WEL

WEL COME
COME TO
TO
AMBO
AMBO UNIVERSITY
UNIVERSITY
TRAINING ON Cooperative
Finance
 Cooperative
Cooperative Financing
Financing

Chapter Topic
I. Financial Management
II. Financial Planning
III. Budgeting
IV. Financial Analysis
V. Risk Management
VI. 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
• Fig1 Financial
FUNDS

Intermediaries

FUNDS
FUN
DS

Lenders (Savers)
-House-Holds Financia
l
Borrowers (Spenders)
-Business firms FUNDS Markets FUND
S
-Business firms
-Government -Government
-Foreigners -Households
-Foreigners
 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 management
 The 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 management
 Financial 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 creditors
Capital 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 Finance
WITH 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 bills
b. The firm has sufficient cash to pay for
unexpected purchases
c. The firm has enough cash reserves to
meet emergencies
Profitability goal
 Require 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 Plan
A 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 business
Proper 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 expansion
To 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 budgeting
 Budgeting 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 evaluation
o But it is not recommend- why? Discuss.
 Budget…
 Budgeting enhances coordination, cooperation
and effective communication
Budgeting 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 & Budgeting
 The process of preparing budget use
accounting information that helps:

To assess the current situation

To assess alternatives while setting
goals/objectives
To measure actual performance
 How to prepare a budget?
• Question for discussion
Discuss the budget
preparation process at
your organization
The steps involved
People 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: Research
1.The budget of the previous year is
evaluated for efficiency/effectiveness
Where 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 Analysis
An analysis of the internal environment will
determine the organization's/RUSACCOS`
strengths & weakness
This can be done through different analysis:
Examination of organizations financial conditions
Members/customers satisfaction
Saving 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 analysis
 Another 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 conditions
Population trends
Inflation/Deflation/foreign currency values
Government 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 Goal
 After Research, the next step is to develop a
goal.
 Directors with the advise of the managers have
responsibility to develop the goals
 Goals 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 Budget
 The board at this point either approves or
rejects the budget
 The 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 Responsibilities
 Makes budget proposals to the board
 Give 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 understood
 Timeliness:- a regular routine for preparing and
examining the reports
 Adaptable:- adaptable to various levels of the staff
and board
 Comparative:- 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 storming
 What does it mean by budgetary
control
 Discuss 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 variance
 Actual expense > budgeted expense:- Unfavorable variance
 Note large favorable/unfavorable variances are
not desirable by mgt. Discuss why, relate to your
real organization