Guests & Participants,

WELCOME
to the
FINANCIAL MANAGEMENT
TRAINING!
Connie A. Sariego
Coop Dev’t Specialist
March 2014
Knowledge Inventory Test

Please answer each question briefly.

1. What is “financial management”?

2. What are the functions of financial management?
3. Enumerate at least 3 sources of coop funds.
4. What is a budget?
Good Luck!
Let us first define our expectations!
Please write down your expectations (mga
inaasahan) from the following:
1) Training (this Course)
2) Co-Trainees (co-participants)
3) Trainers
Only 3 short sentences per category or subject. You are
given 5 minutes to finish and submit your outputs.
Thank you!
FIRST MODULE

Basic Concepts of
Cooperative Financial
Management
This module deals with:

1) Key concepts of cooperative

financial
management;
2) Coop operations which are related
to
financial management; and
3) Elements of good financial policies.
What is Finance?

It is the art and

science in managing
money!
How about Financial Management?

Concerned with the duties of the Financial Managers in the

business firm/cooperative
Concerned with the maintenance and creation of economic
value
and wealth
A decision-making process concerned with planning,
acquiring and
utilizing funds in a manner that achieves the coop’s goals

In short, financial management is planning, organizing,

directing and controlling the financial activities.
FINANCE and ACCOUNTING:
Difference

Accounting is collection and

presentation of financial data.

Finance BEGINS where Accounting

ENDS.
SCOPE of Financial Management

 Fund Management

 Board’s Decision-Making

 Management Accounting
TYPES of Financial Decisions

1) Investment Decisions

2) Financial Decisions

3) Dividend Policy Decisions

Investment Decisions

- Determine scarcity or limitations of coop

funds
- Select capital investment proposals with
positive
present value and with ROR exceeding the
marginal cost of capital
- Consider profitability of individual
project proposal
Financial Decisions
- Mixture of debt and equity should maximize the
value of investment made
- Consider cost of finance available in different
forms
and risks attached to it
- When to introduce new products, when to invest
new
assets, when to replace existing assets, when to
borrow from banks, when to extend credit to
customer/member, how much cash to maintain
Dividend Decisions
- Determination of quantum of profits to be
distributed to members, frequency of payments and
amounts to be retained to the coop
- Ultimate effect of dividend distribution policies and
retention of profits to the coop’s wealth
- Retention of coop profit in the form of
appropriation or reserves for future growth and
expansion schemes
IMPORTANCE of Financial Management

o Successful promotion depends on Financial

Administration.
o Smooth running of an enterprise
o Financial administration coordinates
functional activities
o Focal points of decision-making
o Determination of business success
o Measure of performance
OBJECTIVES of Financial Management
a)Ensure regular and adequate supply of funds
to the concern
b)Ensure adequate returns to stakeholders
which will depend upon the earning capacity,
market price of the share, and expectations of
shareholders/members
c)Ensure maximum funds utilization
d)Ensure safety on investment
e)Plan a sound capital structure
 KEY ELEMENTS of Financial Management

1) Financial Planning (sufficiency and availability of funds at

the right time)

2) Financial Control (security and efficiency of using

assets)

3) Financial Decision-Making (relates to investment,

financing and dividends)
Why Manage CASH?

 to keep the investment in cash as

low as possible while efficiently and
effectively keeping the coop operations
 What should be CONSIDERED in
Cash Management Program?

1) Policies set minimum and maximum cash levels.

2) Cash Needs are forecasted.

3) Cash budgets are continuously updated.

4) Surplus funds are invested or used for loans.

5) Cash is available for member withdrawal and loans.

STRATEGIES in Monitoring CASH BALANCES

a) Accelerate cash inflows by optimizing mechanisms

for collecting cash.
b) Monitor cash disbursement needs or payment
schedules.
c) Minimize the amount of idle cash or funds
committed to transactions and precautionary balances.
d) Avoid misappropriation and handling losses in the
normal course of business.
Identifying Cash INFLOW and Cash OUTFLOW
Particulars Inflow Outflow
1. Cash invested by members _____ ______
2. Cash payment for labor, mat’ls
and operating expenses _____ ______
3. Acquisition of fixed assets _____ ______
4. Loan collection _____ ______
5. Members’ savings deposits _____ ______
6. Payments of dividends to
members _____ ______
7. Increase in pautang _____ ______
8. Decrease in short-term
investments _____ ______
SOURCES and USES
of
FUNDS
A. Sources of Funds

1. Member’s share capital

2. Loans and borrowings
3. Member’s savings and time deposits
4. Revolving capital
5. Subsidies, donations, legacies, grants, aids, other
assistance (local/foreign)
6. Retentions
7. Other sources as authorized by law
B. Uses of Funds

1. Net proceeds of the releases of member’s

approved loans
2. Purchases of merchandize/goods and raw
materials
3. Payment of expenses
4. Withdrawals of member’s paid-up share capital
5. Withdrawals of member’s savings/time deposits
6. Acquisition of property and equipment
7. Payments of capital contributions to
federation/union
8. Investments in bonds and stocks
9. Advances to officers and employees
10. Payments to suppliers and creditors
11. Payments of interest on share capital and patronage
refunds
12. Remittance of CETF
13. Refunds made by customers for their deposits and
advances
FINANCIAL
POLICIES
EXAMPLEs of Financial Policies

1) The coop should keep and maintain

adequate books of accounts in accordance
with generally accepted accounting principles
and practices
2) The coop should adopt/use imprest system of
handling cash if there are banks in the area.
3) All non-cash transactions should be
supported with duly approved pre-numbered
journal vouchers.
4) SCA prescribed by CDA should be used.
5) The bookkeeper/Accountant should
prepare Statement of Financial Condition,
Statement of Operations, Statement of
Changes in Equity, Statement of Monthly
Cash Flows, etc. (specify)
6) Collections should be remitted at the end
of the day (elaborate, if needed).
7) Undeposited collection should be kept in
the coop office inside the vault.
8) Loan in default after grace period is
subject to fines or penalties of 2% monthly.
SECOND MODULE

Elements of the
Accounting System for
Cooperatives
This module is all about:

1) The elements of the Coop Accounting

system;
2) Evaluating the adequacy of the
accounting system of one’s coop in relation
to the standard accounting system for
coops; and
3) The roles of directors and management
in implementing sound accounting system.
The ACCOUNTING INFORMATION SYSTEM

a) It generates for business organization a

reliable financial information needed by
the decision- makers in a timely manner.

b) The design and operation of a system

must consider the anticipated users of
the information and the types of
decisions they are expected to make.
c) The design of the system to meet the
entity’s information requirement depends
on the firm’s size, nature of operations,
volume of transaction data,
organizational structure, form of business
and extent of government regulation.
d) Most firms have an accounting manual
that specifies the policies and procedures to
be followed in accumulating information
within the accounting information system.
OBJECTIVES of the AIS

1. To process the information efficiently at the least

cost (cost-benefit principle)
2. To protect the entity’s assets, to ensure that data
are reliable, and to minimize wastes and the
possibility of theft or fraud (control principle)
3. To be in harmony with the entity’s organizational
and human factors (compatibility principle)
4. To be able to accommodate growth in the volume
of transactions and for organizational changes
(flexibility principle)
 3 TYPES of Accounting Information System (AIS)

 Manual Systems (utilize paper-based journals

and ledger)

 Computer-based transaction system (replace

paper records with computer records)

 Database system (embed accounting data within

the business event data on which they are based;
reduce inefficiencies and redundancies that often
exist in transaction-based systems)
ADVANTAGES of Database Systems

1. The system recognizes business

rather than just accounting
events.
2. The system supports reduction
in operating inefficiencies.
3. The system eliminates
redundant data.
Standard Chart of Accounts
(SCA) for all Types of
Cooperatives
PURPOSE of the Accounting System:

 Proper methods for handling

members’ transactions.
FUNCTIONS of Accounting

o Constructive functions. It involves

recording of transactions in the journal,
classification in the ledger, and
summarization in the financial statements.

o Analytical functions. It involves the

examination and interpretation of financial
statements.
PROCESS/PHASES of Accounting

 Recording

 Classifying

 Summarizing

 Interpreting
 ELEMENTS of the Coop Accounting System

1) Coops adopt the accrual basis of accounting.

2) Credit coops and Multipurpose coops with lending
activities recognize revenues on a modified accrual basis
as interest income from loans and fines; penalties and
surcharges on loans receivables are recognized as
revenues when earned and are actually collected.
3) Expenses when incurred are recognized although not
yet paid.
4) Coops should keep and maintain adequate books of
accounts in accordance with generally accepted
accounting principles and practices.
5) Coops should use the CDA-prescribed Standard Chart
of Accounts.
6) Financial Statements: statement of financial
condition, statement of operations, statement of
changes in equity, and statement of cash flows and
related schedules should be prepared monthly.
7) Coops with multi-business activities: separate
financial reports/statements should be prepared for
each type of activity.
8) The coop accountant should install and adequate
and effective accounting system within the coop.
 ROLES of Directors,
Managers and Accountants
in Implementing Sound
Accounting system
BOARD OF DIRECTORS

 to establish accounting policies and procedures for the

effective operation and ensure proper implementation of
such.

MANAGER

 shall oversee the overall day-to-day business of the coop

by providing supervision and administrative controls
over the Accountant; to provide and submit to the Board
monthly status reports and recommend appropriate policy
or operational changes, if any.
ACCOUNTANT

 to install an adequate and effective accounting system

within the coop; to render reports on financial
conditions, operations and changes in equity of the
coop monthly, annually or as may be required by the
Board and/or GA; shall keep, maintain and preserve
books of accounts, documents, vouchers, contracts and
other business records
THIRD MODULE

Interpreting and
Analyzing Financial
Statements of the
Cooperative
This module covers:

1) The different financial

statements;
2) The elements in each type of
financial statement; and
3) Application of the tools and
techniques in financial analysis.
 Understanding
Financial Statements
Four (4) Basic Financial Statements

 Statement of Financial Position (Balance Sheet)

- shows the assets, liabilities and owner’s
equity of the firm on a particular date such as
the end of the quarter or year.

 Statement of Comprehensive Income (Income or

Earnings Statement)
- represents the results of operations ---
revenues, expenses, net profit or loss for the
accounting period
 Statement of Changes in Equity
- summarizes the changes in a company’s
equity for a period of time (generally, one
year)

 Statement of Cash Flow (Cash Flow

Statement)
- provides information about the cash inflows
and outflows from operating, financing and
investing activities during an accounting
period
Statement of Financial Position
A. Current Assets – include cash or those to be
converted to cash, used or consumed within one year or
one operating cycle whichever is longer.
1) Cash & Cash Equivalent. Cash account is exactly
that cash in any form – cash awaiting deposit or in a
bank.
Cash equivalents are short-term and highly liquid
investment and are readily convertible to cash.
2) Marketable Securities are cash substitutes , cash that
is not needed immediately in the business and is
temporarily invested to earn a return.
3) Accounts Receivable are customer balances
outstanding on credit sales and are reported on the
balance sheet at their net realizable value.
4) Loans Receivables. Loans receivable are clients
outstanding loans granted to and are reported on the
balance sheet at their net realizable value.
5) Inventories are items held for sale or used in the
manufacture of products that will be sold.
6) Prepaid Expenses. Certain expenses such as
insurance, rent, property taxes and utilities are
sometimes paid in cash. They are included in the
current assets if they will expire within 1 year or 1
operating cycle, whichever is longer.
B. Property, Plant & Equipment
- encompasses a company’s fixed assets (also called
intangible long-lived or capital assets) – those assets not
consumed in annual business operations.
C. Other Non-current Assets includes property held
for sale, the cash surrender value of life insurance
policies and long-term advance payments.
D. Current Liabilities. Liabilities represent claims against
assets and current liabilities are those that must be satisfied
in 1 year or 1 operating cycle whichever is longer.
Current liabilities include accounts and notes payable,
current portion of long-term debt, accrued liabilities and
deferred taxes.
1) Accounts Payables are short-term obligations
that arise from credit extended by suppliers for
the purchase of goods and services.
2) Notes Payables are short-term obligations in
the form of promissory notes to suppliers or
financial institutions.
3) Deposit Liabilities are fund generated from
clients in the form of savings deposits and time
deposits.
4) Current Maturities of Long-Term Debt.
When firms have bonds, mortgages or other form
of long-term debt outstanding, the portion of the
principal that will be repaid during the
 5) Accrued Liabilities result from the
recognition of an expense in the
accounting records prior to the actual
payment of cash.
E. Non-Current Liabilities are obligations with
maturities beyond 1 year which include bonded
indebtedness, long-term notes payable,
mortgages, obligations under leases, pension
liabilities, long-term warranties and deferred
income taxes.
F. Deferred Tax Liabilities are the amount of
income taxes payable in future periods in respect
of taxable temporary differences.
1) Share Capital. The amount listed is based on
the par or stated value of the shares issued.
2) Additional Paid-In Capital reflects the
amount by which the original sales price of the
stock shares exceeded par value as well as from
other sources such as donated capital, treasury
stock transaction, etc.
3) Retained Earnings is the sum of every peso a
company has earned since its inception, less any
payments made to shareholders in the form of
cash or stock dividends. This account does not
represent a pile of unused cash stashed away in
4) Retained Earnings Appropriated is the sum
of peso earned appropriated for specific
purpose such as acquisition of property, plant
and equipment, training and other purpose
which the management approved for the purpose.

5) Other Equity Accounts include preferred

stocks, foreign currency translation effects,
treasury stocks and the accumulation of
unrealized gains or losses on investments in debt
and equity securities that are classified as “non-
current investments”.
Statement of Comprehensive Income
Two (2) Options of Presentation:
1) Two Statements
a. An income statement showing the components of income
and expense that are recognized in profit or loss.
b. A statement of comprehensive income beginning with the
net income or loss as shown in the income statement
plus or minus the components of other comprehensive
income.
2) Single Statement showing all components of net income
or loss and all components of other comprehensive
income.
Sources of Income
a) Sales of merchandize to
customers
b) Rendering of services
c) Use of entity resources
d) Disposal of resources other than
products

Component of Expenses
a) Cost of Sales/Direct Cost
b) Gross Profit
c) Operating Expenses
Operating Expenses
1. Selling and Administrative – salaries, rent, insurance,
utilities, supplies, depreciation, advertising expense
2. Depreciation and Amortization
The cost of assets other than land that will benefit a
business enterprise for more than a year is allocated
over the asset’s service life rather than expensed in the
year purchased.
Land is exception to the rule because it is considered to
have an unlimited useful life.
Amortization is the term applied to the cost expiration
of intangible assets such as patents, copyrights,
trademarks, licenses, franchise and goodwill.
 Depletion is the term applied for the cost
of acquiring and developing natural
resources – oil and gas and other minerals
and standing timber.

(cont… component of expenses)

d) Operating Profit
e) Other Income (Expense)
f) Earnings Before Income Taxes
g) Net Earnings
h) Earnings Per Ordinary Share
Statement of Changes in Equity
which shows:
1. The net profit or loss for the period
2. Items of income (including gain) and expenses (including loss)
3. The cumulative effect of changes in accounting policy and
correction of fundamental errors
4. Capital transactions and distributions with/to owners of the
enterprise
5. Balance of accumulated profit or loss at the beginning of the
period and at the balance sheet date, and movements for the
period
6. Reconciliation between the carrying amount of each class of
equity capital, share premium and each reserve at the beginning
and end of the period, separately disclosing each movement
Statement of Cash Flow
1) Direct method. Major classes of gross
receipts and gross cash payments are disclosed.

2) Indirect Method. Net income or loss is

adjusted for the effects of transactions of a non-
cash nature, any deferrals or accruals of the past
and future operating cash receipts or payments
and other income and expense
Cash Flows from Operating Activities
Operating activities are principal revenue-producing
activities of an enterprise and include delivering or
producing goods for sale and providing sales. In general,
cash flows that relate to, or are corollary of items reported
in the income statement are operating cash flows.

Cash Flows from Investing Activities

Investing activities include the acquisition and disposition
of property, plants and equipment and other long-term
assets and debt and equity instruments of other enterprise
that are not considered cash equivalents of held for dealing
or trading purposes.
Investing activities also include:
1) cash advances and collections on loans,
2) cash payments and receipts for future contracts, formal
contracts, option contracts and swap contracts except
when the contracts are held for dealing and trading
purposes, the payment of receipts are classified as
financing activities.

Cash Flows from Financing Activities

These include cash effects of transactions involving
borrowing from creditors and repaying the principal and
obtaining resources from owners and providing them
with a return of investments.
Financing Activities include:

1) Obtaining resources from and returning

resources to owners

2) Obtaining resources through borrowings

(short-term or long-term)

3) Repayments of the amount borrowed

 FINANCIAL STATEMENT ANALYSIS

General Approach
 Background Study and Evaluation of firm industry,
economy and outlook
 Short-term Solvency Analysis (refers to the
company’s ability to meet near-term demand for
cash and normal operating requirements)
 Capital Structure and Long-term Solvency Analysis
 Operating Efficiency and Profitability Analysis
 Other Considerations: Quality of Earnings and
Quality of Assets and Relative amount of debt.
 FINANCIAL ANALYSIS TOOLS AND
TECHNIQUES

a) Horizontal analysis is also called trend analysis

which is a technique for evaluating a series of
financial statement data over a period of time. Its
purpose is to determine increase or decrease that has
taken place. It commonly applies to the balance
sheet and income statement.
b) Vertical Analysis is also called common-size analysis
which is a technique that expresses each financial
statement item as a per cent of a base amount.
c) Trend Percentage Analysis. Trend
percentage state several years’ financial data
in terms of a base year, which equals 100 per
cent.
d) Ratio analysis expresses the relationship
among selected items of financial statement
data.
Ratio Analysis Techniques

Liquidity Efficiency Leverage Profitability

Advantages of Ratio Analysis
 simplifies financial statements
 facilitates inter-firm comparison
 helps in planning
 helps in investment decisions
LIQUIDITY RATIO - measures the short-term
ability of the company to pay its maturing obligations
and to meet unexpected needs for cash.
Current Ratio - test of a short-term debt paying ability
Acid-test Ratio - test of short-term debt ability
without having to rely on inventory
EFFICIENCY RATIO - provides information about how
well the company is using its assets to generate sales.

1. Receivables Turnover - number of times on average, the

company collects receivables
2. Accounts Payable Turnover - measures the speed with
which the company pays its suppliers
3. Inventory Turnover - measures the number of dollars of
sales that are generated per peso of inventory
4. Cash Conversion Cycle - a metric that expresses the
length of time, in days, that it takes for a company to convert
resource inputs into cash flows
5. Asset Turnover - measures how efficiently assets are used
to generate sales
LEVERAGE RATIO - measures the ability of a
company to survive over a long period of time.

PROFITABILITY RATIO - measures the income or

operating access of a company for a given period of
time.
 profit margin measures net income generated
by each peso of sales
 return on assets – an overall measure of
profitability
 return on common stockholders’ equity – peso of
net income earned for each peso invested by the owners
FOURTH MODULE

Applying P.E.S.O.S.
Standards in
Evaluating Cooperative
Performance
This module is all about:

1) PESOS as the financial performance

standards;
2) Application of PESOS standards in the
evaluation of coop’s performance;
3) Strengths and weaknesses of the financial
operation; and
4) Strategies to improve financial
performance and achieve long-term
sustainability.
 PESOS Indicators
a) Portfolio Quality - a tool in monitoring the
quality and level of risks of the loan portfolio of
coops with the following indicators:
1. Portfolio at Risk - The standard rate of loan
balances with one day missed payments is 5% or less
of total loans receivable outstanding.
2. Allowance for Probable Losses on Loans -
* Outstanding balance of loans over 12 months past
due – standard rate is 35%
* Total outstanding balance of loans over 12 months
past due – standard rate is 100%
b) Efficiency – focuses on the operational and
administrative efficiency of the delivery of
financial services like loans and savings products
to its numbers.
EFFICIENCY INDICATORS:
* Asset Yield. Standard rate is at least
inflation rate. Formula: Undivided Net
Surplus divided by Average Total Assets
* Operational Self-Sufficiency. Standard
rate is 120% and above. Formula: Interest
Income from Loans, Service Fees, Filing
Fees, and Fines divided by Financing and
* Rate of Return on Members’ Shares. Standard rate is
higher than inflation rate. Formula: Interest on Share
Capital divided by Average Share Capital
* Loan Portfolio Profitability. Standard rate is more than
20%. Formula: Interest Income from Loans, Service
Fees, filing Fees and Fines divided by Average Total Loan
Outstanding
* Cost per Peso Loan. Standard rate is Php 0.10 per Php
1.00 loan and below. Formula: Financing Costs, Admin.
Costs less Members’ Benefit Expense divided by Average
Total Loans Outstanding
* Administrative Efficiency. Standard rate is 10% and
below. Formula: Administrative Costs divided by Average
Total Assets
c) Stability. Indicators determine whether
financial services can be delivered to its members
in a sustained manner.
STABILITY INDICATORS:
* Solvency. Standard rate is 110% and above.
Formula: (Asset, Allowances) less (Total
Liabilities less Deposits, Past Due Loans,
Loans Restructured, Loans under Litigation)
divided by Deposits, Share Capital
* Liquidity. Standard rate is 15% and above.
Formula: Liquidity Assets less Short-Term
Payables divided by Total Deposits
 * Net Constitutional Capital. Standard rate is 10% and
above. Formula: (Reserves, Allowance from Probable
Loan Losses) less (Past Due Loans, Loans under
Litigation, Problem Assets) divided by Total Assets

d) Operations. Indicators and standards call for minimizing

dependence on external borrowings and greater emphasis
on mobilizing voluntary savings from its members.
OPERATIONS INDICATORS
* Growth in Membership. Standard rate is 75% and above
of target. Formula: Actual Increase in Number of Members
divided by Target Increase in Number of Members
 * Trend in External Borrowings. Standard
rate is no external borrowings. Formula:
ending External Borrowings less Beginning
External Borrowings divided by Beginning
External Borrowings

e) Structure of Assets. Indicators and standards

will help ascertain the quality and the structure
of the assets of the cooperative.
ASSET QUALITY
* Non-Earning Assets/Total Assets. Standard
rate is 5% and below. Formula: Non-Earning
Assets divided by Total Assets
ASSET STRUCTURE
* Total Deposits/Total Assets. Standard rate is
55% to 65%. Formula: Total Deposits divided
by Total Assets
* Net Loans Receivables/Total Assets.
Standard rate is 79% to 80%. Formula: Total
Loans Receivables divided by Total Assets
* Total Members’ Share Capital/Total Assets.
Standard rate is 35% to 45%. Formula: total
Members’ share Capital divided by Total Assets
The PESOS indicators will be computed using
financial statements generated from the Standard
Chart of Accounts for Credit Cooperatives and
other types of cooperatives with credit services.

The equivalent raw score for PESOS indicators

are given appropriate rating.

The overall rating will be computed using a 20%

weight for the COOP rating and 80% for the
PESOS rating.
Ratios for Consumers/Marketing
Cooperatives
a) Liquidity Ratios – measure the ability to meet its
short-term indebtedness
1. Current Ratio
2. Quick Ratio/Acid-Test Ratio
3. Turnover of Cash
4. Debt to Paid-Up Share Capital Ratio
b) Profitability Ratios- measure the ability to generate
more net surplus
1. Net Surplus Ratio
2. Return on Investment
c) Efficiency Ratios – measure how fast
collecting sales and how many times turning
over stock in a given period of time. It
measures the amount of sales generated by assets
and the return earns on assets.

1. Inventory Turnover
2. No. of Days Sales on Inventory
3. Receivable Turnover
4. No. of Days Sales in Receivables
Financial Ratios should be prepared
MONTHLY to monitor regularly the financial
performance of the coop so that necessary
preventive and remedial or corrective
measures could be done immediately.

Financial Ratios are certainly very useful in

making decisions. They should be applied
regularly and interpreted correctly.
FIFTH MODULE

The Basics
of
Budgeting
This module covers:

1) Importance and basics of budgeting;

2) Roles of the Board and management
in budgeting process;
3) Comparison and analysis of actual
financial statements versus budget; and
4) Monitoring of financial performance
of the coop against targets on.
What is a BUDGET?
A budget is a PLAN expressed in quantitative terms
or money and units for a definite period of time in the
future. It includes the expected performance for a
given period (objective of the coop) and the
allocation of resources to the different activities in
order to attain objectives.

The budget serves as a guide in the conduct of

operations during the period.

The budget sets the standard performance.

ADVANTAGES of Budgeting
Compels periodic planning
Enhances coordination, cooperation and
communication
Forces quantification of plans and proposals
Provides a framework for performance evaluation
Enables members of the organization to be aware
of business costs
Satisfies some legal and contractual requirements
Directs the organization’s activities toward the
achievement of goals
FUNCTIONS of Budgeting
1) Planning
- greatest contribution of budgeting to management
- development of ideas, goal setting, selection of strategies, programs
and procedures
2) Control
- comparison of actual results of operations with the budgeted figures
- monitor activities and taking of necessary corrective actions
- giving feedbacks for developing budgets for the next budget period
- enables managers to learn from their mistakes and gain experience
in improving operational efficiency and effectiveness
LIMITATIONS of Budgeting

oMerely estimates, future situations may

warrant revision or modification of plans

o Failure of coordination will fail the entire

budgetary system

o Restrictive of movements and limits their

decision-making power

o Time-consuming and time-costly

Budgeting PRINCIPLES

A. Budget Development
1. Adequate and clearly defined
guidance
2. Encouragement to participate and
cooperate
3. Elimination of anxiety and
defensiveness
4. Structured --- challenging yet
B. Budget Implementation
1. Reward system as a motivation to
work toward attainment of goals
2. Positive attitude --- reward for good
and not punishment for bad
performance
3. Performance reporting system to
get immediate feedback in the result of
each section/unit
Three (3) TYPES of Budget

1) Operational Budget

2) Cash Budget

3) Capital Expenditure Budget

Operational Budget
1. Planning session or conference to prepare action/work
plan for the next period before preparing an
operational budget.
2. Each committee and the Board should prepare their
respective budget to be submitted to the budget
committee which is composed of the manager,
accountant/bookkeeper, treasurer, Board chairperson,
and Audit Chairperson for compilation and
consolidation.
3. The budget committee finalizes the consolidated
operational budget and submit the same to the BODs
for scrutiny and approval through Board resolution
together with the annual plan.
4. The Board recommends to the GA the annual
plan and the operational budget for
approval/ratification.
5. The accountant with the assistance of the
manager prepares the cash budget and capital
expenditure budget taking into consideration
the annual work/action plan approved by the
Board.
6. These budgets are reviewed and approved by
the Board.
Cash Budget
Steps in the preparation:
1. Estimate cash inflows. Sources of cash inflows are share
capital of members, deposits of members, collection of
receivables, proceeds from obtained loans, sale of
merchandize, etc.
2. Estimate cash outflows. Anticipated disbursements include
share capital withdrawals, savings and time deposits
withdrawals, loan releases, loan payments, purchases of
merchandize/goods, financing costs, administrative costs,
selling costs, payment of dividends.
3. Compare cash inflows versus cash outflows.
4. Review the prior year’s position reports. These are a
summary of the cash balance at the beginning, add cash
receipts , less disbursements, and cash balance at the end.
Monitoring and Controlling Cash
Budget
Monitoring is also another aspect of cash
management.

CASH MANAGEMENT aims to:

o provide adequate cash to meet the needs of the
business
o safeguard cash from loss due to theft, fraud,
other criminal manipulations and carelessness
How to Plan Cash
Requirements
1. Make a loan releases, sales forecasts or
estimates of loan releases, and sales.
2. Based on the loan releases and sales
estimates, set up an operational budget.
3. Prepare the cash budget based on the
operational budget.
Dealing with Cash SHORTAGES
Cash may be obtained internally by:
a) Restricting credit and speeding up collection
b) Reducing inventories to a minimum
c) Tightening up on trade relationships
d) Selling without equipment, building and real estate,
securities
e) Adopting capital build-up schemes
f) Campaigning for more depositors on savings and time
deposits and offering high interest rates
g) Adopting loan protection/guarantee program, mutual
aid/damayan fund, etc.
Dealing with EXCESS Cash

If cash budget shows heavy surplus at a certain

period, this excess cash must be invested in
money-earning but highly liquid temporary
investments like money or stock market.

Safeguarding Cash from LOSS

To safeguard coop’s assets, an internal control

system employs an automatic check-and-balance
by requiring that the work of one person is
Some Commonly Adopted Internal Control
Practices:
 Using the imprest system of handling cash by
depositing intact of all cash receipts on a daily
basis and paying through checks cash disbursement
 Using petty cash fund and revolving fund by
custodians for all payments other than checks
 Cash custodians are not bookkeepers/accountants.
 Monthly reconciliation of bank accounts
 Approval of disbursements and signing of checks
 Bad debts write-offs by the Board of
Directors
 Regular internal audit by the Audit
and Inventory Committee
 Conducting unannounced cash counts
and preparing cash reconciliations
 Careful selection of employees
 Annual budgeting by an independent
certified public accountant
Other STEPS in Effectively Managing
Cash
a) All accountable officers and employees should
be adequately bonded.
b) Collections should be deposited in savings
account at the end of the day to generate income
immediately.
c) Cash should be kept in a vault or steel safe to be
opened by two (2) persons. Security of the coop
office should likewise be improved.
d) Fully secured loan applications should be released
immediately while other loan applications should be
processed, evaluated and acted upon within three (3)
days.
e) Borrowers should be encouraged to pay their loans daily
for the shortest possible period by giving them
incentives.
f) Interest income from loans should be deducted in
advance or to be added to the loan for good paying
borrowers.
g) Any loan balance should be deducted upon renewal or
restructuring of loan.
h) All merchandize/goods should be obtained on account
for the longest possible period without interest, always
longer than the term being offered to the members
with interest.
i) Members should not be allowed to apply their share
capital for payment of their loans unless they
terminate their membership.
j) Members’ savings deposits and time deposits and
external borrowings should be used exclusively for
lending operation and other income-generating
activities.
k) Any excess cash should be placed in high yield
investments.
EXTERNAL Borrowings

Borrowing from an external source of credit is a major

decision for a coop to make. The following GUIDELINES
may be useful:

1. Evaluate the coop if it is in good position to borrow.

2. Estimate accurately the amount it needs to borrow.
3. Choose the bank/financial institution from which to
borrow.
4. The choice of bank/financial institution must also be
determined by the size and purpose of the loans as well
as the size and status of the business.
5. In comparing the banks/financial institutions,
find out abut the following items:
- repayment period, including grace period
- interest rate and processing charges
> simple interest
> discount interest
> add-on interest
> interest on amortization principal
- mode of release of funds
 - Mode of repayments
- Collateral and equity requirements
- Other restrictions

Various Types of Credits

1. Short-term loans = payable in 1 year or less
2. Intermediate-term loans = repayable in 1 to
3 years
3. Long-term loans = long-term period up to
10 years
Management of LOANS/Accounts
RECEIVABLES

Credit is essential because it is the

primary form of service by the coops to
their members.

The key to successful credit

management is the systematic
processing of application for loan.
Things to OBSERVE in the Processing of
Loans:

 Loan applicant should fill up the application for loan

and loan note properly with the assistance of the loan
processor after determining that he is qualified to borrow.
They should be duly signed by the applicant/maker,
spouse and co-makers. All required documents should be
attached.

 The loan processor should request and gather initial

data - personal and business data from the loan applicant
and conduct initial interview when the applicant is first
timer or applying for bigger loans.
 The loan processor should evaluate the capacity to pay
of the applicant by analyzing and interpreting the financial
statement of his business. If it is personal and provisional
loans where the amount is relatively small, the capacity is
determined by deducting expenses from his income and
then subtracting the amount of maturing debts.

 The credit investigator should conduct detailed

investigation where additional documents and information
are gathered and validated through interview and where
inspection and appraisal of applicant’s business operations
are made preferably the property offered as security or
collateral. The inspection shuld not exceed three (3) days.
 The credit investigator should assign a credit rating to the
applicant categorized according to the degree of risk of non-
payment or probability of default assuming the loan is granted.
* Prime-ideal accounts. Degree of risk is minimal.
* Desirable. Loan is worth granting.
* Fair or Satisfactory. Degree of risk is relatively high but
other factors favour the granting of loan.
* Not recommended. Loan not worth-granting.
 The application for loan is approved or disapproved by the
credit committee upon recommendation of loan officer/credit
manager.
 The approved loan is released after reviewing and verifying
all necessary legal documents.
Tips on Preventing DELINQUENT Loans
a) Continuously review lending policies to make them
more applicable to the credit needs of the members.
b) Member-borrowers can avail restructuring or re-
financing of loan only once in every loan upon
payment.
c) Member-borrower can renew his loan upon payment of
at least 25% as long as the coop has sufficient cash
with the loan balance to be deducted to the new loan,
and 75% paid if it has low liquidity.
d) BODs should create collection department/unit under
loaning operation separate from credit department to be
headed by a collection officer/supervisor.
e) The coop should keep and maintain members’ loan
ledger accurately and up-to-date, preparing its
schedule monthly and reconciling its total with its
respective controlling balance in the general ledger or
statement of financial condition.
f) The coop should prepare aging of loans/accounts
receivables monthly using delinquency by PAR
(portfolio at risk) and by maturity,
g) The coop’s collection department should adopt and
implement effective collection policies, systems and
procedures.
h) BODs may give incentives to collectors assigned to
delinquent members based on amount collected.
h) The BODs may adopt general amnesty for 1 year
condoning 100% fines/penalty if paid within 1st quarter;
75% fines/penalty if paid within 2nd quarter; 50%
fines/penalty if paid within 3rd quarter; and 25%
fines/penalty if paid within 4th quarter. Interest on loan
should be imposed and collected separately
i) BODs may allow members, officers and employees except
those assigned to collect delinquent loans to be given
commission of 5% to 20% of the amount collected
charging fines/penalty equivalent to the commission given.
j) The loan processor, credit investigator, loan
officer/supervisor, collection officer/supervisor, delinquent
collectors should be carefully selected and properly trained.
Effective Collection Policies, Systems
and Procedures
1. Sending reminding text messages before
instalment loan is in default
2. Sending reminders and collection letters when
loan instalments are in defaults
3. Visiting personally the delinquent members
4. Filing complaints with Barangay Lupong
Tagapamayapa
5. Sending demand letters
6. Filing cases in court
SIXTH MODULE

The Basics of
Investment and
Banking
This module focuses on:

1) Basic concepts of investment and

banking;
2) Various investment instruments;
and
3) Alternative investment
opportunities.
 3 CRITERIA to be Considered in
the Investment of Cash

1) Risk is the possibility of losing the

invested amount or not getting the
expected earning.
2) Return is the earning of investment
3) Liquidity is the characteristic of
investments that can turn back to cash
easily.
5 Common Investment OPTIONS:

1) Treasury Bills and Treasury Notes

(government securities) - a safe investment
that gives good returns; available in most banks.
2) Time Deposits - a relatively safe investment,
as long as the bank has a good track record.
High return comes with high risk as it is in need
of cash. It is insured with PDIC up to Php
250,000.00. If pre-terminated, interest rate is
like savings deposit.
3) Equities/Stock Investments - much riskier than
time deposits and government securities but can give
highest return of the company’s business the coop
invested earns well. They are generally not liquid
unless the company is listed in the Philippine Stock
Exchange. The stocks can be bought directly from
the stock market or PSE.

4) Unit Investment Trust Funds (UITF) - The

expected return of UITF is higher than those of time
deposits or treasury bills because the risk is also
higher. Be sure that the trust company or bank is
reputable. It can be sold back to the bank.
5) Mutual Funds (investment companies) -
The expected return of a mutual fund is higher
than those of time deposits or treasury bills
because the risk is also higher. Be sure that
the investment manager of the mutual fund is
reputable and has a good track record. The
shareholder/contributor has a right to know
what specific investments were made by the
fund and agreed with and understood the risks
and basis of returns of these investments.
BASICS IN INVESTMENT
AND BANKING
Banking Basics
1. From the point of view of the Bank
a) Pool funds of the different publics.
b) Invest these funds prudently.
- to provide returns to the
depositors/investors (interest, dividends)
- to be able to return the money if
withdrawn
- to be able to operate the bank (salaries,
supplies, etc.)
2. From the point of view of the Cooperative

a) We need to have a place to park our

operating funds, other than from our safe
or vault.

b) Liquidity: pay maturing obligations,

expenses, etc.
How do we Manage our Banks?
1. Top of mind: proximity
2. Our perception on the stability of the bank/s
3. Quality of service, later becomes an important
consideration
- competitiveness of the price of their services
- ability to provide us with loans if needed
- fairness of terms and conditions of relationship
- courtesy expended to our people
4. Do not put your eggs in one basket.
5. Do not be blinded by abnormally high interest.
Ensuring LIQUIDITY
1. Study your coop’s cash inflow and outflow.
2. Determine your average cash level, the high
and the low balances, and the timing.
3. Divide your operating cash placements into:
- readily withdrawable (combo account)
- needed next week (time or special deposits)
4. Make sure you have a time deposit maturing
“during your next payment date”
5. Be on your toes as to the status of your bank/s.
INVESTMENT Basics
1) Loans/credit expended to members are
forms of “investments”.
2) Investments become need if you have
access funds.
equity : shares of stocks of secondary
coops, or of corporations
debt instruments: commercial papers, bonds
(private corp. or government), T-bills
others : real estate (for housing?), buy
water or electric facilities
STOCKS or EQUITY Investments
1. Sources of return: dividends, price appreciation (buy
when the price is low and sell at a higher price)
2. Notes on price fluctuation of stocks
- If the company is performing well, its value will
increase, thus, its stock price will increase and vice
versa.
- Stock price performance is more linked or correlated to
overall performance of the economy, or overall business
cycle. If the economy performs well, stock prices go up.
- Any perceived “disruption” in the business
environment causes prices of stocks to go down.
Investment in COMMERCIAL PAPERS,
BONDS
1. Commercial papers are corporate loans with fixed rate of
interest and redeemable at certain dates. Some are
convertible to equity.
2. Bonds are also loans. The purchaser of bonds is essentially
lending to the issuer of bond.
- Sources of return: periodic or scheduled interest/coupon
payment (thus, fixed income), and bullet payment of principal
at maturity
* government bonds – theoretically “risk-free” but lower
returns * company bonds
- Can be sold in secondary market, sell bonds to exit earlier
- If the economy is down, usually bond prices are up.
FACTORS to Consider in Investments
a) Availability of excess funds. Do not gamble on your
operating funds.
b) Risk appetite or risk tolerance.
Ability to take risk: Is your coop capable of absorbing
losses? Will it cause financial ruin if losses occur?
Willingness to take risk: Is your coop willing to invest in
riskier investments?
c) Liquidity needs. If liquidity needs is high, invest in
less risky assets (e.g. bonds). Stocks’ price
volatility could result in losses when liquidity need
arises and price of stock is low.
d) Time horizon. Investment objectives and
associated time horizons may be short term or
long term (time horizon of 5 years or more is
considered long term)
- The longer the time horizon, the more risk the
investor can take.
- Investment in stocks over the long term will
average our results over several market conditions
and cycle, thus, limits exposure to price volatility.
- Also, ideally, stocks should appreciate through
time.
e) Tax concerns. Taxes on dividend payments (from
stocks) and interest/coupon payments (from bonds)
are usually withheld. Coops are not exempt from
capital gains tax (on price appreciation of stocks if
sold).
f) Legal and regulatory factors. Coops are enjoined to
invest reserve funds; coop banks and insurance follow
legal procedures for its reserves.
g) Ethical considerations. Will your coop invest in
stocks of gambling or alcoholic drinks company, etc.?
How about in foreign instruments? Derivatives?
Investment PORTFOLIO ALLOCATIONS

 If risk appetite is high, invest more in equity: higher

risks=higher returns. Your equity to fixed-income
allocation could be 50- 50, or 60-40, or even 70-30.
 If your coop is risk averse, your fixed-income to equity
allocation could be 80-20, or 70-30, or 60-40. Lower
risks=lower returns. Go for government bonds.
 Diversify asset allocation. Once you decide on fixed-
income to equity allocation, you may also peg the limit of
exposure on a particular instrument, say 10% maximum.
If the price of one instrument dives, the impact would not
be as much felt.
BOOKING of Investments

1. Available for sale assets. If the equity/debt

instruments are traded and the coop intends to
sell these when the need arises, or when there
is appreciation in values; short term.

2. Held-to-maturity investments. The HTMI

can be sold also if there is urgent need, but
there was really no intent to trade at the time
these were bought.
 Invest in COOPS!
1) Prioritize our own movement. Your investment in
stocks/commercial papers helps the already big
companies. Investment in government bonds helps the
government. Let’s just hope the money is not “lost”.
2) Invest in ONE Coop Bank, ONE Coop Insurance and
Coop Asset Management.
- This means merger or consolidation.
- The sad stories of the past have their reasons. Similarly,
the success stories also have theirs. Think positive.
- The success stories are also stories of poverty
alleviation, wealth redistribution, nation building.
 VISION: An Integrated Coop
Financial System
Asset Management

Coop Bank Coop Insurance

Coop Primaries
An Important REMINDER!
 Good governance emanates from within: our
nations, our actuations, our lifestyle define us.
But all these come from who we are, what our
values are.
 Simple Life Principles:
a) Live simply.
b) Give more.
c) Expect less.
 At the end, one simple question we have to
answer is this:
 What have you
done to the least of
your brethren?
Thank you
very much!
Prepared by:

Connie A. Sariego
Coop Dev’t Specialist, PCDO