FINANCIAL MANAGEMENT

Time: 3hrs 45 Minutes

Resources: Name tags, Flip Charts, Markers, Overhead Projector

Methods: Introductions

Session By the end of the session participants will be to:

Objectives:  Determine the funds needed to run the business.
 To identify the various sources of finance
 Learn how to prepare a budget
 Describe the concept of tax and its implications on businesses
WORKING CAPITAL
• 2.1 Working Capital
• Working capital is the short-term capacity that enables the business to
operate the long-term assets on a daily basis in order to produce the
desired goods and services. These are funds required for a short period
in business normally less than a year termed as working capital. Current
assets like cash, debtors, prepayments and stock are the gross working
capital of the business. It also has current liabilities like accrued
expenses, creditors, bank overdrafts which when offset against the
current assets results net working capital.
• When money from debtors is collected fast and sales are mainly on cash
then the business will have money to pay creditors
2.2 Importance of Working Capital

• Money is needed to operate the business on daily basis because of

the following reasons:
• Producing goods and services in a timely manner to meet market
needs.
• Maximizing wealth and make better investment decisions in fixed
assets.
• To meet current obligations of the firm as they fall due.
Cash management

• Cash is the most liquid current asset normally held as money. Cash management is very
important because it is a basic input of production through inputs like land, labor and
capital.
• Importance of cash resources
• Transactions Motive: Businesses carry out daily transactions where cash is needed to pay
materials, labor and suppliers.
• Precautionary Motive: Cash is needed as a cushion against unforeseen circumstances like
break down in machinery and any other emergencies.
• Speculative Motive: Cash is maintained to take advantage of any profitability ventures
that may rise e.g. fall in price of raw materials.
• The cash balances maintained must neither be too high nor too low but must be optimal
to ensure that the business meets its operational requirements and also gains returns by
investing it in profitable ventures
 Debtor’s and Creditor’s management

• Debtors are the credit customers that have to pay at an agreed date. Credit
sales should be recorded and monitored. Reminder notices should be
circulated to all debtors. The faster money is collected from customers the
better. This also reduces the risk of customers failing to pay (bad debts) and
enables the business to pay its obligations.
• Entrepreneurs should discourage credit sales by giving calculated discounts to
cash sales.
• Creditor’s management
• Creditors are the credit suppliers that are paid at an agreed date. It is an
obligation that has to be fulfilled by the business and failure to comply may
create distrust. All the credit purchases must be recorded and monitored to
ensure payment.
 Inventory management

• These are the goods bought as raw materials (inputs), work in progress (stock being processed)
and finally goods that are completed (finished products) for sale. Inventory records track of all
physical amounts that your business has at any point in time.
• Importance of recording inventory is to;  Measure profitability.
• Determine production.
• Plan for re-ordering to avoid running out of supplies or items to sell.
• Identify stolen goods.
• Inventories are essential to the business however they involve costs, which include:
• Ordering costs; are costs of preparing and sending orders, communication with suppliers,
making orders into warehouses. These costs normally decrease when the size of the order is big.
• Carrying costs; are costs met to keep the inventories in the business from the time of receiving
them until sale. Carrying costs include storage costs, losses due to damages, risk of inventories
becoming obsolete, insurance, security, lighting and heating.
 Optimal stock level

• The business should keep inventory that minimizes the total costs
(ordering and carrying costs). If an entrepreneur maintains stock
below the minimum level then their ordering costs increase while
stock above the maximum level increases carrying costs.
• Entrepreneurs need to physically count their stock in the stores or
warehouse and record it. This helps them to know how much is sold
and what has remained. The process of doing this is called
stocktaking. Ending inventory for a period is got by;
 Exercise

• Matovu deals in charcoal. He started the month of October with charcoal worth 200,000.
During the month, he purchased charcoal of 300,000. He sold goods of 80,000 and took
home 20,000 to his home. The sales man stole two bags of charcoal of 40,000. How much
charcoal does he have at the end of October?
•
• Self-Assessment
• How much cash should be kept by the business?
• Why do you need cash in your business?
• How long do you take to collect money from your debtors (customers)?
• How long do you take to pay your creditors (suppliers)?
• What kind of items do you keep as stock in your business?
• How long do you take to sell your stock?
2.3 Sources of Funds / Types of Funds
• Retained profits from the business. This is the difference between total earnings and total dividends to date. However, this may rise to
over capitalization of the firm and may therefore represent idle resources.
• Trade credit. This is the supply of goods and services without immediate payment for them. It gives the firm time to invest the money that
would have otherwise used to pay the suppliers. It is a cheap source of financing and does not have complicated modalities, however cash
discounts are foregone and the firm is offered less favorable terms
• Bank overdraft. This is the extent that the business is allowed overdraw its business account. For example, if an enterprise has 10 million
on its account, the bank may allow it to over draw 2 million making a total drawing of 12million.
• Loans. These are the funds offered by individual or financial institutions such as a bank and have to be settled with in a given period. The
costs of the loans include interest, commitment funds, compensatory (minimum balance), collateral (assets pledged). Loan are
advantageous in that are big projects can be financed, loans are easier to pay because they are spread over a period of time and a grace
period is give. However, it involves covenants of not borrowing from other financial institution and the lender creates a fixed charge on the
firm’s assets.
• Ordinary share capital. Here a firm is financed through the issue of shares to existing shareholders or to the public. The shares stand for
ownership position with specific rights and privileges. If one shareholder wants to pull out of the business, then he sells the shares to
another party.
• Customer Advance. Deposits made by clients before taking a product or service e.g carpenters and decorators.
• Sale of assets. Sale of redundant, old or extra asset.
• Leasing. As an alternative to acquiring a loan, it is used to acquire equipment and machinery through specialized financial institutions
called leasing companies. It involves entering into a contract between two parties that is lessor (leasing company) and leasee
(entrepreneur). Under this arrangement the equipment is owned by the leasing company (with exception of the finance lease) though the
entrepreneur pays monthly or annual installment.
• Bootstrapping. Entrepreneurs raised money through unusual and rare sources of money normally evidenced by cost savings. e,g instead of
buying lunch at workplace, pack from home.
• Grants. Interest free source of money normally form donor and development agencies.
 Budgeting
• A budget is a plan of action expressed in quantitative terms (figures). It can be prepared for a business
as a whole or for departments or functions such as sales or production.
• Benefits of Budgeting
• It helps in planning to achieve specific goals.
• It improves communication between management and employees
• Coordination among functions, departments or activities.
• Used to determine performance of the business.
• Helps to clarify authority and responsibilities.
• It is an estimation of various activities.
• Without a budget, a business cannot utilize its resources effectively.
• A budget is a standard with which to measure the actual achievements of people.
• Budget period
• A budget is prepared for a specific period this may be periodic budget or continuous budget.
• Key factor or limiting factor
This is a factor, which effectively limits the activities of an organization for example production capacity,
labour shortage, and customer demand e.t.c
• Budget Process
• Communication of the details of the budget and the guidelines by the head of the enterprise.
• Determine limiting budgeting factor e.g. estimated demand for the cotton has an effect on the cotton
processed or sold.
• Prepare the sales budget (refer to past sales pattern)
• Prepare the expenditure budget
• Coordination of budget and preparation of a master budget of all activities or functions of the business,
• Negotiation of budgets with superiors and its approval.
• Implementation of the budget.
• Monitoring and Review of the budget by comparing actual results with budgeted results.
 PINE FARM BUDGET FOR THE FY 2017

Illustration of a budget
JANUARY FEBRUARY MARCH APRIL MAY JUNE TOTAL

Opening Balance 20,000 79,100 182,323 335,228 543,963 1,160,614

Revenue 500,000 550,000 605,000 665,500 732,050 805,255 3,857,805

Other Incomes 50,000 55,000 60,500 66,550 73,205 80,526 385,781

Total Income 550,000 625,000 744,600 914,373 1,140,483 1,429,744 5,404,199

Less: Expenses

Seeds 120,000 123,600 127,308 131,127 135,061 139,113 776,209

Salaries 200,000 206,000 212,180 218,545 225,102 231,855 1,293,682

Spray 20,000 20,600 21,218 21,855 22,510 23,185 129,368

Water 40,000 41,200 42,436 43,709 45,020 46,371 258,736

Transport 100,000 103,000 106,090 109,273 112,551 115,927 646,841

Other expenses 50,000 51,500 53,045 54,636 56,275 57,964 323,420

Total Expenses 530,000 545,900 562,277 579,145 596,520 614,415 3,428,257

Balance 20,000 79,100 182,323 335,228 543,963 815,328 1,975,942

(Surplus/Deficit)
• Budgetary Control
• This is the monitoring of activities to see whether they conform to the
plan. It involves the comparison of estimated and actual results of the
business.
• The variance could be favorable or un-favorable. The unfavorable
variance should be investigated and a course of action is taken.
Example
The income statement (Profit and loss) of Furniture Dealers ltd is
as follows

Items Budgeted Actual Variance (Difference)

Sales (Furniture) 4,800,000 4,000,000 (800,000) Unfavorable

less Cost of Sales (Timber) 1,000,000 1,600,000 (600,000) Unfavorable

less Expenses (wages) 200,000 100,000 100,000 Favorable

Profit /Loss 3.600,000 2.300,000

The causes of the differences (Variances)
• The sales may reduce due to poor quality of furniture, high prices which
discourage customers and poor customer service.
• The costs of sales were high because of poor bargaining power of the timber,
good quality of the timber and under estimate of timber in the budget.
• The expenses decreased because the business used un-skilled laborers and
had good bargaining power.
• Exercise:
• Prepare a budget for your business for a period of 12 months.
• Refer to your business budget/plan and identify reasons for variances between
budgeted and actual items.