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Point of Financial Independence
NOTES ON COOPERATIVE FINANCIAL MANAGEMENT
Point of Financial Independence is the third module in this proposed study corresponding to the third course listed in the CDA Standard Curricula. The title suggests, as Muhammad Yunus rightly observed, that, “Poverty is unnecessary.” (Brainy Quotes,www.brainyquotes.com.) This must be what The Co-op Idea is all about. In the words of Booker T. Washington, “At the bottom of education, at the bottom of politics, even at the bottom of religion, there must be for our race economic independence.” (Brainy Quotes, ibid.)
Other famous leaders share the same idea -
Part of your heritage in this society is the opportunity to become financially independent (Jim Rohn)… Under capitalism, man exploits man. Under communism, it's just the opposite (John Kenneth Galbraith)… Money is like manure. You have to spread it around or it smells (J. Paul Getty)… We've taken the view that if the rest of the world would democratize and create market economies, that would spread the benefits of prosperity around the world, and that it would enhance our own prosperity, and our own stability and security, as well (Jeffrey Sachs)… It is incumbent upon each of us to improve spending and savings practices to ensure our own individual financial security and preserve the collective economic well-being of our great society (Ron Lewis) …Wealth consists not in having great possessions, but in having few wants (Epictetus)… Surplus wealth is a sacred trust which its possessor is bound to administer in his lifetime for the good of the community (Andrew Carnegie)…
Hence, Point of Financial Independence, the third point of strategic awareness for effective Co-operative leadership.
THE CDA CURRICUM ON FINANCIAL MANAGEMENT
COURSE TITLE FINANCIAL MANAGEMENT
TARGET GROUP Board Of Directors and Treasurer
COURSE DESCRIPTION
This course covers the basic competencies required of a member of the Board of Directors and the Treasurer in overseeing the management of the financial resources of the cooperative.
NOMINAL DURATION 28 hours
SUMMARY OF LEARNING OUTCOME (LO): Upon completion of the course, the learners should be able to :
1. LO1. Explain the basic concepts of cooperative financial management.
2. LO2. Explain the elements of the accounting system for cooperatives.
3. LO3. Interpret and analyze the Financial Statements of the cooperative.
4. LO4. Apply P.E.S.O.S. standards in evaluating cooperative performance.
5. LO5. Explain the basics of budgeting.
Additional Learning Outcome for Treasurer:
6. LO6 Explain the basics of investment and banking
LO1: EXPLAIN THE BASIC CONCEPTS OF COOPERATIVE FINANCIAL MANAGEMENT
ASSESSMENT CRITERIA
·
· Key concepts of cooperative financial management are identified.
· Financial concepts are related to coop operations.
· Elements of good financial policies are identified and elaborated on.
CONTENTS
· Basic Concepts of Financial Management
· Sources & Uses of Funds
· Financial Policies
CONDITIONS - Learner will be provided with the following :
· Reference materials on financial management
· Handouts, exercises and practice set
· Well ventilated and equipped classroom
·
METHODOLOGIES
·
- · • Individual work • Group work • Lecture/discussion
ASSESSMENT METHOD
· Test/Exam
________________________________________________________________________
LO2 : EXPLAIN THE ELEMENTS OF THE ACCOUNTING SYSTEM FOR COOPERATIVES
ASSESSMENT CRITERIA
· Elements of the Cooperative Accounting System are identified.
· Adequacy of the accounting system of one’s cooperative is evaluated in relation to the standard accounting system for cooperatives.
· Roles of directors and management in implementing a sound accounting system are adequately explained.
CONTENTS
· Standard Chart of Accounts
· Elements of the Cooperative Accounting System
· Roles of Directors & General Manager/CEO (in implementing a sound accounting system)
CONDITIONS - Learner will be provided with the following :
· Reference materials on Accounting System
· Standard Chart of Accounts
· Handouts, exercises
· Well ventilated and equipped classroom
METHODOLOGIES
· Individual work • Group work • Lecture/discussion • Exercises
ASSESSMENT METHOD
· Test/Exam
_____________________________________________________________________________
LO3 : INTERPRET AND ANALYZE FINANCIAL STATEMENTS OF THE COOPERATIVE
ASSESSMENT CRITERIA
· The different financial statements are explained.
· The elements in each type of financial statements are identified and classified.
· Tools and techniques in financial analysis are applied.
CONTENTS
· Basic Financial Statements, Including, Statement of Operation, Statement of Financial Condition, Cash Flow Statement, Statement of Changes in Equity and Notes to Financial Statements
· Elements of Financial Statements: Assets, Liabilities, Equity, Revenues and Expenses
· Tools and Techniques of Financial Analysis
CONDITIONS - Learner will be provided with the following :
· Sample Financial Statements
· Properly ventilated & equipped classroom
· Materials and supplies
METHODOLOGIES
· Individual work • Group work • Case Studies • Exercises
ASSESSMENT METHOD
· Test/Exam • Critiquing
___________________________________________________________________________
LO4 : APPLY “PESOS” STANDARDS IN EVALUATING COOPERATIVE PERFORMANCE
ASSESSMENT CRITERIA
· PESOS as the financial performance standards is explained.
· PESOS standards are applied in evaluating performance of the cooperative.
· Strengths and weaknesses of the financial operation identified and analyzed.
· Strategies to improve financial performance and achieve long-term sustainability are developed.
CONTENTS
· P.E.S.O.S: Meaning & Interpretation of Standards
· Monitoring Financial Performance for Sustainability
· Role of Directors & Management in Financial Management
CONDITIONS - Learner will be provided with the following :
· COOP-PESOS
· Properly ventilated & equipped classroom
· Materials and supplies
· Calculator (participants to bring own)
METHODOLOGIES
· Individual work • Group work • Case Studies • Exercises
ASSESSMENT METHOD
· Test/Exam • Critiquing
___________________________________________________________________________
LO5 : EXPLAIN THE BASICS OF BUDGETING
ASSESSMENT CRITERIA
· The importance and basics of budgeting are adequately explained.
· The roles of the board and management in the budget process are adequately explained.
· Actual financial statements vs budget are compared and analyzed.
· Critical thinking and inputs are contributed during the budgeting process.
· Financial performance of the cooperative is monitored against targets on a timely basis.
CONTENTS
· Basics of Budgeting
· The Budgeting Process, including, Roles & Responsibility of Board and GM
· Presenting the Budgets to the GA, including, Projected Income Statement and Capital Expenditures
· Implementing and Monitoring the Budget with variance analysis
CONDITIONS - Learner will be provided with the following :
· Handouts/reference material on budgeting
· Practical exercises, comparative financial statements
· Properly ventilated and equipped classroom
· Participants must bring a copy of their coop’s current budget
METHODOLOGIES
· Individual work • Group work • Case Studies • Exercises
ASSESSMENT METHOD
· Test/Exam • Critiquing
____________________________________________________________________________
LO6 : EXPLAIN THE BASICS OF INVESTMENT AND BANKING
ASSESSMENT CRITERIA
· The basic concepts of investment and banking are explained.
· Various investment instruments are identified.
· Alternative investment opportunities are identified and recommended to the Board of Directors.
CONTENTS
· Investment and Banking (Overview, Principles and Practice)
· Investment Products and Instruments
· Investment Policies
· Monitoring and Control
CONDITIONS - Learner will be provided with the following :
· Handouts, exercises and practice set
· Well ventilated and equipped classroom
METHODOLOGIES
· Individual work • Group work • Case Studies • Exercises
ASSESSMENT METHOD
· Test/Exam
____________________________________________________________________________
What is Financial Management?
Financial Management is the management of the finances of the co-op in order to maximize the benefit to the members (1). Financial Management is concerned with the acquisition, financing and management of assets with some overall goal in mind; It is the process of planning decisions in order to maximize the owner's wealth (2). Financial management also means the management and control of money and money related operations within a business (3).
What are the three important areas of financial management? (4)
1. Acquisition or Investment Decision
It is the most important part of the organization's three major decisions when it is about value creation. It begins with a determination of the total amount of assets needed to be held by the organization.
For example,
How much of the organization total assets should be given to cash or to inventory?
You must consider what will be the size of the firm i.e. the assets side or the left hand side in Balance Sheet.
2. Financing Decision
It is concerned with the makeup of the right hand side of the balance sheet.
On one side some organizations have relatively large amount of debt, and on the other side some organizations are almost debt free. It will be not an Ideal situation but on the other side a certain mix of financing can be thought of as best.
In Organization's financing decision Dividend payout ratio is viewed as an integral part.
Dividend pay out Ratio determines the amount of earnings that can be retained in the organization. As a means of equity financing a balance is required between the values of the dividends paid to stockholders against the opportunity cost of retained earnings lost. Once the financing mix has been decided, there is still one more thing required that how best to physically acquire the needed funds.
3. Asset Management Decision
Now after the assets have been acquired and appropriate financing provided, the next thing is how to manage these assets efficiently.
It means that now financial manager should be more concerned with the management of current assets than with that of fixed assets.
THE INITIAL SOURCES AND USES DEVELOPMENT BUDGET
FOR A START-UP CO-OP (5)
Starting a business, any business, takes money, sometimes a lot; Where is it going to come from? And what is it going to be spent on?
This document will provide an introduction to the formation of an initial sources and uses development budget. Additionally, it will provide insight on how this budget fits into the overall financial projections.
Creating a rough draft of the start-up or project budget is a necessary first step to provide a clear one to two page financial picture of what the co-op is attempting to do.
The steps to creating a budget are simple:
• List any and all uses of funds
• List any and all sources of funds
• Balance until the uses equal the sources
• Remember: there will be many drafts
The sources and uses development budget will be a critical tool for management, planning and communications. Even though this is essentially the “back of the napkin” sketch, just the act of creating this budget will be a clarifying process for the team.
A sources and uses budget will eventually be the “cover page” to the financial projections or “pro forma”. While, the sources and uses budget alone doesn’t determine financial feasibility, the overall pro forma will be a key tool in determining financial feasibility. Pro forma financials serve as the stand-in model for the actual financials until the co-op begins actual transactions. The financials will be built on the development budget.
Keep unpleasant surprises to a minimum by being conservative in both your estimations of costs and income. The creation of a list of funds, doesn’t provide license to spend money the co-op hasn’t yet
received. Costs can be contained without compromising the quality of what you’re trying to accomplish. Having a clear picture of what you’re attempting to accomplish will aid in keeping costs low.
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Sample Sources and Uses Budget
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Owner Investment : |
Facilities : |
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· Member Equity Member |
· Leasehold Improvements |
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· Loans Member Loans |
· Real Estate |
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Debt : |
Equipment (e.g. computers) |
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· Bank Loans |
Inventory |
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· Community loans |
Supplies (e.g. stationary) |
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Other Sources: |
Working Capital |
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· Donations |
Marketing/outreach |
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· Grants (if any) |
Permits, Insurance, Admin, etc |
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Total |
Total |
NOTES
1. http://www.google.com.ph/financial management
2. Jae K. Shim and Joel G. Siegel, cited by Aourang Zaib, Basic Concepts In Financial Management, http://financialmanagementconcepts.blogspot.com
3. William Lasher, Practical Financial Management, Aourang Zaib, ibid.
4. Aourang Zaib, ibid.