WEL COME TOWEL COME TOAMBO UNIVERSITYAMBO UNIVERSITY

WEL COME TOWEL COME TOAMBO UNIVERSITYAMBO UNIVERSITY

TRAINING ON Cooperative TRAINING ON Cooperative FinanceFinance

Cooperative Cooperative FinancingFinancing

Cooperative Cooperative FinancingFinancing

Chapter TopicChapter TopicI. Financial ManagementII. Financial PlanningIII. BudgetingIV. Financial AnalysisV. Risk ManagementVI. Managing Operation, Credit and

liquidity

Chapter one: Financial management

Finance is the life blood of any organization and so is in cooperatives

A cooperative society needs finance to establish, operate, expand and maintain the organization

It is not Finance alone but management of finance that determines the operational results of business

Thus, the need of financial management arise

Role of Finance in an Economy

• Fig1FUNDS

FUNDS

FU

ND

S

Lenders (Savers)-House-Holds-Business firms-Government-Foreigners

Borrowers (Spenders)-Business firms-Government -Households-Foreigners

Financial

MarketsFUNDS

FUNDS

FinancialIntermediarie

s

Role of Finance… Direct Finance:-borrowers borrow funds directly

from lenders in financial markets by selling them securities (also called financial instruments), which are claims on the borrowers, future income or assets.

Indirect Finance:-funds can move from lenders to borrowers by a second route, that involves middleman or a financial intermediary that stands between the lenders savers and the borrowers’ spenders and helps transfer funds from the lender-saver to the borrower- spender.

Financial managementThe topic of finance can generally be

broken into three general, yet related areas:

Financial management deals with the management of finances of a business enterprise: Sources and Utilization

Investments deals with financial markets and security pricing, and

Financial institutions deals with financial firms such as banks

Financial managementFinancial management: is the

management of capital sources and uses so as to attain a desired goal.

It is the process of planning for, acquiring and utilizing funds in ways that maximizes an organization’s welfare.

Capital sources: investors and creditorsCapital uses: assets owned (real and

financial assets), operational costs

Objective of financial Management

Simply put, the objective of financial management is to maximize the value of the firm.

We can state this objective simply, but it is much more complex.

The management of the firm involves many stakeholders, including owners, creditors, and participants in the financial markets,

Objective…Macro level; to make intensive use

of scarce/economic capital resources

Micro level: considered at firm level, deals with over all objectives of the firm

Under the above levels, financial management deals with:

Objective…a) Profit maximization: the earned profit

are the yardsticks of its production, sales, and managerial efficiency. Profit maximization has been considered to be important for the following reasons:

Profit is the standard for measuring efficiency of management,

Survival is difficult without profit maximization,

Attainment of social economic welfare is possible by profit maximization

Profit maximization… For expanding business activities profit

maximization has to be achieved, In the absence of profit business activity

would remain at static level

b) Maximization of Return:- provides basic guideline by which financial decisions should be evaluated

Maximization of return is more explanatory, because it shows information on profit and investment combined

C. Maximization of worth

• All financial decisions are taken such a way so as to maximize the owner’s (members’) wealth. The elements in the maximization of the worth of the firm are:Increase in Profit,Reduction in cost,Source of funds,Minimize Risks,Long run Value

Principles of Coop FinanceWITH REGARD TO PROFIT

• Principle 1: It’s the total profit in the system (cooperative-level and member-level added together) that matters.Can’t look only at cooperative-level.Can’t look only at Member-level.Must “measure” both.

• Principle 2: Cooperative investment decisions should be a two-step process.Evaluate co-op profit potential as a private firm.Then estimate member level profits.

• Principle 3: Negotiate and report the “distribution” of the two levels of profits.

Functions of Financial management• The functions of financial management

can be divided into two groups:a) Executive Functions; Financial Forecasting, Investment decisions, Corporate Asset structure determination, Management of Income, Deciding on new sources of finance, Analysis and appraisal of financial

performance

Executive function…Advising the top management,Managing the flow of internal funds,Cost control,Pricing decisions,Profit planning

b. Incidental or Routine Functions• These include:

Record keeping and reporting,Preparation of various financial reports,Cash planning,Credit management,Custody and safeguarding the financial

assets,Providing top management with information

on current and productive financial conditions of the business as a basis for policy decisions on purchases, marketing, pricing, etc

Basic Factors influencing Financial decisions• The financial manager has to exercise

a great skill and prudence while taking financial decisions

a) External Factors:- Comprise environmental factors that affect the structure, conduct, and performance of the organization. These are factors outside the control of the managers

b) Internal Factors:- these are factors which are related with internal conditions of the organization

Financial Decisions:a) Funds requirement decisions:- is an

important financial decision in which the finance manager has to estimate the total funds required for the physical activities of the organization,

b) Financing decisions:-the finance manager has to identify the sources from which the funds can be raised, the amount that can be raised from each source and the costs involved

Financial Decisions:

c) Investment Decisions:- this involves decisions relating to investment in both capital and current assets. The investment manager has to evaluate different capital investment proposals and select the best in view of the overall objective

d) Dividend decisions:-The establishment of dividend policy is another important function of finance manager

II. Financial Planning Includes the determination of the

cooperatives financial objectives, financial policies, and procedures

It also refers to the process of determining the financial requirements and financial structure necessary to support a given set of plans

a) Objectives Short-term:- market standing, maintain

liquidity and proper provision of service

Objectives… Long-term objectives: To secure and

employ resources in the amounts and proportion necessary to increase the efficiency of other factors of production

b. Activities of Financial plan; Determining the amount of capital

needed by a cooperative society to carryout operations smoothly

The pattern of financing, i.e., the form and proportion of various financial sources

Activities of Financial plan Determining the suitable policies for the

proper utilization and administration of capital

c. Characteristics of sound financial Plan:- Simplicity, Long-term view, Flexibility, Liquidity, Economy (Cost of capital should be

minimum)

Liquidity Vs Profitability• The finance manager is always faced

with the dilemma of liquidity vs profitability

Liquidity means that:a. The organization has adequate cash to

pay for its billsb. The firm has sufficient cash to pay for

unexpected purchasesc. The firm has enough cash reserves to

meet emergencies

Profitability goalRequire the funds of the organization

are used so as to yield the highest return,

Apparently, liquidity and profitability goals conflict, thus finance manager should strive for the appropriate balance between the two.

Financial PlanA financial plan processing the above said

characteristics helps the management in a number of ways:

Successful promotion of a new enterprise,Successful operation of an enterprise,Expansion of businessProper administration of capital,Control and management of asset cash

Factors to be considered in developing financial plan

While developing financial plan a number of factors must be considered, among which the following are the major ones:

Nature of the Business,Amount and level of risk,Appraisal of alternative sources of finance,Attitude of Management with regard to financial

policies,Plan for the future growth,Government policies,

Need for financial Planning• As in the case of general planning

function, financial planning is important.• “If you fail to plan, You are planning to

fail,…”• Financial planning aims at:

Maintain liquidity,Indicate surplus resources available for

expansionTo ensure proper coordination between societies

and members,To increase the confidence in the minds the

supplies of funds by adopting suitable financial policies

BUDGETING & BUGETING CONTROL

• QUESTION FOR BRAIN STORMING• WHAT IS A BUDGET

•IS BUGETING IMPORTANT?•HOW IS BUGETING IMPORTANT IN

RELATION TO YOUR ORGANIZATION?– IF ORGANIZATIONS/SOCIETIES DO NOT BUGET

WHAT PROBLEMS THEY FACE?

Budget definition:• Budget, forecast of expenditures and

revenues for a specific period of time. As a planning document, a budget enables businesses, governments, private organizations, and households to set priorities and monitor progress toward selected goals. To achieve budgetary objectives, it may be necessary to set aside savings or to borrow from outside sources.

Budget…• The personal or family budget is a

financial plan that helps individuals to balance income and expenses.

• A business budget is generally used as a tool to formulate intelligent decisions on the management and growth of a business venture.

• The most complicated budgetary process involves a government budget, which is a plan for the collection and expenditure of monies needed to carry out the social, military, and economic policies of an administration

Budget…• A budget is a tool of managing the future

– As a financial plan the budget projects assets, liabilities, capital, income and expenses

• The need of budgetingBudgeting is a process of matching the needs to

be achieved with the economic resources in a systematic and cohesive way.

People budget for a number of reason, but the main reason is the economic resource constraint.

Benefits of Budgeting: Periodic planning requires budgeting

As a financial road map, the budget provides a plan so that every one in the organization has similar vision of where the ORGANIZATION going during the next budget year

Budget…A budget is a motivational device

An effective budget is planned several months in advance & represents the combined judgment of staff, management and directors

Budgeting provides a frame of reference for performance evaluation- it is a bench-mark against which actual performance is compared

Trend (time) analysis may be used as a means of performance evaluationoBut it is not recommend- why? Discuss.

Budget…Budgeting enhances coordination,

cooperation and effective communicationBudgeting process provides the vehicle for the

exchange of ideas & objectives among people in various organizational segments

Ideally a budget is prepared in a participatory approach, where every responsible person from all segments are invited and have an input in the budget to be prepared

Each party involved know and strive to achieve the accepted plan/budget, through coordination of physical resources and cooperation of different segments…e.g. NASA

Accounting & Budgeting

• Question for Discussion

Distinguish between Accounting and Budgeting

Accounting & BudgetingThe process of preparing budget use

accounting information that helps:

To assess the current situationTo assess alternatives while setting

goals/objectivesTo measure actual performance

How to prepare a budget?

•Question for discussionDiscuss the budget preparation process at your organization

The steps involvedPeople involved, etc

How to prepare a budget?

As stated earlier, effective budget is a shared process involving directors, management and staff, if each group has to abide by the results they should have hands in developing the budget

The following are some of the steps involved in the preparation of the budget

Steps involved in the preparation of the budget

Step One: Research1.The budget of the previous year is

evaluated for efficiency/effectivenessWhere there substantial amounts of

variances?Are there valid reasons for variances?Is the budget effective-did it meets the

goals of the organization

Steps involved in the preparation of the budget

2. Internal Environment AnalysisAn analysis of the internal environment

will determine the organization's/RUSACCOS` strengths & weakness

This can be done through different analysis:

Examination of organizations financial conditionsMembers/customers satisfactionSaving levels,& loan balance,Staff composition & motivation/commitment

Internal Environment Analysis……

After research on the internal environment is completed: This will determine the effectiveness/infectiveness of policies Economic shifts and competitive changes can call for new

policies which will in turn affect the budget

In general the internal environment analysis indicates directors & management the weakness areas to be resolved and the strength areas to be capitalized to move toward the organization goal

3. The external environment analysisAnother component of the research is

external environment analysis which focuses on Traits and Opportunities of the Organization/RUSACCOS

Traits constraining factors outside the organization:Competition: Global, National, & Local

economic conditionsPopulation trendsInflation/Deflation/foreign currency valuesGovernment policies and legislations

The external environment…Opportunities attractive/promising

factors outside the organization:Encouraging policies,Location or another type of advantages

Note what is trait for one could be an opportunity for the other!

Step 2 Develop a GoalAfter Research, the next step is to develop a

goal.Directors with the advise of the managers

have responsibility to develop the goalsGoals should be Specific, Measurable,

Understandable and written in terms of outcome

For example, The RUSACCO aims to increase the volume of loans and savings by 10% and 15%respectively

Each goal is analyzed in terms of the costs and benefits

Step 3 Develop a working Budget

The next step is to appoint the budget committee to develop a budget for each area of the organization

Monetary figures are then allocated to meet the goals as well as associated operational costs

Projections in various goals (loans, investment, savings, etc) are decided

These budgets for various goals are reviewed, revised and merged in to one operating budget

Step 4 Develop final BudgetThe board at this point either approves or

rejects the budgetThe board is responsible for determining

whether the budget is realistic & can meet the organization goal

Thus, after reviewing, the board determines which income or expense items need revision

The budget team makes revision as per the request of the board,

The revised budget once again brought before board for approval

Final budget…Before accepting, the board must

consider the following:-Are the projections realistic?Do the budget contribute to the

Organization goal?Do the budget follow the existing

policies?Note the supreme authority for

approval of the budget lies with the annual general meeting

Managers ResponsibilitiesMakes budget proposals to the boardGive technical/expertise advise to the

board, because some board members may lack financial/technical expertise

Translates the goals of the organization in to budgets

Provide lessons learned from the previous period budget and actual performance analysis

Step 5. Implementation the Budget

Implementing the budget is the managers job

The managers work with workers to make sure the budget become a reality

Managers also setup a reporting system to make sure that the operations of the organization are kept on the right track

Characteristics of effective budget reporting:-

Simplicity:- a design that is easily understoodTimeliness:- a regular routine for preparing

and examining the reportsAdaptable:- adaptable to various levels of the

staff and boardComparative:- maintain comparisons between

the actual and the budgeted income, expenses, etc

Correctable:- contain information whether deviations can be corrected or if estimates need to be revised.

Budgetary Control• Q. for brain stormingWhat does it mean by budgetary

controlDiscuss the budgetary control in

your organization

Budgetary Control….Controlling is a process of making sure

that the actual performance agrees with what was budgeted

Variance/Deviation is the difference between actual results and budgeted data

A variance could be favorable (F) or Unfavorable (U)

Q. When is a deviation said to be Favorable/Unfavorable

Budgetary Control…. If actual performance is better than the

budgeted performance, the variance is said to be favorable, if the reverse is true, it is unfavorable.

For Income:Actual income > budgeted income :- Favorable varianceActual expense > budgeted expense:- Unfavorable

variance

Note large favorable/unfavorable variances are not desirable by mgt. Discuss why, relate to your real organization