Employees 6.18 0 43 1. Does the restaurant rent or own its premises? Renters Before loan will have a lower fixed asset base and higher operating costs. Monthly Sales 180,987 4,000 4,131,400 2. Who are the restaurant’s clients? Restaurants catering to higher-income clients will need more expensive Profit margin 0.35 0.03 0.96 furnishings and fixtures to create an atmosphere appropriate to these diners. Total Assets 488,109 5,110 6,502,000 3. How complicated is the menu? The more complicated the menu, the more sophisticated (and expensive) the Inventory 61,397 962 742,693 kitchen required. Value Working capital requirement: Most financing needs for cafés and restaurants go to working capital. These include purchase of supplies, including teff, wheat, fruits and vegetables, spices, coffee, tea, sugar and other supplies required to make different variety of food and drinks. Beverages also should be added to the list of inventory items for cafés and restaurants. Restaurant inventories in comparable nations run between 10-15%, and the WEDP restaurants in our sample averaged 12%. Loan size: Most of the loans given to cafés and restaurants are used for working capital purposes, as most restaurants financed were those in operation for a while (averaging 5 years). Accordingly, loan disbursements averaged between 10,000 to 1.8 million, with an average of 237,000. If the MFI finances a startup business, the financing needs could be higher as these businesses are characterized by high initial investments. Loan term: Average loan terms range from 12 to 44 months, with an average of 34 months in the sample taken. However, this seems too long given the fact that most of it went to financing of working capital needs. Since this is a high turnover business, the loan term needs to be shorter, ideally averaging 12 months or less. Profitability: Cafés and restaurants are a high margin business. Accordingly, the profit margin could go over 100% at times, but averaged 35% in the sample taken. Profitability depends on the space available and variety of items in the menu. Appraising café and restaurant-critical areas to review: Cafés and restaurants are affected by the location of business, size of space and number of tables/chairs, variety of menu, and the attractiveness of the place. Loan officers can estimate the numbers of users in a day based on the chairs and tables available. Be sure to check occupancy at different times of day. One simple way for loan officers to compare cafés or restaurants and to develop cash flow projections is by the number of tables. However, loan officers should keep in mind that location, menus offered, food quality and the restaurant’s atmosphere can all affect pricing levels and cost structures.

11 | P a g e

Construction and Machinery Rental An average construction and machinery rental has the following characteristics: 













General description: These are businesses engaged in Construction Average Min Max Machinery rental of construction machinery like excavators, loaders, Sale/Rental dump truck, bulldozers, road rollers, mixers, etc. (51) Investment requirements: Costs of the machinery are 3.5 1 10 relatively high, estimated in millions of Birr. Hence, startup Years Operating is costly. Working capital requirement: Working capital loans are Loan size 350,588 50,000 800,000 required to cover the high running costs, including fuels, disbursed maintenance, salaries and commission and other costs to operate the machines. Most of the financing needs from Loan term 33.25 24 36 the MFIs will cover working capital requirements. Loan term: The average term ranges from 24 to 36 # Employees 6.43 0 32 months, averaging 33 months. This seems high for a Before loan working capital loan, and it should be lower to match with the cash flows. Monthly Sales 483,425 20,000 1,607,000 Loan size: Loan size is not high, as it is given for working capital and not for purchase of the machineries. If the loan Profit margin 0.40 0.07 0.93 is required for the purchase of machines, it would require relatively bigger size loan. Total Assets 2,589,471 75,200 8,776,430 Profitability: Profitability depends on the demand for the services. The machinery generates higher cash flow in the short term, but at times they may not get to market. Inventory 370,687 7,800 2,250,000 Appraising construction materials renting businessesValue critical areas to review: The cash flow generating capacity depends on the number of machines, the running cost for Debt to 0.14 0.66 0.09 Assets each machine, the hourly rental rate and the demand. In most cases, the demand for such machinery is high due to the booming construction in the country. However, there are slack seasons like the rainy season, which needs to be considered. Market linkages (working with different agents) are also a factor to consider. There is high chance of getting the market if the borrower works with many agents/ broker than by themselves.

12 | P a g e

Baltena/Food Processing An average Baltena has the following characteristics: 

 





 

Food Average Min Max General Profile: Baltena (food processing) involves making Processing different varieties of spices. Though it is described as a (114) manufacturing business, the actual processing takes little Years 4.48 0.08 35 time. Hence, it is considered a business with high turnover Operating and labor intensive. This category also includes small-scale manufacturers producing injera, primarily for wholesale. Loan size 245,544 40,000 2,000,000 disbursed Investment requirements: This is a labor-intensive business with little investment requirement. Loan term 33.34 12 60 Working capital requirement: Capital is required for the purchase of the raw material/inputs. Most of the assets are # Employees 4.64 0 40 Before loan in a form of inventory inputs as well as finished products. Loan size: The loans are normally used for buying raw Monthly Sales 261,696 8,000 1,999,800 materials/ingredients, i.e. for inventory, hence this type of firm doesn’t require huge investment. It is normally a Profit margin 0.29 0.05 0.80 handmade/labor intensive process. There are large-scale producers requiring higher loans. Such producers normally Total Assets 506,091 17,900 4,800,000 also own different machineries like grindings mills. Loan Terms: One might assume that for a manufacturing Inventory 122,887 8,000 1,235,000 firm investing in fixed assets, an average loan term over Value three years is reasonable. However, within the Ethiopian firms surveyed, many food processing firms were seeking Debt to 0.49 2.23 0.42 loans for inventory. Inventory is processed and then sold, Assets presumably within at least a one-year period (hopefully sooner). Loan terms should be careful to provide appropriate loan terms based on the use of the loan as well as the business needs. Profitability: Food processing is a fast-moving business, more similar to trade as the processing is done over short periods and the items sell quickly. Profit margin can go up to 80%, but highly affected by seasonality. Appraising food processing businesses-critical areas to review: Emphasis should be given to availability of market linkages due to the nature of the business, daily manufacturing capacities and quality of the products. Borrowers need to have regular customers that receive the items in bulk and as a standing order. Seasonality, and variety of spices produced should also be considered.

13 | P a g e

Hotels with Bars and Restaurants An average hotel with a bar and restaurant has the following characteristics: 













Hotels with Average Min Max Restaurants General Profile: The hotel business has higher initial costs (281) and relatively low running costs once functional. The main Years 4.77 0.5 35.00 purpose of loans to established hotels is for expansion, i.e., Operating construction of additional rooms and renovation-hence capital intensive. A relatively smaller portion of loans is Loan size 254,031 15,000 2,400,000 disbursed used for working capital. Investment requirements /Fixed Assets: Fixed assets Loan term 34.39 12 60 account for a high percentage of total assets, mainly acquired during start-up. When evaluating the value of the # Employees 5.48 0 50.00 fixed assets, loan officers should consider their age and Before loan condition. Working capital requirement: /inventory: Hotels typically Monthly Sales 166,777 6,520 1,286,808 have less than five percent of their assets in inventory, with a slightly higher percentage for hotels with restaurants. In Profit margin 0.37 0.04 0.98 the sample assessed, the average was about 14%. The low percentage is because the total asset is relatively bigger as it often includes buildings. Total Assets 637,513 1,200 11,372,200 Loan size: The loan size could be relatively bigger depending on the purpose of loan. If the loan goes toward Inventory 85,868 578 1,699,880 renovation, a higher loan size may be required. But in most Value cases, the loan goes to working capital, going as low as 15,000 ETB. Loan term: The loan term also depends on the purpose of loan. Working capital loans can be repaid over a shorter time period. For the businesses reviewed, it ranged from 12 to 60 months, with an average of 35 months. Since most loans are for working capital, the average loan tem should be shorter. Profitability: Small business-sized hotels are typically high-margin businesses, largely because the majority of costs in the hotel business are up front, during the construction and start-up phases. The average profit margin in the sample assessed is about 37% but could go as high as 98%, depending on the quality and location of the hotel. Additional services in bar and restaurant contributes to the high margin. Appraising hotel businesses-critical areas to review: Loan officers assessing hotels should note that once past the start-up phase, the largest cost should be labor and supplies, and this should be relatively low in Ethiopia, resulting in high profit margins. Accordingly, most of the loan goes to working capital if it is a mature hotel; while the loan goes to investment if it is in start-up phase (or if there is a planned renovation). While estimating cash flow, room prices and average occupancy should be assessed. There may be some seasonality in the hotel business which needs to be considered as well. Seasonality issues should also be considered while fixing repayment schedules. Hence, instead of setting a standard loan term, the maturity level of the hotel and the intended purpose should be analyzed in setting appropriate terms that match the cash flows.

14 | P a g e

Import/Export An average import/export business has the following characteristics: 











General description: These businesses engage in Import & Average Min Max importing various processed materials including clothing, Export merchandise, and various equipment. The size of the Business businesses vary, mainly depending on the amount of (60) working capital they have and the business license they Years 4.44 0.5 33 Operating hold, which might restrict the type of material to be imported. Loan size 386,917 100,000 1,075,000 Working capital requirement: This is a capital intensive disbursed business. The more working capital they have, the bigger the business can grow. Accordingly, financing needs are Loan term 32.55 24 36 more for working capital. Loan term: The loan term shouldn’t be too long due to # Employees 4.56 0 35 the high turnover of the business. The average of 33 Before loan months seems to be high, and MFIs should consider reducing it. Monthly 1,421,644 30,000 18,836,250 Loan size: Loan size depends on the nature of the items Sales the business license allows them to import. A business importing clothes needs lower capital than the one Profit 0.26 0.06 0.74 margin importing heavy machines. In the assed businesses, it averages about 386,000. Total Assets 1,876,801 126,000 23,870,000 Profitability: The profit margin ranges from 6 to 74% in the sample, averaging 26%. This is affected by the volume Inventory 523,619 3,000 2,200,000 of import. Value Appraising import and export businesses-critical areas to review: The variety of materials covered, demand for the materials, volume of imports, availability/access to foreign exchange and relationship with banks, sales arrangements (diversification of recipients and standing agreements) are critical factors to consider. Lead time to import materials (including customs clearance time) is also another critical area to assess.

15 | P a g e

Retail Shops An average retail shop has the following characteristics: 









 

Retail Shop Average Min Max General Profile: Retail shops are one of the most common (535) activities Ethiopian women are engaged in. It involves Years 3.93 0.5 26 buying and selling various commodities/merchandise. It is Operating a fast moving business with high sales turnover and low investment cost. Loan size 167,714 10,000 745,000 Investment requirement: Investment in retail shops disbursed involves acquiring the shop and furnishing it with shelves and displays. These are normally a one-time investment, Loan term 33.2 12 60 with less frequent expansion and renovation. Hence, in most cases, and for mature businesses, a loan is required to increase stock levels. # Employees 1.7 0 18 Working capital requirement: Inventory is the major asset Before loan for a retail shop. Typically, cash and inventory will account Monthly Sales 146,530 2,352 3,749,185 for 40-50% of total assets. At times, Inventory levels could account for up to 80% of total assets. Loan size: Loans normally go toward buying Profit margin 0.30 0.01 0.99 merchandise/inventory, though rarely they might be used for the purchase of fixed assets. The average loan size is Total Assets 382,983 8,000 5,384,000 about 167,000 ETB. Loan term: The loan terms here again appear excessive. A Inventory 119,215 1,700 4,418,000 strong retail shop should be able to turn over its inventory Value well in advance of 33 months. MFIs may wish to consider shorter loan terms, based on the borrower’s capacity to repay. Profitability: Margins in retail shops will vary widely based on the type of goods sold. Appraising retail shops-critical areas to review: When loan officers review the sales of a retail shop, they should closely examine the location. A shop in a high-traffic area has a strong sales advantage over a shop hidden in a dark alley. Moreover, inventory levels and competition in the area should also be considered in estimating sales and expenses. Variety of items offered also need to be considered.

16 | P a g e

Stationary Shops An average stationary shop has the following characteristics:











 

Stationary Average Min Max General description: These are businesses engaged in (68) the sale of stationery items including notebooks, pens, Years 3.8 0.5 11 pencils, papers, markers, staples, punchers, folders, Operating clips, sticker, etc. They can range from small to medium size shops, which also can accommodate bulk Loan size 236,353 21,000 1,000,000 purchases. disbursed Investment requirements: The business doesn’t require Loan term 31.55 12 60 fixed investment as such. It is the buying and selling of stationery items. Fixed investments may only include shelves and renovating shops, if owned. # Employees 2.14 0 8 Working capital requirement: Most of the assets are in Before loan the form of inventory. Hence, financing is mostly required to increase stock levels and increase the Monthly 247,134 5,000 2,170,000 variety of items offered. Sales Loan term: The loan tem should be relatively shorter, as this is a high-turnover business. The average term is Profit 0.31 0.04 0.75 32 months for the businesses reviewed, which seems margin high for this type of businesses. MFIs need to consider shortening the loan term to match with the cash flow Total Assets 477,807 10,300 2,880,000 pattern of the business. Loan size: Loan sizes range from 20,000 to 1 million ETB Inventory 160,794 2,000 900,000 in the sample reviewed. The loan size can be bigger Value depending on the space available and demand in the area, and if the business offers wholesaling service. Profitability: This an average margin business with profit margins averaging at 31%. Appraising Stationary shops-critical areas to review: Inventory management /control, location of shop (near school, universities), variety of items supplied, and turnover of major items (check for purchase dates and check against stock levels).

17 | P a g e

Tailoring and Weaving An average tailoring and weaving shop has the following characteristics: 













General description: These are businesses engaged in Average Min Max making traditional cloths, as well as making ready-made Years 4.24 0.5 17.00 clothes for women and men. Raw materials include Operating cotton and sewing threads. Investment requirements: Initial investment for this Loan size 303,397 35,500 1,000,000 business includes various weaving equipment, sewing disbursed machines, iron for stretching cloths, etc. Part of the loan taken could go for the purchase of more equipment and Loan term 35.21 24 60 expansion of the business. Working capital requirement: The business involves the # Employees 5.34 1 33.00 purchase of raw materials and processing and selling Before loan final products. Hence, they need funds for the purchase Monthly Sales 221,054 9,600 824,500 of raw materials in bulk and to increase inventory of final products for sale. Inventory is both in raw material and the final product. Inventory accounts for about 27% as Profit margin 0.30 0.02 0.71 seen from the sample businesses. Loan term: As loans are taken for both investment and working capital, the loan term could be an average of 24 Total Assets 638,742 41,270 2,985,000 months. For the sample businesses, it ranges from 24 to 60, which is on the higher end. Inventory 173,405 2,000 900,000 Value Loan size: Weaving/tailoring businesses range from small to medium, with relatively medium financing needs. Expanding businesses may need higher loan sizes to increase the number and improve the quality of machines used, compared to mature businesses, which may only require loans for working capital. In the latter case, the loan amounts would be lower. Profitability: These businesses have average profitability of about 30%. It could go to as high as 71% depending on the target market. Some businesses target people in medium and high class, including tourists, in which case they earn higher margins. Appraising Weaving/ tailoring businesses-critical areas to review: As these are mainly engaged in making traditional clothes, the business is highly affected by seasonality. The peak seasons are around national holidays and the slack season is during the rainy season. Design makes a big difference in the current market. Those businesses focused on making new designs, especially appealing to the young generation, may attract more customers compared to those sticking to the common traditional designs.

18 | P a g e

Wholesalers – Grain, Vegetables and Fruits An average fruit, grain and vegetable wholesaler has the following characteristics: 













Wholesaler Average Min Max General description: These are businesses engaged in Grain/Veg/ the sale of vegetables and fruits, and those in the sale Fruit (71) of various grains also providing grindings services, Years 4.53 0.5 20 especially for teff. Operating Investment requirements: These require relatively larger investment to buy the grinding mill/ machines. Loan size 235,521 35,000 1,396,000 Grinding mills cost between 50,000 and 80,000. For disbursed those selling fruits and vegetables, their initial investment is low. Loan term 33.23 12 48 Working capital requirement: All businesses in this category require relatively larger working capital to buy items in bulk and obtain price advantages. # Employees 2.52 0 10 Before loan Loan term: The loan term should be low for mature business demanding working capital loans. But it Monthly 307,208 7,500 3,456,000 averaged 33 months for the sample businesses Sales reviewed, which is on the high end. Loan size: The loan size depends on the purpose of Profit 0.25 0.04 0.92 loan. In most cases, loans go to working capital to buy margin commodities in bulk and sell to retailers. In such Total Assets 538,772 13,750 3,000,000 cases, they may require higher loan sizes. The average loan was 235,000 for the assessed Inventory 114,803 1,500 439,500 businesses. Value Profitability: The average profit margin was 25% for the sample reviewed. The margin is affected by seasonality and price of grains and vegetables which are volatile in the market. Appraising wholesale businesses-critical areas to review: A wholesaler needs to have regular customers (retailers), and this is a key area to be assessed during appraisal. Regularity and stability of supply is another critical area to review. Since most of the loan request goes to inventory financing, ensure that increases in inventory are within the limit of the business, given its current status, and they will be able to accommodate. These include space, the inventory control system in place and the demand. Increases in inventory by more than two times will have more risk as the capacity (management capacity plus demand) to cope with the increased inventory is not tested.

19 | P a g e

Wood and Metal Work An average wood and metal work shop has the following characteristics: 













General description: These are business involved in Wood and Average Min Max Metal Work (62) producing furniture from wood and metal. Most have a large manufacturing area to produce household and Years Operating 4.44 0.5 22 office materials. The finished products often include Loan size 269,323 30,000 1,200,000 beds (metal and wood), office tables and chairs disbursed (wood), doors (metal and wood), and the like. Investment requirements: Metal and wood works require high initial investments to buy the necessary Loan term 34.58 24 60 machinery. On-going investments are minimal unless they want to change the machines. # Employees 6.64 0 25 Working capital requirement: The working capital is Before loan also relatively larger for this type of business, even Monthly Sales 275,805 2,000 2,030,000 though it varies with the size of the business. The raw material, i.e., different metal and wood, are normally Profit margin 0.29 0.05 0.64 purchased in bulk and costs are high. Loan term: Businesses buying machinery require longer terms than those using the loan for working Total Assets 708,740 10,000 3,636,000 capital purchases. For the businesses surveyed, the loan term ranged from 24 to 60 months depending on Inventory Value 196,305 2,500 1,625,000 the purpose of loan determined by maturity of the businesses. Loan size: Loan sizes ranged from 269,000 to 1.2 Debt to Assets 0.63 0 3.00 million for the assessed businesses. The loan size is affected by the size of the business and the purpose of loan. Profitability: The profit margin depends on the quality of the products and material used. On average it was about 29% for the sample assessed. Design and location of workshop determines cost structure of the businesses and hence the profit margins. Appraising Metal and wood work-critical areas to review: The number and capacity of machines required for each stage of the production cycle should be reviewed. Staffing levels, quality of products and availability of inputs are among factors to be assessed.

20 | P a g e