Thinking like a small business owner

Ecuadorian bread by Vilseskogen, CC Flickr 

The World Bank helps to design dozens of projects that assess and address the difficulties of reaching small business owners with services, which include anything from credit and technical assistance, to exports markets, value chains, technology and more.

A deeper understanding of the challenges, opportunities and risks small business owners face might help Bank staff and other development specialists to do an even better job.

For example, meet Reina, a baker in Quito, Ecuador. Reina operates a business with four workers, two ovens, and a range of sweet and salty breads popular with the neighbors. Her small shop has electricity most of the day and a reliable water connection most of the year.  The display windows are filled with freshly baked rolls that hide the ovens, the small warehouse for raw materials and the occasional chaos that arises during busy weekends and holidays.

How did she get here? Reina worked for another baker for five years, learning the trade. She took a two-day course on business management from an institute on the other side of town. Then Reina took out a loan from an informal group of friends, who lend periodically to each other for business and home needs, to buy her first oven. Reina offered part-time jobs to a few relatives and a friend and trained them in the basics. And Panadería Estrella (the Star Bakery) was born. It is a story repeated thousands of times in emerging markets. This is how the shadowy informal sector creates work… and wealth.

With her investment on the line, Reina makes a number of decisions every day which can determine the bottom line of the bakery. As we go decision by decision, you will understand what she does and what she needs more easily. One decision leads to another and another.
 

Decision #1: Who wants to buy my bread and why?  Reina sells to people walking down the street, but she has her eye on an elementary school five blocks away which might buy a lot of hot fresh bread early in the day. Reina has to understand marketing – how can she convince the school that it needs her products?

Decision #2: If the school says “sí,” she will need more raw materials. Could her current supplier provide them and where would she store them? What if the current supplier’s truck crashes or his mill breaks down? She begins to realize she needs to diversify the sources of flour, eggs, milk, paper bags and more. Transporting all that bread quickly will also be a challenge so logistics and managing the raw materials become increasingly important for Panadería Estrella.  

Decision #3: Who will help her bake the additional bread?  Reina’s team is already working hard, and since the school order would have to be delivered by 7 a.m., she would need a few more workers in the early morning. She asks the current team for ideas of people who like to bake and don’t need to sleep!

Decision #4: Don’t forget the bottom line, Reina!  The idea has to be profitable, so she has to cost out the ingredients, labor, electricity, water and her time as manager – to set the right price for the school. If it is too high, the school will look elsewhere. If it’s too low, she will bake herself into bankruptcy. How can she track those expenses and set the right price for her breads?

Decision #5: What if the oven breaks down? Reina has her eye on a used oven, only two years old, but she also has to pay for an upcoming baptism, host a friend’s wedding reception, and pay remaining school fees for her three children. Beyond the costs of the business, she needs to start saving for that oven. Or would it be more efficient to get the business books in order and apply for a microcredit loan?

Decision #6: Bigger batches, better workflow. Once a week, two of the workers collide and it takes several minutes to clean up the eggs, milk, equipment and workspace. Is it time to reconsider how the ovens, the pans, the little warehouse area, raw materials, and workers move around the small space?

Decision #7: Sweet and salty breads are fine, but what else can she add to her recipe list?  Reina hears about a two-night course on wedding cakes, and the photos she sees are impressive. Since she is hosting her friend’s wedding in two months, maybe it is time to try making three-tiered wedding cakes. This means new ingredients, a new metal table, a special mixer and decorating equipment. The first few experiments are a mess, so Reina realizes that she needs some help from an expert baker (we call it technical assistance).

How decisions form a basic business plan. Let’s think about the services Panadería Estrella needs. Here is the rather exhaustive list: marketing, workflow management, training for workers, costing and new product design training for the owner, transport options, diversification of raw material suppliers, credit, information on ovens, and a course on wedding cakes.

Since Reina also has other pressing family demands,  these needs have to be met cheaply, quickly, and conveniently for her business to grow. She may need to register the bakery as a formal business, pay taxes, and feed the health inspector when he visits. Maybe someday Reina will ask her nephew to build her an internet virtual store front, bringing the panadería into the 21^st century.

Reina’s most important skill is not baking or selling, it is a clear and realistic long-term business vision about where she wants to take the panadería.

She may also set limits on how far the business should grow,  before it becomes too big, too complex and too indebted for her to manage. This comes from her experience, her local knowledge and her business savvy.

Now back to the reality of the work of the World Bank and other development organizations’ projects. Small business owners like Reina remind us of the importance of the business fundamentals. Their business needs are basic and their time is valuable; sitting in full day theoretical courses won’t cut it. Their businesses grow incrementally, one oven at a time.

They need advice from process engineers, experienced business owners, market information, and costing systems. In other words, their businesses and resources may be small, but their vision and needs are not. They can benefit directly from such specific help from a matching grants facility, a competitiveness agency, a microfinance institution, a government-supported project, or other sources that the World Bank and others support.

Next time we are working with counterparts to cook up a small business development project design, it is useful to keep Reina and the millions of other small business owners in mind.

We just need to mix the right ingredients to offer the right project recipe and create business and learning opportunities.
 
As they say in the baking business, a good baker always rises to the occasion, it is the yeast she can do.