Tadala's Broilers: A Loan, a Grant and a Promise from Traders
Tadala, 24, runs a broiler unit in Salima with a shed that can hold 800 birds. She buys 500 day-old chicks per six-week cycle at MK1,200 each, spends MK4,500 per bird on feed and MK300 per bird on medication and litter, and loses about 5 per cent of birds before sale. Live birds sell at MK9,000 each to traders who come to the gate, and she sells every bird she produces. She has no savings and finances each cycle from the previous one. A microfinance institution has offered a MK2 million loan at 22 per cent a year repayable over 12 months, and a grant of MK1.2 million is available for fixed assets only, such as a bigger shed or a feed mixer. Traders have said they could take 1,200 birds a cycle but only if supply is regular. Feed prices rose 15 per cent last year, and two neighbours who expanded quickly went out of business after a disease outbreak.
1. Calculate the profit per cycle and the return on the money tied up. What does this tell you about the real constraint on growth?
Read the worked answer
Cost per chick placed = 1,200 + 4,500 + 300 = MK6,000, so 500 chicks cost MK3,000,000 per cycle.
Sales = 500 × 0.95 = 475 birds × MK9,000 = MK4,275,000.
Profit per cycle = MK1,275,000, a margin of about 29.8 per cent of sales. Cost per bird sold = 3,000,000 ÷ 475 ≈ MK6,316, against a price of MK9,000.
The cycle lasts six weeks, and with cleaning and rest the shed realistically runs six or seven cycles a year, though the 800-bird capacity caps output at roughly 760 birds sold per batch if she filled it.
The important number is the return on the money actually tied up. She funds the whole MK3,000,000 from the previous cycle's proceeds, so profit of MK1,275,000 on roughly MK3 million of working capital is a return of about 42 per cent per cycle - far above the 22 per cent interest on the loan. That tells her the binding constraint is not the shed and not the market; it is cash to buy chicks and feed. The shed limits her to 800 birds, but her own cash limits her to 500, and the loan of MK2 million buys working capital for only about 333 birds (2,000,000 ÷ 6,000). Growth therefore comes from adding capital per batch, not from adding buildings.
2. Advise Tadala on how to use the MK2 million loan and the MK1.2 million grant. Justify the plan and show the financial test it must pass.
Read the worked answer
Use the grant for the constraint that cash cannot solve. The grant may only buy fixed assets. The shed's 800-bird ceiling does block the 1,200-bird supply the traders want, so use the grant to expand the shed and improve ventilation and biosecurity rather than to buy a feed mixer - at 500 to 800 birds she buys finished feed, and a mixer adds little unless she can source and balance raw materials reliably.
Use the loan for working capital, not buildings. Interest at 22 per cent on MK2 million is about MK440,000 a year, or roughly MK50,000 per six-week cycle. Two million buys about 333 birds of working capital. An extra batch of 333 birds would earn 333 × (0.95 × 9,000 − 6,000) = 333 × 2,550 ≈ MK849,000 per cycle, comfortably covering the interest and leaving a substantial surplus. The loan passes the test, but only if the birds survive and sell.
Phase the expansion. Do not jump to 1,200 birds a cycle: that needs about MK7.2 million of working capital, which neither the loan nor retained profit can fund. Instead expand the shed with the grant to hold about 1,000 birds, run two staggered batches from the loan plus retained profit, and keep one cycle's feed cost as a cash reserve before promising traders regular supply. Get the traders' commitment in writing, with a price and volume, because their verbal promise is not a contract.
3. Identify the two greatest risks in this plan and explain how Tadala should manage each.
Read the worked answer
Risk 1: disease. A single outbreak can wipe out a batch worth MK3 million before any sale, and the two neighbours who expanded quickly failed for exactly this reason. High stocking density and multiple batches in one shed increase the risk. Manage it with strict all-in, all-out production with a clean rest period between batches, a footbath and limited visitors, vaccination and a written medication schedule, separation from neighbouring flocks, prompt removal of dead birds, and a relationship with a veterinarian rather than advice from other farmers. Expand gradually so that one bad batch does not destroy the whole business, and keep enough reserve to restock after a loss.
Risk 2: feed price and cash-flow shock. Feed is MK4,500 of the MK6,000 cost per bird, so a 15 per cent rise adds MK675 per bird, about MK337,500 per batch at 500 birds - more than a quarter of the current profit. Because she finances each cycle from the last, a price rise or a delayed sale forces her to buy smaller batches or cheaper feed that performs worse. Manage it by buying feed in bulk where storage allows, negotiating a fixed price for a full cycle, agreeing with traders that price moves with feed cost, and refusing to borrow for consumption - the loan should fund birds, not overheads.
A third risk deserves watching: the traders' verbal promise. Selling every bird she produces means no buffer, so a sudden refusal to buy leaves live birds that must be fed daily. A written order before each batch is placed is the simplest protection.