Learning Resource

TAM 2: Explaining Profitability and Borrowing

The aim of the second booklet is to help people to take stock of their current livelihood strategies and decide if they consider any of their enterprises as businesses from which they hope to make a financial profit.  Guidance is then provided on how to work out the profitability of both farm and non-farm enterprises. 

The importance of making a profit for business growth is explained and how you can work out the rate of return on the capital invested. This is then used to show how borrowing to expand a profitable enterprise in which the rate of return is greater than the interest paid is very positive for the owner.  The money he has available to invest will increase.  However, if a loss is made his capital can disappear very quickly.  Constructing a simple balance sheet can help people to assess the level of risk they are running when they borrow money.

The book concludes with a look at how to improve the profitability of enterprises and how to budget the potential profitability of a new enterprise.