Required citation:

Boscolo, M., Lehtonen, P. and Pra, A. 2021. Developing bankable business plans – A learning guide for forest producers and their organizations. Forestry Working Paper No. 24. Rome, FAO. https://doi.org/10.4060/cb4520en

The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations (FAO) concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The mention of specific companies or products of manufacturers, whether or not these have been patented, does not imply that these have been endorsed or recommended by FAO in preference to others of a similar nature that are not mentioned.

The views expressed in this information product are those of the author(s) and do not necessarily reflect the views or policies of FAO.

ISSN 2664-1062 [Print]

ISSN 2664-1070 [Online]

ISBN 978-92-5-134353-1

E-ISBN 978-92-5-134416-3 (MOBI)

© FAO, 2021

Some rights reserved. This work is made available under the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 IGO licence (CC BY-NC-SA 3.0 IGO; https://creativecommons.org/licenses/by-nc-sa/3.0/igo/legalcode).

Under the terms of this licence, this work may be copied, redistributed and adapted for non-commercial purposes, provided that the work is appropriately cited. In any use of this work, there should be no suggestion that FAO endorses any specific organization, products or services. The use of the FAO logo is not permitted. If the work is adapted, then it must be licensed under the same or equivalent Creative Commons licence. If a translation of this work is created, it must include the following disclaimer along with the required citation: “This translation was not created by the Food and Agriculture Organization of the United Nations (FAO). FAO is not responsible for the content or accuracy of this translation. The original [Language] edition shall be the authoritative edition.”

Disputes arising under the licence that cannot be settled amicably will be resolved by mediation and arbitration as described in Article 8 of the licence except as otherwise provided herein. The applicable mediation rules will be the mediation rules of the World Intellectual Property Organization http://www.wipo.int/amc/en/mediation/rules and any arbitration will be conducted in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).

Third-party materials. Users wishing to reuse material from this work that is attributed to a third party, such as tables, figures or images, are responsible for determining whether permission is needed for that reuse and for obtaining permission from the copyright holder. The risk of claims resulting from infringement of any third-party-owned component in the work rests solely with the user.

Sales, rights and licensing. FAO information products are available on the FAO website (www.fao.org/publications) and can be purchased through publications-sales@fao.org. Requests for commercial use should be submitted via: www.fao.org/contact-us/licence-request. Queries regarding rights and licensing should be submitted to: copyright@fao.org.

Cover photograph: Acacia plants being planted for future charcoal production in Yanonge, DRC. ©CIFOR/Axel Fassio

Contents

Acknowledgements

Abbreviations and acronyms

1. Introduction

1.1 Why this learning guide?

1.2 Objectives of this guide

1.3 Who can benefit from this guide?

1.4 How to use this guide

1.5 What is included in this guide?

2. How to develop a bankable business plan

2.1 What is a bankable business plan?

2.2 Overview of the ten modules

2.3 MODULE 1: Evidenced business idea

2.4 MODULE 2: Committed and competent management and organization

2.5 MODULE 3: Market outlook

2.6 MODULE 4: Scalable production assets

2.7 MODULE 5: Assessment of market participants and marketing strategy

2.8 MODULE 6: Applied technologies and logistics

2.9 MODULE 7: Assessment of business environment and legal issues

2.10 MODULE 8: Financial analysis

2.11 MODULE 9: Compliance with environmental, social and governance criteria

2.12 MODULE 10: Risk assessment

3. Aligning the plan with investor’s criteria

4. The way forward

4.1 Support of public agencies and development partners

4.2 Glossary of technical terms

4.3 Annexes

5. References

Boxes

1. Drivers of wood supply and demand in Africa

2. Partnering for scale

3. The market as a source of finance

4. The with/without project approach

5. Globally recognized ESG frameworks and guidelines

6. Accelerator and incubation programmes for forest business ventures

7. Towards new financial instruments in Uganda and Kenya

Figures

1. The ten modules for developing a bankable business plan

2. Central Park Bees (Swahili Honey) business model Canvas

2a. Canvas fill order and risk iteration path

3. Central Park Bees business organogram

4. Overview of demand and supply drivers

5. East Africa (2012–2030) and Uganda (2019–2030) trade deficit in wood products

6. Map of TGAN tree farmers (clusters of forest farms in red)

7. TGAN inventory summary

8. Komaza partnership model with smallholder farmers

9. Example of value chain mapping

10. Swahili Honey competitor analysis matrix

11. SWOT analysis framework

Tables

1. The ten modules in brief

2. Key questions to define your business idea

3. Key aspects of organizational sustainability

4. Examples of management team members’ duties

5. Management team information matrix

6. Key information to be collected for an effective market outlook

7. Market demand assessment framework

8. Key information on forest and land resources availability, productivity and management

9. Framework for assessing the market participants

10. Key information to include in a marketing strategy

11. Key information to include regarding technology

12. Technical specifications for a briquetting plant

14. Key elements of external services

13. Total briquetting plant capital expenditure

15. Key institutional and legal issues

16. Revenues data template

17. Variable costs (per unit of production) data template

18. Fixed costs data template

19. Capital expenditures data template (examples)

20. Hypothetical example of capital expenditures

21. Cash-flow template

22. Cash flow for a briquetting plant in Zambia

23. Financial indicators

24. Example of simple ESG indicators

25. Risk categorization

26. Central Park Bees risk assessment matrix

27. Financial sources, instruments and their criteria

Acknowledgements

This learning guide is the product of a multidisciplinary collaborative effort. The authors thank all those who provided inputs and comments during the drafting of the text, especially colleagues at FAO (Christophe Besacier, Benjamin De Ridder, Lucy Garrett, Mathilde Iweins, Rao Matta, Ewald Rametsteiner, Tiina Vähänen, Sven Walter), Joshua Schneck (IUCN), Jonathan Gheyssens (UNEP), Mauro Masiero and Alessandro Leonardi (ETIFOR), Steve Gretzinger (GreenWood Resources), Michael Brady (CIFOR), Thomas Gichuru (Tree Growers Association of Nyandarua), Joseph Kadendula (Central Park Bees) and Geoffrey Okoth Yoga (Green Charcoal Uganda). They also thank the participants in the expert meeting on “Catalysing private finance for inclusive and sustainable forest value chains” organized by FAO in April 2019, and training courses held in Kampala (Uganda) and Nairobi (Kenya) in October and November 2019, who gave valuable feedback and made suggestions on the training materials and activities. Copy-editing by Caroline Lawrence and graphic design by Roberto Cenciarelli. The Forest and Farm Facility, the Forest and Landscape Restoration Mechanism (FLRM), the Partnerships Division of FAO, and the Global Environment Facility (GEF), through its support of the Joint Initiative of the Collaborative Partnership on Forests on Forest Landscape Restoration, are also gratefully acknowledged for their financial support to pilot and finalize the guide.

Abbreviations and acronyms

CAPEX capital expenditure

CIFOR Center for International Forestry Research

DBH [tree] diameter at breast height

DD due diligence

DFI development finance institution

DSCR debt-service (coverage) ratio

EBITDA earnings before interest, taxes, depreciation and amortization

EIB European Investment Bank

ESG environmental, social and governance

ESIA environmental and social impact assessment

ESMMP environmental and social management and monitoring plan

ESMP environmental and social management plan

FAO Food and Agriculture Organization of the United Nations

FFF Forest and Farm Facility

FFPO forest and farm producer organization

FLR forest and landscape restoration

FLRM Forest and Landscape Restoration Mechanism

FMU farm/forest management unit

FSC Forest Stewardship Council

GDP gross domestic product

HR human resources

IFAD International Fund for Agricultural Development

IRR internal rate of return

IUCN International Union for Conservation of Nature

KPI key performance indicators

MA&D market analysis and development

MAI mean annual increment

NGO non-governmental organization

NPV net present value

NWFP non-wood forest product

OPEX operating expenditure

PBP payback period

PEFC Programme for the Endorsement of Forest Certification

PO producer organization

ROAM restoration opportunities assessment methodology

ROI return on investment

SDGs Sustainable Development Goals

SME small and medium-sized enterprise

SPGS Sawlog Production Grant Scheme

SRI sustainable and responsible investments

SWOT strengths, weaknesses, opportunities and threats

TGAN Tree Growers Association of Nyandarua (Kenya)

TNC The Nature Conservancy (Kenya)

UNCTAD United Nations Conference on Trade and Development

WRI World Resources Institute

1. Introduction

1.1 WHY THIS LEARNING GUIDE?

This guide was developed to improve the capacity of small producers, their organizations and small and medium-sized enterprises to access private investment and finance for sustainable forest-based businesses. With strengthened business planning capacity, small holders and SMEs are better able to participate in forest value chains and derive increased socio-economic benefits from them.

Mobilizing and leveraging private investment that complements public investments promises to be transformational for rural economies in many developing countries[1] since the investments required to achieve the Sustainable Development Goals (SDGs) cannot be met through official development assistance and government resources alone.[2]

A wide variety of investment funds and funding instruments is currently available for financing forestry businesses. They range from traditional development finance institutions, philanthropic foundations and local capital entities, to new investors such as sustainable and responsible investors, impact funds, and business acceleration and incubation organizations. In addition, a growing number of financial investors promote sustainable investments as a strategic objective and are actively exploring business opportunities in developing countries.

However, smallholders and their producer organizations (POs), small and medium-sized enterprises (SMEs), and communities in low-income countries have historically struggled to access finance due to a number of obstacles such as:

• limited business development capacities;

• limited scale of operations;

• poor awareness of natural resource use and management, and of available processing technologies;

• insecure tenure rights;

• insufficient capacity to access markets and lack of integration among market participants along value chains;

• weak organizational structures and management capacities; and

• poor understanding of the criteria (and standards) needed for investment.

In addition, interested investors frequently voice concerns about the limited pipeline of potential bankable business plans in developing countries, especially in forestry; poor and inconsistent information on the investment environment; and few examples of successful business and investment cases. Both impact and commercial investors observe that many of the project proposals they evaluate do not meet their minimum investment criteria, provide little detail, and/or have risks that are perceived to be too many, too high or unclear.

As a result, POs and SMEs need improved skills to properly value their assets, position and integrate into value chains, scale up their operations and develop sustainable businesses.

Scaling up the development of sustainable forest-based value chains will have major climate and development benefits: increased productivity, increased carbon stocks (in forest assets, in wood products and through substitution of non-renewable materials and energy) and improved resilience against climate change effects. It will also contribute to reducing poverty through increased employment and incomes, and to closing the wood gap between supply and demand anticipated as a result of population and economic growth (World Bank et al., 2017). In addition, many forests are crucial for food production, supporting watersheds and soils, and reducing the risks of floods, landslides and other natural disasters.

Several opportunities to develop and scale up sustainable forest value chains and businesses are emerging with the global shift toward promoting greener, climate-smart bioeconomies. This shift emphasizes the use of sustainable wood products, recycled products, renewable energy, and the restoration of ecosystems.

For example, the upcoming UN Decade on Ecosystem Restoration (2021–2030), together with the call for scaled-up action to tackle climate change, will mobilize resources for sustainable forest-based activities. It will also create important opportunities and synergies to link restoration activities to income-generating opportunities for rural populations, thus giving local populations a stake in the long-term success of those efforts.

It is widely acknowledged that ecosystem restoration and businesses that operate in sustainable forest value chains are key to achieving various Sustainable Development Goals (SDGs), such as those relating to climate change, poverty eradication, food security, water and biodiversity conservation.

FAO and the United Nations Convention to Combat Desertification (UNCCD) (2015) have suggested that forest and landscape restoration (FLR),[3] can offer significant returns (7–79 percent) on investments in restoration, depending on the objectives of the restoration action. Other studies (e.g. Verdone and Seidl, 2017) estimate that every USD 1 invested in restoring degraded forests can yield between USD 7 and USD 30 in economic benefits, when the value of multiple ecosystem services is considered.[4] This guide can help turn restoration activities into viable businesses, which in turn will increase momentum towards the achievement of the Sustainable Development Goals.

FAO and partners are actively supporting capacity-building and knowledge-sharing on value chain development and finance. In April 2019, as part of the activities of the joint initiative of the Collaborative Partnership on Forests (CPF) Sustainable Wood for a Sustainable World (SW4SW), FAO organized an expert meeting on “Catalyzing private finance for inclusive and sustainable forest value chains” with the active participation of private companies, investment funds, development finance institutions, SMEs, producer organizations, development agencies and sector experts.[5] A key conclusion was that, while opportunities exist to mobilize private capital for sustainable forestry value chains, unlocking this potential requires: (1) training and mentoring to strengthen business development capacities of producer organizations and SMEs; (2) enhancing communication between the forest and finance sectors; (3) improving the availability, quality and transparency of information on forestry value chains; and (4) enhancing the investment environment. This guide follows up on the expert meeting conclusions offering a practical tool to start addressing these challenges.

1.2 OBJECTIVES OF THIS GUIDE

The learning guide has been developed to assist smallholders, producer organizations and enterprises in the preparation of bankable business plans. It offers a framework to think through, organize and develop a convincing investment proposal.

The guide introduces ten key elements, presented as modules, which should be included in any bankable business plan.[6] Templates, tips and advice also provide users with a structured way to think through and compile information related to each of these elements.

The goal is to increase the attractiveness of the business proposal to funding sources and thus facilitate access to finance. The guide is especially aimed at those producer organizations and companies that seek to scale up operations and need the know-how to do it themselves.

This guide is not meant as a comprehensive toolkit and additional resources may be needed to develop specific aspects of a business plan. Some relevant resources are suggested within each module. Deciding which additional material to consult will depend on the objectives of the business plan, the level of investment sought, and the specific circumstances in which the business operates.

This guide complements other activities supported by FAO and other development agencies, such as the facilitation of dialogue between forest and finance sectors and other efforts to strengthen legal and sustainable forest-based value chains.[7]

1.3 WHO CAN BENEFIT FROM THIS GUIDE?

The learning guide was developed to support:

• forest and farm producer organizations (FFPOs), including smallholders and their associations;

• small and medium-sized forest enterprises (SMEs); and

• other organizations and companies that provide technical assistance to local projects in forest-based value chains.

In order to take full advantage of this guide, it is highly recommended that a concrete business idea is clearly identified and that a promising and accessible market exists. The guide would be most beneficial for organizations/enterprises with annual sales in the tens of thousands of dollars, which are seeking to mobilize finance of at least USD 50 000 to 100 000, depending on local contexts. The higher the amount of financing sought, the more evidence may be required by the lender. It is less suitable for accessing funding from microfinance institutions that rarely finance long-term investments.

If, on the other hand, these conditions do not yet exist, other tools are available to initiate a business exploration, such as FAO’s market analysis and development (MA&D) (FAO, 2011), or the International Union for Conservation of Nature (IUCN) and World Resources Institute (WRI) guide to the restoration opportunities assessment methodology (ROAM) (IUCN and WRI, 2014).

The guide can be adapted to the specific needs of established businesses that seek financing to expand or improve their existing activities, as well as start-ups.

Individual modules can also be used independently for a specific purpose. For example, the first module can help to prepare businesses for an initial conversation with funding sources. Organizations that have some, but not all, information can use other modules to collect and organize information that has been requested by the funding source.

The guide can also be used by technical assistance providers who work with producer organizations and companies to strengthen their capacities in business planning for inclusive and sustainable forest-based value chain investments.

Finally, the authors believe that it will be useful to forestry, restoration and livelihood development investors, programmes and projects that need to mobilize finance to strengthen sustainable forest-based value chains in order to achieve their goals.

1.4 HOW TO USE THIS GUIDE

Individuals or groups might use some or all of the guide to develop their bankable business plan independently. The authors tested this material using the following modalities, which can be replicated:

• In-person training. Providers of technical assistance may adapt this material to develop training programmes.

• Semi-structured mentoring and coaching. The guide has been piloted with a selected group of producer organizations[8] which were mentored by a team of experts over the course of ten weeks. As they worked their way through the modules, the POs completed specific tasks for each component, presented their work and received feedback from the mentoring team. This systematic, supported process was highly successful. It broke down the required work into manageable pieces, and provided structure and targeted input for their specific plan.

1.5 WHAT IS INCLUDED IN THIS GUIDE?

The learning guide is organized into four main chapters. Further to this introductory chapter, Chapter 2 begins with a description of what makes a project’s business plan bankable and includes ten modules that provide a roadmap to develop the user’s own plan.

Each module provides:

• a short description of the component that should be included in the plan, and why it is important;

• ready-to-use templates and tools to organize information and think through key questions relating to the component;

• examples from actual cases that illustrate how some businesses presented that information;

• useful references, such as published and open-access reports, articles, documents and databases to enhance learning; and

• checklists to keep the user on track and ensure that the common concerns of creditors and investors are addressed.

Chapter 3 provides an overview of the most common financial instruments as well as the criteria adopted by creditors and investors to evaluate a business plan. It is useful to know these criteria in advance and assess a business plan against them to judge the feasibility of accessing these funds. For example, size of investment (often referred to as ticket size), financial criteria based on cash flows (such as debt service, return on investment – ROI), scalability, sustainability, and proven track record with competent management.

Chapter 4 suggests possible ways forward to business developers and development partners.

2. How to develop a bankable business plan

2.1 WHAT IS A BANKABLE BUSINESS PLAN?

What is a bankable business plan and what should it include? A business plan is a rational presentation of a business idea that uses language and performance metrics familiar to potential investors (see, for example, IFC, 2019). It presents the business concept and its aims and describes how they will be reached in a systematic way. In order to be considered “bankable” the plan must present a clear and credible earning logic.

For practical purposes, the process of developing a bankable business plan can be broken down into ten modules, as shown in Figure 1.

The separation into modules is meant to provide manageable building blocks to facilitate the preparation of a plan. The modules are connected and, together, affect the overall sustainability of the business idea. Each financing source may have its own forms or templates highlighting the kind of information required. The information generated by working through the ten modules will provide a base and reference to complete them. Therefore, the amount of information and sequence suggested in this guide is only indicative.

How to present a business plan? A business plan should be presented as a brief but comprehensive document where, in principle, all ten modules are addressed and evidenced. Nevertheless, there is no need to report or attach all the technical documentation, studies and data sheets (though their availability should be mentioned in a business plan and they should be kept readily accessible, as a business plan evaluator may ask for further material).

Data are of key importance as they link the idea to verifiable evidence and a clear earning logic. Finally, as a business plan may be evaluated by experts who may not be familiar with the specific business area or some technical terms, the language used should be simple, clear and convincing, without sounding overly enthusiastic or critical. Balanced recognition of challenges and transparent discussion of past mistakes inhibiting success are well regarded by potential investors, particularly when the plan shows how the business has learned from experience and plans to use these lessons for improvement.

How is a business plan “bankability” evaluated by creditors? Bankability is evaluated by creditors or investors in a process known as due diligence (DD). This is an investigation or audit of a potential investment opportunity or use of lender’s funds. Essentially, it covers investigation into all relevant aspects of the past, present and predictable future of the business, covering: (1) quantity and quality assessment of the available or required assets to be owned or managed, financial statements, basic assumptions and legality of the planned business; (2) evaluation of factors that may have a future impact on the business or assets; and (3) confirmation of information provided by the project developer. DD is commonly carried out in the investing/lending phase but is also applied, on behalf of a lender, to monitor and assess the performance and use of funds of the company/enterprise that has received the funds.

The preparation of a plan requires multiple skills and competencies in technical and operational topics, business organization and management, financial modelling, market analysis, legal and institutional issues assessment, as well as a minimal understanding of the institutional framework and policy instruments that impact the business environment.

As some organizations or enterprises may not have all of these skills, they may benefit from assistance through early-stage business development programmes such as accelerators and incubators, or support from appropriate experts[9] or mentors. This assistance might be needed to accompany an organization through the whole guide or used to provide targeted input on specific modules.

2.2 OVERVIEW OF THE TEN MODULES

Table 1 introduces the ten modules addressed in this learning guide.

EXAMPLES: Overview of the business cases reported in this guide

The learning guide refers to business plans from actual initiatives developed by producer organizations from Kenya, Uganda, the United Republic of Tanzania and Zambia.

Tree Growers Association of Nyandarua in Kenya

In 2019, the Tree Growers Association of Nyandarua (TGAN), with FAO and Forest and Farm Facility (FFF) support, began to develop an ambitious business plan to set up a Timber Trading Cooperative. The objective is to aggregate all the timber sales of its members and consequently give farmers a stronger market position. Thanks to the favourable climate, soils and land available for tree farming, together with the efforts of development agencies to promote private commercial forestry, Nyandarua County is currently among the main suppliers of wood material to Kenya’s major cities.

Green Charcoal Uganda: briquettes from agricultural waste in Uganda

In Uganda, two engineers founded Green Charcoal Uganda in 2015, a successful SME that is producing cheap and “green” briquettes from agricultural waste such as palm kernel husks, as an alternative to traditional charcoal, therefore reducing local deforestation. In a country where 90 percent of the energy comes from biomass, this solution can alleviate pressure on Uganda’s already strained forest ecosystems. The aim of the business is twofold: find an alternative source of fuel and create an additional source of income for the smallholder farmers. In fact, Green Charcoal Uganda also works together with the smallholder farmers, teaching them to char the waste using locally fabricated carbonizers and then buying their char powder to manufacture carbonized briquettes. http://greencharcoalug.com

Central Park Bees (Swahili Honey), honey production in the United Republic of Tanzania

A locally sourced honey producer, Central Park Bees, has grown its business from supplying the major cities of Tanzania, to exporting internationally to such places as the Comoros, Dubai, Kenya, Mozambique and Oman. Central Park Bees has been in business since 2015 and in 2017 it launched the Swahili Honey brand, focusing on the production of jars of pure honey with the idea of bringing a world-class and ethically sourced honey to the market, produced by smallholder farmers and traditional beekeepers in rural areas. Central Park Bees works with more than 780 smallholder farmers from rural Tanzania, providing them with training in modern beekeeping techniques, access to beekeeping equipment loans, securing a reliable market for their honey, increasing the price received and overcoming obstacles to market access. Given that bees need open spaces with access to flowers for pollen/nectar, the beekeepers’ groups and cooperatives are maintaining and restoring forest landscapes. https://swahilihoney.co.tz/

Cotton stalks and other biomass-based pellets and briquettes in Zambia

This business plan was developed in 2018 by the United Nations Conference on Trade and Development (UNCTAD) in Zambia.[10] It supports and encourages business development diversification of the country’s cotton producers. The development of an alternative modern and ecofriendly energy source responds to a market need to cater for the growing demand for cooking and heating fuels in Zambia, thus contributing to the goal of universal access to modern and clean energy in the country by 2030. In particular, it focuses on the use of cotton stalks and other agroforestry waste/biomass as feedstock for producing pellets and briquettes, thereby reducing pressure on forest ecosystems. The business plan content addresses most of the aspects needed in a business plan at macro-level, with the aim of overcoming the barriers of limited information on the techno-economic viability and on product development and promotion. FAO has been supporting the Cotton Association of Zambia (CAZ) through mentoring to adapt this business profile.

Note: * Green Charcoal Uganda and Central Park Bees successfully participated and received investments from ECOSTAR-The Nature-Accelerator, an intensive acceleration programme developed by ETIFOR (University of Padua, Italy) for early-stage impactful start-ups creating sustainable solutions in the agriculture, forestry, natural resource and ecotourism sectors. The acceleration programme took place from May to July 2018 in Italy and was powered by the impact investor Fledge. https://www.ecostarhub.com/nature-accelerator/.

2.3 MODULE 1: EVIDENCED BUSINESS IDEA

The first step in business planning is to clarify the key aspects of the business idea, such as its purpose, the product or service provided, the problems it will solve and the target market. In addition, the business idea should provide a concise overview of key elements such as the location, resources, investment needed and the earning logic. It is essential that the business idea gets the product-market fit right and is compatible with its business environment.

Given that the presentation of the business idea is typically an introduction to a business plan, it is particularly important to communicate it in a simple but effective way. Table 2 provides a template for organizing these ideas.

Many business plan templates are also available online for organizing and summarizing a business idea, such as the one used by the Central Park Bees example.

EXAMPLE: Central Park Bees (Swahili Honey) business model Canvas

An interesting and effective template is the business model Canvas*, which is a visual chart containing and linking all the elements evidencing the business idea. The business model Canvas template is widely used, in particular by impact investors in start-up acceleration programmes. The template consists of nine connected boxes, showing how all the different components of the business idea can be linked in order to work successfully (see Figures 2 and 2a).

The template is particularly useful for brainstorming a business idea, and it can be outlined on a whiteboard, sheet of paper or notepad.

Figure 2 gives an example of a business model Canvas compiled by Central Park Bees.

Note: * Lean business-plan templates, available at https://bmtoolbox.net/tools/lean-canva

USEFUL REFERENCES

• EIB. 2020. Investing in nature: financing conservation and nature-based solutions. A Practical Guide for Europe. Luxembourg, European Investment Bank. (also available at https://www.eib.org/attachments/pj/ncff-invest-nature-report-en.pdf.

• FAO. undated. RuralInvest toolkit. Module 3, “Detailed project formulation and analysis” [online]. Rome. http://www.fao.org/in-action/rural-invest/toolkit/en/

• FAO. 2019. RuralInvest – preparing effective investment project proposals. E-learning course, Lessons 1 and 2 [online]. Rome. https://elearning.fao.org/course/view.php?id=185

• IFC. 2020. Investment proposals [online]. Washington, DC, International Finance Corporation, World Bank Group. https://www.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/solutions/investment-proposals

• WUR. 2020. Landscape finance: investing in innovation for sustainable landscapes. E-learning course [online]. Netherlands, Wageningen University & Research. https://www.wur.nl/en/show/Landscape-Finance-Investing-in-Innovation-for-Sustainable-Landscapes-3.htm

MODULE 1 CHECKLIST

Is the business idea a proven concept (i.e. you have evidence it has worked in similar cases and could work in this case)?

Is there sufficient clarity in terms of: (1) the problem it solves; (2) the market it serves; (3) the value it creates; (4) the earning logic; (5) the anticipated economic, social and environmental impacts?

Is the business idea agreed and supported by stakeholders?

Has the business idea been validated with technical experts, associated stakeholders and potential off-takers? Remember that there is seldom room for experimental ventures that are very risky from the viewpoint of the investor.

Does the planned business have the required skills, resources and commitment to carry on with the idea and deal with the unavoidable issues that will arise?

For producer organizations, it is important that members agree with the business idea. Therefore, the process of answering these questions could be done in a participatory way, with trusted stakeholders and people/technicians familiar with the business. This process will also help a business developer to better understand local needs and priorities, identify workable solutions, make a preliminary assessment of the pros and cons, and verify the existence of a clear earning logic. This is also an opportunity to create/foster a sense of commitment and ownership among founders and stakeholders. Finally, providers of technical assistance can provide valuable feedback and suggestions, which could help to better understand the business plan implications, address potential limitations or reduce the time wasted on ideas that are not useful for the success of the business.

2.4 MODULE 2: COMMITTED AND COMPETENT MANAGEMENT AND ORGANIZATION

A key aspect of a business plan is to demonstrate the organizational sustainability of the planned business, i.e. that the business and its management are credible and capable of running in such a way as to be operational in the long term. To do so, a business plan must include information on the planned business legal status and structure, as well as management staff skills and expertise.[12] Table 3 can help to organize this information.

The legal form is important because it defines the legal framework and the personal, financial and tax requirements with which the planned business must comply. The legal form can be changed over time according to the planned business growth or because of changes in the legal framework.

Investors are unlikely to fund an informal entity. In this case, the informal entities will need to access finance through intermediaries or other stakeholders along the value chain. In some regions, intermediation is through local funds managed by civil society organizations. The pros and cons of formalization have been discussed, for example by Dau and Cuervo-Cazurra (2014) and Colombijn and Morbidini (2017). Due to the numerous implications of choosing a specific legal form, consulting an expert is recommended. For forest and farm producer organizations (FFPOs), it is not always necessary to be formally registered by the government. However, formal status may be needed to increase the confidence of investors. In the case of smallholder associations, it may be helpful to share the history of how the association was formed and how it supports members. This history often links to its vision and mission, and criteria for membership. Information on the membership, by age and gender, may also be useful to certain investors.

In addition, it is worth stressing the vital importance of reliable accounting systems and transparent annual reporting for the planned business. This is key to accessing finance as well as improving management and business decisions.

A successful business must have a committed management devoted to carrying it forward. This might be a farmer with a vision and entrepreneurial mindset or an organization with a lean structure. A common failing in business development is to install managers based on customary authority rather than competence and track record. Managers chosen on the basis of customary authority are often simply not equipped for the job. If there is no clear manager or organization in charge, it is unlikely that the business will be successful. Personal investment (e.g. land, capital, labour), demonstrating interest in the business (e.g. physical presence at business site), sense of purpose that goes beyond economic return (e.g. concern for members, employees) and the ability to work together and build partnerships are all revealing signs of a committed management. Organizational structure can be summarized in an organogram, which visually represents the structure, positions and hierarchy, as in the Central Park Bees example. Names of the key members/shareholders and staff member could also be provided.

EXAMPLE: Central Park Bees (United Republic of Tanzania) organization and management

The management team of Central Park Bees is made up of eight people, as shown in the business organogram in Figure 3.

The role and duties of each member of the management team have been reported in a business plan. Some examples are given in Table 4.

Management staff competencies are crucial to bankability because the investor needs to know who is in charge and taking strategic decisions on behalf of the planned business and assess whether those in charge have the appropriate competencies and experience. A business plan must therefore show that the roles are clearly defined. The plan should also demonstrate the track record and show a well-structured curriculum for key staff that justifies their responsibility. A manager, accountant, supply coordinator, production manager and head of sales are some of the typical important roles that should be covered in an organization. Of course, some of these roles may be assigned to a single person, but everyone must understand who is in charge of what. In the case of producer organizations, competency in management and leadership may also be needed, along with accountability systems. Table 5 provides a matrix to organize the management team information and can be adapted to a specific organizational structure.

MODULE 2 CHECKLIST

Are the legal status and governance arrangements of the organization/enterprise defined?

Is the annual reporting quality reviewed against best practices and legal requirements?

Are the vision, management objectives, organizational hierarchy and functions of the organization/enterprise shared and well understood by key staff and shareholders? Investors are very sensitive to this and might carry out surveys/interviews among the staff and shareholders.

Are all the data and information on the planned business reported?

Is an HR policy implemented? How does the organization ensure commitment?

Are the financial and technical management capacities adequate for business needs? Investors might assess the key managerial staff and management systems, job descriptions and process manuals.

Are business organograms, written job descriptions with clearly defined responsibilities, business track records and curricula of management team reported?

2.5 MODULE 3: MARKET OUTLOOK

Secured markets are normally the starting point to any successful business plan. A business plan should include a quantitative and qualitative examination of direct market demand, investigating the current and potential off-takers, the drivers of future demand, the volumes, qualities and prices of products as well as the foreseen market channels. An example of anticipated wood demand and supply in Africa is provided in Box 1.

The assessment of market demand is of key importance. On the one hand, it defines the characteristics that the product or service must have in order to satisfy the buyer’s needs (e.g. volume, price, quality, market channels or point of sales, labelling, packaging), elements which will then be needed to elaborate a first market strategy (Module 4). On the other hand, it broadly defines the existing and potential scale of the business and consequently the scale of the investment (in terms of volume of production, costs, etc.).

Different market channels may exist for different products. Typically, the highest value is gained from products that are exported. However, the highest volumes are sold to local and national markets. Where demand is increasing, for example because of economic or population growth, or because of trade limitations (such as those imposed by the COVID-19 pandemic), catering for local and national markets can be a good strategy when building resilient forest value chains.

How is market demand evaluated? At this stage, some key information that should be collected by a business developer for the market outlook is presented in Table 6.

Table 7 provides a framework for the identification of the product or service category and the most convenient approaches to market demand evaluation.

Market information and data can be collected through specific market studies. However, in cases where there are no reliable market studies in place, basic information can be used from trade statistics published by national public institutions or international agencies, available grey literature (e.g. past market studies), and by conducting interviews/surveys with people familiar with the market and direct off-takers.

It is vital that the market analysis is not carried out as a static exercise, but that the organization/enterprise monitors and keeps up-to-date information on the market. In this case, FAO and partners can provide guidance in creating market information systems and carrying out outlook studies.

EXAMPLE: Demand assessment for Green Charcoal in Uganda

In order to assess the potential market demand for its product, Green Charcoal Uganda analysed existing studies on energy and woodfuel consumption, collected data from national statistics, and carried out interviews with potential consumers and market participants. Based on the information collected, it was able to segment market demand into two categories:

• Households: the total annual consumption for domestic biomass in Uganda was estimated at 850 000 tonnes.

• Cement factories, confectionery industries and schools: in this case it was estimated that the cement factories alone consume about 320 000 tonnes of biomass annually and the confectioneries another 300 000 tonnes.

Looking at future market trends, official studies forecast that the demand for firewood and charcoal in Uganda will increase by 70 percent by 2030, in line with the population growth and rate of urbanization. In parallel, traditional charcoal burners and firewood harvesters are facing challenges of wood scarcity. It must be considered that an average urban household in Uganda consumes 1 tonne of charcoal annually, which is equivalent to cutting down about 88 medium-sized trees. Green Charcoal Uganda planned to increase the production of briquettes to 4 500 tonnes by 2022. In addition, based on the information collected by interviewing potential consumers, they identified the distribution channels – supermarkets, retail shops and charcoal sellers for reaching households, and direct sales to cement factories, confectionery industries and schools – and defined the prices and promotion strategy.

USEFUL REFERENCES

• FAO. undated. RuralInvest toolkit. Module 3, “Detailed project formulation and analysis” [online]. Rome. http://www.fao.org/in-action/rural-invest/toolkit/en/

• FAO. undated. FAOSTAT [online]. Rome. http://www.fao.org/faostat/en/

• FAO. 2011. Community-based tree and forest product enterprises: market analysis and development (MA&D). Manual. Rome. (also available at http://www.fao.org/3/a-i2394e.pdf).

• Jacovelli, P. 2010. Uganda’s Sawlog Production Grant Scheme: a success story from Africa. International Forestry Review, 11: 119–125. https://doi.org/10.1505/ifor.11.1.119

• SPGS. 2010. Sawlog Production Grant Scheme timber market study. Uganda, Ministry of Water and Environment. http://spgs.mwe.go.ug/sites/files/Timber%20Market%20Study%202010_0.pdf

MODULE 3 CHECKLIST

Is there evidence of a gap between demand and supply that warrants entering this market?

Has the validity of demand projections for the products or services been assessed?

Are the anticipated prices for products or services realistic?

Are these prices competitive under current and anticipated conditions?

Have the market channels been identified?

2.6 MODULE 4: SCALABLE PRODUCTION ASSETS

As a starting point, a business plan needs to entail a description of the extent and nature of the scalable production assets, i.e. the resources owned/managed by the organization or enterprise for which it has secured clearly defined commercial or customary rights and which can potentially be scaled up to meet market requirements.

Scaling of the assets can take place by expanding those resources (for example through reforestation/afforestation or acquisition or lease of new land) but also by aggregating smallholders with producer organizations or with company outgrower schemes (see Box 2 below). In some cases, scalability is not so important, as even small assets can provide sufficient scale for niche value chains. At this stage, it is also of key importance to provide evidence of the assets’ property or commercial/customary rights, for example land register or contracts references. In the case of FFPOs, it is fundamental to keep up-to-date information and documentation of the members’ area.

In particular, for business plans based on the use of forest or land resources, it is strongly suggested that an inventory of forest or land resources be provided, along with a clear description of current and future management regimes as evidence of raw material availability and sustainable management of the resources in question. Table 8 provides a sample template for organizing this information. It is recommended that this information be presented by farm or forest management unit (FMU), although organizations with many members will present it in an aggregated way (for example grouped by area, type of farmer, or characteristics of the resource).

For businesses based on processing (e.g. production of sawnwood or charcoal) or on production of non-wood forest products (NWFPs, e.g. honey, nuts), information needs to be collected on production levels achievable with existing technologies or management regimes.

If possible, and relevant, over time the organization or enterprise should develop or adapt information systems that contain geospatial information (e.g. GIS-based maps), ideally by farm/FMU. If the base exists, it will be easy to add details on species, age classes, growth and yields, ownership, infrastructure and other relevant information. FAO and its partners can provide guidance in finding the adequate solutions and appropriate toolsets to create information systems.

EXAMPLE: Resource base for Tree Growers Association of Nyandarua in Kenya

In order to determine its resource base and upscaling opportunities, TGAN carried out a tree inventory to collect data among its members. The inventory, completed in 2020, showed that around 3 000 farmers (2 064 male and 936 female) have around 1 500 ha of tree plantations, representing approximately 0.5 percent of the total land area of Nyandarua County (Figure 6).

The inventory gathered data on species (i.e. 48 percent eucalyptus, 44 percent cypress, 3 percent pine and 6 percent other species) and tree size. Volumes have been estimated. Potential harvestable levels were calculated by applying basic growth and yield models. Figure 7 reports the inventory summary.

TGAN’s business idea is to:

• increase efficiency of production by realizing economies of scale through the establishment of a cooperative that would aggregate, sort and market production;

• expand the volume and quality of timber to be sold in the local market; and

• collectively negotiate fairer prices for tree products.

Based on the inventory data, TGAN is also planning to expand both the number of participating farmers and the area allocated to tree planting by farmers (from an average of 0.5 ha/farmer to about 1 ha/farmer), reaching a planted area of about 3 000 ha by 2025 and doubling the current wood flows in five years. This would allow TGAN to become a major wood trader in the regional market.

USEFUL REFERENCES

• Abed, T. & Stephens, N.C. 2003. Tree measurement manual for farm foresters. 2nd edn. M. Parsons, ed. Canberra, Australia, Bureau of Rural Sciences, National Forest Inventory. (also available at http://data.daff.gov.au/mapserv/plant/report_list.phtml).

• Caldwell, B. et al. forthcoming. Taking stock: what we grow together counts. Rome, FAO.

• FAO. undated. Open Foris – a set of free and open-source software tools that facilitates flexible and efficient data collection, analysis and reporting. [online]. Rome. http://www.openforis.org/

• FAO. undated. Open Tenure – open-source software designed by FAO to empower communities. [online]. Rome. http://www.fao.org/e-agriculture/news/open-tenure-open-source-software-designed-fao-empower-communities

• FAO. 1981, reprinted 1992. Manual of forest inventory: with special reference to mixed tropical forests. FAO Forestry Paper No. 27. Rome. (also available at http://www.fao.org/3/ap358e/ap358e00.pdf).

• FAO. 2008. National Forest Monitoring and Assessment. Manual for integrated field data collection. Working Paper NFMA 37/E. Rome. (also available at http://www.fao.org/forestry/14727-072b68bcfa49334202f1586889517ce24.pdf).

• FAO. 2020. Global Forest Resources Assessment (FRA 2020). Rome. (also available at http://www.fao.org/forest-resources-assessment/en/).

MODULE 4 CHECKLIST

Have the land tenure rights been clearly defined and documented? Can they be verified?

Are verifiable data on land area and other resources available and reported in the business plan?

Are future, regularly occurring maintenance (or reinvestment) costs included in the business plan?

If use of forest or land resources is foreseen, are data on productivity and management available? Can these data be verified?

Does the organization/enterprise have the capacity (e.g. an information system) to monitor changes in forest and land resources?

2.7 MODULE 5: ASSESSMENT OF MARKET PARTICIPANTS AND MARKETING STRATEGY

A business plan should also indicate how it will ensure a strong position in competitive markets. This requires assessing the market participants and sketching out a marketing strategy. This is key to clearly identifying who the market participants are, assessing their status and role, and discerning their potential as partners or competitors. A useful way to start is to carry out a simple mapping of main relevant businesses that operate in the value chain, as in the roundwood example from Kenya. It is useful to define the specific position of the planned business compared to other businesses within the value chain. This exercise is better done with the support of trusted stakeholders and people familiar with the market.

EXAMPLE: Roundwood value chain in Nyandarua County (Kenya)

Figure 9 represents the roundwood value chain mapping exercise carried out by the Tree Growers Association of Nyandarua (TGAN).

The stakeholders in the Nyandarua. County roundwood value chain have been identified as follows:

• Tree growers: small- and medium-scale farmers managing woodlots and typically selling the wood on stumpage.

• Middlemen: buying standing trees from tree growers and selling to a trader processing the trees into sawn timber. Middlemen are not always part of the trade, as tree growers also sell directly to traders.

• Traders/processors: buying standing trees from tree growers or middlemen. A trader may operate within the county and/or transport the timber to other markets.

• Treatment plant: buying eucalyptus poles at stumpage or factory gate from middlemen.

• Power chainsaw operators: hired by a trader to harvest the trees. Chainsaw operators generally lack safety awareness and protective gear and are weak on cutting skills to maximize sawn timber volumes.

• Processing entrepreneurs: hired by a trader to process logs into sawn timber in designated timber yards (not permanent as they relocate with the availability of raw materials, normally on leased premises). In most cases, the trader owns the processing machinery.

• Transport entrepreneur: hired by a trader to transport logs and sawn timber to markets. A trader sometimes has own transport facilities.

The main final consumer of transmission poles in Nyandarua County is the Kenya Power & Lighting Company (KPLC). Currently, due to the Rural Electrification project implemented by the government, the demand for poles outweighs the supply. However, due to quality challenges, KPLC is considering sourcing poles from outside Kenya and using alternatives such as concrete poles. TGAN identified the opportunity to replace the middlemen in the transmission poles (among other products) business. Working directly with farmers, TGAN would have a strong competitive advantage and could tap the opportunity for both improving the quality of poles on the supply side and increasing the tree growers’ income on the market side.

For small producers, other market participants may often provide business support (see Box 3). For example, middlemen, traders and processors often enable production with advance payments to small producers. As small producers organize themselves and engage in collective bargaining and marketing, they may begin to perceive other market participants as competitors.

It is important at this stage to reassess whether the other market participants are indeed competitors or could actually become partners. For example, processors could be seen as natural partners for timber growers, as they will seek to buy wood. However, in some cases, processors may also have their own plantations and seek a monopolistic position in the market. To counter these tendencies, the organized producers need to make sure that they control a sufficient part of the raw material supply.

Table 9 can be used to organize information about other value chain participants and how they can contribute to (or hinder) the success of the business.

EXAMPLE: Central Park Bees (Swahili Honey) competitor matrix

In the United Republic of Tanzania’s honey production market, a number of similar companies sell pure honey in supermarkets and commercial stores. Central Park Bees carried out a competitor analysis on these companies’ quality versus prices for the amount of pure honey they sell alongside Swahili Honey’s product (Figure 10). This matrix exercise allowed Central Park Bees to better define its market position and competitive advantages and disadvantages.

It is important to understand the potential synergies with partners and the competitive advantage over competitors. Several tools are available for this. A useful exercise is to map potential competitors and partners based on strategic market positioning variables, as in the Central Park Bees example. It is worth mentioning that a foresighted business developer would not only look at the current market participants but, based on the business growth strategy, also identify and assess who the partners and competitors will be once the business grows.

To assess the competitive advantage of the business over competitors, a common practice is to carry out a SWOT analysis. SWOT is a simple and practical tool that allows identification of an organization's or enterprise’s strengths, weaknesses, opportunities and threats in relation to the competitive environment. The SWOT analysis (Figure 11) is done in two steps: (1) identifying the key strengths and weaknesses of the organization/enterprise – these are internal factors that can represent an advantage or disadvantage against the competitors (e.g. resources, management, technology); and (2) identifying opportunities and threats – these are external factors or situations that may bring an advantage or damage the business, usually linked to the business climate or competitors’ actions. A SWOT analysis is more effective when it is done in a participatory way by a group of people directly involved in business planning, with the support of key technicians and stakeholders.

Using the information from the SWOT analysis on the target market,[14] potential partners and competitors, the business is ready to develop its own marketing strategy. A marketing strategy refers to the set of actions that the organization/enterprise plans to implement in order to reach the market and promote its product or service value proposition, i.e. how it helps consumers to achieve their results and why it is better than similar products or services on the market.

A common marketing strategy is based on the so-called “4Ps”: (1) price, that is the value of a product (or service); (2) presentation, specifically the characteristics (quantity, quality) of the product or service; (3) promotion, meaning the actions to reach and enter the market; and (4) place, i.e. where and when the product or service will be sold. These elements form the base of a coherent and well-structured marketing strategy. Table 10 lists the key aspects to include in a business plan’s marketing strategy.

In general, the competitive environment is not static. On the contrary, partners and competitors change their strategies, adopt new technologies and explore new markets. Therefore it is essential that the organization or enterprise monitors the actions of the partners and competitors in order to respond and adapt rapidly to a changing business environment.

USEFUL REFERENCES

• Bolin, A., Macqueen, D., Greijmans, M., Humphries, S. & Ochaeta Castellanos, J.J., eds. 2016. Securing forest business. A risk-management toolkit for locally controlled forest businesses. London, International Institute for Environment and Development. (also available at https://pubs.iied.org/13583IIED/).

• Bolin, A., Macqueen, D., Greijmans, M., Grouwels, S., Camara, K. & Ndethiu, L., eds. 2018. ForBInc. Forest business incubation toolkit by and for forest and farm producer organisations. London, International Institute for Environment and Development. (also available at https://pubs.iied.org/13596IIED/).

• Macqueen, D. (ed.) et al. 2012. Supporting small forest enterprises – a facilitator’s toolkit. Pocket guidance not rocket science! IIED Small and Medium Forest Enterprise Series No. 29. Edinburgh, UK, International Institute for Environment and Development. (also available at https://pubs.iied.org/13558IIED/).

• Udemy. Value proposition design: develop compelling value propositions for your products & services using a worldclass business tool. E-learning course [online]. California, USA. https://www.udemy.com/course/create-products-services-that-customers-want/

MODULE 5 CHECKLIST

Is the market and value chain positioning of the planned business clear?

Have the market participants, including both competitors and partners, been assessed?

Have the potential synergies (with partners) and competitive advantages (against competitors) been defined?

Has the organization/enterprise developed a first marketing strategy, providing insights on which actions are planned in order to promote the product or service?

2.8 MODULE 6: APPLIED TECHNOLOGIES AND LOGISTICS

Applied technologies, infrastructure and equipment influence the ability to access value chains as well as influence the characteristics of the product or service that can be marketed. As such, they determine the investment need, ecological footprint, productivity of the business, possibility of scaling up production, workforce skills needed, and efficient use of raw materials and other inputs. Therefore, a business plan should specify the technologies that will be used as well as the logistics required to carry out activities such as harvest, aggregation, storage, transport and processing. If relevant, the business plan should mention the capital expenditures (to acquire technology or equipment) and the skill sets needed to operate them. It is worth highlighting that aspects such as access to energy and availability of the required skill set and equipment are particularly crucial in developing country contexts and must be carefully taken into consideration by a business developer.

If the business envisions the adoption of or investment in technology, it is important to: (1) consider the existing and planned technologies, and assess their pros and cons; and (2) look for technology benchmarks and options from the region (e.g. capacity, required skills, equipment and energy resources and costs) and identify the most appropriate option.[15] This information can be organized in the following template (Table 11).

EXAMPLE: Technical and economic viability of investing in a biomass briquetting plant in Zambia

This example shows how information on a planned technology could be concisely reported in a business plan.

A biomass briquetting plant with a production capacity of 8 tonnes/day has been proposed under this business plan in Zambia. The chosen briquetting mill models use a wide range of raw materials, including cotton stalks and residues from soybean, maize and other agroforestry residues. The technical specifications of the briquetting mill are summarized in Table 12.

Concerning operation and implementation, the proposed briquetting mill could start with a single eight-hour shift for 150 days (from June/July to November/December) per year, expected to increase by 16 percent annually until it hits 300 days of production per annum. For implementation, the following support infrastructure has been identified:

• up to 3 000 m^2 of land, i.e. 150 m^2 space for the mill, 500 m^2 product storage, 50 m^2 office space, and the remaining 2 300 m^2 space for raw materials in bulk and future expansion area;

• three-phase electricity supply connection;

• reliable water source; and

• good access roads and telecommunications coverage.

Table 13 shows the estimated planned capital costs for the investment, including costs for the land and building, plant and assorted equipment such as tractor and trailer, light truck and a raw materials chipper. Project development fees are assumed to be 5 percent of all the other capital costs.

Most briquetting mills are modular and their production capacity can easily be increased by adding more units.

Besides the available technology, the state of logistics and infrastructure needed to move the products to the points of sale must also be assessed. For example, lengthy and costly transport due to distances, road conditions, and the presence of nontariff barriers (e.g. police roadblocks, inspection blocks) can make wood and non-wood-based businesses uneconomic. The plan should convey that the conditions of transport infrastructure (e.g. main, secondary and forest roads as well as rail, ports, airports and sometimes rivers) have been verified. If vital to the business, it is also important to verify the availability, conditions and costs of storage and collection facilities (e.g. collection yards, pits, shed storage). A practical way to introduce these business logistics is to draw a map indicating, for example, the location of tree growing, mills, points of sale, etc.

AVAILABLE TOOL: OpenStreetMap

For drawing up a map, an open-source provider such as OpenStreetMap is freely available. www.openstreetmap.org

Along with the infrastructure conditions, the availability, capacity and costs of external services must also be verified in advance, starting from the elements listed in Table 14. External services refer to all those providers that are needed to run the business. For example, if the business involves shipping, access to ports, shipping costs, storage and loading capacity have to be assessed in a business plan.

USEFUL REFERENCES

• ANSI. undated. American National Standards Institute Webstore [online]. Washington, DC. http://webstore.ansi.org

• ASTM International. undated. Wood Standards. West Conshohocken, USA. (also available at http://www.astm.org/Standards/wood-standards.html).

• EU. undated. Standards in Europe. Brussels, European Union. https://europa.eu/youreurope/business/product/standardisation-in-europe/index_en.htm

• FAO. 1992. Cost control in forest harvesting and road construction. Rome. (also available at http://www.fao.org/3/T0579E/T0579E00.htm).

• Gatsby. undated. Kenyan Forestry Sector. London, Gatsby Charitable Foundation. https://www.gatsby.org.uk/africa/programmes/kenyan-forestry-sector

• PFP. 2016. Value chain analysis of plantation wood from the Southern Highlands. Iringa, United Republic of Tanzania, Private Forestry Programme. (also available at http://www.privateforestry.or.tz/en/resources/view/value-chain-analysis-of-wood-plantation-from-the-southern-highlands).

MODULE 6 CHECKLIST

Is a list provided of the main technology planned for use, with associated detailed information?

Has energy access, including costs, been assessed?

Does the organization/enterprise have the required skill set for adopting the planned technologies?

Have the conditions of the infrastructure been assessed?

Have the availability, capacity size and costs of external services needed to run the planned business been assessed?

2.9 MODULE 7: ASSESSMENT OF BUSINESS ENVIRONMENT AND LEGAL ISSUES

It is important for a business plan to convey some understanding of the operating environment: what regulations, taxation, trade restrictions, prevalence of illegal activities, or other incentives/disincentives does the business face? Institutional and legal issues that the planned business might face need to be clear. Compliance with the law may influence the selection of, and the arrangements with, contractors and suppliers. It may also involve costs. Some of the key institutional and legal aspects to be addressed are listed in Table 15.

Depending on whether or not the business developer is the landowner, the most common system for tracing wood and non-wood forest products (NWFPs) is based on the cadastral parcel, within which the producer has real rights. If the producer is not the landowner, then the legal and fiscal requirements set by local, regional and national legislation must be ensured for each of the stakeholders in the business supply chain.

Given the importance of an appropriate institutional, political and economic setting for the success of a business, developers may benefit from reviewing existing reports on the overall business environment, i.e. the governance and macro-economic factors that affect development (e.g. economic and political stability, national security,[16] rule of law, regulatory quality, clarity and stability of taxation, corruption rate, etc.).

Specific information can be found in national public institutions or international agency statistics, or by using existing tools, as made available by international statistics agencies, for example:

• World Bank International Finance Corporation, Doing Business: https://www.doingbusiness.org/

• World Bank, Enabling the Business of Agriculture (country profiles): https://eba.worldbank.org/

• World Economic Forum, Global Competitiveness Report: http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf

• World Bank, Worldwide Governance Indicators: https://info.worldbank.org/governance/wgi/

These reports can provide hints on which environmental factors could most seriously affect the planned business and thus need attentive monitoring.

EXAMPLES: Legal and policy framework for cotton stalks in Zambia

An interesting approach, which can help to strengthen a business plan, is to provide a reference to the supportive national policy framework. This has been done in Zambia for the cotton stalks and other biomass-based pellet and briquettes business plan. The business profile shows that there are at least three strategic policy tools that support the proposed business idea (see UNCTAD 2019):

• Zambia’s Seventh National Development Plan (7NDP 2017–21) aims to create a diversified and resilient national economy for sustained growth and socio-economic transformation. Processing cotton stalks and other biomass into cleaner and more efficient cooking and heating fuel is in line with the 7NDP 2017–21 goals and objectives. Through increased investments in value addition and industrialization of cotton by-products, the proposed processing of cotton stalks into pellets and briquettes is expected to give rise to improvements and positive impacts on employment and wealth creation.

• The Second National Agriculture Policy (NAP) is another key national development policy that seeks to develop an efficient, competitive and sustainable agricultural sector. Improved cotton-stalk processing is also in line with the NAP’s prime objective of increased employment opportunities and incomes.

• The National Industrial Policy 2018 (NIP) identifies cotton as one of the eight manufacturing subsectors to prioritize.

More generally, the business profile also shows that Zambia has an adequate body of laws to facilitate and nurture the proposed investment. Primary legal frameworks include the Zambia Development Agency Act, which facilitates SME development, investment promotion and trade; the Citizens Economic Empowerment Act of 2006; the Business Regulatory Act of 2014; the Compulsory Standards Act of 2017; the National Technical Regulations Act of 2017; and the Patents Act of 2016.

USEFUL REFERENCES

• Castrén, T., Katila, M. & Lehtonen, P. 2014. Business climate for forest investments: a survey. Washington, DC, World Bank Program on Forests. (also available at https://www.cbd.int/financial/doc/wb-busclimateforst2014.pdf).

• FAO. undated. Creating an enabling environment for responsible investment in agriculture and food systems. E-learning course [online]. Rome. http://elearning.fao.org/course/view.php?id=455

• FAO & WHO. Codex Alimentarius. International Food Standards.[17] Rome, FAO, and World Health Organization. (also available at www.fao.org/fao-who-codexalimentarius/en).

• World Bank. 2009. Clusters for competitiveness – a practical guide & policy implications for developing cluster initiatives. Washington, DC. (also available at http://www.fao.org/sustainable-food-value-chains/library/details/en/c/267097/).

MODULE 7 CHECKLIST

Are sufficient indications provided on the overall business environment (e.g. regulations, requirements, restrictions, incentives)?

Have the norms that regulate the business been identified and reviewed?

Have the specific factors influencing the sector and business been assessed?

2.10 MODULE 8: FINANCIAL ANALYSIS

The heart of a business plan is a financial model that assesses the financial sustainability of the business. This type of analysis quantifies whether the planned business is financially viable (i.e. answering the question of how bills are paid) and profitable (i.e. answering the question of how much net income is made over time).

As a result, the business plan has to provide an estimate of cash flows with clearly evidenced underlying assumptions such as product prices, volumes, costs and risks over time. The anticipated costs have to be clearly indicated, i.e. operational costs, capital expenditures, etc. An investor should always compare the costs with industry benchmarks, when available.[18]

If the business developer has no experience in financial analysis, seeking technical assistance from experienced providers is recommended. A poorly done financial analysis can lead to business failure.

For existing businesses, a financial analysis will rely on accounting and management records such as balance sheets and financial reports that help assess their financial sustainability. For existing businesses, balance sheets and financial reporting are important and among the first things a bank looks at when evaluating a loan request. It is therefore essential, once a business is established, that it carries out proper and transparent financial management practices. Further guidance on financial statements and on how to set up a financial management system can be found in publications such as Financial Intelligence by Berman and Knight (2013) or websites like www.inc.com. This module covers the main elements of a financial analysis process (i.e. cash flow, financial indicators, sensitivity analysis).

The main steps in a financial analysis include:

1. collecting data on revenues and costs;

2. developing cash-flow tables;

3. computing financial indicators; and

4. running a sensitivity analysis.

These are briefly described in turn. This information can be organized and computed using Excel spreadsheets (FAO can provide templates on request). Specific FAO software is also available (see FAO RuralInvest tool).

1. Collecting data on revenues and costs

A typical financial plan will have monthly or annual revenues and costs forecast for a number of years, depending on the nature of the business and the investor request. For forest-based businesses, this is likely to reach even 30 or 50 years. For example, it is not uncommon for businesses that emphasize sustainable wood production to look at returns and impacts that occur in 30 years.

AVAILABLE TOOL: FAO RuralInvest software for financial calculations

The RuralInvest software, developed by the FAO Investment Centre, automates many financial calculations needed to analyse project proposals. It considers all elements, allows for comparison of alternatives and can also be used to monitor and evaluate proposals. Major outputs generated by RuralInvest include annual cash flow; internal rate of return (IRR); net present value (NPV); costs, income and net income; and number of direct and indirect beneficiaries. The demonstration software and guidelines are available at: http://www.fao.org/in-action/rural-invest/toolkit/en/

The first step is to collect data on: (1) revenues; (2) costs or expenditures; and (3) other input data (e.g. tax regime[19]).

Revenues. Table 16 provides a template for organizing the data needed to estimate revenues. The input information can be based on past results (if the business is already operating), or market studies.

Products are sold at different steps of the value chain. For example, trees can be bought or sold “on the stump”, at the farm gate, collection yard, processing unit, or at market centres by wholesalers or retailers. In estimating revenues, it is therefore important to specify the price to be paid given certain product characteristics (e.g. species, dimensions, grade/quality), how the product is sold (e.g. “on the stump”, roundwood, sawnwood) as well as the unit of sale (e.g. tree, log, m^3, tonne). Revenues can be earned not only from the sale of products but also from the provision of services. In this case, revenues should specify the basis for the revenue collection (for example, service fees could be charged on the basis of area, volume, value, etc.).

Costs or expenditures are categorized as operating expenditures (OPEX, sometimes called working capital) and capital expenditures (CAPEX).

Operating expenditures (OPEX, often referred to as annual costs) are those costs that are required to run the operations and occur periodically throughout the year.

There are two types of operating costs:[20]

• variable costs[21], which are directly related to the scale of operations (e.g. costs of raw materials, consumables, labour, transport, energy, etc.). They are normally expressed as costs per unit of production;

• fixed costs[22], which do not depend on the scale of operations (e.g. management costs, salaries, rent, maintenance, etc.).

It is important to identify all costs that might occur, break them down into categories and, if possible, validate them with technicians or specialists. Tables 17 and 18 provide templates that can be helpful in organizing variable and fixed costs.

Variable costs will be organized around key activities (e.g. felling, skidding, loading, unloading, etc., in the case of tree harvesting) and be reported referring to these activities (e.g. cost of felling, in USD/m3) when reliable activity-level cost estimates are available.

If an activity is subcontracted (e.g., a third party is hired to transport the products) the cost of their service can be inserted on the line item associated with that activity (see TGAN example below).

EXAMPLE: Tree Growers Association of Nyandarua (TGAN), Kenya

The Tree Growers Association of Nyandarua (TGAN) is exploring the development of a business based on the establishment of a timber trade cooperative that would allow individual growers to aggregate their production and collectively sell their timber. Tree growers will join the cooperative gradually over time until a total area of 3 600 ha is reached by 2034. They initially plan to hire harvesting and transport services from third parties. The information they collect allows them to estimate that the cost of harvesting, skidding, loading and unloading will be in the range of USD 10/m^3. The cost of transport to the aggregation yard, assuming an average distance of 20 km, will be USD 4/m^3.

Fixed costs do not depend on production levels and typically include payroll costs (e.g. management and administration costs) or other non-payroll costs such as rent or marketing. A template to account for fixed costs is provided in Table 18.

Capital expenditures[23] (CAPEX) refer to all one-off costs incurred to acquire assets (e.g. purchase of machinery or land). Table 19 provides a template to organize the data on capital expenditures to be included in the financial analysis.

EXAMPLE: Hypothetical investments needed for farmers to aggregate and organize their supply

Table 20 reports a hypothetical example of investments needed by the Tree Growers Association of Nyandarua (TGAN) to operationalize the establishment of a timber trade cooperative that would allow individual growers to aggregate their production and collectively sell their timber.

2. Developing cash-flow tables

The cash-flow table is developed prior to the calculation of financial indicators. The table includes the revenues (cash inflows) and expenditures (cash outflows) produced by each activity over time, including only those transactions which lead directly to a change in cash. Table 21 provides a template for a simple cash-flow analysis.

A basic cash-flow table is developed at current prices and not considering inflation. The cash-flow table is useful to determine if the annual revenues are sufficient to cover annual costs (can bills be paid?), to assess whether income (net of operating costs) is sufficient to replace investments at the end of their useful life, and to estimate how many years of business operation will be needed to pay back the capital expenditures.

Some businesses may require a loan or equity in order to cover their capital expenditures. The cash-flow table is generally sufficient for the business to approach a financial institution. The financing institution, after reviewing the cash flow table and determining the financial viability of the business, will work together with the project developer to prepare a financing plan.

It is advisable to calculate the financing costs (loan repayments in the form of principal and interest) of the potential loan. Subtracting the financing costs (and eventual depreciation and amortization costs) from the EBITDA allows the business to estimate its cash flow (profit before tax). Subtracting taxes (e.g. value added tax, corporate income tax, sales taxes, etc.) from this cash flow generates profits after tax.

EXAMPLE: Cotton stalks and other biomass-based pellets and briquettes in Zambia

The business will use cotton stalks and other agroforestry waste/biomass as feedstock for producing pellets and briquettes. In the scenario of an investment in an 8 tonne-per-day (TPD) briquetting plant, the study assumes that 40 percent of the project costs would be in the form of equity (USD 45 475) while debt will make up for the remaining 60%. Table 22 below summarizes the revenues, operating costs and financing costs of a proposed briquetting plant which can be used to compute the cash flow (UNCTAD, 2019).

3. Computing financial indicators

Financial indicators[25] provide information on the capacity of the business to generate value. The typical financial indicators used in forestry businesses are described in Table 23 and include: net present value (NPV), internal rate of return (IRR), breakeven point, interest cover ratio, debt-service (coverage) ratio, debt-to-equity ratio, and payback period (PBP). Formulas can be found in any standard financial analysis textbook or directly in the Excel spreadsheet. The suitability of one indicator in comparison with another one depends on the characteristics of the investments and on the investor’s goals. The NPV and the IRR are generally considered the most intuitive methods for evaluating profitability and ranking alternative investments.

One of the essential elements to be considered in the computation of most financial indicators is the discount rate. The discount rate represents the opportunity cost of capital[26] and converts revenues and costs that occur at different times in present value (discounted) terms. In present value terms, revenue and costs that occur in different years can then be compared.

EXAMPLE: Cotton stalks and other biomass-based pellets and briquettes in Zambia (continued)

Using the cash flow of the Zambia example above (cotton stalks and other agroforestry waste/biomass to produce pellets and briquettes), one can compute debt servicing indicators such as ICR and the DSCR as below.

Similarly, one can calculate that the project has a payback period of 4 years. This is the length of time that is required for the project to recover its initial investment. Under the assumption that equity costs occur on year zero (the year before the project begins to generate revenues), the example generates an NPV (discounted cash flow) of USD 113 047 and an IRR of 56.1%.

Source: Adapted from UNCTAD (2019).

4. Running a sensitivity analysis

Risks and uncertainties associated with financial analysis can also be addressed through a sensitivity analysis that checks how the financial indicators vary when variables change. This consists of performing several financial analyses with differing underlying assumptions, answering the question “what if”. For example: “what if the labour cost increases by 20 percent?”; “what if sawn timber prices fall by 10 percent next year?”; “what if not all tree growers join the cooperative in the first year?”; or “what if the government introduces/removes subsidies for reforestation activities?” and so on. Many of the parameters used in the financial analysis are estimated or based on assumptions and thus not known with certainty. Therefore, running a sensitivity analysis[27] is helpful to test the financial model’s robustness and resilience against different scenarios and hypotheses, and identify those variables or aspects that need close monitoring. Obviously, it is useful to link the sensitivity analysis to the outcomes of the risk assessment (see Module 10) which point to the most probable and severe risks. If the predicted risks materialize, the sensitivity analysis quantifies the financial implications.

USEFUL REFERENCES

• Cubbage, F., Davis, R., Frey, G. & Behr, D.C. 2013. Financial and economic evaluation guidelines for community forestry projects in Latin America. Program on Forests (PROFOR) and World Bank, Latin America and the Caribbean region. (also available at http://documents.worldbank.org/curated/en/125651468045551850/pdf/807810WP0ENGLI00Box037982000PUBLIC0.pdf).

• FAO. undated. RuralInvest toolkit. Module 3, “Detailed project formulation and analysis” [online]. Rome. http://www.fao.org/in-action/rural-invest/toolkit/en/

• IFAD. 2015. Guidelines on economic and financial analysis. 3 vols. Rome, International Fund for Agricultural Development. (also available at https://www.ifad.org/en/document-detail/asset/39761833 ).

• PFP. 2018. Investment opportunities in the Tanzanian forest industry and bioenergy sectors. Cluster analysis. Helsinki, Finland. Private Forestry Programme. (also available at http://www.privateforestry.or.tz/uploads/PFP_Investment_Opportunities_Final.pdf).

• PwC. undated. Introduction to financial modelling. [online]. Singapore, PricewaterhouseCoopers. https://www.pwc.com/sg/en/academy/academy-in-house-programme/intro-financial-modelling.html

• PwC & WBCSD. 2010. Sustainable forest finance toolkit. London, PricewaterhouseCoopers LLP, and Geneva, Switzerland, World Business Council for Sustainable Development. (also available at https://www.pwc.co.uk/assets/pdf/forest-finance-toolkit.pdf).

MODULE 8 CHECKLIST

Have the revenues been estimated based on a sound approach?

Have all the expenditures been identified, classified and validated?

Have all the underlying assumptions on revenues and costs been assessed?

Have the cash-flow tables been developed, and the relevant financial indicators computed?

Have the robustness and resilience of the business financial model been tested by running relevant sensitivity analysis?

2.11 MODULE 9: COMPLIANCE WITH ENVIRONMENTAL, SOCIAL AND GOVERNANCE CRITERIA

A statement of the environmental, social and governance impacts, often referred to as ESG, has become a crucial part of business plans, on the one hand for judging all-round sustainability and, on the other hand, as part of the business strategy and risk management. The overall objective of an ESG policy is to identify, evaluate, prevent and/or manage the environmental and social risks and impacts of a project.

When companies assess and report their ESG impacts (e.g. as part of sustainability reporting) they often refer to the Sustainable Development Goals framework. Common indicators are:

• increased area (hectares) of sustainably managed forest land (relating to SDG indicator 15.2.1);

• increased area (hectares) managed for conservation purposes (relating to SDG indicator 15.2.1);

• increased area (hectares) of afforestation or reforestation (relating to SDG indicator 15.1.1 and 15.2.1);

• carbon (tCO_2e) stored in forest vegetation and sequestered (SDG 13.2.2);

• sustainable timber production (m³) contributing to the sustainable management and efficient use of natural resources (SDG 12.2), reduction of materials footprint (SDG 12.2.1), and storing carbon permanently (SDG 13.2.2);

• decent jobs created (SDG 8.8).

Aspects such as tenure, governance, benefit-sharing arrangements and environmental considerations are also part of the risk assessment (Module 10). In practice, the business developer could do one assessment with a framework that covers all ESG and risk issues. The key here is the measurement, where possible, of anticipated impacts on the environment (e.g. increase in biodiversity, CO_2 stocks), social aspects (e.g. local job income and creation, social infrastructure), and improved governance (e.g. agreement procedures, stakeholder consultations, etc.).

A practical first step is to look at the national legislation, norms, and standards of potential investors (e.g. fund, bank). In fact, the main objective of the investor’s ESG due diligence is usually to verify the social and environmental sustainability of a business plan and its performance against explicit sustainability criteria and/or good practices. Large investors may have their own standards, while others may adopt globally recognized ESG frameworks or guidelines (see Box 5).

ESG frameworks commonly include the following features:[28]

• A policy to clearly exclude certain activities such as child labour, deforestation, use of prohibited chemicals, forced displacement, etc.

• The promotion of sustainability and resilience, and hence the reduction of risks and vulnerabilities associated with natural and human-made hazards, climate change, violence, conflict, political and social instability or economic volatility. Compliance with the ESG policy, requirements and standards adopted by the investor can be summarized in an ESG action plan.

• Selection of specific indicators that can help the business (and the investor) to ensure that the investment is “responsible” and results in positive impacts. Hence, the plan should include a simple monitoring and evaluation (M&E) framework for tracking the progress of these indicators.

Business plan developers may also consult guidelines about specific criteria of inclusiveness such as gender, youth, or other categories.

To demonstrate compliance with the ESG policy, requirements and standards of the investor, the plan can include the indicators that will be monitored and actions to ensure that progress on those indicators will be made. If information on the investor’s criteria is not available, a business plan can still mention intended ESG impacts. This example is from the Tree Growers Association of Nyandarua (Kenya).

EXAMPLE: ESG indicators at the Tree Growers Association of Nyandarua (Kenya)

Table 24 identifies the most relevant ESG issues, the possible key performance indicators (KPI), and the monitoring/verification mechanisms.

USEFUL REFERENCES

• Brotto, L., Pettenella, D., Cerutti, P. & Pirard, R. 2016. Planted forests in emerging economies: best practices for sustainable and responsible investments. Occasional Paper 151. Bogor, Indonesia, Center for International Forestry Research. (also available at https://www.cifor.org/publications/pdf_files/OccPapers/OP-151.pdf).

• Climate Bonds. undated. Standard and Certification Scheme [online]. https://www.climatebonds.net/standard/

• FAO. 2020. Ex-Ante Carbon-balance Tool (EX-ACT).[29] [online]. Rome. http://www.fao.org/tc/exact/ex-act-home/en/

• FAO. 2014. Principles for Responsible Investment in Agriculture and Food Systems (RAI). Rome, Committee on World Food Security. also available at http://www.fao.org/cfs/home/activities/rai/en; http://www.fao.org/3/a-au866e.pdf

• FSC. undated. Principles [online]. Bonn, Germany, Forest Stewardship Council. https://fsc.org/en/about-us

• PwC & WBCSD. 2010. Sustainable forest finance toolkit. London, PricewaterhouseCoopers LLP, and Geneva, Switzerland, World Business Council for Sustainable Development. (also available at https://www.pwc.co.uk/assets/pdf/forest-finance-toolkit.pdf).

• Rainforest Alliance. 2019. Sustainable Agriculture Standard. Applicable for smallholder farms. New York. (also available at https://www.rainforest-alliance.org/business/wp-content/uploads/2019/06/draft-smallholder-agriculture-standard-v2.pdf).

• The Equator Principles. 2020. Risk management framework adopted by financial institutions. https://equator-principles.com/about/

• UN PRI. 2019. An introduction to responsible investment in forestry. London, United Nations Principles for Responsible Investment. (also available at https://www.unpri.org/download?ac=6441).

MODULE 9 CHECKLIST

Has the business developer looked at the ESG policy, regulation or standard adopted by the potential investor?

Does the business plan comply with the investor’s ESG criteria?

Has a sound ESG action plan been developed? Remember that it is also important to capitalize on ESG opportunities as part of the value enhancement plan.

Are some KPI and the related monitoring/verification mechanisms allowed to give evidence of the impacts defined?

2.12 MODULE 10: RISK ASSESSMENT

A bankable business plan should demonstrate that the risks have been identified and assessed and that there are effective mitigation measures in place and people responsible for them. Systems to handle risks are vital for bankability as they can have a direct impact on the business earning logic. Not everything can be predicted, but if the right systems are in place, creditors and investors will have more confidence that the planned business is prepared to address issues that could emerge.

Risks mean all those situations or events that affect and challenge the ability of the planned business to reach its objectives. Risks can be classified in a number of ways and they can also partly overlap. A common approach is to distinguish between:

• internal risks, or risks that the business can somehow control, i.e. technical and operational risks, HR and management risks; and

• external risks, or risks deriving from factors that the planned business cannot control, i.e. legal and institutional risks, economic and market risks, environmental and climate risks, and social risks.

Table 25 summarizes a simple risk categorization.

The assessment of risks is a fundamental part of the financing decision. In fact, in making investment decisions, the cost of capital investment is weighed against the benefits. Many investors expect higher returns for investments made in developing countries than in more developed countries, due to higher risk factors.

In forestry businesses, typical risk factors are those associated with insecure forest and land tenure, poor governance, over-dependence on a few buyers, fragmented information on prices, poor security, limited technical know-how and low market awareness. The planned business should consider all the key risks and have a strategy to deal with them. It is useful to: (1) identify the risks that the business is exposed to and categorize them according to their nature; (2) assess the probability and severity of the risks (e.g. high, medium, low) to allow prioritization; and (3) choose the mitigation measures, or how the planned business will respond to these risks. Mitigation measures, more particularly those relating to climate change, should be part of the loan agreement with the financial institutions.

A risk assessment can be summarized in a matrix which identifies the sources of risk, their probability, severity and mitigation measures. The matrix could also include a column on responsibility for mitigation action. The risk assessment matrix of the United Republic of Tanzania’s Central Park Bees project is provided as an example.

EXAMPLE: Central Park Bees (Swahili Honey) risk assessment matrix

In the case of Central Park Bees (United Republic of Tanzania), an assessment matrix was used to assess risks. First, the risks were identified and assessed against the probability and severity if they materialized. Second, the risks were estimated qualitatively to low, medium and high. Finally, the business developers defined mitigation measures for the most severe risks (See Table 26).

The example above provides a qualitative assessment of risks. Some risks can be quantified if there are existing data or benchmarks that allow probabilities to be estimated. This may be the case when sufficiently long time series are available for forest fires, wind and pest damages, rainfall patterns, historical price fluctuations, etc.). In practice, such data are often scarce in developing countries and most of the risks are expressed with qualitative measurements.

USEFUL REFERENCES

• FAO. undated. Climate risk assessment and management in agriculture. Rome. (also available at http://www.fao.org/3/i3084e/i3084e06.pdf)

• FAO. undated. Investment Learning Platform (ILP). [online] Rome. http://www.fao.org/investment-learning-platform/themes-and-tasks/risk-analysis/en/

• FAO & UNECE. 2018. Section 3.2: Risk management in a changing climate. In: Forests and Water – valuation and payments for forest ecosystem services, pp. 18–20. Rome, FAO, and Geneva, Switzerland, United Nations Economic Commission for Europe. (also available at https://www.unece.org/fileadmin/DAM/timber/publications/sp-44-forests-water-web.pdf).

• Bolin, A. & Macqueen, D. eds. 2016. Securing the future: Managing risk and building resilience within locally controlled forest businesses. London, International Institute for Environment and Development. (also available at https://pubs.iied.org/13587IIED/?c=forest&p=2)

• IFC. 2020. Risk management. Washington, DC, International Finance Corporation, World Bank Group. (also available at https://www.ifc.org/wps/wcm/connect/Industry_EXT_Content/IFC_External_Corporate_Site/Industries/Financial+Markets/Risk+Management/).

MODULE 10 CHECKLIST

Have the main internal and external sources of risks been identified and categorized?

Have the probability and severity of risks been assessed?

Does the business plan provide sound mitigation measures to address the risks?

3. Aligning the plan with investor’s criteria

To successfully access finance, a business plan must also align with the investor’s interests and criteria. Understanding these criteria, including sustainability, is important. This chapter briefly reviews possible sources of finance and their instruments, and some of the criteria for accessing them.

There are various sources of finance, for example own capital, government institutions and agencies, commercial banks, development banks, financial investors, etc. The three major financial instruments include loans, equity and grants. These may also be offered as various blends. Given that their availability varies by country and region,[30] a detailed mapping of the sources at country level should be carried out prior to capacity-building. Typical categories are summarized in Table 27.

Each investor will have its own criteria. For example, some social impact funds may have minimum criteria such as:

• years of operation (e.g. at least three years);

• positive equity with review of debt-service coverage and debt-to-equity ratios;

• sustainable and scalable sources of revenue (e.g. >USD 200 000 per year. However, if the expected social impact is likely to be significant, this limit could be lowered to USD 100 000 per year);

• audited statements for at least one year;

• quarterly financial statements; and

• strong evidence of measurable and sustainable social impact with a focus on underserved populations.

In general, the larger the amounts needed, the stricter the minimum criteria.

USEFUL REFERENCES

• FAO. undated. Sustainable Forest Management (SFM) toolbox. [online] Rome. http://www.fao.org/sustainable-forest-management/toolbox/modules/forest-finance/tools/en/?page=1&ipp=10&no_cache=1&tx_dynalist_pi1[par]=YToxOntzOjE6IkwiO3M6MToiMCI7fQ==

• FAO & UNCCD. 2015. Sustainable financing for forest and landscape restoration. Opportunities, challenges and the way forward. Discussion Paper. Rome, FAO, and Bonn, Germany, Global Mechanism of United Nations Convention to Combat Desertification. (also available at http://www.fao.org/3/a-i5174e.pdf).

• World Bank. 2018. The future of food. Maximizing finance for development in agricultural value chains. Washington, DC. (also available at https://www.worldbank.org/en/topic/agriculture/publication/the-future-of-food-maximizing-finance-for-development-in-agricultural-value-chains).

4. The way forward

There are early indications that this guide is helping producer organizations to more effectively structure their business ideas and engage constructively with financing sources. Additional complementary resources are being prepared. In this respect, FAO is preparing a companion learning guide (Caldwell et al., forthcoming) to help producer organizations to carry out farmer-led tree inventories so that they have adequate information on the value of their assets, are able to sell their trees for fairer prices, and receive greater returns through collective bargaining and marketing. This resource will provide technical guidance to support the development of these capacities.

Local forest finance and business learning hubs may also need to be established in those countries with the ambition to promote restoration at scale. These learning hubs can provide information, investment intelligence, technical assistance, capacity-building, mentoring, and match-making opportunities for smallholders, communities and businesses seeking guidance on how to invest in locally owned and managed forest enterprises, as well as promoting investment opportunities and products. This will help both FFPOs and finance institutions, which will find it easier to identify attractive projects. Establishment of these hubs (or strengthening existing ones) could initially be supported and coordinated by a unit in FAO to facilitate sharing of good cases, development of capacity-building and learning materials, preparation of relevant materials, and technical advice and mentoring. Several accelerator and incubation programmes for forest-based businesses already exist (see Box 6).

4.1 SUPPORT OF PUBLIC AGENCIES AND DEVELOPMENT PARTNERS

The initial pilot of this guide has identified a number of needs that should be further addressed by the development community:

• Making data on resources and markets more accessible and available is of crucial importance to the development of bankable business plans. Assisting producer organizations to assess their assets and markets is a role that government agencies and international organizations can support by providing statistics and outlooks on forest resources, production, consumption and prices. Producer and industry organizations can also serve their members by facilitating the collection and analysis of this type of information.

• Value chain assessments are essential to understand markets, market access, flow of funds, and what connects producers to markets. Missing links may be identified. It may also be the case that, in order to support small producers, investments are needed to address “bottlenecks” elsewhere in the value chain. Supporting the business of tree growing, for example, may require investments in downstream processing to ensure better and more stable prices to growers, and motivate more investments in plantations. Downstream investments create and grow markets for raw material and also enable its more efficient utilization. Such investments make sense if a sufficient supply of raw material can be guaranteed and, therefore, sufficient assets are available and supply can be organized. Such considerations can only be empirically made with a value chain assessment.

• Dialogue with finance institutions and funds needs to be promoted. Certain finance institutions seek investment opportunities that can deliver social and environmental returns. However, they often lack awareness of forestry businesses, how they work and the risks involved. Development partners can play a key role here in facilitating knowledge exchange among business developers, producers and financial institutions. An example of dialogues being promoted in Kenya and Uganda is presented in Box 7.

• Project pipelines and financial intermediation may also be required as many development finance institutions work with investment sizes that are considerably larger than the finance needed by producer organizations. Pipelines of bankable projects need to be developed and this depends on local business development capacities. Financial intermediaries may also be involved, as they play a role in making smaller amounts of finance accessible.

• Governments and policy-makers need to favour the creation of a more favourable policy environment for business development and investments in restoration and sustainable forestry. This is generally called financial infrastructure and includes policies on collateral definition, and collateral and credit registries. It can be improved by providing transparent information at national level and promoting local, national and regional trade.

As this guide is being finalized, the world is dealing with the economic recession triggered by the Covid-19 pandemic. The long-term implication of the Covid-19 pandemic cannot be fully predicted. However, it is clear that restoration activities can play an important role in the economic recovery, given the range of economic, social and environmental benefits they can generate. For this to happen, it will be important to link restoration to the building of productive landscapes, where possible and desirable.

4.2 GLOSSARY OF TECHNICAL TERMS

4.3 ANNEXES

4.3.1. Annex 1: Examples of business opportunities that can be linked to restoration

5. References

Abed, T. & Stephens, N.C. 2003. Tree measurement manual for farm foresters. 2nd edn. M. Parsons, ed. Canberra, Australia, Bureau of Rural Sciences, National Forest Inventory. (also available at http://data.daff.gov.au/mapserv/plant/report_list.phtml).

ANSI. undated. American National Standards Institute Webstore [online]. Washington, DC. http://webstore.ansi.org

ASTM International. Wood Standards. West Conshohocken, USA. (also available at http://www.astm.org/Standards/wood-standards.html).

Bolin, A. & Macqueen, D. eds. 2016. Securing the future: Managing risk and building resilience within locally controlled forest businesses. London, International Institute for Environment and Development. (also available at https://pubs.iied.org/13587IIED/?c=forest&p=2)

Bolin, A., Macqueen, D., Greijmans, M., Humphries, S. & Ochaeta Castellanos, J.J., eds. 2016. Securing forest business. A risk-management toolkit for locally controlled forest businesses. London, International Institute for Environment and Development. (also available at https://pubs.iied.org/13583IIED/).

Bolin, A., Macqueen, D., Greijmans, M., Grouwels, S., Camara, K. & Ndethiu, L., eds. 2018. ForBInc. Forest business incubation toolkit by and for forest and farm producer organisations. London, International Institute for Environment and Development. (also available at https://pubs.iied.org/13596IIED/).

Brotto, L., Pettenella, D., Cerutti, P. & Pirard, R. 2016. Planted forests in emerging economies: best practices for sustainable and responsible investments. Occasional Paper 151. Bogor, Indonesia, Center for International Forestry Research. (also available at https://www.cifor.org/publications/pdf_files/OccPapers/OP-151.pdf).

Caldwell, B. et al. forthcoming. Taking stock: what we grow together counts. Rome, FAO.

Canvas. Lean business plan templates [online] https://bmtoolbox.net/tools/lean-canvas/

Castrén, T., Katila, M. & Lehtonen, P. 2014. Business climate for forest investments: a survey. Washington, DC, World Bank Program on Forests. (also available at https://www.cbd.int/financial/doc/wb-busclimateforst2014.pdf).

Central Park Bees. Swahili Honey. [online] Dar es Salaam, United Republic of Tanzania. https://centralparkbees.co.tz; https://swahilihoney.co.tz/

Climate Bonds. undated. Standard and Certification Scheme [online]. https://www.climatebonds.net/standard/

Colombijn, F. & Morbidini, M. 2017. Pros and cons of the formation of waste-pickers’ cooperatives: a comparison between Brazil and Indonesia. Decision, 44: 91–101. https://doi.org/10.1007/s40622-017-0149-5

Cubbage, F., Davis, R., Frey, G. & Behr, D.C. 2013. Financial and economic evaluation guidelines for community forestry projects in Latin America. Program on Forests (PROFOR) and World Bank, Latin America and the Caribbean region. (also available at http://documents.worldbank.org/curated/en/125651468045551850/pdf/807810WP0ENGLI00Box037982000PUBLIC0.pdf).

Dau, L.A. & Cuervo-Cazurra, A. 2014. To formalize or not to formalize: entrepreneurship and pro-market institutions. Journal of Business Venturing, 29(5): 668–686. https://doi.org/10.1016/j.jbusvent.2014.05.002

Echoing Green. undated. [online]. New York. https://echoinggreen.org/

EIB. 2018. Environmental and social standards overview. Luxembourg, European Investment Bank. (also available at http://www.eib.org/attachments/strategies/environmental_and_social_overview_en.pdf).

EIB. 2020. Investing in nature: financing conservation and nature-based solutions. A Practical Guide for Europe. Luxembourg, European Investment Bank. (also available at https://www.eib.org/attachments/pj/ncff-invest-nature-report-en.pdf).

ETIFOR. 2018. ECOSTAR – The Nature Accelerator [online]. Padua, Italy. https://www.ecostarhub.com/nature-accelerator/

F6S. [online] F6S.com.

FAO. undated, Investment Learning Platform (ILP) [online]. Rome. http://www.fao.org/investment-learning-platform/themes-and-tasks/risk-analysis/en/

FAO. undated. Climate risk assessment and management in agriculture. Rome. (also available at http://www.fao.org/3/i3084e/i3084e06.pdf).

FAO. undated. Contract Farming Resource Center (CFRC) [online]. Rome. http://www.fao.org/in-action/contract-farming/en/

FAO. undated. Creating an enabling environment for responsible investment in agriculture and food systems. E-learning course [online]. Rome. http://elearning.fao.org/course/view.php?id=455

FAO. undated. FAOSTAT [online]. Rome. http://www.fao.org/faostat/en/

FAO. undated. Open Foris – a set of free and open-source software tools that facilitates flexible and efficient data collection, analysis and reporting [online]. Rome. http://www.openforis.org/

FAO. undated. Open Tenure – open-source software designed by FAO to empower communities [online]. Rome. http://www.fao.org/e-agriculture/news/open-tenure-open-source-software-designed-fao-empower-communities

FAO. undated. RuralInvest toolkit. Module 3, “Detailed project formulation and analysis” [online]. Rome. http://www.fao.org/in-action/rural-invest/toolkit/en/

FAO. undated. Sustainable Forest Management (SFM) toolbox. [online] Rome. http://www.fao.org/sustainable-forest-management/toolbox/modules/modules/forest-finance/tools/en/?page=1&ipp=10&no_cache=1&tx_dynalist_pi1[par]=YToxOntzOjE6IkwiO3M6MToiMCI7fQ==

FAO. 1981, reprinted 1992. Manual of forest inventory: with special reference to mixed tropical forests. FAO Forestry Paper No. 27. Rome. (also available at http://www.fao.org/3/ap358e/ap358e00.pdf).

FAO. 1992. Cost control in forest harvesting and road construction. Rome. (also available at http://www.fao.org/3/T0579E/T0579E00.htm).

FAO. 2008. National Forest Monitoring and Assessment. Manual for integrated field data collection. Working Paper NFMA 37/E. Rome. (also available at http://www.fao.org/forestry/14727-072b68bcfa49334202f1586889517ce24.pdf).

FAO. 2011. Community-based tree and forest product enterprises: market analysis and development (MA&D). Manual. Rome. (also available at http://www.fao.org/3/a-i2394e.pdf).

FAO. 2014. Principles for Responsible Investment in Agriculture and Food Systems (RAI). Rome, Committee on World Food Security. (also available at http://www.fao.org/cfs/home/activities/rai/en; http://www.fao.org/3/a-au866e.pdf).

FAO. 2015. Environmental and social management guidelines. Rome. (also available at http://www.fao.org/3/a-i4413e.pdf).

FAO. 2015. Small and medium scale forest enterprises. Market analysis and development [online]. Rome. http://www.fao.org/forestry/enterprises/25492/en/

FAO. 2016. Global Forest Resources Assessment 2015. Rome. (also available at http://www.fao.org/3/a-i4793e.pdf).

FAO. 2019. Catalyzing private finance for inclusive and sustainable forest value chains. Report of the expert meeting, 2–3 April 2019. Rome. (also available at http://www.fao.org/forestry/48858-064440fb9719c37f1b7b2a3e957b017c1.pdf).

FAO. 2019. RuralInvest – preparing effective investment project proposals. E-learning course, Lessons 1, 2 and 3 [online]. Rome. https://elearning.fao.org/course/view.php?id=185

FAO. 2020. Ex-Ante Carbon-balance Tool (EX-ACT). An appraisal system to estimate the impact of agriculture and forestry development projects, programmes and policies on the carbon-balance. [online]. Rome. http://www.fao.org/tc/exact/ex-act-home/en/

FAO. 2020. Global Forest Resources Assessment (FRA 2020). Rome. (also available at http://www.fao.org/forest-resources-assessment/en/).

FAO, IFAD & WFP. 2015. Achieving Zero Hunger: the critical role of investments in social protection and agriculture. Rome, FAO, International Fund for Agricultural Development, and World Food Programme. (also available at http://www.fao.org/3/a-i4951e.pdf).

FAO & IISD. 2018. Model Agreement for Responsible Contract Farming – with commentary. Rome, FAO, and Winnipeg, Canada, International Institute for Sustainable Development. 68 pp. (also available at http://www.fao.org/3/ca1772en/CA1772EN.pdf).

FAO & UNCCD. 2015. Sustainable financing for forest and landscape restoration. Opportunities, challenges and the way forward. Discussion Paper. Rome, FAO, and Bonn, Germany, Global Mechanism of United Nations Convention to Combat Desertification. (also available at http://www.fao.org/3/a-i5174e.pdf).

FAO & UNECE. 2018. Section 3.2: Risk management in a changing climate. In: Forests and Water – valuation and payments for forest ecosystem services, pp. 18–20. Rome, FAO, and Geneva, Switzerland, United Nations Economic Commission for Europe. (also available at https://www.unece.org/fileadmin/DAM/timber/publications/sp-44-forests-water-web.pdf).

FAO & WHO. 1963. Codex Alimentarius. International Food Standards. Rome, FAO, and World Health Organization. (also available at www.fao.org/fao-who-codexalimentarius/en).

Fledge. undated. [online]. https://www.ecostarhub.com/nature-accelerator/

FSC. undated. Principles [online]. Bonn, Germany, Forest Stewardship Council. https://fsc.org/en/about-us

FSC. 2012. Strategic review on the future of forest plantations. Helsinki, Finland, Indufor/Forest Stewardship Council. (also available at https://ic.fsc.org/download.strategic-review-on-the-future-of-forest-plantations.671.htm).

Gatsby. undated. Kenyan Forestry Sector. London, Gatsby Charitable Foundation. https://www.gatsby.org.uk/africa/programmes/kenyan-forestry-sector

GoodCompany Ventures. undated. [online]. Philadelphia, USA. https://goodcompanyventures.org/

Green Charcoal Uganda. undated. [online]. Kampala. http://greencharcoalug.com

IFAD. 2012. Agricultural value chain finance strategy and design: technical note. Rome, International Fund for Agricultural Development. https://www.ifad.org/en/web/knowledge/publication/asset/39181165

IFAD. 2015. Guidelines on economic and financial analysis. 3 vols. Rome, International Fund for Agricultural Development. (also available at https://www.ifad.org/en/document-detail/asset/39761833).

IFC. 2012. Performance Standards [online]. Washington, DC, International Finance Corporation, World Bank Group. www.ifc.org/performancestandards

IFC. 2019. Working with smallholders. A handbook for firms building sustainable supply chains. Washington, DC, International Finance Corporation, World Bank Group. https://openknowledge.worldbank.org/handle/10986/29764

IFC. 2020. Doing business [online]. Washington, DC, International Finance Corporation, World Bank Group. https://www.doingbusiness.org/

IFC. 2020. Investment proposals. Washington, DC, International Finance Corporation, World Bank Group. https://www.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/solutions/investment-proposals

IFC. 2020. Risk management. Washington, DC, International Finance Corporation, World Bank Group. (also available at https://www.ifc.org/wps/wcm/connect/Industry_EXT_Content/IFC_External_Corporate_Site/Industries/Financial+Markets/Risk+Management/).

IUCN & WRI. 2014. A guide to the restoration opportunities assessment methodology (ROAM): assessing forest landscape restoration opportunities at the national or sub-national level. Working Paper (Road-test edition). Gland, Switzerland, International Union for Conservation of Nature, and Washington, DC, World Resources Institute.

Jacovelli, P. 2010. Uganda’s Sawlog Production Grant Scheme: a success story from Africa. International Forestry Review, 11: 119–125. https://doi.org/10.1505/ifor.11.1.119

Macqueen, D. (ed.) et al. 2012. Supporting small forest enterprises – a facilitator’s toolkit. Pocket guidance not rocket science! IIED Small and Medium Forest Enterprise Series No. 29. Edinburgh, UK, International Institute for Environment and Development. (also available at https://pubs.iied.org/13558IIED/).

Macqueen, D., Benni, N., Boscolo, M. & Zapata, J. 2018. Access to finance for forest and farm producer organisations (FFPOs). Rome, FAO, and London, IIED. Research Report, 98 pp. Licence: CC BY-NC-SA 3.0 IGO. (also available at https://pubs.iied.org/13606IIED/).

Miller, C. & Jones, L. 2010. Agricultural value chain finance. Tools and lessons. Rome. FAO. (also available at http://www.fao.org/3/i0846e/i0846e.pdf).

PFP. 2016. Value chain analysis of plantation wood from the Southern Highlands. Iringa, United Republic of Tanzania, Private Forestry Programme. (also available at http://www.privateforestry.or.tz/en/resources/view/value-chain-analysis-of-wood-plantation-from-the-southern-highlands).

PFP. 2018. Investment opportunities in the Tanzanian forest industry and bioenergy sectors. Cluster analysis. Helsinki, Finland. Private Forestry Programme. (also available at http://www.privateforestry.or.tz/uploads/PFP_Investment_Opportunities_Final.pdf).

PwC. undated. Introduction to financial modelling [online]. Singapore, PricewaterhouseCoopers. (also available at https://www.pwc.com/sg/en/academy/academy-in-house-programme/intro-financial-modelling.html).

PwC & WBCSD. 2010. Sustainable forest finance toolkit. London, PricewaterhouseCoopers LLP, and Geneva, Switzerland, World Business Council for Sustainable Development. (also available at https://www.pwc.co.uk/assets/pdf/forest-finance-toolkit.pdf).

Rainforest Alliance. 2019. Sustainable Agriculture Standard. Applicable for smallholder farms. New York. (also available at https://www.rainforest-alliance.org/business/wp-content/uploads/2019/06/draft-smallholder-agriculture-standard-v2.pdf).

SPGS. 2010. Sawlog Production Grant Scheme timber market study. Uganda, Ministry of Water and Environment. (also available at http://spgs.mwe.go.ug/sites/files/Timber%20Market%20Study%202010_0.pdf).

The Equator Principles. 2020. Risk management framework adopted by financial institutions [online]. https://equator-principles.com./about/

Udemy. Value proposition design: develop compelling value propositions for your products & services using a worldclass business tool. E-learning course [online]. California, USA. https://www.udemy.com/course/create-products-services-that-customers-want/

UNCTAD. 2019. Promoting cotton by-products in Eastern and Southern Africa (ESA). Geneva, Switzerland, United Nations Conference on Trade and Development. (also available at https://unctad.org/en/PublicationsLibrary/ditccominf2019d2_en.pdf).

UNPD. 2019. New York, United Nations Population Division [online]. https://population.un.org/wpp/

UN PRI. 2019. An introduction to responsible investment in forestry. London, United Nations Principles for Responsible Investment. (also available at https://www.unpri.org/download?ac=6441).

VC4A. undated. Venture Capital for Africa [online]. https://vc4a.com/; https://consulting.vc4a.com/

Verdone, M. & Seidl, A. 2017. Time, space, place, and the Bonn Challenge global forest restoration target. (also available at https://doi.org/10.1111/rec.12512)

WEF. 2019. The global competitiveness report. Geneva, Switzerland, World Economic Forum. (also available at http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf).

World Bank. undated. Enabling the business of agriculture (country profiles) [online]. Washington, DC. https://eba.worldbank.org/

World Bank. undated. Worldwide Governance Indicators [online]. Washington, DC. https://info.worldbank.org/governance/wgi/

World Bank. 2009. Clusters for competitiveness – a practical guide & policy implications for developing cluster initiatives. Washington, DC. (also available at http://www.fao.org/sustainable-food-value-chains/library/details/en/c/267097/).

World Bank, CIF & PROFOR. 2017. Harnessing the potential of private sector engagement in productive forests for green growth. Washington, DC. (also available at https://www.profor.info/sites/profor.info/files/Productive%20forests%20booklet%20-updated.pdf).

World Bank. 2018. The future of food. Maximizing finance for development in agricultural value chains. Washington, DC. (also available at https://www.worldbank.org/en/topic/agriculture/publication/the-future-of-food-maximizing-finance-for-development-in-agricultural-value-chains).

WRI. undated. The Land Accelerator [online]. Washington, DC, World Resources Institute. https://thelandaccelerator.com/

WRI & TNC. 2018. The business of planting trees: a growing investment opportunity. Washington, DC, World Resources Institute, and Nairobi, The Nature Conservancy. (also available at https://www.wri.org/publication/business-of-planting-trees).

WUR. 2020. Landscape finance: investing in innovation for sustainable landscapes. E-learning course [online]. Netherlands, Wageningen University & Research. https://www.wur.nl/en/show/Landscape-Finance-Investing-in-Innovation-for-Sustainable-Landscapes-3.htm

Your Europe. undated. Standards in Europe [online]. Brussels, European Union. https://europa.eu/youreurope/business/product/standardisation-in-europe/index_en.htm

1 This is also helped by momentum around the development of the bioeconomy.

2 FAO and Global Mechanism of the UNCCD (2015) estimated that USD 36 billion (per year) will be needed to meet the Bonn Challenge target alone, and more than USD 318 billion per year must be invested to reach full land degradation neutrality. FAO, the International Fund for Agricultural Development (IFAD) and the World Food Programme (WFP) estimate that an additional USD 140 billion per year (globally) must be invested directly in agriculture and rural development in order to achieve SDGs 1 and 2 (FAO, IFAD and WFP, 2015). http://www.fao.org/3/a-i4951e.pdf. More recently, the Sustainable Development Solutions Network (2019) estimated a total SDG financing gap for 59 low-income developing countries on the order of USD 400 billion per year through 2030.

3 FLR is the ongoing process of regaining ecological functionality and enhancing human well-being across deforested or degraded forest landscapes. FLR is more than just planting trees – it is restoring an entire landscape to meet present and future needs and offer multiple benefits and land uses over time.

4 Additional estimates on the return of businesses that generate economic value by improving nature can be found in WEF (2020): http://www3.weforum.org/docs/WEF_The_Future_Of_Nature_And_Business_2020.pdf; or TNC (2020): https://www.nature.org/en-us/what-we-do/our-insights/reports/financing-nature-biodiversity-report/. Commonland and KPMG (2020).

5 Participants included development finance institutions: IFC, EIB, FMO and Finnfund; companies/funds operating in developing countries: Criterion Africa Partners, Form Ghana, Komaza, IWC, Ecosystem Services, 12Tree Finance, responsAbility, GreenWood Resources and Dasos Capital; and consultant companies Indufor and Lexeme Consulting. http://www.fao.org/forestry/48858-064440fb9719c37f1b-7b2a3e957b017c1.pdf

6 Most associations and small enterprises will have some of these elements already, but not all. For example, associations may already have conducted a preliminary exploration of potential business ideas and gathered information on production levels and possible markets. However, this information alone is not sufficient for a funding source to appraise the soundness of the business.

7 These initiatives include FAO’s work through its Forest and Farm Facility, the FLR Mechanism and SW4SW; The World Bank’s PROGREEN programme; the Center for International Forestry Research (CIFOR)’s work on value chains, finance and investments; and the Global Forest Financing Facilitation Network (GFFFN) of the United Nations Forum on Forests, among others.

8 These POs intend to present their business proposals to a set of finance institutions that have already expressed interest in financing initiatives that can deliver modest returns while contributing to the achievement of the SDGs.

9 Such as forestry consulting companies, law firms, accountants, consultants, non-governmental organizations (NGOs), development partners, project developers.

10 UNCTAD commissioned this investment profile as part of the United Nations Development Account Project 1617K, promoting cotton by-products in Eastern and Southern Africa (ESA), intended as a tool for the Government of Zambia to promote investments in the sector. The full report is available at https://unctad.org/en/PublicationsLibrary/ditccominf2019d2_en.pdf

11 The term “direct off-taker” is used in order to avoid confusion with end-consumers of the product, which are not necessarily the same (e.g. supermarkets are the direct off-takers of many cooperatives while the end-consumers are the general public or a publicly funded school).

12 In some cases, a score card can be used (in combination with financial information) to assess the health of the organization and if it is holistically moving towards a better situation in the long term.

13 These include Kilombero Valley Teak Company (United Republic of Tanzania), Komaza (Kenya), Green Resources (Uganda), New Forests (United Republic of Tanzania), IWC, Form Ghana (Ghana), 12Tree (Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Panama, Peru).

14 Additional tools and frameworks are available to assess the market structure (e.g. competitor concentration, barriers to entry). Porter’s Five Forces can be used to analyse and understand the competitive forces in a market and help to define a business’ marketing strategy. For more information: https://www.isc.hbs.edu/strategy/business-strategy/Pages/the-five-forces.aspx

15 Even if the implementation of some technologies is not feasible, perhaps due to costs, comparison of technologies is always recommended as this helps to select the best in the short term, and to plan future improvements in the long term.

16 In developing countries, this can be a significant operational risk as social unrest in the form of demonstrations or terrorist organizations can impact business in several ways.

17 The Codex Alimentarius was established in 1963 to develop harmonized international food standards, which protect consumer health and promote fair practices in food trade.

18 Benchmarking is the practice of comparing business processes and performance metrics to industry bests and best practices from regional competitors. Dimensions typically measured are quality, time and cost. Common metrics in forestry include mean annual increment (MAI), the cost of a product at the point of sale (e.g. stumpage price, farm gate price, mill price, etc.), recovery rates (e.g. for processing plants), the cost of inputs (e.g. skilled or unskilled labour, electricity, etc.), and productivity (e.g. costs to deliver a unit of product).

19 As mentioned in module 2, formal status is important to access finance as investors are unlikely to fund an informal entity.

20 Companies aim to minimize fixed costs so that when production volumes decrease, costs also decrease. This is why some business functions are outsourced.

21 In FAO’s RuralInvest software, variable costs are also referred to as production costs.

22 In FAO’s RuralInvest software, fixed costs are referred to as general or recurrent costs.

23 In FAO’s RuralInvest software, capital expenditures are called investment costs.

24 Also called operating profit or cash flow before financing and taxes (see PFP 2018).

25 These are also referred to as financial ratios and can be broken down into four main categories: (1) profitability or return on investment ratios; (2) liquidity ratios; (3) leverage ratios; and (4) operating or efficiency ratios. https://www.inc.com/encyclopedia/financial-ratios.html

26 The discount rate is based on the assumption that money today is worth more than the same amount in the future (e.g. because money received today can be deposited at the bank and generate interest).

27 Probabilistic analysis (i.e. stochastic models using Monte Carlo/random sampling simulations) can be also be done to enhance the quality of sensitivity analysis. Microsoft Excel and specific tools (e.g. Crystal Ball, @RISK, etc.) can help the business planner to make this type of more elaborate sensitivity analysis.

28 For larger projects, investors and banks will require a government-approved environmental and social impact assessment (ESIA) and accompanying government-approved ESMP, rather than a single ESG action plan. Many governments require an environmental and social management and monitoring plan (ESMMP) and environmental permit. So an ESMMP is typically also required by financiers and government regulators.

29 Ex-Act is an appraisal system to estimate the impact of agriculture and forestry development projects, programmes and policies on the carbon-balance.

30 Numerous publications exist, such as Access to finance for forest and farm producer organisations (Macqueen, 2018); Agricultural value chain finance strategy and design: technical note (IFAD, 2012).

31 Further information on types of investors and their expected returns on investments can be found at http://www.fao.org/3/a-i5174e.pdf.