Financial Analysis and Feasibility of Micro Business Development

Sector Industry Tanjung Morawa District Deli Serdang

Yulita Triadiarti

and Akmal Huda Nasution

Faculty of Economics, Universitas Negeri Medan, Medan-Indonesia

Keywords: Financial Analysis, Develop Micro Enterprise

Abstract: Micro, Small, Medium Enterprises (MSMEs) has an important and strategic role on national economic

development. The main role of MSMEs is to increase economic growth and labor absorption as well as the

place where economic output will be distributed. In 1997-1998, MSMEs was able to survive in the middle of

economic crisis and moreover the number of MSMEs was increasing rapidly after the year. The internal

MSMEs’ obstacle to develop is capital. Evaluating the financial feasibility can be done by using analysis

based on Net Present Value (NPV), IRR, and Payback period. In this case, the college which has the capacity

of knowledge and the depth of study in managing the bankable and feasible enterprise can be MSMEs guider

to undertake their business. This research study is about financial analysis of micro enterprise in industrial

sector in sub-district Tanjung Morawa, Deli Serdang. The research area is chosen as it is near from Medan as

well as one of industrial center in Sumatera Utara. The result of the research shows that micro enterprises in

sub-district Tanjung Morawa are difficult to get additional capital so their business is not able to develop

maximally. According to financial analysis, it is found that generally micro enterprises in sub-district Tanjung

Morawa are feasible to be developed.

1 INTRODUCTION

Micro, Small and Medium Enterprises (MSMEs)

have an important and strategic role in national

economic development. The role of MSMEs is

primarily to increase economic growth and absorb

employment as well as a forum for the distribution of

development outcomes. When the economic crisis

occurred in the period 1997-1998, MSMEs proved to

be able to survive even increased rapidly after the

crisis. Data from the Badan Pusat Statistik (BPS)

shows that after the crisis the MSMEs were able to

absorb 85 million to 107 million workers until 2012.

The 2012 data shows that the number of

entrepreneurs in Indonesia was 56,539,560 units. Of

these, the number of MSMEs was 56,534,592 units or

99.99%. The remaining approximately 4,968 units or

0.01% are large businesses. The next data recorded in

BPS is that nationally MSME growth in 2013 was

7.51%, 2014 was 4.91%, 2015 was 5.71%, 2016 was

5.78% and in 2017 amounted to 4.74%, so that the

average growth of MSMEs from 2013 to 2017 is

5.73%. If calculated, the average growth of new

MSMEs in Indonesia is 3,239,716.8 per year that

appear in Indonesia. The amount is quite large and

proves that MSMEs will grow in the coming years

(LPPI and Bank Indonesia, 2015).

The MSME business does not always run

smooth. Internal constraints that always appear as the

main obstacle in MSMEs are business capital. Many

things cause the emergence of capital constraints,

including geographic barriers, administrative

constraints, and others. Administrative constraints

arise because the management of the MSME business

is still traditional, haven’t a good financial

administration and management system. This is a

major weakness for MSMEs to get funding from

financial institutions. Regarding the distribution of

funds to the business world, financial institutions

must consider business feasibility and ability to return

capital. Financial institutions, especially banks, must

pay attention to capacity, collateral, economics

condition, character and capital of business

entities. Risk aspects and loan repayment guarantees

are the standard for banks in channeling their funds.

208

Triadiarti, Y. and Nasution, A.

Financial Analysis and Feasibility of Micro Business Development Sector Industry Tanjung Morawa District Deli Serdang.

DOI: 10.5220/0009496002080212

In Proceedings of the 1st Unimed International Conference on Economics Education and Social Science (UNICEES 2018), pages 208-212

ISBN: 978-989-758-432-9

Debt default will be a problem for banks and increase

the risk of the bank. Risk can be reduced by

evaluating financial feasibility. Financial feasibility

evaluating can be done through Net Present Value

(NPV), Internal Rate of Return (IRR) and payback

period analysis (Nugraheni and Suprihanto, 2015).

Research was held out in Tanjung Morawa. The

selection of the research area with the reasoning that

geographically the location of Tanjung Morawa is

very close to Medan, the capital city of North

Sumatera and it is the industrial centers of

Medan. Tanjung morawa is one of the sub-districts in

Deliserdang which has many industries from middle

to upper industries, even micro industries. Rapid

industrial development has become a major challenge

for micro-enterprises to survive, compete with

middle-to-upper industries. The aim of this research

is to analyze main obstacle and the feasibility of the

development of micro industries in the District

Tanjung Morawa Deliserdang.

2 RESEARCH METHOD

This research was conducted in Tanjung Morawa

Deli Serdang on July to September 2018. The

research object is the owner of the industrial micro-

sector who are made as respondents and domiciled in

Tanjung Morawa.The sample selection method used

Convenience sampling by choosing based for ease in

data retrieval. The sample selection like this on the

idea that the District Tanjung Morawa consisted of 25

villages and there is hundreds of micro-business

industry sectors in village. The results of data

described there were 31 micro-businesses which

were willing to provide the required data. Primary

data obtained from direct interviews with respondents

using a questionnaire. Financial analysis and

business development feasibility integrated in the

following stages:

1. Preliminary survey of the condition of micro-

enterprises in Tanjung Morawa.

The survey began by looking at the conditions of

various micro-industry businesses in Tanjung

Morawa District. Based on data from the Badan

Pusat Statistik (BPS) of Deli Serdang Regency, it

can be seen that the number of micro-businesses

spread in several villages and sub-districts of

Tanjung Morawa District consists of several

types of industries including food, beverage,

textile, furniture, wood, earthenware and many

others.

2. Determination of research samples.

The sample selection is based on the

Convenience Sampling method so that the data

search process is not determined in advance what

type of business the data will be taken.

Determination of samples on the basis of

convenience is done as well as possible so that

the types of industries chosen are very diverse,

including the food processing industry, furniture

manufacturing, sculpture and earthenware

making, broom making, corn processing, trident

and glass making.

3. Retrieving data to respondents

Data collection was carried out by involving 2

research members plus 4 team members. The data

collection method used is through in-depth

interviews with business owners using

observation sheets and filling out questionnaires

conducted by team members.

4. Data processing

Data is processed using descriptive statistical

methods to determine the size of the

concentration and distribution of data.

Furthermore, the data is processed using financial

analysis in the form of calculating the Net Present

Value (NPV), Internal Rate of Return (IRR), Net

Benefit / Cost Ratio (B / C Ratio), and Payback

Period

5. Results Analysis and Discussion

Analysis of the results and discussion is done by

tabulating and grouping the data obtained to get

conclusions about the difficulties faced by

business owners to develop their business.

Feasibility analysis based on financial capability

is carried out by the method of financial analysis

NPV, IRR, B/C Ratio, and Payback Ratio.

6. Analysis of the feasibility of developing micro

enterprises by financial analysis.

Financial analysis was followed by an analysis of

the feasibility of developing micro-enterprises in

the industrial sector in the Tanjung Morawa area.

Each calculation result of NPV value, IRR, B/C

Ratio and Payback ratio will be analyzed to

determine whether the business is feasible to be

developed or not.

7. Evaluation and improvement of analysis results

The next step is to perfect the results of the

research so that the conclusions needed are

needed in accordance with the research

objectives. Related to things the results of the

analysis will be prepared to be eligible for

publication.

The financial feasibility analysis used consists of

(Utari, Hadiana and Suryadi, 2016):

a) Net Present Value (NPV)

Financial Analysis and Feasibility of Micro Business Development Sector Industry Tanjung Morawa District Deli Serdang

209

The Net Present Value of a project is the

difference in Present Value (PV) of the

current benefits with Present Value (PV) cost

flows (Fleeson et al., 2017).

The NPV formula is as follows:

Information:

NB: Net Benefit (Benefit - Cost)

C : Investment Costs + Operating Costs

B : Benefits that have been discounted

C : Cost that has been discounted

I : Factor discount

n : Year (time)

Furthermore, the feasibility of a business can be

measured by the conditions below:

NPV> 0: Decent business/profit

NPV < 0: Unfit business/ loss

NPV = 0: Break even

b) Internal Rate Return (IRR)

The Internal Rate of Return (IRR) is the rate of

return on net investment (Kusuma, 2012). The

IRR interest rate will be obtained NPV=0. This

means that the interest rate investment giving

NPV=0. To obtain the final results of the IRR

calculation, it must find a discount rate results in

NPV positif. It was looking for discount rate

produces a negative NPV (Sekaki and

Pekanbaru, 2016).

The formula for calculating the IRR is as

follows:

Information:

IRR : Internal Rate of Return

i1 : Discount rate that produces NPV +

i2 : Discount rate that produces NPV-

NPV1 : Net Present Value is positive

NPV2 : Net Present Value is negative

IRR has three values where each of these values

has meaning to the investment criteria when

compared to the social opportunity cost of

capital (SOCC) as a discount factor .

IRR < SOCC, means that the business is not

financially feasible.

IRR = SOCC, means the business is in a

breakeven point.

IRR > SOCC, this indicates that the business is

financially feasible.

c) Net Benefit Cost Ratio (Net B/C Ratio)

Net Benefit Cost Ratio (Net B/C Ratio) is a

comparative number between the number

of present value (PV) that is positive (as a

numerator) with a negative number of present

value (PV) (as a denominator) (Kusuma, 2012).

Assessment criteria are as follows:

Net B/C > 1: Business is declared

eligible/profitable.

Net B/C < 1: Business is declared not

eligible/loss.

Net B/C = 1: Business is at break even.

d) Payback Period

Payback Period is useful to find out how long it

will take to close back investment expenditure

by using cashflow. In a manner systematic can

be formulated as follows (Wahyuningrum,

Sukmawati and Kartika, 2014):

P = I / A

Information:

P = Amount of time needed to return

investment capital (year)

I = Investment costs (rupiah)

A = net benefit every year (rupiah)

Assessment criteria are as follows:

PBP < 5 Years: Decent business

PBP > 5 Years: Business is not feasible

PBP = 5 Years: Break Even

3 RESULTS AND DISCUSSION

Primer data is carried out by taking data directly

through interviews (in-depth interviews )

with owners of micro business sector industry. There

were 31 respondents in several Tanjung Morawa

villages. A total of 9 respondents owned a business in

the food sector, 4 respondents had a broom business,

3 respondents owned a trellis and glass making

business, 4 respondents owned ceramic pots and jars

business, 4 respondent had furniture manufacturing,

1 respondents has a stone business, 2 respondents

have a business of making temper and tofu, and each

of the 4 respondents has a corn processing business,

fertilizer, and painting frames.

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Based on the results of the question and answer using

a questionnaire with respondents, it can be mapped

several problems that are always faced by micro

business owners in the industrial sector in Tanjung

Morawa. These problems include:

1. The educational background of the business

owner is low.

Most of the total respondents are only

graduated from junior high and high

school/equivalent so basic knowledge in

business development is very

minimal. Business activities are carried out

only based on experience and knowledge

obtained from generation to generation.

2. Weaknesses in production planning.

The business owner never plans to determine

the amount of production. It is strongly

associated with an educational background

which is relatively low so that an

understanding of the plan/budget is

minimal. In the future, relevant training and

mentoring needs to be given to business

owners related to the field of production

planning.

3. The business owner does not make financial

statements.

All respondents stated never prepare financial

statements on a business carried not know

how the value of business assets and how

much profit can generate from

operations. Such conditions can cause

difficulties for the owner in separating

personal property from business assets that

have an impact on the sustainability of the

business because he treats it as personal

wealth.

4. Licensing and legality.

Businesses are developed on average have

not been incorporate, not have a business

license, P-IRT, halal certificate and other

legal requirements. Business owners

complain of the high costs and complicated

procedures that they prefer not to take care of

permits and legality.

5. Difficulty in determining the current amount

of capital.

The business owner is unable to

determine the exact amount of capital owned

by the business at this time. This is related to

the previous problem, namely the failure to

prepare financial statements. The inability to

determine capital is currently an indicator of

the weak measurement capability of business

development.

6. The small number of employees.

Of all respondents around 90% only have 1-5

employees. This shows that the ability to

provide employee salaries is still low.

7. Difficulty in getting additional capital for

business development.

Difficulty in getting additional capital is the

main obstacle, considering that capital is a

key factor that can describe the constraints

mentioned earlier.

Financial analysis carried out on micro-enterprises in

the industrial sector in the Tanjung Morawa region is

by calculating the Net Present Value (NPV), Internal

Rate of Return (IRR), Net Benefit Cost Ratio (B/C

ratio), Payback Period (PP).

a. Net Present Value (NPV)

Based on the results of calculating the NPV value

of the 31 MSMEs sampled, 28 MSMEs have a

positive NPV value and 3 MSMEs have a

negative NPV value (the results of the

calculation are attached). Then the results were

obtained that 90,32% of MSMEs were very

safe and benefited and around 9.68% of MSMEs

were still not feasible and unable. Based on the

analysis, it can be concluded that the ability to

develop and generate high profits for MSMEs in

the Tanjung Morawa Sub-district area. The next

analysis is that MSMEs are very feasible to

develop. If the development of investments in

MSMEs is carried out, there are opportunities for

success.

b. Internal Rate of Return (IRR)

The IRR (internal rate of return) is the discount

rate that results in an NPV equal to zero. If the

IRR calculation results are greater than the

discount factor, it can be said that the investment

that will be made is feasible. If it is equal to a

discount factor, it is said that the investment

invested will return the investment, whereas if

the IRR is smaller than the discount factor, the

investment invested is not feasible. Discount

factor in this research uses a reference interest

rate set by Bank Indonesia, which is equal to

4.5%. Discount factor is also called the Social

Opportunity Cost of Capital (SOCC). From the

results of the IRR calculation (the results of the

calculations attached) obtained as many as

23 MSMEs have IRR values > SOCC (Social

Opportunity Cost of Capital). The remaining

8 MSMEs have an < SOCC IRR value. Results

showed that 74.1% of SMEs are financially

viable business, while 25, 9% of SMEs are still

not financially feasible.

c. Net Benefit Cost Ratio (B/C ratio)

Financial Analysis and Feasibility of Micro Business Development Sector Industry Tanjung Morawa District Deli Serdang

211

The B/C Ratio method basically uses the

equivalent data of the present value of revenues

and expenditures which in this case the B/C Ratio

is a comparison between the present value of

receipts or income derived from investment

activities with the present value of expenses

(costs) during the investment takes place within

a certain period of time. The eligibility criteria is

if the value of B/C Ratio > 1 and formulated with

BCR = (∑ Present Value of Income): (∑ Current

Value of Expenditures).

Based on the results of the B/C ratio ratio of

31 MSMEs , 25 MSMEs have a B/C Ratio > 1,

while 6 MSMEs < 1. About 80.64% of

businesses that are running are already feasible

businesses that have been developed and have

benefited. 19.36% of businesses that are running

still cannot be considered operationally feasible

and have not produced sufficient profits. The

B/C Ratio < 1 is a new business and the

operational age is still relatively short.

d. Payback Period (PP)

Payback period is a period that is needed to be

able to recoup investment expenditure by using

the proceeds or net cash flows. Based on the

results of the Payback Period calculation of 31

MSMEs sampled, the overall payback obtained

is still below 2 years. The average payback

period is 0.3947. This figure shows that the cash

flow generated by the business to cover the

investment value is very short.

The payback period of the investment is an

average of 0.3947 years. This means that funds

embedded in assets will be recoverable

within 0.3947 years. If investors are faced with

two investment choices, then choose the smallest

payback period. Based on the payback period

analysis, it can be concluded that the MSMEs

sampled on average are able to obtain back the

funds planted for investment briefly and illustrate

that the cash flows generated are quite good.

4 CONCLUSION

The identification of the main constraints faced by

micro-industries in the industrial sector in Tanjung

Morawa Deliserdang shows that the difficulty of

obtaining additional capitalfor business

development is the biggest obstacle to the survival of

MSMEs. Difficulty in getting additional capital is the

main obstacle, considering that capital is a key factor

that can describe the constraints mentioned earlier.

Financial analysis by calculating the value of Net

Present Value (NPV), Internal Rate of

Return (IRR), Benefit and Cost Ratio (B/C Ratio)

and Payback Period resulted in a fairly good

assessment of the feasibility of developing micro-

business industry in Tanjung Morawa District,

Deliserdang. In general, it can be concluded that the

micro business in the industrial sector in Tanjung

Morawa sub-district is feasible for development

because it is quite profitable, can survive and have a

relatively short investment return period.

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