Financial Management in a Co-operative 4


Upon completion of this module the reader will know and understand the following:

 

  1. What is Financial Management?
  2. What are the consequences of poor financial management?
  3. What are the tools that will ensure effective financial management?

Basics

Materials for Download 

  • Glossary of key financial terms

External Resources

How to do it

Success when starting a business often comes down to understanding risks, developing a realistic plan, managing finances well and effectively and marketing what you have to sell. In this chapter we will discuss the basic fundamentals of financial management.

What is Financial Management?

Financial management reflects the financial position with the objective of identifying its relative strengths an weaknesses. Poor financial management is the leading cause of business failure. Co-operative members who do not prioritise their financial obligations will often not be able to sustain their business. Bad management translates to poor planning by management.

Financial Management requires accurate record keeping of financial transactions on all levels. This will allow any co-operative to be pro active in their financial and production planning.

  • Do you as a co-operative have control over your financial resources?
  • Do you cash up all your sales on a daily basis?
  • Do you know the amount of stock you have?
  • Are you recording the daily transactions?

If the co-operative does have control over the financial resources then you will be able to track how these resources are acquired and how these resources advance the objectives of the co-operative.

Unnecessary, impulsive and random spending will increase the possibility of the co-operative not being able to track and record and manage the financial resources.

All decisions in a co-operative and areas of operation have a financial aspect to it. The money issue affects the co-operative with regards to buying inputs, buying machinery and equipment, paying wages and receiving payments.

What are the consequences of poor financial management?

Cash flow problems

This affects the operations negatively

  • Escalation of conflict
  • Insolvency
  • Shutting down operations/ Liquidation

Losses

  • Member financial losses
  • Assets loss
  • Resource loss
  • Damage to name and reputation to members and co-operative

Members must be diligent in this area of governance as this will determine the success or failure of the co-operative.

What are the tools that will ensure effective financial management?

Internal financial control

  • All incoming and outgoing finances are recorded accurately
  • Requisition forms can be designed for almost every transaction

Setting up of financial policies and procedures

  • This is a monitoring tool for implementation and compliance
  • The Board of directors are responsible to ensure that this tool is in place
  • It is a statement of how the co-operative would run its financial matters
  • This ensures that all finance related issues are monitored and supervised properly
  • It gives certainty to roles and responsibilities
  • It ensures an ‘objective’ benchmark against which to monitor compliance or non compliance
  • All assets are protected
  • All reporting on financial matters would be consistent and regular
  • It strengthens the leverage that can be made to donors or other external finance resources.

Record Keeping

  • Keeping the actual physical documentation
  • A certified accounting system
  • Keeping all physical documents means designing a proper financial filing system the keep all primary documentation safe and at hand
    • Invoices received
    • Invoices paid
    • Customer Statement
    • Receipts
    • Utility and telephone Bill
    • Bank Statements
    • Creditors Journal
    • Debtors Journal
    • General Journal
    • Cash Flow Statements
    • Balance Sheets
    • Budget for each fiscal year
    • Asset Register
    • Inventory Lists

Costing

Costing assists with controlling budgets, it strengthens cash flow management and assists in pricing products.

It is most unfortunate that many cooperatives jumps straight into production without having a clue as to what they want to achieve financially. They do not plan the way forward financially, but rather plan as they go along. This is a huge mistake and if any cooperative is in this situation it is not too late to back track and start the planning process.

Costing is very important in planning a business as it entails many financial exercises that must be completed before production can happen.

Budget

A budget is an estimate of income and expenditure for a set period of time i.e the financial year. 

It is an invaluable tool to help you prioritize your spending and manage your money. It eliminates wasteful expenditures, and can be adapted quickly as your financial situation changes, in order for you to achieve your financial goals.

  • Income and expenditure budgets: These show how much a Co-operative expects to receive and to spend in future periods.
  • Production budgets:These set out how much a Co-operative must produce in coming periods of time in order to meet demand.

Income

Income is all the sales and additional finances that are accumulated by the co-operative.

This must be done by taking the following into consideration: What product will be manufactured or produced and what should the proposed income be after the member determined what the production cost will be?

Expenses

Fixed expenses are the payments that you have to make each month, for example rent, electricity, telephone etc.

This will also include capital expenses such as machinery and equipment.

Make sure that you allocate the money that you will spend on each item and add it up.

Production

The cooperative must determine what the production cost of each item should be that they plan to manufacture and what the proposed income will be when the product is sold. The production cost is deducted from the actual income amount and the cooperative will know exactly what the price of the product should be in order to make a profit on a sale

  • What are the components of the product?
  • What is the cost of the component?
  • What is the turnaround time to produce and sell the product?
  • What will the customer be charged?

Cash Flow Statement

Cash flow is the movement of money into and out of your company.

The cash flow statement describes the cash flow of your business for twelve months.

Its primary purpose is to provide information regarding a company’s cash receipts and cash payments. It traces the flow of funds (or working capital) into and out of your business during an accounting period.

Many start up co-operatives can do a a projection cash flow statement, that will propose what the working capital would be for the proposed year.

This will enable the co-operative to see important factors that will influence the month to month operations and production. Each month will be analysed individually to see whether or not that particular month will be profitable or not. At the end of the exercise the cooperative will see whether the business will be viable or not.

A cash flow statement must be realistic and all market related aspects , including, threats, weaknesses and opportunities must be taken into consideration. It is also good to include a loss margin to enhance the realistic features of the proposed cash flow statement.

Profit and loss

A profit and loss statement records the entire income and expense of the co-operative and will determine whether the co-operative, made a profit, ran a loss or simply broke even for that particular financial year.

This included with the balance sheet must be completed by an appointed accountant.


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