Aynalem Zewde washed coffee

industry

Business plan
/financial feasibility study/
In partial requirement for investment license

Submitted to: Gedeo zone investment expansion

business process

Submitted by: Aynalem Zewde(owner)

Dilla , Gedeo, Ethiopia

2010 E.C
 Table of Contents
I. General background of Yirgacheffe woreda................................................................................ 1
II. Executive summary .................................................................................................................... 3
III. Business background................................................................................................................. 4
3.1. The business ......................................................................................................................... 4
3.2 The product ........................................................................................................................... 4
3.3. Key personnel....................................................................................................................... 5
IV Market plans .............................................................................................................................. 6
4.1. Market analysis .................................................................................................................... 6
4.2. Marketing strategy................................................................................................................ 6
4.3 Pricing strategy...................................................................................................................... 7
V. Action plan ................................................................................................................................. 8
5.1 Personnel ............................................................................................................................... 8
5.2. Expenses and cost of sales ................................................................................................... 9
5.3. Fees collection ...................................................................................................................... 9
VI. Financial projections............................................................................................................... 10
6.1 Risks .................................................................................................................................... 10
6.2. Estimated cost of a project/ investment.............................................................................. 10
6.3. Working capital .................................................................................................................. 11
6.4. Project financing ................................................................................................................ 11
6.5. Proforma financial statements ............................................................................................ 12
 I. General background of Yirgacheffe woreda
Geographically Yirgacheffe woreda is located at 415 Km south from Addis Ababa the capital of
federal republic of Ethiopia, and 136 Km far from Hawassa , the previous capital of SNNPR, in
in the southern part along Ethio-Kenya main road. It has 17 local kebele and municipality having
three kebele. The woreda is well known organic coffee producer in the world accordingly it is
awarded international quality standard prize.

Yirgacheffe woreda is one of eight woreda in Gedeo zone and surrounded by wonago woreda in
the north ,Oromia region in the west, chorso woreda in the south , raphe and Bule woreda in the
East.

Geographically yirgachefe woreda is located at the 2400m above sea level, on average its climatic
zone characterized by dega, weina dega and kola of which more than 75% is characterized by
weina dega that is favorable for coffee plantation. hence it is characterized by moderate tempera-
ture throughout the year and its mean annual temperature is 18 o c and mean annual rain fall is
1500mm . the total area of the woreda is 17,245 Hectare out of which 219 hectare is covered by
forest,46 hectare is grass land , 135 hectare uncultivated land , and the rest cultivated land.from
the total arable land 97.5% is cultivated.

The woreda is endowed with numerous natural resource in addition to coffee and enset among
others it has water resource those flow in different direction and then finally join lake abaya , the
largest rift valley lake in the country. The existence of such resource builds conductive situatio ns
for washed coffee processing industries because water is one of the requirement for the industry.

The characteristics of the population of the woreda is of pyramidal age and sex structure , having
a very wide bottom and narrow apex which reflect high birth date, short life expectance and rapid
decline upward age groups due to high death rate. Total population of town is around 148050 out
of which male accounts 52% and female constitute 48% , with the estimated population growth
rate 4.5% per year . out of those inhabitants of the town 35% were infant(age group 0-14) produc-
tive age group (from 15-64 years old) accounts 55% and population aged above 64 years accounts
10% elderly people. Economically dependent population of the age of the Dilla town is relative ly
high and accounts for about young dependency ratio 68.5 and 4.9 percent for the old.

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The economic activity of Yirgacheffe woreda is predominantly agrarian characterized by persis-
tent production like coffee and enset. In addition high land crops like barley, wheat, soya beans,
corn etc. beekeeping and others. Commercial activities highly concentrated along the highway and
major stream road. There are independent local markets in each local kebele where the aforemen-
tioned products and factory products are exchanged. There are hotels ,restaurants , and groceries
in Yirgacheffe town.

The woreda has electric power , water supply, road transport and health centers and other social
service producers like kindergartens , elementary and secondary schools, TVET collage and so on
. But with the rapid and complex development of town.OMO micro finance institution render fi-
nancial service to the society of Yirgacheffe woreda. Bank and insurance companies are available
in Yirga cheffe and Dilla town which are easily accessible to the woredas the render financ ia l
service to the woredas in Gedeo zone.

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 II. Executive summary
Aynalem Zewde washed coffee processing industry is a new business undertaking that will supply
high quality washed coffee to central market that will be competitive in international market. Cur-
rently there is increase in quantity of coffee production in Yirgacheffe woreda , where as there are
only few numbers of washed coffee processing industry, which created a market gap characterized
by surplus supply of coffee is increasing in local and international market from time to time.
Having these two opportunities the owner planned to establish the plant.

Further more , it is projected return profit in its very short period of operation and the relative ly
moderate amount of investment required for commencing the project. It will start operation in the
next harvest year of the red coffee , and the first year revenue is estimated to be birr 4,400,00.00.

The industry differentiate itself from its competitors through offering relatively higher price for
the farmers, including bonus of 2% to those who supply greater quality, above 100,000 Kg red
coffee per year, and processing wet coffee as per international standard using technologically ad-
vanced machineries as well as trained man power so that the industry will produce only Grade A
1st rank washed coffee.

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 III. Business background

3.1. The business

Aynalem Zewde wet coffee processing industry is a dynamic business which is owned by w/ro
Aynalem Zewde as a sole proprietorship by initial investment of Birr 2,500,000. it is on the pe-
riphery to capture extensive market share in the fast growing wet coffee processing industry and
increasing coffee production in the woreda that is not absorbed by existing industries. The owner,
general manager retailer of wet coffee to industries in Yirga cheffe woreda and supplier of dry
coffee to central market for the last 10 years, has managerial capacity as well as practical experi-
ence in area as entrepreneur. The project planned to hire Ato Aliyu Asefa as chief mechanic , who
has deploma in general mechanic and extensive experience as in the field. Ato Dereje Wako as
head of industry and Ato Bekele Deyasso as accountant, both of them have generated basic idea
for its establishment.

The marketing and financial consultant developed marketing strategy that is well suited to built a
large market share in the woreda. It has the potential to gain a reputation for buying greater quantity
of red coffee to be pulped than its competitors.

Head , industry will coordinate purchasers , chief mechanic and daily laborers experienced in the
area , should meet the high standard that the industry has set for its quality products to be supplied
to central market.

3.2 The product

The industry is brought into being for the sole purpose of pulping red coffee and then supply Grade
A 1st rank processed coffee to the central market, in Gedeo zone Yirgacheffe Woreda sede kebele
peasant association in the area of 1.2 hectare land that is located in 10Km from the Ethio-Kenya
main road and additional 500m from main rural road . The area is near to a river since it is washed
coffee processing plant. But it has to be treated to minimize environmental pollution via prepara-
tion of facultative logon at distance no less than 25m from the aforementioned river.

The production will generally made at own built facility, which is easily accessible to suppliers of
red coffee to be plumped in the area, i.e. in the site where coffee plantation are increasing, farmers
can use horses, donkeys and mules as transportation media. Coffee dealers who supply in bulk
quantity can use road transportation to offer its raw material since the industry is located near to

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main road. A key selling point is the quality of coffee offered to central market which will be
greater than that of other competitors in the area.

3.3. Key personnel

w/ro Aynalem Zewde is the owner and general manager who has significant coffee dealing expe-
rience management skills. Ato Dereje head of industry has 15 years practical experience in leading
different private and cooperative wet coffee processing industry in Yirga cheffe. He had taken
different work shops in wet coffee processing, environmental pollution management in coffee pro-
cessing industry and coffee quality assurance technique. Ato Aliyu Assefa , chief mechanic has
12+2 diploma in general mechanic and 12 years practical experience in the area , who is currently
working as chief mechanic of Ferenju Defar wet coffee processing industry and Demelash gen-
eral garage in Yirga cheffe. Further more it is planed to hire Ato Bekele Deyasso as an accountant
having 10+3 TVET diploma in accounting three years practical experience in wet coffee pro-
cessing industries that manage and control financial activities of the industry.

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 IV Market plans

4.1. Market analysis

The owner and his marketing and financial consultant carried out substantial research prior to es-
tablishing the industry, which concludes existence of surplus supply of raw materials i.e. red cof-
fee, in the area surrounding the industry; and to the growth of demand for high quality grade A 1 st
rank wet processed coffee in central market as well as international market as general. The research
result were quite compassionate. According to the findings of information obtained from Gedeo
zone agriculture and rural development department there is ever increasing supply of red coffee to
industry in Yirgacheffe woreda in general and sede kebele in particular, where there is no even
single wet coffee processing industry. Due to this fact farmers and coffee dealers are exposed to
transport their red coffee to surrounding kebeles that consume much energy, material and time
resource. Information obtained from minister of agriculture and rural development , central coffee
auction , revealed the existence of increasing demand for quality Yirga cheffe grade A 1 st rank
washed coffee in central and international market with positive increase in its price. Assessment
of Yirga cheffe coffee producer’s farmers cooperatives union is also strengthening findings from
central coffee auction. The union have been producing and exporting grade A 1st and 2nd rank
Yirga cheffe washed coffee to international market and won different quality awards from inter-
national quality and standard assurance authorities. The farmers and coffee dealers in the area are
complaining on the price they receive from the sale of red coffee that is lower than the price paid
by investors in Yirgacheffe and other woredas for the same type and quality red coffee.

To sum up there is surplus production of raw materials, red coffee , high demand for washed in
central and international market, the price paid by investor in the area is lower than those investing
in neighboring woreda.

Because , we are implementing marketing strategy that stresses quality raw material by higher
price, so as to produce and sale high quality products at prevailing central market price we will
capture and retain considerable portion of farmers and coffee dealers from existing industries.

4.2. Marketing strategy

Basically, Aynalem Zewde washed coffee industry will market itself as purchaser of high quality
red coffee by relatively higher price than its competitors. As part of this strategy, the industry

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advertises by using shop notice/tapela/ local newspaper and calling local meetings and telling the
supplier the price they will get for their quality supply, engaging itself in public service like con-
struction of road and schools. The preferred mode of advertising is word of mouth by which it
hopes to disseminate information to generate a significant amount of costumers through referrals.
For this end it planned to use blockers and elders in the era.

4.3 Pricing strategy

The relation to purchase price of raw material , red coffee , it is planned to use psychologica l
pricing strategy where it will pay trivially higher price for quality raw material than others will.
This can achieved through lowering overhead expense, by reducing labor cost through family em-
ployment and hiring fewer employees. Another means is to enhance quality of output , washed
coffee , by using technologically advanced machineries and trained labors in the conversion pro-
cess. The price of output ,washed coffee, is depend upon the quality, type and rank of washed
coffee determined by bargaining power. Since, the industry planned to produce high quality
Yirgacheffe grade A 1st rank washed coffee it well sale its products at higher price as compared to
those who produce other type, lesser grade and rank washed coffee.

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 V. Action plan

5.1 Personnel
The industry plans to keep wage and salary expense low, at least initially.to achieve this objective
it will hire just one head of industry in supervisory position and, an accountant, a chief mechanic
and his assistant, a store keeper and five purchasers on contract employment and hundred daily
laborers. The industry will pay monthly salary of birr 2,000.00 , birr 1,500.00, birr 1500.00, birr
1200.00 , birr 1000.00, and birr 800.00; for head of industry for 12 months accountant only for 5
months , chief mechanic for only 4 production months, assistant mechanic only 4 production
months, store keeper only 5 months, and a purchaser only 4 production months. Daily laborers are
paid 40 Birr per day payable on bi-weekly basis. Since , the industry will operate in the harvesting
period of red coffee and stays in operation only for four months with in a year, salaries and wages
are paid only for five production months. Summary of salaries and wages is given below.

No Name of employee Position No of No of Monthly Annual Re-

em- month payment payment mark
ployee s
1 Ato Dereje Wako Head , industry 1 12 2000.00 24000.00
2 Ato Dereje Asefa Chief mechanic 1 4 1500.00 6000.00
3 Ato Nigusie Alako Ass. Mechanic 1 4 1200.00 4800.00
4 Ato Bekele Accountant 1 5 1500.00 7500.00
Deyasso
5 W/ro Wotu Figa Store keeper 1 5 1000.00 5000.00
6 5 purchasers Purchasing 5 4 800.00 16000.00
7 Daily laborers Loading/ unload- 100 5 600.00 300000.0 Birr
ing 0 40/day
for 30
day in
month
Total 110 - - 363,300.
00

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5.2. Expenses and cost of sales
In addition to salaries and wages paid to employees and daily laborers, it will incur cost of red
coffees ,utilities, supplies and consumables ,insurances, interest etc. Their sum will be 93,750.00
per month for four months during operation and it may fall to only depreciation and head of indus-
try salary other than cost of red coffee, 75% of sales for the period. Except depreciation other
expenses are paid in cash.

Ashenafi Uddowashed coffee industry

Estimated annual operating expense
No Item Amount
1 Salary 63,300.00
2 Wages 60,000.00
3 Insurance 18,000.00
4 Fright 17,500.00
5 Supplies 15,000.00
6 Utilities 30,000.00
7 Depreciation 82,000.00
8 Interest expense 75,650.00
9 Miscellaneous expense 13,550.00
Total 375,000.00

5.3. Fees collection

Since, most of costumers of the industry are individuals who are residents of Addis Ababa city
exporting coffee to international market its products are sold on cash basis only. As a result, there
is no accounts receivable and hence, no risk of uncollectability.

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 VI. Financial projections

6.1 Risks
Since the business is established based on situations analysis and market research that revealed
favorable result, internal strength exceeding its weakness, as well as its opportunities excel threat;
the grocery will continue for indefinite period in profitable operation, although, every business
venture is vulnerable to risk of failure due to future loss or bankruptcy. It is confident that the
grocery will be successful and free of risk of loss up to 95%.

6.2. Estimated cost of a project/ investment

Aynalem Zewde washed coffee industry
Estimated cost of a project
No Item Remark
1 Acquisition cost of machinery 322,145.50
2 Lump sum contract price for recu- 500,000.00
peration of the building and other
facilities
3 Cost of equipment and furniture 97,854.50

920,000.00
Sub total
Contingency 5% 46,000.00
Grand total 966,000.00

Lump sum contract price for recuperation of the building and other facilities includes:

 Chemical and bag store with office 7.10x8.75m

 Parchment coffee store 7.30x15.20m
 Coffee drying beds
 Water pump house
 Main water reservoir
 Recycling

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  Water tanker
 Skin separation tower
 Reception – cherry hopper –machine house
 Fermentation tank
 Sump tank
 Soak tank
 Facultative logon

6.3. Working capital

Cash ………………………………………………..Birr 2,500,000

Inventories …………………………………………1,320,000.00

Supplies ……………………………………………14,000.00

Total working capital ……………………………....3,834,000.00

Less: accounts payable ……………………………. (300,000.00)

Net working capital …………………………………Birr 3,534 ,000.00

6.4. Project financing

Total cost of project 966,000.00
Add : net working capital 3,534,000.00
Total financing requirement 4,500,000.00
Less: initial investment made by at Aynalem Zewde (2,500,000)
Bank loan 2,000,000
Collateral is available , residential building of the investor in Yirga cheffe town 03 kebele , for
bank loan.

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6.5. Proforma financial statements
Aynalem Zewde washed coffee industry
Projected income statement
For the three years ended hamle 2013
Year I `Year II *** Year III***
Sales * 15,200,000.00 16,720,000.00 18,392,000.00
Less: cost of goods sold** 10,640,000.00 11,704,000.00 12,874,400.00
Gross profit 4,560,000.00 5,016,000.00 5,517,600.00
Less : operating expenses 375,000.00 832,275.00 877,038.80
Income before tax 3,764,500.00 4,180,725.00 4,640,561.00
Income tax**** 0.00 0.00 0.00
Net income 3,764,500.00 4,180,725.00 4,640,561.00

Notes to financial statements

 *sales for the first year is according to the selling price of products offered, the industry
planned to provide 20 trucks carrying 400 feresula to be sold at birr 1900.00 per feresula
 ** cost of goods sold is estimated to be 70% of annual sale
 ***income tax is exempted for the first three years as investment promotion incentives
 ***sales for subsequent year are projected at 10% income from just ending year’s sales
and operating expense increased by 5%.

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