Ipyet/Financial Management in SMEs
|
Work in progress, expect frequent changes. Help and feedback is welcome. See discussion page. |
|
Module 2.2: Financial Management for Youth Entrepreneurs
A discussion paper by
Naomy Lintini
Welcome to this session on financial management for youth entrepreneurs.
|
To enable participants discuss:-
|
Contents
Introduction
As we may all be aware, any youth running a business enterprise requires accurate financial information to help them make good business decisions. This session will discuss the key elements that must be covered in financial management training and how facilitators can simplify delivery of this topic to youth entrepreneurs. The session will also discuss the relationship between the record keeping process and the preparation of financial statements. Participants are invited to share their various experiences and the challenges they face in delivering this topic and in facilitating learning among youth entrepreneurs.
Food for thought:
Why should youth entrepreneurs learn about managing business finances?
Session Outline
- Key elements in financial management and the link to bookkeeping
- Business financing and Sources of finance
- Financial Statements
- Financial Prudence
- Facilitation considerations and participatory training methods
Key Elements in Financial Management and Link to Bookkeeping
Introduction
Financial management is about understanding the basic financial processes in an enterprise and using available information to determine finances requires to start a business and to develop financial statements that can assist the youth entrepreneur to make effective business decisions.
For youth entrepreneurs to effectively use financial information, they to know at least three basic concepts, namely; process of business financing, bookkeeping, and development of the three basic financial statements.
The role of the facilitator in this learning process is to motivate the youth to learn, understand, and assimilate. One key element of motivation is assisting the youth achieve a strong sense of self esteem; facilitators must seek ways of building this as they deliver financial management training to the youth.
Business Financing
Financial management in an enterprise starts with the process of sorting out the input of finances in the enterprise. Youth entrepreneurs need to understand the importance of first determining how much business finance an enterprise requires and for what purpose. This is followed by determining where the business financing will come from.
Facilitators must ensure that this component of financial management is adequately addressed as it forms the basis for the effective start up of any enterprise. Figure 1 below can assist facilitators to effectively summarize this session.
Table.1: Required Capital and Method of Financing (Example)
<<insert table here>>
Facilitators must ensure that participants comprehend for what purpose finances are required in an enterprise and how these finances are to be sourced. Youth entrepreneurs must appreciate that means of financing must always match (equal) required capital.
|
Can you identify three types of loans that an enterprise can get from the Bank
|
A case study which requests participants to calculate (exercise) required capital and method of financing is the most practical approach to delivering this session. Facilitators must assist youth entrepreneurs to discuss the challenges, advantages and disadvantages of financing a business with a loan.
Financial Prudence
It is common knowledge that the practice of enterprise is risky and has uncertainties. This is why it is important that the youth exercise financial prudence in managing of business finances. Financial prudence is defined as the process of exercising caution, frugality and discipline in the application and utilization of business resources.
In applying the principle of prudence in financial management, youth entrepreneurs need to strike a balance between the financial needs of the business and how to finance these needs. Facilitators must encourage youth to exercise frugality and discipline in the following financial areas:-
- Extending credit facilities to customers
- Drawings by owners from the business
- Borrowing for business purposes
- Controlling business cash flows
One of the main challenges that youth entrepreneurs face in managing business finances is on how to apply funds for conflicting demands (including personal financial demands).
|
Why should youth entrepreneurs separate business finances from personal (family) finances?
|
Financial statements
Financial statements are the main tools for financial management in an enterprise. A facilitator must ensure that youth entrepreneurs understand the purpose of these financial statements before they go about teaching how to come up with these statements.
The Profit & Loss Statement
The profit and loss statement measures the financial performance of the business by answering the questions: Is my business a profitable venture? Does it make money? This statement gives the youth entrepreneur a summary of the total revenues less expenses, financing costs and taxes over a period of time.
The Balance Sheet
The Balance sheet measures the financial position of the enterprise and answers the questions: What does my enterprise own, How much does it owe? How healthy is my enterprise. The balance sheet shows the youth entrepreneur the financial position of a company at a given point in time.
The Cash Flow Statement
The Cash Flow Statement assess whether the enterprise generates enough cash to finance its daily operations and growth. It answers the questions: How much cash came into my enterprise? Where did it come from? Where did it go? How much is remaining. The cash flow statement shows the entrepreneur the net movement of cash through the business over a period of time.
|
Which two profit/loss positions does a Profit/Loss Statement give?
|
In delivering such sessions, facilitators must use a learner focused approach to training which encourages creativity and reflection by participants. The questions above help the youth entrepreneurs to reflect on their business and to desire to seek answers to the questions.
The link to bookkeeping
In a simplified finance management system, the cash/record book can be used to generate a historical profit and loss statement and a balance sheet. In this case, the cash/record book becomes the link between bookkeeping and this topic. This is because the cash/record book is made up of information extracted the different books under the bookkeeping system.
Facilitation considerations and participatory training methods
For the facilitator, a case study (preferably the same one used in book keeping) is an effective way of generating a discussion among participants. The case study must involve the four stages:-
- Reading and understanding the case
- Analysing and interpreting the case
- Drawing lessons from the case
- Relating the case to own situations
It is the role of the facilitator to assist the participants to go through the four stages.
In financial management training, the facilitator must ensure that learning and skill acquisition has taken place because it is the basic skills that youth entrepreneurs will require to apply the knowledge in their businesses. Financial management training must therefore always engage participants in exercises and assignments that help to develop skills for immediate application.
|
What challenges do youth entrepreneurs face in maintaining financial discipline?
|
Experience sharing and discussion among participants also help to remove fear and anxiety among participants about the topic.
Further Reading
- Artill, P. and Mc Laney, E. (2001). Accounting and Finance for Non Specialists, 3rd Edition. Pearson Education Limited
- Dyson, J, R. (2001). Accounting for Non Financial Students. 5th Edition. Prentice Hall.
- Pretty, J; Guijt, I; Scoones, I and Thompson, J. (1995). A trainers Guide to Participatory Learning and Action. IIED London
