TRAINING

MANUAL
BOOKKEEPING
FINANCIAL &
MANAGEMENT

Table of Contents

Acknowledgement
.............................................................................................................................
iii
Preface................................................................................................................. iv
Module 1: The Importance of Bookkeeping...........................................................1
Module 2: The Use of Symbols in Bookkeeping.................................................... 10
Module 3: How to Keep Accounting Records........................................................ 18
Entry Systems in Bookkeeping............................................................................ 19
Module 4: How to Calculate Business Profit and Loss.......................................... 28
Module 5: Managing Business Cash and Accounts............................................... 35
Managing Accounts............................................................................................. 35
Module 6: Financial Management........................................................................ 41
Module 1: The Importance of Bookkeeping

Background information for the Facilitator

• Most micro and small scale entrepreneurs do not write down how much money
comes in and how much goes out of their business. They keep everything in their
head. As a result, they do not actually know how much money they are earning,
how much they buy and sell on credit and how they could improve their business.
Objectives
• After completing this section, participants will be able to:
• State what a business is all about
• Know the different business ownerships, their advantages and disadvantages
• Understand entrepreneurship
• Explain the importance of bookkeeping in business operation
• Raise interest in the course

Time
• 8 hours
Number of Participants
• A group preferably to include 10 to 15 persons, but it should not exceed 25
participants. Larger groups make it extremely difficult for the facilitator to track
the progress of individuals.
Materials
• Flip charts, chalk or white board, markers, chalk and a cleaning rag
• Exercise books, pens, pencils, rulers, erasers, calculators for all participants
• Area suitable for writing and learning
Type of Participants
• CFDC, CFF Entrepreneurs such as retailers, wholesalers, farmers and
manufacturers
• Village leaders

LESSON
A. UNDERSTANDING
BUSINESS What is a
Business?
Let the participants discuss the answers first, before giving suggestions. Any answer
resembling the following is good. (Answer) All activities whereby you try to earn an
income on a regular basis are called businesses.
A business (also known as enterprise or firm) is an organization which is engaged in
the trade of goods, services, or both to satisfy the consumers in order to make a profit.
Businesses are predominant in capitalist economies, where most of them are privately
owned and administered to earn profit to increase the wealth of their owners. Businesses
may also be not-for-profit or state-owned.
Activity: 1

Ask participants to list all the things and resources that are found in a business. This may
include people, machinery, stationery, etc.

Ask a volunteer to talk about his/her business they are operating. Let the volunteer explain
to the group the products/ services he/she is selling.

In a group discussion, let participants discuss what products/ services CFDC and CFF are
engaged in.
Also let them discuss some possible business opportunities they may engage with in the future.

In what kind of business are you? (As a group and/or as an Individual)

If your participants are working together in a co-operative business, invite individual
participants to dicuss what additional income-generating activities they do at home.

Business Ownership
Ownership forms related to micro, small and medium enterprises are:

• Sole proprietorship (owned by one person)

• Partnership (owned by a few persons, could be 2-20)
• Co-operative (owned by a large group)

a) Sole Proprietorship/ Sole Trader

In this form of ownership, the whole business is owned by a single person.

o The owner enjoys all the profits of the business but also accepts all losses.
o This single owner has complete freedom to manage the affairs of the
business as he desires; he is answerable to nobody.
o The owner’s liability is unlimited. That is in settling the debts of the
business if the business assets are insufficient, the personal assets will
also be taken.
o Being owned by a single person, the resources of the business are limited.

b) Partnership

Here, two or more persons join to start a business.

o The owners collectively are called the company, and individually,

partners.

o The profits and losses are shared by the partners in agreed

proportions. o Their liability towards the firm’s debts is unlimited.
o Freedom of conducting the affairs of the business is restricted as the
partner is liable to the other partners.
o Since more than one person is involved, the resources of the firm are
usually more.
o A partnership could also be formed to combine the resources required for
the enterprise. Resources could include skills, money, land, raw material
etc.
 Example:
Flomo has money to buy palm nuts; Fatu has skills to produce palm oil.

Flomo and Fatu can come together to form a partnership and create a
palm oil processing business.

c) Co-operative and Group Ownership

A co-operative is when people come together to do business with a common purpose

and intent.

o In a co-operative form of ownership, a large number of persons

collectively own the enterprise and are involved in its activities. The part
owners are called members.
o All the members contribute an equal amount towards capital, share the
profits equally and have equal rights.
o Since a large number of owners are involved, the management of the co-
operative is entrusted to a small group of members who are elected by
the many.
o The financial asset is crucial. The liability of the members is limited.
o That is even if the assets of the co-operative are insufficient to satisfy the
debts, the members’ personal assets cannot be touched.
o A co-operative is also much more powerful than individuals or
partnerships.
o A co-operative represents a large group of people and, quite often, this
gives its access to Government programs and developmental agencies,
which offer financial assistance in the form of grants or interest-free loans.

A business owned by multiple individuals may be referred to as a company; although

that term also has a more precise definition.

Note: In these three categories of business ownership, it is essential to establish

appropriate bookkeeping and financial management of the finances of these forms
of business. Money coming in and money going out must be recorded in the various
books of the business for good management of record keeping .

Activity: 2
Ask participants to provide in a table format the advantages and disadvantages of the type of business
they are managing or would like to start.

Divide participants into groups of five and let them discuss whether the CFDC and CFF are businesses.
In the context of CFDC and CFF explain social enterprise and social entrepreneurship. After the
exercise, distribute Handout 1.
 What Are YOU Encountering as Problems Within Your Own Business?
In starting or operating a business, there is no guarantee that the business will run
without any problems. These are some of the problems faced in managing and or starting
a business:

• Lack of funds to buy stock;

• Problems with selling (marketing);
• Money needed for emergency cases;
• People not paying their debts;
• Money needed for ceremonies.

Problems Faced By Business Owners

• Time Management - Time management can become problematic for the owner
of a small business. Small businesses often operate on a extremely tight budget,
precluding the hiring of many employees. The owner is often faced with trying to
manage and grow the business while at the same time having to do the daily
operation. Small business owners can also find themselves so tied up in running
the business that they don't take time to enjoy families, hobbies or other
activities.
• Inflexibility - Refusing to let go of an idea and move on to something else is a
common problem for small business owners. For small business owners to
succeed, it is necessary for them to be willing to think like an entrepreneur and
explore many different ideas. Whether it is the need to replace inventory, provide
additional services or go to a new location, a small business owner must remain
flexible if he wants his small business to succeed.
• Obtaining Credit - Access to credit can be an issue for the small business owner,
according to the Washington Post. A business line of credit can provide needed
cash flow during the start-up months. It can also ensure that the owner has the
ability to expand the business with inventory and meet her payroll. A small
business, however, will not always qualify for a large credit line, which can hinder
the owner's ability to succeed.
• Employees Issues - Small business owners often face a dilemma when it comes
to hiring workforce. Staffing enough workers to cover enough the business needs
without destroying the business's profit margin can be a tricky process. Things are
never easy for a small-business owner. No matter how hard you try, there are
always problems to solve and fires to put out. At least you can take comfort in
knowing you're not alone. Every small-business owner goes through the same
thing.
• Cost - A study conducted by the National Federation of Independent Business
reported in 2008 that the primary problem that business owners face is the cost of
running the business. The inability to control some costs, including health
insurance, energy bills and inflation, add stress to the business owner's bottom
line. In addition, the cost of paying employees, stocking inventory and basic
overhead can make cash flow issues for the small business owner.

Activity: 3
In their groups ask participants to provide a list of possible businesses they can manage or create
in the forestry sector.

Let them discuss what could be possible hindrances or barriers keeping them from starting such
businesses.
What is Entrepreneurship?
Who is an entrepreneur?
• Someone who creates a new business idea
• Someone who has passion and spirit
• Someone with good business ideas

What are some of the characteristics an entrepreneur must possess?

• Positive self-esteem
• Positive self-confidence
• Commitment / Self-discipline
• Independence
• Forward looking
• Motivated
• Innovative
• Creative, risk taker/ courageous
• Initiator
• Opportunist
• Goal/ pace setter

Understanding Basic Bookkeeping

What is bookkeeping?
The bookkeeping system refers primarily to recording the financial effects of financial
transactions only.

Bookkeeping means that you write down all the money that comes into your
business and all the money that goes out of your business.

In the normal course of business, a document is produced each time a transaction occurs.
Sales and purchases usually have invoices or receipts. Deposit slips are produced when
lodgments (deposits) are made to a bank account. Cheques are written to pay money out
of the account. Bookkeeping involves, first of all, recording the details of all of these
source documents into multi-column journals (also known as books of first entry or
daybooks).

For example, all credit sales are recorded in the sales journal, all cash payments are
recorded in the cash payments journal. Each column in a journal usually corresponds to an
account. In the single entry system, each transaction is recorded only once. Most
individuals who balance their cheque-book each month are using such a system, and
most personal finance software follows this approach.

The difference between manual and any electronic accounting system stems from the
latency between the recording of the financial transaction and the posting in the relevant
account. This delay, lacking in electronic accounting systems due to the immediate
posting into relevant accounts, is not replicated in manual systems, thus giving rise to
primary books of accounts such as Sales Book, Cash Book, Bank Book, Purchase Book for
recording the immediate effect of the financial transaction.
Understanding the importance of bookkeeping in your business?
The imperative of business records cannot be overemphasized. Every serious
entrepreneur must as a matter of fact be able to maintain proper records of his or her
business transactions. Proper bookkeeping is critical to sustaining and expanding a
business. Without it, the entrepreneur runs the risk of hitting cash flow crunches, wasting
money, and missing out on opportunities to expand his business. When you maintain
proper records of your business transactions, you will be properly positioned to carry out
official business analysis and see how your business is fairing.

The purpose of bookkeeping is to help you manage your business and also to allow tax
agencies to evaluate your business venture. As long as your book keeping achieves both
of these objectives, you are in the right direction. Any financial institution who wants to do
business with you must request your business records. Your ability to make it means you
are serious about your business.

How do you think bookkeeping could help your business?

a) Why bookkeeping?

Many people do not write down how much money comes in and how much money
goes out of their business. This is because they do not know how to do it, and they
do not know that it can improve their business. Therefore, people do not exactly
understand how much money they are earning, how much customers have bought
on credit and how much stock they have bought on credit. Where groups of people
work together, lack of a proper bookkeeping system often leads to mistrust and
accusations between group members. Bookkeeping is beneficial because you cannot
keep everything in your head. People is careless by nature.

Bookkeeping means that you write down all of the money that comes into
your business and all the money that goes out of your business.

b) Of what value is bookkeeping to your business?

o You will know how much money you have received,

o You will know how much money you have spent and how you have spent
it; o You can calculate whether you are making a profit or a loss;
o You will be able to make better decisions on what to buy and sell;
o You can keep records of buying and selling on credit, so that people cannot
trick you;
o You can keep records of money coming in and going out of a group project
and thus prevent abuse of funds and avoid mistrust amongst group
members.
Activity: 3

Distribute Activity Handout 2 (role play). Ask participants to divide themselves into
groups and conduct the role play in the handout.
After performing each role-play ask the participants a question:

Play 1: What is the woman's problem? What could she have done to avoid this problem? (answer) She
had spent all her money without thinking about the school fees that she had to pay. She does not even
remember what she has spent her money on. She could have kept records of her income and expenses
and planned for the payment of the school fees.
Play 2: Why was the carpenter cheated? (answer) Because he had no written proof of how much money
the customer owed him.
Play 3: Why were the group members angry? What could they have done to avoid this problem?
(answer) The group members were angry because nobody knew what had happened with the money
from the bakery. If they had kept records, they would have known how much money came in and went
out of their business. It would also have helped them to know whether they were making a profit with the
bakery or not.

Best practices in bookkeeping

Here are best practices to make bookkeeping easier for you:

• Manage to go through your books once a week (preferably at the end of the week)
to do the following:
a) Categorize your expenses
b) Mark invoices as paid by associating them to deposits you've imported or
update invoice status
c) Setup contractors and clients in your contact list

• Reconcile your account(s) at the end of every month.

a. Make sure that the remainder of your account matches what is in your
bank statement.
• Run weekly and/or monthly reports.
• Do not forget to assign personal expenses as non taxable expenses.
• Make sure that you have separate bank accounts for personal and business
purposes.
• Bookkeeping is a extremely valuable process in managing a business.
• The three Best Practices you should install for yourself in understanding the rule
of what is involved in the bookkeeping system to ensure that you provide the
service your business needs in evaluating its financial condition are:
b. Make a firm decision that you will make your bookkeeping.
c. Familiarize yourself with the Accounting Cycle and the Financial
Statements.

d. Become familiar with your Accounts Payable, Accounts Receivable,

Customer Balances, and Aging Reports.

Record Keeping
The benefits of record keeping
• Many people do not write down how much money comes in and how much money
goes out of their business.
 • This is because they do not know how to do it and they do not know that it can
improve their business.
• What you cannot determine, quantify and record what you cannot monitor and
control.
• There is a limit to how much you can keep in your memory.
• Record keeping, therefore, is a pre-requisite to successful business operation.

a. Advantages of keeping records

o Record-keeping is crucial because you cannot keep everything in your
head.
o Memory is not good enough for proper research and planning.
b. Advantages of regular record-keeping
o You will know how much money you have received, how much you have
spent and how you spend it.
o You can calculate whether you are making a profit or a loss and also
know your break-even point.
o You can keep records of buying and selling on credit. That is, you will know
whom your debtors are and how much they owe you, and who your
creditors are and how much you owe them.
o You can keep records of money coming in and going out of group
businesses or projects. This will prevent misuse of money and avoid
mistrust
among group members.
o It can help you in the monitoring and controlling of your stock levels,
knowing when to make a new order and how much to order.
o By comparing your actual record with your planned budget, you can
determine if you are on the right track during your business year.
c. Disadvantages of not keeping records or keeping poor records
o You will not know how much money you are earning, whether your
business is making a profit or losing money.
o You will not know why you are making a profit or losing money.
o You will not be able to make good decisions that will allow you to make
more money and save your business from losing money.
o You will not know which customers owe you money, how much they owe
you or how much you owe someone else.
o Where groups of people work together, lack of a proper record-keeping
system often leads to mistrust and accusations between groups and
members.
Characteristics of good record keeping
A good record keeping system is easy to use and records the necessary information
details. Depending on the complexity of the business, the amount of detail will vary. Some
businesses will want to keep accurate records down to the enterprise or location level.

Recommended documents for a good record keeping system include:

• Business accounts for checking, savings, and investing and credit cards.
• An income and expense ledger or appropriate software program to record all cash
business transactions by date and category.
• Inventory involves the physical counting and valuation. It is done at least annually
at the end of the business fiscal or calendar year.
• A depreciation schedule for all business assets showing asset basis:
o Cost valuation
 o Market valuation
• A cost and market valuation balance sheet summarizing assets and liabilities of
the firm.
• An income statement listing
o Receipts,
o Expenses,
o Accounts receivable and
o Accounts payable.
• A statement of cash flows showing the source of cash inflows into the business
and where business cash outflows went.
• Enterprise records showing receipts and expenses by enterprises with some level
of profitability analysis.

What records should be kept

When one person or groups of persons choose to run a business, they must establish
measures that will account for money or monies that come in and go out of business. This
is done through the use of record books. There are many reasons why you must write
down all money that comes in and money that goes out of your business:

• You do not combine your personal finances with the business money;
• You will know when you buy on credit;
• You will know when you sell on credit;
• There is transparency in recording the business money;
• Have the fear of one person cheating the others;
• Trust from people who will need to give you a loan like the banks.

These are some of the record books needed for good record keeping:

• Cash Book
• Inventory Record
• Credit Record
• Debtor Book
• Labor Book
The details of these various record books that will help your business improve will be
discussed further in the subsequent modules of this manual.

REVIEW QUESTIONS
At the end of this lesson, ask the following questions to find out whether the participants
have understood the lesson:

• What is a business?
• List some key characteristics of an entrepreneur?
• Which type of businesses would you like to operate?
• What is bookkeeping?
• How can bookkeeping help your business?
• What are useful record books for business operations?
• Of what importance are these record books?
Module 2: The Use of Symbols in Bookkeeping

Background Information for the Facilitator

When keeping books, you have to write down all the money that comes in to your
business and all the money that goes out of your business. All participants understand
how to write figures and do calculations, but some participants may not be able to read
and write (yet). Therefore, we shall be making use of symbols and drawings.

(Note: if all your participants are literate, you can simply replace the symbols by words.
Where the course is being used together with literacy classes (reading and writing) the
symbols can also be used to illustrate the words.)

Objectives
After completing this section, participants will be able to:

• Identify symbols of money that come in and go out of business.

• State from which source money comes in and goes out of business.
• Point out things that they spend money on in the business.

Time
• 4 hours

Number of Participants
• A group preferably include 10 to 15 persons, but it should not exceed 25
participants. Larger groups make it extremely difficult for the facilitator to track
the progress of individuals.
Materials
• Flip charts, chalk or white board, markers, chalk and a cleaning rag
• Exercise books, pens, pencils, rulers, erasers for all participants
• Area suitable for writing and learning

Type of Participants
• Entrepreneurs such as retailers, wholesalers, farmers and manufacturers
• Village leaders

LESSON
• Can you mention three sources from which you receive money?
• List any three things on which you spend money?
• If bookkeeping means that you write down all the money that comes in and goes
out, how would you do it?

All answers are good. Explain the following.

You all know how to write figures. Because some of the participants are not able to read
and write yet we shall be making use of highly basic symbols and drawings.
 Explanation

Activity: 3
Invite some of the participants to come to the chalkboard and make a very simple drawing of the
following:
• money
• fish
• food
• transport
• firewood

Drawing of Symbols
Below, draw examples of symbols on the chalkboard as shown. Ask the participants what
they see in the pictures.

Explain that they can use any symbol that they find easy to draw as long as they know
that they will remember it ('this resembles a fish for me'). It should be an extremely basic
drawing so that it is easy for them to 'write' it in the exercise books. Throughout they
should keep the same symbol for the same thing.

Spend sufficient time with the participants drawing different symbols on the chalkboard.
They should also try to draw things in their exercise books that they see in their
surroundings (matches, cup, and chair.) (Note: below you will find a list and explanation
of all the symbols that are being used in this book. However, if your participants find it
easier to use another symbol, please adopt that symbol.)
Symbols for 'Money In' and 'Money Out'

Bookkeeping means that you write down all the money that comes in and the money that
goes out. The following symbols will be used:
Examples:
LD
• Liberian dollar symbol

US
• United States Dollar symbol

These are the two currencies used for our purpose but for now, we will use the Liberian
Dollar currency.

Money In = money becomes more, so we use the addition sign +

Money Out = money becomes less, so we use the subtraction sign
-
The Cash Book
The book in which we write all the money that comes in and goes out is called a 'cash
book'.

You can use an regular arithmetic exercise book as a 'cash book'.

All money that comes in is written on the left page
All money that goes out is written on the right page

Cash book
Activity 6
Draw a 'cash book' on the chalkboard. Ask the following questions and invite participants to
illustrate the answers by drawing a symbol on the correct side of the 'cash book'.
(Note: the symbols in this example are meant to give you an idea. Do not just copy them, but use the
symbols that your participants indicate.)
From which sources do you Receive Money?

(Money becomes more

+ );

Accept all answers. If not mentioned remind them of:

• Income from sales
• Gifts from husband, relatives or friends
• Loans from banks, money lenders or others
• Collections from savings group (susu)

What do you spend your Money on?

-
• (Money becomes less );
• Accept all answers. If not mentioned, remind them of:
• Buying of materials (fish, rice, seed)
• Firewood
• Transport (taxi, bus)
• School fees, school uniforms
• medicines, hospital bills
• Food
• Cloth
• Beauty-products (nail polish, pomade)
• Hairdresser
• Ceremonies (funerals, weddings, outdoorings)
• Sweets, snacks, ice cream
• Church, fetish
Activity 7: Individual Exercise
This is an individual exercise for all participants. All participants are to take their exercise books and
do the following exercises:
Draw the symbol for 'money in' on the left side, and the symbol for 'money out' on the right side.
Think about the sources from which you receive money and draw a symbol under 'money in'.
Think about the money that you spend and draw a symbol under 'money out'.
Help the participants where they have difficulties
 Income and Expenditure
• Money that comes in and goes out of your business;
• Money that goes out of your business for your family and yourself.

Show the picture of the cash book with 'money in' and 'money out' again and ask the
following questions:

Activity 8:
Which money from the picture belongs to your business and which money belongs to your
household or yourself?
Why do you think it is Important to Separate the two?
It is important to keep the two separate, otherwise you will not be able to calculate whether your
business gives profit or not.
How could you keep the Business and Household Money Separate?
All answers are good. Give the following tip:
You could use a box (tin, purse, or piece of cloth) to keep your

Replacement and repair of equipment and utensils:

You will have to keep money separate so that you will be able to pay for things like repair
of a machine, replacement of utensils when they are worn out, or unexpected costs.

Activity 8:
The participants should sit together in pairs of two and do an exercise. They should take their exercise
books and write the symbol for 'money in' on the left page and the symbol for 'money out' on the right
page. Each pair should choose a business that is familiar to them. They should discuss the expenditure
involved in making and selling their product (or giving their service). They should draw symbols of the
items that bring in money on the left page, and symbols of the items on which they spend money on the
right page. When everybody has finished ask some of the participants to draw a cash book on the
chalkboard, explain the outcome of their discussion, and write the symbols
REVIEW QUESTIONS
At the end of this lesson, the participants should be able to draw symbols in their exercise
books to indicate the money that comes in, and the money goes out.

1. Ask the following questions to find out whether they understood the lesson:
2. What is a cash book?
3. Where in the cash book do you write the money that comes in, and goes out?
4. What is income?
5. What is expense?
Module 3: How to Keep Accounting Records

Background Information for the Facilitator

This system of keeping accounting records will help those attending this workshop to write
down all the money that comes in and goes out of your business.

The accounting records will encourage vender/investors to invest into the business. It also
helps the business for audit purposes.

Objective (s): After the completion of this session, you will be able to:
• Identify the different accounting records to be kept during the operation of
business

• State the advantages and disadvantages of keeping accounting records

• State the characteristics of good record keeping
• Identify transactions and record entries into the various records

Time
• 8 hours

Number of Participants
A group preferably include 10 to 15 persons, but it certainly not exceed 25 participants.
Larger groups make it extremely difficult for the facilitator to track the progress of
individuals.

Materials
• Flip charts, chalk or white board, markers, chalk and a cleaning rag
• Exercise book, pens, pencils, rulers, erasers, calculators for all participants
• Area suitable for writing and learning

Type of Participants
• CFDC, CFF, Entrepreneurs such as retailers, wholesalers, farmers and
manufacturers

• Village leaders

LESSON

Entry Systems in Bookkeeping

Ways to Enter Transactions into the Various Records
The primary bookkeeping record in single-entry bookkeeping is the cash book, which is
similar to a checking account register but allocates the income and expenses to various
income and expense accounts. Separate account records are maintained for petty cash,
accounts payable and receivable, and other related transactions such as inventory and
travel expenses
Simple Cash Book Entry
Financial record-keeping means that you write down all the money that comes in and the
money that goes out.

The following symbols are used:

• Money in = Money becomes more, so we use the addition sign

(+) All money that comes in is written on the left page (LEFT)

• Money out = Money becomes less, so we use the subtraction sign

(-) All the money that goes out is written on the right page (RIGT)

The book in which we write all the money that comes in and goes out is called a ‘Cash
Book’. You can use an standard arithmetic exercise book as a ‘cash book’.
 CASH BOOK
Left Side = Money In (or Right Side = Money out (or
income) expenditure)

st st
1 Column = Date: the day that you 1 Column = Date: the day that you pay
received the money the money
2nd Column = Source of Income 2nd Column = What the money was spent
3rd Column = How much money on
3rd Column = How much money

Table1: Example of a Blank Cash book

DATE MONEY IN AMOUNT DATE MONEY OUT AMOUNT

Total Total
 Table 1a: Example of a Filled in Cash Book

MONEY
DATE MONEY IN AMOUNT DATE OUT AMOUNT
(LD) (LD)
Sold 10pcs of local Purchased
20-Jan-09 planks 2,000 1-Jan-09 machinery 3,000
Sold 14pcs of local Payment of
25-Jan-09 planks 2,800 7-Jan-09 salary 1,200
Sold 20pcs of local 16-Jan-
29-Jan-09 planks 4,000 09 Transportation 800

Total 8,800 Total 5,000

Inventory record
An Inventory Record: keeps a record of physical items that your business has at any
point in time. It includes what you had at the beginning of the year, what has been added
to those items through purchases and production and how much has left your business
through sales, consumption, planned use or losses.

Example of inventory record

Beginnin
No. Description Qty g Purchases Sales Loss
1. Computers 5 5 2 1 1
2. Printers 6 2 4 2 2

Credit Book
A Credit Book: Keeps the record of all the money the customers have to repay for goods
and services purchased on credit.

Transactions for credit book

1. June 2, 2011 Credited 5 gallons of honey for LD 900 to Fatu Business Center to be
paid in 15 days.
2. June 15, 2011 Siah credited 2 baskets of snails costing LD 800 from Jumah
Business Enterprise.
3. June 20, 2011 Flomo took 3 pieces of planks for Dweh Plank Center on credit for LD 500

Example of Credit Book

CUSTOMER CREDIT BOOK

NAME:___________________________

ADDRESS:________________________
DATE DESCRIPTION CREDIT PAYMENT BALANCE SIGNATURE

June 2, 2011 5 gallons of honey LD 900 0 LD 900

June 15, 2011 2 Baskets of snails LD 800 0 LD 800
June 20, 2011
3pcs planks LD 500 0 LD 500

Total LD 2,200 0 LD 2,200

Debtor Book
A Debtor Book: Keep a record of all whom the business owes (those who have supplied
goods and services to the business on credit).

Transactions
1. June 2, 2011 Credited 5 gallons of honey for LD 900 from Fatu Business Center to
be paid in 15 days.
2. June 15, 2011 Siah Enterprise credited 2 baskets of snails costing LD 800 from
Jumah Business Enterprise.
3. June 20, 2011 Flomo Inc. took 3 pieces of planks for Dweh Plank Center on credit for LD
500
Example of Debtor Book

DATE DESCRIPTION DEBT PAYMENT BALANCE

Fatu Business
June 2, 2011 5 gallons of honey LD 900 0 LD 800

Siah Enterprise
June 15, 2011 2 Baskets of snails LD 800 0 LD 800

June 20, 2011 Flomo Inc.

3pcs planks LD 500 0 LD 500

Total LD 2,200 0 LD 2,200

Labor Book
A Labor Book: keeps a record of who had worked for you, how much they have worked
(number of hours, days or quantity of work done), how much they were paid and when
they were paid.
 Transactions for labor book
On March 2, 2011, Yarkpawolo Kollie cut down trees for construction of bee keeping
material for Lorpu in the amount of LD 900 for 3 hours.
March 12, 2011 Dweh Dartu brushed Fatu’s farm for the amount of LD 700 for 2 hours.
March 23, 2011 Tarnue Zolu prepared snail raising materials for Kuma Saah for LD 600
Date Description Hourly work Amount
March 2, 2011
Yarkpawolo Kollie 3 hours @ LD 300 LD 900
per hour
March 12, 2011
Dweh Dartu 2 hours @ LD 350 LD 700
per hour
March 23, 2011
Tarnue Zolu 2 hours @ LD 300 LD 600
per hour
Total LD 2,200

Activity 10:
Distribute Handouts 3, 4, and 5
 Single-Entry System (Journal)

The primary bookkeeping record in single-entry bookkeeping is the

cash book, which is similar to a checking account register but
allocates the income and expenses to various income and expense
accounts. Separate account records are maintained for petty cash,
accounts payable and receivable, and other relevant transactions
such as inventory and travel expenses.

Transactions
January 2, 2012 Received LD$ 3,000 for sales of goods

January 14, 2012 Received LD$ 6,000 for services rendered to customer

January 22, 2012 Purchased office supplies for LD$ 1,000

January 26, 2012 Pay for advertisement for LD$ 300

January 31, 2012 Bank charges in the amount of LD$ 15

Table: 2 Sample Revenue and Expense Journal for Single-Entry Bookkeeping

No Date Description Revenue Sales/Serv Expense Advert Supply Misc

Jan 2, 2012 Sales of goods 3,000 3,000

Jan 14, 2012 Services 6,000 6,000

Jan 22, 2012 Purchase 1,000 1,000

Jan 26, 2012 Office supply 300 300

Jan 31, 2012 Bank charges 15 15

Total 9,000 9,000 1,315 300 1,000 15

Double Entry System

Earlier transactions in the books of accounts were recorded under single entry system.
The system had some shortcomings as there was not a complete record of all the
transactions. Also, problems were faced while preparing final accounts. Problems were
also faced as there was no self balancing method of accounting which could guarantee, to
some extent, the accuracy of the books of accounts. So a need was felt for some
uniformly accepted system of accounting which could help in the verification of the
accuracy of books to some extent. These problems were solved by the Double Entry
System of accounting. This system has totally replaced the single entry system. This
system is now followed everywhere. Under this system of accounting, every transaction in
business involves at least two accounts. That is why this system of accounting is called
the “Double Entry System” Under this system every transaction has two aspects
i.e. debit side and credit side. Under this system, every transaction is entered into at
least two accounts in the Ledger. In one, account, the transaction is entered on the Left
hand side i.e. on the debit side of the account and on the other account an entry for an
equal amount is made on the Right hand side of the account i.e. the credit side of the
account.
 For example, suppose Flomo paid cash salaries to his staff. The two accounts affected are
cash account and salaries account. As cash is going out of it, cash account is credited.
Salaries are expenses for the business, salaries account is debited. Again Gorpu bought
raw material for the production unit, the two accounts involved are Cash account and
Purchases account. She paid carriage to transport goods to her factory; the two accounts
involved are cash account and carriage account. She sold finished goods to customers on
credit, the two accounts involved are the customer's personal account (debtor) and sales
account. She also purchased furniture for her office on credit. The two accounts involved
are furniture account and the personal account of the seller (creditor). Thus we can see
that every transaction has two aspects in the Double entry system of accountancy. Now
which account is debited and which is to be credited depends on the types of accounts
involved and the rules of debit and credit for that type of account. The basic principle is
that for every single transaction there are two entries – one to a
“giving account” and a corresponding one to a “receiving account.” In principle it is
said that you Credit (Cr) the giving account and Debit (Dr) the receiving account.

ASSETS = LIABILITIES + OWNER’S EQUITY

The equation is termed the fundamental accounting equation because these relationships
are so essential to the analysis and presentation of accounting information. The
relationship between the Income Statement or Profit & Loss Account and the Balance
Sheet is that profit increases an owner’s equity and a loss reduces it. The corresponding
double entry effect is always on the ASSETS, increasing or reducing them.
A number of examples are in Activity 10 to serve as discussion on the accounting entries
and effect of each transaction on the accounting equation.

Activity 11:
Distribute Handout 6 - Exercise

These are other examples that will help you better understand the double entry system in
bookkeeping:

Transactions on double entry system

January 1, 2012 Purchased office supplies for LD$ 1,000

January 5, 2012 Payment for advertisement in the amount of LD$ 300

January 11, 2012 Payment for goods in the amount of LD$ 6,000

January 15, 2012 Freight charges in the amount of LD$ 700

January 20, 2012 Received LD$ 3,000 for sales of goods

January 25, 2012 Received LD$ 6,000 for services rendered to customer

January 29, 2012 Bank charges for the month in the amount of LD$ 120
 Entries for the transactions above
January 1, 2012: Debit Office supplies for LD 1,000 and Credit cash for LD 1,000

January 5, 2012: Debit Advertisement for LD 300 and Credit cash for LD 300

January 11, 2012: Debit Goods for LD 6,000 and Credit cash for LD 6,000

January 15, 2012: Debit Freight charges for LD 700 and Credit LD 700

January 20, 2012: Debit Cash for LD 3,000 and Credit sales for LD 3,000

January 25, 2012: Debit Services for LD 6,000 and Credit Cash for LD 6,000

January 29, 2012: Debit bank charges for LD 120 and Credit cash for LD 120

Remember that to every debit there must be a corresponding credit.

The Balance Sheet

Balance Sheet- Where does the Balance Sheet come from?

1. What is a Balance Sheet?

A balance sheet is a financial report that shows the financial picture of a company at a
given time. Balance sheets are usually done monthly or quarterly depending on the
nature and size of the business. The basic principle of the balance sheet is to show what
you own, what you owe and how much you personally have invested in your
business. It gives you a idea of whether or not you can pay your creditors, how you
manage your inventory and how you manage your billing. What is the worth of your
business? This is a valuable tool to improve your business.
2. How is the Balance Sheet Structured?

There are two columns to a balance sheet. The first column lists what you own, or your
assets. This includes your cash on hand, accounts receivable and inventory. You will also
need to include prepaid and other expenses. You may also have other assets such as a
note that will be due at a later date. In the left column you would list your liabilities.
These include loans that you owe, accounts payable and taxes that you may owe. Both
sides of the sheet are totaled and the owners net worth or investment is added to the
liabilities side and then that column is added again. Both numbers on the sheet should
equal each other, hence the name balance sheet. If they don't, you know you have
missed something and should go back through your accounts again.

Table 3a: Example of a Blank Balance Sheet

LIABILITIES & OWNER EQUITY

ASSETS AMOUNT AMOUNT

Total - Total -

Left Side = Assets (Property of the Right Side = Equity(Debt

Company) Liabilities & &
Capital of the Company)
 Table 3b: Example of a Filled in Balance Sheet
Assets AMOUNT Liabilities & Owner Equity AMOUNT

Cash at bank 7,000 Purchased payable 1,200

=
Sales on credit 3,000 Short term loan 3,000

Purchased Goods 5,000 Capital 10,800

Total 15,000 Total 15,000

1. Information Provided by the Balance Sheet

The information on your balance sheet can help a bank decide whether to lend your
business money or not. This is one point you would like to know exactly what's going on
all the time in your business. You have a chance to improve your company, thus making
the sheet more appealing to the bank. It can show you if the financial position of your
company can handle hiring more employees or giving the current ones a raise. And, if you
ever wanted to sell your business the buyers would like to see your balance sheets. Once
you've done the sheets for a year, you can see how your business is growing or if the
market is declining. You can see if there are areas where you want to cut back or maybe
spend more money. Just by maintaining this one financial form, you can have a wealth of
information at your fingertips.

Activity 12:
Distribute Handout 7&8 - Exercise

3. Operating Assets and Liabilities

Several different operating assets are needed to carry on the operations of a business.
Several different kinds of operating liabilities are generated as a normal part of its
transaction. Certain assets have to be in place before sales and expense transactions can
be carried on. Inventory has to be purchased or manufactured before it can be offered for
sale to customers. Several expenses have to be prepaid, such as insurance premium and
office supplies.
Other operating assets and liabilities are the result of sales revenue and expense
transactions. Accounts receivable are the result of sale on credit. Accountable are the
results of buying inventory on credit and not paying expenses until sometime after they
are recorded as expenses.
Operating assets don’t earn interest income and operating liabilities don’t require interest
expense, though there are minor exceptions.
Business managers should know which specific operating assets and liabilities are
needed. They should also know that each operating asset and liability should be relative
to revenue and the expenses of the business. Managers should know how high the
accounts receivable balance should be relative to the total invoices in respect of
payments that are not made for the period, given the normal credit terms of the business
and the history of its clients regarding late payment.
REVIEW QUESTIONS
At the end of this lesson ask participants the following questions to find out whether they
have understood the lesson:

• What records should be kept?

• What are three of the benefits of record keeping?
• List two advantages and disadvantages of record keeping.
• Describe the characteristics of good record keeping?
• Which entries are made in the cash book? Give examples?
• What is a balance sheet?
• How is the balance sheet structured?
Module 4: How to Calculate Business Profit and
Loss

Background Information for the Facilitator

This section will help participants know what profit is and how it is calculated.

Objective (s): After the completion of this session, you will be able to:
• Differentiate business profits and personal income
• Identify the importance of separating business finances from private money
• Identify unnecessary expenses
• Calculate profit and loss statement
• Define revenue and earnings
• State and explain the various determinants of profit
Time

• 4 hours
Number of Participants

• A group preferably include 10 to 15 persons but it should definitely not exceed 25

participants. Larger groups make it very difficult for the facilitator to track the
progress of individuals.
Materials

• Flip charts, chalk or white board, markers, chalk and a cleaning rag
• Exercise books, pens, pencils, rulers, erasers, calculators for all participants
• Area suitable for writing and learning
Type of Participants

• CFDC, CFF Entrepreneurs such as retailers, wholesalers, farmers and

manufacturers
• Village leaders

LESSON
Calculating Income and Expanses?

What is Income?
Income is the consumption and savings opportunity gained by an entity within a
specified time frame, which is typically expressed in monetary terms. However, for
households and individuals, "income is the sum of all the wages, salaries, profits, interest
payments, rents and other forms of earnings received in a given period of time." For firms,
income generally refers to net-profit: what remains of revenue after expenses have been
subtracted. In the field of public economics, it may refer to the accumulation of both
monetary and non-monetary consumption ability, the former being used as a proxy for
total income.

Income is money that comes into your business.

Explanation

Money into your Business = Income

How does Money come into your Business?
• By producing and selling goods
• By buying and selling goods
• By giving a service (like a taxi driver who provides transportation)
• By receiving gifts from friends or family members
• By getting a loan
• By inheritance

Other Income Activities

• Producing and selling palm oil
• Drying and selling fish
• Producing and selling bread
• Weeding mats
• Producing and selling cassava
• Producing and selling rice
• Receiving donations
•

What is an Expense?
Expense is money spent or cost incurred in an organization's efforts to generate revenue,
representing the cost of doing business. Expenses may be in the form of actual cash
payments (such as wages and salaries), a computed expired portion (depreciation) of an
asset, or an amount taken out of earnings (such as bad debts). Expenses are summarized
and charged in the income statement as deductions from the income before assessing
income tax. Whereas all expenses are costs, not all costs (such as those incurred in
acquisition of income generating assets) are expenses.

Expenditure is money that goes out of your business.

Money out of your Business = Expenditure

How does Money goes out of your Business?

• Materials or ingredients (like fish and firewood for fish smoking, fabric for Dress
making, flour for bread baking);
• Services like:
o Transport (taxi,
bus) o Market toll
o Electricity bills
o Rent payment
• Wages and salary payments

Other Expense Activities

• Purchase of materials
• Office supplies
• Payment for goods

What are Unnecessary Expenses?

Unnecessary expenses are expenses that people make out of temptation, but they are not
really necessary. People often forget about these expenses when they calculate their
business expenses, and therefore their income is less than they expected.
You are now aware from which sources you earn money and what you spend
your money on. Can you recommend some expenses that are unnecessary, or
which you could reduce?

Accept all answers. Suggest the following:

• Are you tempted to buy snacks, drinks or ice-cream when you go to the market?
• Do people think you to wear a new cloth at every ceremony?
• Do you regularly buy nail polish and other beauty products?

What is Profit?
Profit is the investment gain or reward that entrepreneurs aim to get to reflect the risk that
they take. Profit is also an important signal to other providers of funds to a business.
Banks, suppliers and other lenders are more likely to provide finance to a business that
can demonstrate that it makes a profit (or is very likely to do so in the near future) and
that it can settle debts as they become due. Profit is also an important source of income for a
business. Profits earned which are kept in the business (i.e. not distributed to the owners
via dividends or other payments) are known as Retained Profits.

Retained profits are an important source of income for any business, but especially start-
ups or small businesses. The time a product is sold for more than it cost to produce it,
then a profit is earned which can be reinvested.

Profit can be measured and calculated. So here is the formula:

PROFIT = TOTAL SALES less TOTAL COST

Table: 4: Example of a Filled in Profit or Loss Formula

Sales Costs Profit or Loss

LD
LD 100,000 LD 75,000 25,000 (Profit)
LD LD
LD 100,000 125,000 25,000 (Loss)
Total Sales greater than total = Profit
costs
Total costs greater than total =Loss
sales
Total sales = total costs =Break-even
Explanation
Share ideas with the participants about the symbol to be used for profit and loss in
business.

Then explain the following and draw the symbols on the chalkboard:

Money in - Money out = Profit or Loss

Profit - means that there is more money coming in than there is going out.
Loss - means that you spend more money on producing or buying your products than
money you earn by selling the goods.
 How to Calculate Profit or Loss

a) Include the title and period. When creating a profit and loss statement, the
document is titled at the top of the page with "Profit & Loss Statement." Under the
title, include the period of time that the statement covers. A profit and loss
statement normally covers one month, one quarter or one year. This is written using
words such as "For the Month Ending January 31, 2011."

b) Record all business transactions. A profit and loss statement should not be created
until all transactions for the period have been recorded and posted into the
appropriate accounts in the company's general ledger.

Activity 13:
Read the following example to the group.
A women's group is running a poultry project. They buy chicks and feed them until they are mature.
The chicken food can easily be bought in the village. Sometimes chickens get sick and they have to
buy medicines. The chickens are sold on market days in town, about 15 kilometers from their village.
They always take the bus to get there. In town they pay a porter for carrying the chickens from the bus
station to the market. At the end of the day all the chickens are sold.
Draw a cash book on the chalkboard. Tell the story again, item by item. Let the participants tell you
which actions bring in money and which actions need money. Ask individual participants to draw the
appropriate symbols in the correct columns on the chalkboard.
.
 To find out whether you are making a profit or a loss, we will go through the process as
was discussed and as we discuss further. What is the money that goes out of your
business to produce your goods (or provide your service)?

• What materials do you buy;

• What services do you pay for;
• How much do you pay for work someone has done for you;
• How much do you need for replacements and repair of your tools and equipment?

How much do you receive by selling the same goods (or by providing the Works or
service)?

The cash book will help you to remember how you have spent the money that has gone
out of your business and how much money has come in from your sales or services.

Activity 14:
Brainstorm with the participants on the following questions, or choose other examples of businesses
that are more familiar to your participants:
What is the income and the expenditure concerned with operating a Cook shop?
What is the income and the expenditure involved in buying and selling Palm wine?
Go through the following process: • What materials do you buy?
• What services do you pay for?
• To whom do you pay wages?
• Do you need money for replacements and repair?
For both examples draw a cash book on the chalkboard and draw the symbols in the correct columns.

Have a discussion on the following question to get your participants aware of the
importance of wages:

Which of the following group members in the poultry project should be paid for their
work?
 • •The members who feed the chickens and clean the chicken house?
• •The members who sell the chickens in town?
• • The members who are part of the group but do not do any work in the project?

All members that do work on the project should be paid for their work.

If people are helping you in your business they will have to be paid a salary. If household
members are assisting you, you may choose not to pay them, but you will have to pay for
their food and clothing. You also have to think about the amount of money you will be able
to withdraw from your business money as your own 'salary' (or pay), so that you do not
mix up your personal and business expenses. In a group business, you will have to decide
how you will share the benefits between the group-members.

Activity 15:
Distribute Handout 9, 10, 11, 12 and Activity 16 & 17
REVIEW QUESTIONS
At the end of this lesson ask participants the following questions to find out whether they
have understood the lesson:

• What is income?
• What is an expense?
• What is profit?
• How to calculate profit and loss?

Why do you have to keep your business finances separate from the money for your
household?

How does money come into your business (income)?

How do you spend the money that goes out of your business (expenditure)?

What are unnecessary expenses?

Module 5: Managing Business Cash and Accounts

Background Information for the Facilitator

This cash and accounts management unit, is the most important and vital element in
doing a business. It determines the failure and success of a business.

Objective (s): After the completion of this session, you will be able to:
• State the importance of managing accounts
• Explain the efficiency and effectiveness of managing cash
• Demonstrate how to make entries in the cash flow statement and state the
importance
• Define credit/ loan
• State the importance of selling and buying on credit
• State the advantages and disadvantages of selling and buying on credit

Time
• • 4 hours

Number of Participants
• A group preferably include 10 to 15 persons but it should definitely not exceed 25
participants. Larger groups make it very difficult for the facilitator to track the
progress of individuals.
Materials
• Flip charts, chalk or white board, markers, chalk and a cleaning rag
• Exercise books, pens, pencils, rulers, erasers, calculators for all participants
• Area suitable for writing and learning

Type of Participants
• CFDC, CFF, Entrepreneurs such as retailers, wholesalers, farmers and
manufacturers

• Village leaders

LESSON

Managing Accounts
The managing of any account of a business is important for the survival of that business
finances. The proper management of the cash flow as it relates to receipts and payment
from the company account will help to improve the business financial management
system. Also the management of the books in terms of cash and bank accounts; bank
reconciliation will serve as a guide for proper financial management.

Managing Cash
Cash is the lifeblood of your business. Managed well, your company remains strong.
Managed poorly, your business goes into cardiac arrest. If you haven't considered cash
management an important issue, then you're probably undermining your business's short-
term stability and its long-term survival. But how can you manage business cash better?
Start with understanding how good cash-management practices can affect your
company's growth and survival of your business. To practice a more elaborate form of
cash management, you must be able to accurately assess your current cash position and
get fairly reliable predictions at key intervals about how much you'll need to meet the
company's expenses.

Cash Flow Statement

What is Cash Flow?
In financial accounting, a cash flow statement, also known as statement of cash
flows or funds flow statement, is a financial statement that shows how changes in
balance sheet accounts and income affect cash and cash equivalents, and breaks the
analysis down to operating, investing, and financing activities. Essentially, the cash flow
statement is concerned with the flow of cash in and cash out of the business. The
statement captures both the current operating results and the accompanying changes in
the balance sheet. As an analytical tool, the statement of cash flows is useful in
determining the short-term viability of a company, particularly its ability to pay bills.

People and groups interested in cash flow statements include:

• Accounting personnel, who want to know whether the organization will be able to
cover payroll and other actual expenses
• Potential lenders or creditors, who want a clear picture of a company's ability to
repay
• Potential investors, who want to evaluate whether the company is financially
sound

• Potential employees or contractors, who want to know whether the company will
be able to provide compensation
• Shareholders of the business.
The cash flow statement was formerly known as the Flow of Cash Statement. The cash
flow statement reflects a firm's liquidity.

The balance sheet is a snapshot of a firm's financial resources and obligations at a single
point in time, and the income statement summarizes a firm's financial transactions over
an interval of time. These two financial statements reflect the accrual basis accounting
used by firms to match revenues with the expenses associated with generating those
revenues. The cash flow statement includes only inflows and outflows of cash and cash
equivalents; it excludes transactions that do not directly affect cash receipts and
payments. These non-cash transactions include depreciation or write-offs on bad debts or
credit losses to name a few. The cash flow statement is a cash basis report on three types
of financial activities: operating activities, investing activities, and financing activities.
Non-cash activities are usually reported in footnotes.

The cash flow statement is intended to:

• Provide information on a firm's liquidity and solvency and its ability to change
cash flows in future circumstances
• Provide additional information for evaluating changes in assets, liabilities and
equity

• Improve the comparability of different firms' operating performance by eliminating

the effects of different accounting methods
• Indicate the amount, timing and likelihood of future cash flows
The cash flow statement has been adopted as a standard financial statement because it
eliminates allocations, which might be derived from different accounting methods, such as
various timeframes for depreciating fixed assets.
 Importance of Cash Flows
In the most general sense, cash flow for a business is simply the flow of cash through the
organization over time. Cash flows are needed for the firm to survive and thrive. Cash is
paid out in return for the inputs that are used in the manufacturing process (materials,
labor, professional service to practice a more complicated form of cash management, you
must be able to accurately assess your current cash position and do reasonably reliable
predictions at key intervals about how much you'll need to pay the company's expenses
expertise, etc.) and after goods or services are created and sold, the revenues received
advance cash that is used to fund further production and sales. Cash flows that are not
reinvested in the production and sales process may be paid out to owners. For the firm,
investments in various business projects provide future cash flows that contribute to the
firm’s economic value. An understanding of how future cash flows are generated and what
factors affect those flows is an integral part of making investment decisions that increase
a firm’s economic value.

Cash flows are also the core for non-profit organizations such as hospitals. Even if
operating a non-profit organization, cash flow is needed to meet the various expenses
associated with operating the organization.

Cash flows are also the principal source of intrinsic (or economic) value for the firm or for
any other type of financial investment. Private firms are valued using estimates of the
future cash flows the business activity will be able to generate. Public companies have
their common stock prices determined by supply and demand forces in the stock markets
that are influenced by the cash flows the stock investments will return to investors over
time. For the investors who are buying the stock, potential cash flows from different
investment opportunities (including stocks) provide the information that allows them to
decide where to invest their money.

Managing Credit
Buying and selling on credit is very popular. It can be rewarding but it can also be very
risky as people do not always remember who owes them money and to whom they owe
money and how much. Some people may only pay after a long time or not pay at all.
Understanding how to manage credit will help you to better control your business. .

Therefore it is sometimes better not to sell on credit at all. If you have to sell on credit,
keep the following rules:

• Only sell on credit to regular customers who you are sure will pay you back on
time.

• Demand payment of part of the amount.

• Always carry sufficient cash to buy new stock.
• Keep records of people who buy from you on credit.
Table 5: Advantages and Disadvantages of Selling on Credit

Advantages Disadvantages
• It is a service to your • Your customers may linger in repaying or may not pay you
customer and it will attract at all
some customers. • There may be quarrels over repayment
• Can easily add to a lot of money which makes it difficult
for you to remember who should repay you and how much
• The money that your customers still owe you cannot be
used to purchase materials or upgrade your business
 Table 6: Advantages and Disadvantages of Buying on Credit

Advantages Disadvantages
• To buy stock in a season when it is cheap
(such as fish, cassava), preserve and store • There may be quarrels or confusion over
it
repayment.
and sell it when the prices are high.
• You may forget that you owe someone
• To enable you to buy cheaper in bulk (items
money.
such as flour). There is a tendency to buy unnecessary
• things.
• To include seasonal high expenses (such as
• Sometimes you have to pay more when you
plugging).
buy on credit (interest charges).

Important Points
If you decide to purchase on credit, make sure that you will be able to repay payback your
credit on time! Before buying on credit do the following:

• Calculate how much profit you will get with your business.
• The profit should be enough to repay your credit and still leave some money for
savings.

Buying goods on credit for yourself or your household could put you in trouble

Ask yourself: Will your business make enough profit to pay for the products that you
have bought on credit for your household or family?

You need to plan ahead for selling and buying on credit

Follow these pointers:

•
• You cannot spend the money you do not have. As long as you have not received
the money that people owe you, it is not yet yours. For example, you cannot use
the money to buy materials. You can only pay for expenses after you have
received your money people owed you.
• The same thing applies when you have to repay other people. If you have bought
something on credit for business or family, you have to repay your credit before
you can calculate your business profit. You have to raise some money separate to
repay your credit.
By all means, try to repay your credit on time so that people will be prepared to give you
credit any time you ask it again. Your character standing for repaying credit on time is
called credit worthiness.
Activity 16:
Have a discussion with the group on the following examples of buying and selling on credit:
In which of the following cases will you sell on credit to a customer?
1. Fatu comes to your kiosk and wants to buy oil on credit. She is not a regular
customer. (Answer)
2. Flomo buys vegetables from you every Saturday. He usually pays cash. This time he did not bring
enough money to pay for everything he needs. He promises to pay next week.
(Answer)
3. Kumba wants to buy two loaves of bread. She did not bring enough money. She has not paid you yet
for four loaves that she bought in the previous week.
(Answer)
4. You are selling fifty loaves of bread twice a week to a shop. They always pay you at the end of the
month. (Answer)
5. You sell a fish sometimes to a trader in the market. The agreement is that she pays you after she has
sold
the fish again. But she is not very reliable. It often takes a number of weeks before she repays you the
money. (Answer)

Activity 17:
In which of the Following Situations will you buy on Credit?
1. You have seen a beautiful pair of shoes in the shop but you do not have
money. (Answer)
2. There has been an unusually large catch of fish, which is being sold cheaply. You are sure that you
will be able to smoke and sell a lot of fish and you have calculated that you will make a profit. You think
you will be able to pay back your credit in two weeks.
(Answer)
3. Lorpu is selling dry rice and fish. She is also thinking about selling rice and stew. She will have to buy
a bag of rice on credit. When she calculates the profit, she finds that it is not sufficient to repay the
credit.
(Answer)
4. Buying sugar and flour in bulk from wholesale is much cheaper than buying it from the market. But
you don’t have enough money to buy in bulk. You have calculated that you can make profit with your
bakery and you can even make more profit when you buy the stock in bulk from the wholesale.
(Answer)

Loan

Activity 18:
Divide the participants into small groups of three or four persons. Let each group think of a business in
which it is common to have a seasonal cash flow and where it is common to buy and sell on credit. They
should try to think of strategies to deal with the cash flow fluctuations and advantages and
disadvantages of buying and/or selling on credit in this particular business. After the discussions, one
person from each small group should present their case to the other participants.
Activity 19:
Distribute Handout 13

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of
financial assets over time, between the lender and the borrower.

In a loan, the borrower initially receives or borrows a sum of money, called the principal,
from the lender, and is obligated to pay back or repay an equal amount of money to the
lender at a later time. Typically, the money is paid off in regular installments, or partial
repayments; in an annuity, each installment is the same amount.

The loan is usually provided at a cost, referred to as interest on the debt, which provides
an incentive for the lender to engage in the loan. In a legal loan, each of these obligations
and restrictions is enforced by contract, which can also put the borrower under additional
restrictions known as loan covenants. Although this article focuses on monetary loans, in
practice any material object might be lent. Acting as a provider of loans is one of the
principal tasks for financial institutions. For other institutions, issuing of debt contracts
such as bonds is a regular source of funding.

Advantages
• A bank loan can be secured quickly; in less than an hour, a qualified borrower can
complete a bank loan transaction.
• A bank loan can be used in a number of ways; money can be borrowed for many
large-ticket items, such as furniture, vehicles or home renovations.
Disadvantages
• Some loans carry a prepayment penalty, preventing the borrower from paying the
note off early without incurring additional cost.
• There are a number of limitations on the transaction. Good credit is usually
required to borrow money, and there are stipulations on how the money can be
used.

REVIEW QUESTIONS
Borrowing too much money can lead to decreased cash flow and payments can even
exceed income in some cases; this is why many loan payments are limited to a certain
percentage of a borrower's income.

• Managing cash is accomplished by preparing a cash budget of expected income

and expenses. Explain.
• Selling on credit can help grow your business but care must be taken to ensure
that money is repaid promptly and that repayment terms are understood by
everyone. Explain.
• Buying on credit may increase earnings by obtaining product for sale before cash
is available, but care must be taken to ensure that the amount borrowed can be
repaid on time and the cost of interest is affordable. Explain.
• Good planning is needed to control the wise use of credit. Explain.
Module 6: Financial Management

Background Information for the Facilitator

In this financial management module, exercises, activities and handout will be distributed
to bring the lesson across the learners’ level.

Objectives
At the end of this section, participant will be able to:

• Define finance
• Employ financial control system in the operation of a business
• State the principles of financial management
• Explain procurement process to reduce expenses
• Know what is savings and follow the saving procedure

Time
• 8 hours

Number of Participants
• A group preferably include 10 to 15 persons but it should definitely not exceed 25
participants. Larger groups make it very difficult for the facilitator to track the
progress of individuals.
Materials
• Flip chart or newsprint and markers OR chalkboard, chalk and a cleaning rag
• Exercise books, pens, pencils, rulers, erasers for all participants
• Hand calculator (if available)
• Area suitable for writing and learning

Type of Participants
• CFDC, CFF, Entrepreneurs such as retailers, wholesalers, farmers and
manufacturers

• Village leaders

LESSON
Financial Controls and Systems
What is Finance?

Finance is the study of how investors allocate their assets over time under conditions of
certainty and uncertainty. A key factor in finance, which affects decisions, is the time
value of money, which states that a unit of currency today is worth more than a unit of
currency tomorrow. Finance measures the risks vs. profits and gives an indication of
whether the investment is good or not.

• Management control (as exercised in planning, performance evaluation, and

coordination) of financial activities aims to achieve the desired return on
investment.

• Managers use financial statements (a budget being the main one), operating
ratios, and other financial tools to exercise financial control.
How to Ensure Effective Financial
Control?

This checklist provides guidance on how to ensure sound financial management.

i. Forensic Auditing
Forensic auditing allows managers to assess how to keep their businesses
against waste, abuse, and various forms of economic crime, such as fraud.
ii. Implementing an Effective Internal Controls Systems

In some jurisdictions law or regulation may require effective systems of internal

control, with serious penalties for careless failure. The Sarbanes–Oxley Act (2002)
requires CEOs and CFOs of companies with listings in the United States to certify
their assessment of the effectiveness of internal control over reported disclosures
(s302) and financial reporting (s404), with penalties of up to $1 million and ten
years imprisonment..

iii. Developing Financial Management Tools for the Small Business

The tools must be designed to assist with the basics of business finance for the
managers of small businesses. It should focus on key areas, informing on financial
statements, financial analysis, business plans, and budgets. In addition it should
provide information on successful financial planning and management, and how
to run a small business from a solid financial plan.
iv. Adhering to Principles of Financial Management

Financial management principles in the corporate world apply equally to farming

whether public or privately owned. The concept of financial management and
accountability of business is better understood when looked at as a way of
marshalling financial resources and determining how the financial resources are
used and accounted for.
The management of the financial resources should be guided by:

• Best practices
• Laws and regulations

Business and management therefore need to have transparent and ethical

systems for the management of the financial resources available to them.

A transparent system of control ensures:

• There is a seamless and complete trail of documents for each

transaction-“the audit trail”
• There is documented authorization of each transaction whether needed by
the owner or not
• Explanation for each transaction is documented when not immediately
obvious
• Transaction could be understood by a third party without the need for further
explanation
An “ethical” system of control and accountability:

• Reflect the good business practice

• Reflect the value statement of the business
• Protect employees from undue influence by other internal or external parties

Key Features of Effective Control and Accountability Systems

The key features of effective control and accountability systems include a number of
areas:

• Governance
• People Management
• Policy and Strategy
• Processes
i. Governance

• The staff and owners/governors have a shared understanding of their own

financial management roles, responsibilities and accountabilities as well as
those of others
• Employee governance arrangements ensure that governors are able to fulfill
their financial management roles properly
• The business manager and bursar ( if applicable) operate with financial
integrity setting an example to governors and employees alike
• The governing body has considered and approved to establish a controls
policy instrument designed to ensure resources are properly managed
• There are effective arrangements to consider issues of conflict of interest or
whistle blowing

ii. People Management

• The governing body includes individuals who are able to act as a critical
friend on financial issues, provide strategic direction on financial issues
and can ensure financial accountability.
• Staff with financial management responsibilities include person (s) who
can effectively manage financial processes and ensure accountability
requirements are met.
• Financial management personnel are deployed in such a way that
financial controls can be maintained across the school.

iii. Policy and Strategy

• The business has an annual budget that is reasonable and affordable and
which reflects and is compatible with the business and strategic plans.
• The budget is reviewed and approved by the governors.
• The budget has been communicated promptly to all stakeholders
including related staff budget holders.
• The governors have identified the risks currently faced by the business
and have taken measures to manage critical risks.
 iv. Processes and Resources
• The business has procurement arrangements in place to ensure fairness
and value for money.
• The financial management information produced is relevant, accurate,
convenient and user friendly.
• The businesses financial policies and regulations that are up to date are
approved by the governors and are implemented consistently.
• Proper accounting records are kept consistently and the governors have
evidence that this is the case.
Roles and Responsibilities
The roles and responsibilities of owners or governors in managing the business’s financial
resources include:

• The clear communication of financial responsibilities and authority levels to all

employees ( “the Mandate”)
• Formulation of accounting and financial management policies and procedures
• Ensuring that the financial management function is carried out in line with the
policies and procedures put in place
• Strategy planning and approval of the annual budget
• Review of management accounts and periodic independent reports
• Ensuring that legal obligations are complied with
• Ensuring the business has adequate financial management staff in place or relies
on proper external expertise
The role and responsibilities of management in managing the business financials include:

• Implementation of the approved policies and procedures

• Production of management information
• Monitoring and authorization of income and expenses in accordance with the
mandate
• Preparation of budgets in-line with the business strategic objectives

Policies and Procedures Manual

Financial control and accountability issues pertaining to business should include a
documented policies and procedures manual relating to:

• Billing, receipt of business and lodgment at the bank

• Procurement and disbursement of funds and related authority levels
• Petty cash management and bank account operations
• Capital investment funding
• Safekeeping of business’ assets and monitoring of liabilities
• Financial reporting
• Management of financial records
In designing the financial control policies for your business a key principle should be the
‘segregation of duties’. This ensures that no-one person has full control over any one
transaction. This helps prevent errors as well as deliberate fraud and also avoids putting
employees in positions.

Balance Between Control and Operational Efficiency

Unnecessary controls and procedures can lead to frustration for employees and
inefficiency. Therefore, authorizaty levels and limits should be set at right amounts to
enable individuals to do their daily job, you should not attempt to “over control” small and
insignificant transactions and as an owner, do not insist on seeing all the paperwork
for every transaction especially those that are routine in nature. This does not mean that
you do not make periodic reviews.

Monitoring Compliance
Do not rely on the processes and procedures operating as instructed without monitoring.
In insuring yourself of compliance, the following measures could be adopted:

• Internal audit either in- house or on an outsourced basis

• External audit
• Conduct periodic spot checks yourself
• Closely examine management performance and variances and seek explanations
for unusual patterns

Owned Money vs Borrowed Money

• Owned money is less risky, because the owner is not answerable to anyone
even if he loses the money in the business.
• Interest need not be paid on own money.
• Initially when the business is struggling to establish itself, interest could
be a heavy burden.
• Many profitable businesses have failed on account of erosion of capital due to
interests on loans.
• However, it is generally not possible to finance a business entirely out of your
own money.
Therefore, a loan becomes a necessity.

Sources of Funding
The three main sources of funding are:

• Own Money (equity capital)

• Loans (borrowed money).
• Grants/Subsidies (given by Government/Development Agencies/Funding NGOs)

Assessing the Need for a loan

• Owners of small businesses everywhere blame non-availability of loans for all
their problems.
• Experience shows that, in the majority of cases, the real problem is something
else, such as slow inventory management or poor collection of debts.
• Therefore, whenever a small business seeks loans or complaints of lack of money,
it is important to examine all aspects of the business carefully to determine
whether the money sought is really required.

Even if money is required, the following options should be examined before considering a
loan:

• Is there any old, non-moving or slow-moving stock that can be disposed of by

offering it at a low price for quick cash instead of expecting a good price and
waiting for it?

• Are there any debts remaining uncollected due to disputes etc. that can be settled
by agreeing to get a little less than what is owed?
• Are there any surplus assets that are idle that could be sold?
 • The point in all these cases is to release the money locked up in unproductive
assets within the business and, thus, avoid taking loans that may not be required.

Time value of money

The time value of money is the value of money accounting for a given amount of
interest earned over a given amount of time. The time value of money is the key concept
in finance theory.

For example, $100 of today's money invested for one year and earning 5% interest will be
worth $105 after one year. Therefore, $100 paid now or $105 paid just one year from now
both have the same value to the recipient who assumes 5% interest; using time value of
money terminology, $100 invested for one year at 5% interest has a future value of
$105. The method also allows the valuation of a likely stream of income in the future, in
such a way that the annual incomes are discounted and then added together, thus
providing a lump-sum "present value" of the entire income stream.

Interest rate

An interest rate is the rate at which interest is paid by a borrower for the use of money
that they borrow from a lender. Specifically, the interest rate (I/m) is a percent of principal
(I) paid at some rate (m). For example, a small company borrows money from a bank to
acquire new assets for their business, and in return the lender receives interest at a fixed
interest rate for deferring the use of funds and instead lending it to the borrower. Interest
rates are usually expressed as a percentage of the principal for a period of one year.

Future Value

The Future Value of a cash flow represents the amount, at some time in the future, that
an investment made today will grow to if it is invested to obtain a fixed interest rate. For
example, if you were to deposit $100 today in a bank account to acquire an interest rate
of 10% compounded annually, this investment will grow to $110 in one year. This can be
shown as follows:
Year 1
$100(1 + 0.10) = $110
At the end of two years, the initial investment will have grown to $121. Notice that the
investment earned $11 in interest during the second year, whereas, it only earned $10 in
interest during the first year. Thus, in the second year, interest was earned not only on the
initial investment of $100 but also on the $10 in interest that was paid at the end of the
first year. This occurs because the interest rate in the example is a compound interest
rate.
The interest rate in the example is 10% compounded annually. This implies that interest is
paid annually. Thus the balance in the account was $110 at the end of the first year. Thus,
in the second year the account pays 10% on the initial principal of $100 and the $10 of
interest earned in the first year. Thus, the $121 balance in the account after two years can
be computed as follows:

Year 2
$110(1+0.10) = $121 or
$100(1+0.10)(1+0.10) = $121 or
$100(1+0.10)2 = $121
If the money was left in the account for one more year, interest would be earned on $121,
i.e., the initial principal of $100, the $10 in interest paid at the end of year 1, and the $11
in interest paid at the end of year 2. Thus the balance in the account at the end of year
three is $133.10. This can be computed as follows:

Year 3
$121(1+0.10) = $133.10 or
$100(1+0.10) (1+0.10) (1+0.10) = $133.10 or
$100 (1+0.10)3 = $133.10
A pattern should be becoming apparent. The Future Value of an initial investment at a
given interest rate compounded annually at any point in the future can be found using the
following equation:

where

• FVt = the Future Value at the end of year t,

• CF0 = the initial investment,
• r = the annually compounded interest rate, and
• t = the number of years.
Future Value Example
Find the Future Value at the end of 4 years of $100 invested today at an interest
rate 10%.

Solution: Future Value

Present Value

Present Value describes the process of determining what a cash flow to be received in
the future is worth in today's dollars. Therefore, the Present Value of a future cash flow
represents the amount of money today which, if invested at a particular interest rate, will
grow to the amount of the future cash flow at that time in the future. The process of
finding present values is called Discounting and the interest rate used to calculate present
values is called the discount rate. For example, the Present Value of $100 to be received
one year from now is $90.91 if the discount rate is 10% compounded annually. This can be
demonstrated as follows:

One Year
$90.91(1 + 0.10) = $100 or

$90.91 = $100/(1 + 0.10)

Notice that the Future Value Equation is used to describe the relationship between the
present value and the future value. Thus, the Present Value of $100 to be received in two
years can be shown to be $82.64 if the discount rate is 10%.

Two Years
 2
$82.64(1 + 0.10) = $100 or

$82.64 = $100/(1 + 0.10)2

A pattern should be becoming apparent. The following equation can be used to calculate
the Present Value of a future cash flow given the discount rate and number of years in the
future that the cash flow occurs. (This equation can be obtained algebraically from the
Future Value Equation.)

where

• PV = Present Value
• CFt = Future Cash Flow which occurs t years from now
• r = the interest or discount rate
• t = the number of years
Present Value Example
Find the Present Value of $100 to be received 3 years from today if the interest
rate is 10%.

Solution: Present Value

Annuities

An Annuity is a cash flow stream which adheres to a specific pattern. Namely, an Annuity
is a cash flow stream in which the cash flows are level (i.e., all of the cash flows are equal)
and the cash flows occur at a regular interval. The annuity cash flows are called annuity
payments or simply payments. Thus, the following cash flow stream is an annuity.

Figure 1

While, the following cash flow stream is not an annuity because the payments do not
occur at a regular interval.

Figure 2

When a cash flow stream is of the form given in Figure 1, i.e., an annuity, the process of
finding the Present Value or Future Value of the cash flow stream is greatly simplified.

Present Value of an Annuity

The Present Value of an Annuity is equal to the sum of the present values of the annuity
payments. This can be found in one step through the use of the following equation:
Procurement and Evaluation

a) What is Procurement?
Procurement is the aspect of supply concerned with translating an initial end-user
statement of requirements to the actual end-products or items.

It includes the acquisition of:

• Goods – purchases
• Works – hiring of contractors
• Services – hiring of consultants

b) Procurement Roles for the Owner/Board

The management of the business has specific roles in support of the procurement
function. These include:
• Defining procedures for selecting, contracting and monitoring suppliers
• Identifying key supply sources for the major requirements
• Approving major contracts and supply arrangements usually based on a pre-
agreed financial value

c) Reduce your Costs by Good Planning for buying:

• Buying at the lowest possible price (compare the prices of different
suppliers and/or buy during the season when the price is very low);
• Buying in bulk, if they are products that can be stored;
• Buying the right amount of perishable products (like tomatoes); reducing
travel and transportation costs.

d) Reduce your costs by good planning for production:

• Producing the amount (of perishable goods) that people will buy;
• Inspect the quality of the products you produced, and pack it in a neat way;
• Prevent wasting materials;
• Producing a lot at one time may be more profitable than producing small
amounts at different times.

e) Procurement Systems and Methods

There are different approaches to procurement that may be appropriate to schools. Choice
of the most appropriate method is dependent on the size of the school, range of suppliers,
the value of the order, the timeframe and the importance of the goods/services to the
school.

Direct Procurement – purchase direct from a single random supplier either locally or
through remote connection via internet or catalogue buying based on best price. Suitable
for small price immediate requirements where there is no pre-approved supplier for the
procurement requirement.

Direct Contracting – purchase from a single pre-approved service/goods supplier. May

be appropriate when:

• Supply is for an extension of an existing contract e.g. repair work

• Standardization of goods and services needs to be compatible with the existing
resources
• Supply needs are urgent
• Items or services are obtainable from only one source
• The school requires items from a particular source to guarantee performance
Close Tender – where pre-approved suppliers and service providers are asked to submit
bids against a given specification. This is suitable for requests where:

• Reliability and quality are paramount

• There are relatively few potential suppliers (especially for a particular brand of
product)
• Supply is of vital components in ongoing projects
• Procedure
• No public advertising
• Bids are solicited from a limited number of pre-approved/known suppliers
• No preference for a particular bidder

Open Market Tender – a public, open procedure where all potential suppliers are invited
to bid against a given specification. For major supply or contract work an open market
tender may be appropriate where:

• There is a long lead-in time for supply

• The contract would be for a significant value
• There are a number of potential suppliers and open competition may cause
significant savings
The process may be time-consuming as it will probably need:

• Advertising
• Defining procurement needs and terms and conditions in advance
• Reviewing several tenders and possibly meeting with suppliers

Criteria for Evaluation of Suppliers

Criteria for evaluation of suppliers will differ from business to business. However, the key
elements used are:

Table 7: Criteria for Evaluation for Suppliers

 Ability to meet the technical specification of the supply request.
Technical Capability Available manpower and standard equipment or facilities are
indicators of technical capabilities.
Knowledge of the product being tried and tested or reputation
Product Reputation
of supplier should be considered.
The financial status of the supplier/service provider should be
Financial Resources
considered.
Proven track record of supplier/service provider should be
Past Performance
considered.
The supplier address should always be business premises. A
residential home will typically indicate a “brief case merchant”
Supplier Location with little capital, stock, or knowledge of the products and
quality required. A convenient location may be suitable for quick
‘just-in time’ delivery.
Range of A supplier of wide selection at competitive prices can reduce the
Goods/Services resources and time you need to commit to buying.
Available
Availability of parts for replacement and/or employees to
Parts and Service
provide additional service when required
What is the supplier’s approach to the return of goods found
Conditions of
defective in use? Settlement terms are also a factor as are
Contract
communications and inventory availability.
Suppliers Management
• Implementing approved procedures for selecting, contracting and monitoring
suppliers
• Identifying supply sources
• Approving day-to-day and smaller contracts and supply arrangements in
accordance with “the mandate” and limits
• Confirming satisfactory distribution or supply of goods and services

Hallmarks of Good Procurement Systems

The Management should take responsibility for defining the procurement practices of the
business. Effective procurement should be organized to provide all of the following
elements:

• Economy
• Efficiency
• Transparency and fairness
• Accountability and ethical standards

1) Economy
The objective is to maximize value for money. This does not necessarily correspond to
cheapest price. Lowest price may not correspond to lowest cost over the long term.
Quality and effectiveness are important factors in determining ‘value’.

2) Efficiency
Good procurement is always time-consuming but this should not be out of proportion to
the value of the goods or services being procured. Procurement processes should
therefore be practical and not over-ambitious. The goods or services being procured
should be compatible with your existing set processes and resources.

3) Transparency and fairness

Good procurement establishes and maintains procedures that are friendly and
unambiguous, are impartial, stable and reliable. This builds trust and improves
relationship with suppliers and helps in the efficiency of the procurement process.

4) Accountability and ethical standards Procurement policies should keep those

people responsible for procurement accountable for adherence to those policies.
It should be a challenge and be a obstacle to collusion and corruption.
A sound procurement process is one that combines all the above elements. A key
objective is to encourage the courage and willingness of well-qualified suppliers to
compete for your business. This directly and concretely benefits both the school and
responsive suppliers.

Conversely, procurement of materials and services that is devoid of the above elements
can result in:

• Hesitation to compete on the part of good suppliers

• Submission of inflated or deflated pro-forma invoices and bids
• Delayed or inadequate performance
• Collusion in bribery by frustrated or unscrupulous contractors and staff
responsible for purchasing
• Poor value for the school
• Betrayal and abuse of the school’s trust for personal gain
• Damage to the school’s reputation in the community
 Financial Planning
What can you do with the money if you have a profit?
Accept all answers. Bring out the following:

If you have not taken any money from the business money for yourself and your family,
then you will have to get some money out for yourself first. The rest of the money can be
put into savings, until you need it.

What are savings?

Savings means that you save money aside and you do not spend it, unless you have
planned to use it for some purpose.

For what purpose would you save money?

• To replace or repair worn or damaged equipment and utensils;
• To grow your business;
• To improve your way of living;
• Building a house;
• Sending the children to a good school;
• To prepare for emergency cases.

Activity 22:
Read the following story to the group. The participants should listen carefully, because you will ask them
how the women in the story can reduce their costs. A group of women has a small bakery in a village.
They bake sugar bread, tea bread and buns. The group members take turns in baking the bread. They
also take turns in buying the stock. Every other day someone goes to town to buy the bags of flour that
are needed plus the other ingredients. She is given the money for the bus fare and food during the
journey. They buy cooking oil, sugar and yeast in small quantities from the kiosk in the village.
Sometimes members of the group give bread for free to their relatives. On some days they are baking
more bread than they can sell. Some of it gets spoiled and they have to throw it away.

Activity 23:
• The doughnut seller is saving to buy a bigger cast iron pot, so that she can fry more
doughnuts at a time and thus sell more. In future she also wants to bake cakes, so she is
saving to buy an oven;

• The poultry farmer wants to save money so that she will be able to buy more chicks;
• The fishmonger wants to be able to buy more cheap fish during the peak season, so that she
can store it and sell it during the season when fish is scarce and the prices are high. She wants
to save some money, so that she is not forced to sell the fish beforehand;
• The driver wants to save money so that he can buy his own taxi.
How to save the money? (Handout – 10 Ways to Save Money)
Saving money is one of those tasks that are so much easier said than done. There's more
to it than spending less money (although that part alone can be difficult). How much
money will you save, where will you put it, and how can you make sure it stays there?
Here's how to set realistic goals, keep your spending in check, and make the most for your
money.

i. Kill your Debt First. Simply calculating how much you spend each month on
your debts will illustrate that eliminating debt is the fastest way to free up money.
Once the money is freed from debt payment, it can easily be re-purposed to
savings. Plus, the sooner you pay off debt, the less interest you'll pay, and that
money can be saved instead.

ii. Set Savings Goals. For short-term goals, this is easy. If you want to buy a video
game, find out how much it costs; if you want to buy a house, determine how
much of a down payment you’ll need. For long-term goals, such as retirement,
you’ll need to do a lot more planning (figuring out how much money you’ll need to
live comfortably for 20 or 30 years after you stop working), and you’ll also want to
figure out how investments will help you achieve your goals.

iii. Establish a Time-frame. For example: "I want to be able to buy a house two
years from today." Set a specific date for accomplishing shorter-term goals, and
make sure the goal is attainable within that time period. If it’s not attainable,
you’ll just get discouraged.

iv. Figure out how much you’ll have to Save per Week, per Month, or per
paycheck to attain each of your Savings Goals. Take each item you want to
save for and figure out how much you want to start saving now. For most savings
goals, it’s best to save the same amount each time. For example, if you want to
give a LD 20,000 down payment on a home in 36 months (three years), you’ll
need to save about LD 550 per month every month. But if your paychecks amount
to LD 1,000, it might not be a realistic goal, so adjust your time-frame until you
end up with an approachable amount.

v. Keep a Record of your Expenses. What you save falls between two activities
and their difference: how much you make and how much you spend. Since you
have more control over how much you spend, it's wise to take a serious look at
your expenses. Write down everything you spend your money on for a couple
weeks or a month.

vi. Trim your Expenses. Take a good, hard look at your spending records after a
month or two have passed. You’ll probably be surprised when you look back at
your record of expenses: LD 30 on ice cream, LD 10 on parking tickets? You’ll
probably see some obvious cuts you can do. Depending on how much you want to
save, however, you may want to make some tough decisions. Think about your
priorities, and make cuts you can live with. Calculate how much those cuts will
save you per year, and you'll be much more motivated to pinch pennies.
Tips in saving money

Why not…

• Move to a less expensive house or apartment? Refinance your mortgage?

• Save money on gas, or give up a car altogether? If your family has multiple cars, can you bring it
down to one?
• Shop the discount racks at clothing stores. Items on clearance are marked down considerably and
could save you 50% of the price.
• Cut down on your utility bills?
• Restrict eating out? Buy food in bulk? Cook more at home? You might be able to save a lot of
money when market or grocery shopping.
• Only use one cell phone or save money by calling over the internet for free with services such
as Skype?
• Live without DSTV
• Get a better price on insurance? Call around and make sure you are getting the best price you can.
Consider taking a higher deductible, too.

vii. Reassess your Savings Goals. Subtract your expenses (the ones you can't live
without) from your take-home income (i.e. after taxes have been taken out). What
is the difference? And does it match up with your savings goals? Let's say you've
decided you can definitely get by on LD 150 per month and your paychecks
amount to LD 230 per month. That leaves you with LD 80 to save. If there’s
absolutely no way you can fit all your savings goals into your budget, take a look
at what you’re saving for and cut the less important things or adjust the time-
frame. Maybe you want to lay off buying a new car for another year, or maybe
you don’t really need a big-screen TV that badly.

viii. Make a Budget. Once you’ve managed to balance your earnings with your
savings goals and spending, write down a budget so you’ll see each month or
each paycheck how much you can spend on any given activity or group of things.
This is especially important for expenses which tend to fluctuate, or which you
know you're going to have a extremely difficult time restricting.

ix. Pay yourself First. Savings should be your preference, so don’t just say that
you’ll save whatever is left over at the end of the month. Deposit savings into an
account (or your piggy-bank) as soon as you get paid. An easy, effective way to
start saving is to simply deposit 10% of every check in a savings account.

x. Don't get discouraged and Don't Give Up. You may not think you can become
wealthy but to become a millionaire is possible if you set up an aggressive savings
plan and stick to it. You may be surprised how much money you can give aside for
something far more entertaining than what you could buy with short term savings.
Good things usually take time and the longer you save the more interest you will
be making on your savings as well!

Activity 24:
Distribute Handout 14 & 15

REVIEW QUESTIONS
At the end of this lesson ask the following questions to find out whether your participants
have understood the lesson:
• What is finance?
• What is the difference between bookkeeping and finance?
• Give examples of financial controls and systems.
• List three sources of funding.
• Explain the procurement procedures.
• Demonstrate a basic understanding of the financial planning process
Glossary

Account payable- A liability backed by the general reputation and credit standing of the
debtor

Account receivable- A promise to receive cash from customers to whom the business
has sold goods or for whom the business has performed services

Asset – An economic resource that is expected to be of benefit in the future

Capital – The claim of a business owner to the assets of the business

Expense – Decrease in owner’s equity that occurs from using assets or increasing
liabilities in the course of delivering goods or service to customers

Inventory- All the goods that a company owns and is expected to sell in the normal
course of operation

Liability - An economic obligation (a debt) payable to an individual or an organization

outside the business

Invoice – A seller’s demand for cash from the purchaser

Ledger – the record holding all the accounts

Net loss – Excess of total expenditure over total revenues

Sales – the amount that a merchandiser or a seller earns from selling its inventory of
goods

Transaction – An event that affects the financial position of a particular entity