Enabling Environment for effective financial management

Key areas that provide an enabling environment for effective financial management and therefore analysis include; good governance, good leadership, proper integration of staff with in the financial management
function and appropriate financial policies and procedures.
 The governance structure should be appropriate and the governing body active.
 The vision and mission should be clear and consistently stated, known and shared.
 The organisational core values should be clearly stated, known and shared.
 Clearly defined strategy that helps planning and implementing activities. Minutes of board and management meetings should be kept including action points which are followed up.
 Board and management exercise effective leadership.
 The leadership should set priorities and provide a clear direction for the SACCO
 The leadership directs, motivates and manages staff well
 The organisational structure is clear and appropriate for effective leadership
 The SACCO should have adequate infrastructure, facilities and technology to carry out its activities
Financial policies and procedures
 The SACCO should have an appropriate and documented financial policy and procedures
 Staff should be aware of and comply with the stated policies and procedures


Objectives and Users of Financial Statements

The primary objective of Financial Statements is to communicate in general terms the financial performance and position of the institution and how well the institution is achieving its stated objectives. The following are the typical SACCOs‟ stakeholders and the broad areas of analysis that interests them:
 Board members: The board members would like to interpret /analyse financial statements and operational statistics to better
perform their key duty of monitoring management performance and steering the SACCO towards attaining its institutional objectives, which usually includes financial sustainability.
 Management: They measure their performance with a view to improving it. They would also like to study, identify and address areas of good, average and poor performance.
 Membership: These assess the prospects of receiving dividends and capital growth and the overall safety of their investment and savings in the SACCO.
 Regulatory bodies: These would like to be convinced that the SACCO is run professionally. They would also like to know whether
the institution is financially and operationally sound and that it is run in such away as to maintain the soundness and safety of assets, for continuity.
 Creditors: The creditors would like to be assured that the SACCO will be able to pay both interest and principal. They are concerned with short term liquidity (ability to meet current financial obligations as they become due) long term solvency (ability to generate enough cash to repay long term debts as they mature) as well as the levels of debt in relation to equity.
 Donors: The donors would like to know whether the SACCO will be able to provide the service on a sustainable basis and create impact while meeting grant or loan requirements and conditions.
Various SACCO stakeholders require information to assess the extent to which the institution objectives have been attained. Accounting through financial statements provides most of this information. Best practice in microfinance stipulates that good financial management and financial analysis is the basis for successful and sustainable microfinance operations.
The quality of financial analysis depends on the quality of the information that has been recorded for analysis and this information is derived largely from the accounting system.

If you find an excuse, don’t pick it up

When it comes to excuses, the world is full of amazing inventors. Don’t spend half your life telling what you are going to do and the other half explaining why you didn’t do it. An alibi is the supposed proof that you did what you didn’t do, so that others will think you didn’t do what you did.

Mistakes have hidden powers to help us, but they fail in their mission of helping us when we blame them on other people. When you use excuses, you give up your power to change and improve. You can fall down many times, but you won’t be a failure until you say that someone else pushed you. Edmund Gosse said, “Never mind whom you praise, but be very careful whom you blame.”

If you find an excuse, don’t pick it up. Failures are experts at making excuses. There are always enough excuses available if you are weak enough to use them. The world simply does not have enough crutches for all the lame excuses. It’s always easier to find excuses than time for the things that we don’t want to do.

From: John Mason Book “Imitation is Limitation.”

When God gives you a word, don’t make a paragraph out of it

There is a famous old story about a man who was sleeping at night in his cabin when suddenly his room was filled with light, and God appeared. The Lord told the man He had work for him to do, and showed him a large rock in front of the cabin. The Lord explained that the man was to push against the rock with all his might. So the man did, day after day.
For many years he toiled from sunup to sundown, his shoulders set squarely against the cold, massive surface of the unmoving rock, pushing with all of his might. Each night the man returned to his cabin sore and worn-out, feeling that his whole day had been spent in vain.
Since the man was showing discouragement, the adversary (Satan) decided to enter the picture by placing thoughts into his weary mind: “You’ve been pushing against the rock for a long time, and it hasn’t moved.” Thus, he gave the man the impression that the task was impossible and that he was a failure. These thoughts discouraged and disheartened the man. Satan said, “Why kill yourself over this? Just put in your time, giving just the minimum effort; that will be good enough.”
That’s what the fatigued man planned to do, but he still decided to make it a matter of prayer and take his trouble thoughts to God. “Lord,” he said, “I’ve labored long and hard in your services, putting all my strength to do what you have asked. Yet after all this time, I have not even budged that the rock by half a millimeter. What’s wrong? Why am I failing?”
The Lord responded compassionately, “My friend, when I asked you to serve Me you accepted, I told you that your task was to push against the rock with all of your strength, which you have done. Never once did I mention to you that I expected you to move it. Your task was to push.
“And now you come to Me with your strength spent, thinking that you have failed. But is that really so? Look at yourself. Your arms are strong and muscled, your back sinewy and brown; your hands are callused from constant pressure, your legs have become massive and hard. Through opposition you have grown much, and your abilities now surpass that which you used to have. True, you haven’t moved the rock. But your calling was to be obedient and to push and to exercise your faith and trust in My wisdom. That you have done. Now I, my friend, will move the rock.”

Lesson: When God gives you a word, don’t make a paragraph out of it. Usually our additions to what He says get us in trouble or cause delays. Yes, use the faith that moves mountains, but remember, it’s He who will actually do it.
From the Book “Imitation is Limitation” by John Mason.

Financial Management

Financial management for the SACCOs involves decisions on how the SACCOs‟ operations will be financed (sources of funds), how the funds are utilised (investment decisions) with the overall objective of achieving the SACCO mission and goals. Financial management thus focuses on the development of strategies to prudently manage the financial assets of the SACCOs as well as using tools and techniques for financial planning to achieve its organisational objectives.
Like all other microfinance institutions, the managers and board of the SACCOs have a fiduciary duty to prudently manage the financial resources of the SACCO. As part of this responsibility, the directors are legally required to prepare and present financial statements that show the financial performance and position of the SACCO over a specified period.
The information extracted from the financial statements is then used in assessing the stewardship of the board and management and to what extent the financial objectives have been achieved. The SACCO‟s financial objectives may include amongst others;
 Maximizing of capital growth
 Attaining financial Sustainability
 Prudently managing the assets and liabilities of the SACCO
The SACCOs‟ financial statements by themselves tell only a flat story. From a cursory look at the figures in the financial statements presented by the directors, and managers, one may not be able to decide whether the SACCO is doing well or badly, whether it is financially strong or vulnerable. To extract from them a meaningful story that relates to the SACCO‟s vision, mission, objectives and plans, and the extent to which these have been achieved, finance professionals have developed several tools and methods collectively referred to as Financial Analysis which collectively aid Financial Management.
The discipline of financial analysis, therefore, is one of extracting meaningful interpretation out of general financial statements. Financial analysis involves comparing one figure against another to produce ratios, and assessing whether the ratio indicates a weakness or strength. The comparison can be with other Institutions, or for the same institution but over different periods. Financial ratio analysis can be broadly grouped into the following categories;
 Profitability ratios
 Liquidity ratios
 Solvency ratios
 Portfolio quality ratios
 Efficiency ratios

Introduction to Planning in Co-operatives

What is planning?
Planning is the basic process of setting and selecting goals and determining how to achieve them. It is about pre-determining where you want to go and laying strategies of how to get there even before the journey starts.
Why do we plan?
Everybody in every organisation makes some kind of plan. In most cases, however, it is poor planning rather than lack of it that results into poor results. Organizations are established for various purposes and to achieve them, planning is necessary. They are
established with a view of making profits, meeting customer needs, providing employment, growing and serving a multiplicity of other objectives. Planning therefore helps one to reduce chances of failure and instead increase chances of success.
Organizations are set up in environments that differ and today, business environment is dynamic with socio-political and technological changes taking place fast. In such environments, setting stable goals or objectives becomes difficult. While setting goals is difficult, achieving them is even more difficult. Planning enables us to:
 Look into the uncertain future and map out ways to achieve our purpose using various planning techniques
 Set realistic goals that have been thought out properly
 Focus on those aspects that are vital and possible within constraints of the environment
 Forecast future trends to some degree (since planning involves looking ahead)
 Identify the factors that affect our intended goals and work out mitigation measures
 Determine in advance how we are going to do the things we have envisaged to do
 Examine our resources and their adequacy for planned activities/ outcomes
Plans are therefore a key function of management, and are generally based on pillars illustrated below:
Who Plans?
Planning takes place all the time at all levels in any organization, whether conscious or not. Everybody in the organization should plan his or her work on a day to day basis or longer. Normally lower level managers and staff involved in operations plan within the
framework of broader, longer term plans. Middle level managers also plan within the framework of broad overall plans.
Good management tends to plan for long periods (three to five years). This is normally referred strategic planning. The shorter term plans (one year or less) are referred to as operational or annual plans, Middle level management tends to focus on operational plans while top level management focuses on strategic planning.
Types of plans
A typical MFI has different types of plans. Broadly, plans are of the following types:
(i) Strategic/ Business plans – these are of a long time nature. They are usually 3 to 5 years. Strategic plans define broadly where the organization wants to be in future. Some organizations have plans for longer periods up to 10 years. Due to the volatile nature of the environment organizations operate in, longer period plans beyond five years are not advisable.
(ii) Operational plans – these are of a short term nature. Operational plans are derivative plans. They are derived from the strategic plans and give details of how specific objectives will be achieved by aligning shorter term activities to the strategic plan. These plans are usually for one year. They may however range from 6-18 months.
There is also another set of plans described as standing plans. These are standardized approaches for handling recurrent and predictable situations. These include:
Policies: These are general guidelines for decision making. They set the limits or boundaries for taking a decision. A policy channels the thinking of people in an organization so that they take decisions consistent with objectives. For example a microfinance institution may have a policy of not exceeding a loan amount of 10million.
Standard procedures: A procedure is a detailed set of instructions for performing a sequence of activities that occur regularly or very often. For example a microfinance institution has standard procedures of approving a loan. Standard procedures are the
means of carrying out a policy.
Rules/ Regulations: These are statements stipulating specific actions that must or must not be taken in a given situation. They are either dos or don’ts.
Overview of the planning process
Planning gives purpose and direction to the organization. It helps decide what, when, how and why we do certain activities or tasks. Planning goes through a process that involves scanning the environment, establishing goals, developing premises /assumptions, determining alternative courses of action, evaluating the various alternative courses, selecting a course of action, formulating derivative plans and quantifying the plans into budgets.
Scanning the environment
Whether it is a new or an on going business the first step in the planning process is to scan the internal and external environments. Managers should take a preliminary look at possible opportunities that can be taken advantage of in light of the organization’s
strengths and weaknesses. Scanning the environment also reveals the threats.
Setting goals and objectives
The second step in the planning process is to set goals and objectives. Having realized the internal strengths and weaknesses as well as external opportunities and threats the environment the institution is operating in offers, the manager(s) establish organizational
goals. These are broad aims or statements of purpose. The goals provide the basic sense of direction that forms the activities of the organization.
An organization’s mission is the “unique aim” for its existence. This unique aim sets it apart from other Organizations. No two organizations can have a similar mission, though the wording of a mission for two organizations may be similar.  The term goal refers to the organization’s grand or long term purpose, which is derived from its mission and which in turn determines mid and short term objectives. Goal is a broad term that states what is to be achieved as a result of all the organization’s activities.
Organizational objectives are specific targets derived from its goal, which in turn flows from its mission. Objectives are usually quantitative or otherwise objectively measurable. Good organizational objectives should be: Specific, Measurable, Achievable,
Realistic and Time-bound (SMART). Setting organizational goals is the process that defines what the organization plans to
achieve. This is very important since deployment of organizational resources will respond to this goal definition. For an existing organization, the goal setting process involves assessing whether the organization is achieving its existing goals or not. To do
this, management asks questions like – What are the gaps? What elements of the goal(s) are no longer relevant and what new perspectives should be introduced into the goal? What should be done to address the gaps and challenges? Is it necessary to review the goals, reduce them or amend them? Are the existing goals achievable, given the environmental factors and dynamism? These will help the organization make decisions on what to do with its existing goal(s).
For a new organization or one without existing goals, the goal setting process involves examining the mission and based on it, determining the organization’s grand, long term purpose. In both cases (whether goals are being adjusted or formulated), mid and shorter term objectives are then derived from the goals.
Premising / developing assumption
The third step in planning is to establish forecasts and assumptions from the environment about the events that will affect the objectives and their achievement. For instance, what will the sales be, how will competition evolve? What might the ongoing regulatory trends do to the sector? Which factors will affect demand and supply volumes in the future? What effect might some or all of these have on prices, wages, rates and other revenue/expenditure elements? This step also involves assessing the present situation both in terms of the organization and also the environmental conditions. Forecasts or projections can be made if the
environment is known. Having established the goals and objectives showing what we want to achieve, we must make assumptions about what is likely to happen. We may, for instance assume that inflation and interest rates will be at certain levels in the future. This then enables organization to determine the activities to be undertaken in order to tap opportunities while controlling risks. Forecasts are not only made about the external environment but also about the environment internal to the organisation.
Determining Alternative Courses of Action
This is a stage of analysis. It involves using various analytical tools and skills to generate the different courses of action. When goals have been selected/ formulated and we know what we require to achieve them, then the various ways of achieving the goals can be logically determined. These are the strategies, policies and tactics. Strategies are broad programmes to achieve goals. Policies are broad frameworks to guide thinking and action, while tactics are operational decisions aimed at efficient resource utilization.
Different courses of action may be adopted to take full range of opportunities available and to boost organizational health.
Evaluating the various Alternative Courses of action Having generated the different alternatives the next step is to analyze and evaluate each in light of the available resources and objectives. This involves anticipating, for each probable course of action, what would happen if you took one particular course of action. The necessary factors are examined and likely outcomes assessed. At this stage also, scanning the environment and forecasting will be done.
Selecting a Course of Action
This is the actual point of adopting a plan or selecting a strategy, the point of decision making. As already said, a plan is a predetermined course of action. It is a process of deciding by selecting one or a few alternatives among many. At this stage, you actually generate the strategic plan if this process is at top level. If it is at a lower level, you generate an operational plan.
Formulating Derivative Plans
Once the basic (broader) plan has been made, derivative plans to support it must be made. If the basic plan was strategic, the operational plans will have to be made. Plans for each sub-unit in the organizations like product development, finance, personnel will also have to be made. For an organisation with branches/sub-units, sub-plans are necessary for each department and branch. This Aids budgeting which is the final stage of the planning process.
Budgeting is the final step in the planning process. Budgets are the quantitative expression of a plan. Budgets give meaning to plans because they show how and where the financial commitment is to be made, and what financial results are expected from this.
A budget is an estimation or projection of the financial performance and condition of an organization for a future time period. Therefore put in another way, budgeting is translating ones plans in monetary terms.
Purpose of budgeting
Budgets have five general purposes:
 They put business strategy into operation
 They allocate resources
 They provide incentives to managers
 They help in the control of spending
 They communicate plans and expectations
(i) Putting business strategy into operation
This can be achieved through the planning process that involves many people creating mission statements, analyzing strengths, weaknesses, opportunities and threats (SWOT analysis), prioritizing initiatives, determining courses of action and allocating resources to produce a comprehensive strategic plan document.
Budgets innovatively reflect the organizations’ real strategy-whether that strategy is implicit or explicit. It shows what the organization thinks is going to happen and what initiatives it is going to take to harness its external environment, improve internal
environment and thus improve its performance.
In some cases, the budget is the place where funds are set aside for new programs, capital investments, and all types of enhanced resources. The budget may incorporate new goals for the organization or deepen/ broaden existing ones.
(ii) Resource allocation
Budgets presume resources are limited. The budget process forces the organization to take stock of its resources and to determine their limits. It must identify the sources of funds it can tap and how they will best be used. An organization can structure its
allocations on the basis of units or departments, programs, activities, or managers. In some cases, particular resources will be tied to particular units or programs, as in grants or restricted gifts.
(iii) Incentives
Every budget is governed by rules, stated or not stated. These rules encourage certain behaviours on the part of people in the organization. The behaviours encouraged by the budget process can benefit or harm the organization, depending in part on how well they were thought, although unintended effects occur in even the most carefully designed
system. An organization therefore needs to design rules that provide incentives for managers to make more careful spending decisions throughout the year.
(iv) Control
The traditional view of budgets considers them a tool for controlling spending. Departments receive budgets that tell them how much to spend, and the central offices do not let them spend more than what appears in their budget. The assumption here is that
spending will tend to be uncontrolled if it is not cut off and that managers or departments need a lot of help in knowing when to cut back on spending. In the modern context, budgets are planning tools that consider income generation, cost allocation and new
opportunity tapping. It is therefore important to remember that the budget is not only an expenditures control toll but also a tool for watch over the income generation process as well. The income generation is very important aspect of budgeting which many SACCO leaders and managers tend to forget and instead concentrate on expenditure variables yet
both sides require equal attention.
(v) Communication

Budgets are critical vehicles for internal and external communications. The budget process allows leadership to describe its plans, goals, and assessment of economic conditions for the rest of the organization. In soliciting budget proposals, leadership can
ask the various parts of the organization for their assessment of relevant conditions, thus providing new information about the organizations opportunities and threats and obtaining a reality check on leadership’s vision. Once the budget is set, managers can
take their guidance from it. External groups rely on budgets to understand the organization’s plans and expectations. Funders want to see budgets that show how the organization intends to use the money it receives.
The budget shows an organization’s Administrative Committee what management thinks is going to happen in the coming year and what management intends to do to boost its outcomes. At the intra institutional level, the branch or departmental budget tells senior management how the branch/ department heads thinks their units are going to fair. The budget also allows the Management Committee and external groups to assess management’s ability to oversee finances, serve as a steward for resources, and achieve objectives. If the budget is unrealistic, it suggests that management does not have a good plan for maintaining the organization’s financial health.
In summary, an effective budget should:
 State all of the assumptions
 Be understandable and simple
 Represent the combined judgment of staff and management
 Cover a period for which reliable estimates can be made
 Be flexible to permit adjustment
 Establish standards of performance
 Provide motivation and guide performance
 Guide management and staff towards objectives
Who should be involved?
Operational/ activity based budgets must be drawn up by people who have ground experience. Long term strategic budgets should be drawn by senior management. For an annual budget, both the strategic and operational angles are needed; therefore field staff,
departmental managers, accounts staff, and senior management should all be involved. A budget committee normally coordinates the process. The overall budget (Master Budget) should be approved by the Administrative Committee.
Budgeting Process
The budget process provides the vehicle for operationalising strategy by making decisions to allocate funds in line with the strategy. There are differences between organizations- size, type of mission, number of products/ programs/ projects, to name just
a few factors. Across the variety, the budget process maintains a remarkably consistent shape. Generally, the budget process consists of three basic phases:
 Budget development
 Budget monitoring, tracking, and adjustments
 Analysis of final results
These phases cross years: Budget development takes place before the budget year in question starts; Monitoring and adjustment occur throughout the budget year; Final results are analyzed after the year ends. In most healthy organizations, one of these three
phases is in progress at any given time, and the phases from different years feed back to each other.
(i) Budget Development
It should start with a set of activities to lay the ground for the next year’s budget. Managers of the organization should start the process by evaluating its financial position and reviewing the organization’s strategies. Managers usually begin by looking at the
results from the year that has just ended. Although another complete year-the one current underway-will occur between the period covered by those results and the year for which they are preparing a budget, this information is the best at this time, as it covers the most recent results realized.
(ii) Budget Monitoring, Tracking and Adjustments
Activity related to monitoring and tracking the current year budget usually consumes more time than budget development. The first task in managing the current year is to make sure that spending stays with in limits and that the revenue goals are achieved. If
revenues exceed plan, increased spending may be acceptable or necessary. In face of revenue shortfalls, it does not do the organisation any good to meet its expense budgets.
The process of comparing actual and budgeted outcomes periodically is known as budgetary control.
(iii) Analysis of Final results
When the year ends, the budgeted and actual results are tallied. At this point the budget process has completed the cycle. Only with the final results can the organisation judge whether its budgeting process has succeeded or failed. The following questions should be answered:
 Did the budgeting process succeed in anticipating events of the year?
 Did the process help the organisation identify and respond to conditions as they changed during the year?
 What do the final results tell us that we need to take into consideration for our planning for next year, and do they suggest an adjustments we need to make in our plans, goals, or actions during the year that just got started?Prior year budget versus actual analyses and full year forecast form the basis of the ensuing year’s budget.
Implementation/ execution of Plans
After going through the entire process of planning, the plan(s) should be executed or implemented. Even the most well thought out plan will remain useless if it is not executed. In implementing the plan(s), tasks are assigned with deadlines to responsible
individuals and progress is continually assessed against set goals and milestones.

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