FINANCIAL MANAGEMENT

Course Description: This course covers the basic competencies required of a member
of the Board of Directors and the Treasurer in overseeing the
management of the financial resources of the cooperative.

Upon completion of the course, the learners should be able to:

LO1. Explain the basic concepts of cooperative financial management.

LO2. Explain the elements of the accounting system for cooperatives.
LO3. Interpret and analyze the Financial Statements of the cooperative.
LO4. Apply P.E.S.O.S. standards in evaluating cooperative performance.
LO5. Explain the basics of budgeting.
LO6. Explain the basics of investment and banking.

LO1. Explain the basic concepts of cooperative financial management.

To prosper, cooperatives must be well organized, well financed, well managed, and governed
well by the committed membership. They must be progressive, adapting to changing business
climates and responsive to their members changing needs.

Financial management (also known as business finance) is just one of the broadest areas in the
study of Finance. It involves decisions within firms.

ART. 3. General Concepts (Philippine Cooperative Code of 2008 popularly known as RA 9520)

A cooperative is an autonomous and duly registered association of persons, with a common

bond of interest, who have voluntarily joined together to achieve their social, economic, and
cultural needs and aspirations by making equitable contributions to the capital required,
patronizing their products and services and accepting a fair share of the risks and benefits of the
undertaking in accordance with universally accepted cooperative principles.

ART. 4. Cooperative Principles:

Every cooperative shall conduct its affairs in accordance with Filipino culture, good values and
experience and the universally accepted principles of cooperation which include, but are not
limited to, the following:

1. Voluntary and Open Membership

Cooperatives are voluntary organizations, open to all persons able to use their services
and willing to accept the responsibilities of membership, without gender, social, racial,
cultural, political or religious discrimination.
2. Democrative Member Control
Cooperatives are democratic organizations that are controlled by their members who
actively participate in setting their policies and making decisions. Men and women
serving as elected representatives, directors or officers are accountable to the
membership. In primary cooperatives, members have equal voting rights of one-
member, one-vote. Cooperatives at other levels are organized in the same democratic
manner.

3. Member Economic Participation

Members contribute equitably to, and democratically control, the capital of their
cooperatives. At least part of that capital is the common property of the cooperative.
They shall receive limited compensation or limited interest, if any, on capital subscribed
and paid as a condition of membership. Members allocate surpluses for any or all of the
following purposes:
a. developing the cooperative by setting up reserves, part of which should at least be
indivisible;
b. benefitting members in proportion to their patronage of the cooperative's business;
and,
c. supporting other activities approved by the membership.

4. Autonomy and Independence

Cooperatives are autonomous, self-help organizations controlled by their members. If
they enter into agreements with other organizations, including government, or raise
capital from external sources, they shall do so on terms that ensure democratic control
of their members and maintain their cooperative autonomy.

5. Education, Training and Information

Cooperatives shall provide education and training for their members, elected and
appointed representatives, managers, and employees, so that they can contribute
effectively and efficiently to the development of their cooperatives.

6. Cooperation Among Cooperatives

Cooperatives serve their members most effectively and strengthen the cooperative
movement by working together through local, national, regional and international
structures.

7. Concern for Community

Cooperatives work for the sustainable development of their communities through
policies approved by their members
The sources and uses of funds: (Chapter VIII of RA 9520: Capital, Property and Funds)

Article 72. Capital Sources:

Cooperatives registered under this Code may derive their capital from any of the following
sources:
1. Members share capital.
2. Loans and borrowings including deposits.
3. Revolving capital which consists of the deferred payment of patronage refunds, or
interest on share capital.
4. Subsidies, donations, legacies, grants, aids, and such other assistance from any local or
foreign institution, whether public or private, provided that capital coming from such
subsidies, donations, legacies, grants, aids, and other assistance shall not be divided into
individual share capital holdings at any time but shall instead form part of the donated
capital or fund of the cooperative.

Sample of Financial Policies stated in the Code are:

Article 75. Capital Build Up

The bylaws of every cooperative shall provide for a reasonable and realistic member capital
build-up programs to allow the continuing growth of the members investment in their
cooperative as their own economic conditions to continue to improve.

Article 78. Investment of Capital.

A cooperative may invest its capital in any of the following:
a. In shares or debentures or securities of any other cooperative;
b. In any reputable bank in the locality or any cooperative;
c. In securities issued or guaranteed by the Government;
d. In real estate primarily for the use of the cooperative or its members; or
e. In any other manner authorized in the bylaws.

Chapter X. Allocation and Distribution of Net Surplus

Article 86. Order of Distribution:
1. An amount for the reserve fund which shall be at least 10% of the net surplus.
Uses of the Reserve Fund:
a. Used for the stability of the cooperative and to meet net losses in its operations.
b. Not be utilized for investment, other than those allowed in this Code.
c. Shall not be distributed among the members, upon dissolution of the
cooperative.
d. To establish a usufructuary trust fund for the benefit of any federation or union
to which the cooperative is affiliated.
e. To donate, contribute, or otherwise dispose the amount for the benefit of the
community where the cooperative operates.
LO2. Explain the elements of the accounting system for cooperatives.

The accounting equation applies to all economic entities regardless of size, nature of business, or form of
business organization. It applies to a small proprietorship such as a corner grocery store as well as to a
giant corporation such as Coca-Cola Co. The equation provides the underlying framework for recording
and summarizing economic events.

The cooperatives accounting system is a method of recording and reporting the financial results
of its business transactions. The bookkeeper records the business transactions of the
cooperative in a daily journal. These records are then used to generate various financial reports
that provide an historical record of the cooperatives business activity.

The accounting system of a cooperative is divided into two:

1. Financial Reporting
These financial statements report the results of the cooperatives business transactions.
This section also explains the monthly cash flow statement, a planning tool for
management.

2. Bookkeeping
Covers the record keeping functions of the daily journal and general ledger. Also covers
the member records that are needed because of the cooperatives unique role of
providing economic benefits distributed in proportion to each members use.
LO3. Interpret and analyze the Financial Statements of the cooperative.

Financial reports are used to evaluate past operations and are the basis for management and
operating decisions on future projects.
Users of Financial Statements:
1. The board of directors use the reports for feedback on the financial status of the
cooperative, to evaluate progress and to make informed decisions about future
operations.
2. Managers need accurate and timely information to run the day- to-day operations.
3. Creditors examine the financial reports when considering loans to the cooperative and
accountants need accurate records to prepare tax documents.
4. Government regulatory bodies, i.e. BIR, SEC, etc.

Importance of Financial Statements:

1. They report the financial position of the cooperative, its performance over a given time
period, and its ability to meet cash obligations.
2. They are the basis for planning future operations.
3. Managers, bookkeepers and board members should be able to understand and interpret
these reports so they can make informed business decisions about the future of the
cooperative.
4. Ensures that the cooperative is operating according to cooperative principles.

Chapter V of RA 9520 (Responsibilities, Rights and Privileges of Cooperatives:

Article 52. Books to be kept open:
1. Every cooperative shall have the following documents ready and accessible to its
members and representatives of the Authority for inspection during reasonable office
hours at its official address:
b. A copy of the Code and all other laws pertaining to cooperatives;
c. A copy of the regulations of the Authority;
d. A copy of the articles of cooperation and bylaws of the cooperative;
e. A register of members;
f. The books of the minutes of the meetings of the general assembly, board of directors
and committees;
g. Share books, where applicable;
h. Financial statements; and
i. Such other documents as may be prescribed by laws or the bylaws.

2. The accountant or the bookkeeper of the cooperative shall be responsible for the
maintenance and safekeeping of the books and records of account of the cooperative in
accordance with generally accounting principles. He shall also be responsible for the
production of the same at the time of inspection.
 3. Each cooperative shall maintain records of accounts such that the true and correct
condition and the results of operations of the cooperative maybe ascertained there from
at any time.

Bookkeeping

The daily business transactions of the cooperative are recorded for later use in generating
financial reports. If the books and accounts are kept accurate and current, the balance of each
account can be transferred to the appropriate financial statement whenever needed.

THE DAILY JOURNAL

The daily journal is a chronological record of every business transaction of the cooperative.
Entries come from sales receipts, invoices, and other paper- work and should be made for every
day that the cooperative conducts business to ensure that each business transaction is recorded
as it occurs.

Dual entry accounting is used to record this exchange. Each transaction recorded in the daily
journal shows the resource or obligation the cooperative received and the resource or
obligation that was exchanged.

Recording Transactions in the Daily Journal:

Every page of the journal should be numbered for future reference. All transactions entered
should include the following information:
1. Date of the transaction;
The date entered in the daily journal should indicate when the transaction occurred, not
the date recorded.
2. Name of each account;
Each type of business transaction that will likely occur during normal operations should
be given an account name.
A chart of accounts (Exhibit 7) should be developed for each cooperative that lists all the
accounts used and the corresponding reference numbers. Large block of sequential
numbers should be designated for each category so that other accounts can be added as
operations expand or other needed accounts are identified.
3. Reference number of each account;
Each cooperative will have unique accounts and reference numbers, depending on the
particular business and the transactions that occur. The most common category groups
used are assets, liabilities, equity, revenue, and expenses.
4. Peso amount, entered as a debit or credit.
The peso amount of each transaction is entered in the last two columns of the daily
journal as either a debit or credit. Because each transaction is an equal exchange, the
amount entered in the debit column must equal the amount in the credit column.
Debits are gains to the cooperative and always entered in the left-hand column when a business
transaction is recorded. A credit amount indicates a resource the cooperative has given up or an
obligation it has incurred and is entered in the right hand column.

THE GENERAL LEDGER

The general ledger is used to combine all the transactions from the daily journal, which are in
chronological order, into each of the cooperative accounts. It contains the same information as
the daily journal, but is used to show the balance for each account. The balance can then be
used to generate the financial reports of the cooperative.

Each ledger sheet should be labeled with the name of the account and the corresponding
account number from the chart of accounts. The information transferred from the daily journal
to the general ledger during posting includes:
1. Date of the transaction;
2. Description of the transaction;
3. Reference number to the daily journal;
4. Peso value entered as a debit or credit;
5. Account balance, as a net debit or net credit.

THE MEMBER ACCOUNTS

Accurate records of each members patronage and their benefit from and obligation to the
cooperative are important to members and other agencies to show the cooperative is operating
within cooperative guidelines and principles.

Examples of member accounts:

1. Patronage account-Accurate records of the level of each members patronage are
needed to determine the distribution of patronage refunds.
Member volume is also needed to determine the cooperatives tax liability because any
profit not allocated to members is taxable income for the cooperative.
 2. Capital-Cooperatives usually require some member investment, especially for start up
capital. Members will rely on the cooperative to have accurate and cur- rent records of
their investment in the cooperative.
Capital accounts will also be important to banks and other lending institutions. Lenders
usually require members to provide some portion of the capital.

3. Retained Earnings-These are used by the cooperative to finance the future operations or
supplement start up capital. They are returned to the members in accordance with the
bylaws.
The retained earnings account for each member should show the amount earned each
year, the amount returned, and the current balance.

LO3. Interpret and analyze the Financial Statements of the cooperative.

A Cooperative prepares four key financial statements from the summarized accounting data:
1. A statement of operations presents the revenues and expenses and resulting net income
or net loss for a specific period of time. (income statement)
2. A statement in changes in equity summarizes the changes in owners equity for a specific
period of time.
3. A statement of financial condition reports the assets, liabilities, and owners equity at a
specific date. (balance sheet)
4. A statement of cash flows summarizes information about the cash inflows (receipts) and
outflows (payments) for a specific period of time.

Also, explanatory notes and supporting schedules are an integral part of every set of financial
statements.

THE INCOME STATEMEN (Statement of Operations):

The income statement reports the results of all business transactions of the cooperative that
occurred during a certain time period, such as month, quarter or year. It shows the total dollar
revenue of the cooperative, the total expenses, and the resulting net income (or loss).

Elements of the Statement of Operations:

1. Revenue is the peso amount earned by the cooperative from operations.
Gross inflow of economic benefits during the period arising in the course of the
ordinary activities of the coop when those inflows result in increases in equity, other
than increases relating to contributions from equity participants.

Gross revenue is the total profit the cooperative received from providing goods and
services to members that can be used for business expenses.
Sources of Revenues:
a. It can come from several sources, such as selling merchandise in a supply
cooperative, charging members for services or marketing their products.
 2. Cost of goods sold and Cost of Service
The cost/value of commodity sold as determined using physical or perpetual inventory
system.
All costs incurred that are directly related to the generation of power, water and other
services (A separate subsidiary shall be maintained).

3. Expenses are the costs incurred to provide services to members.

Gross outflows of economic resources and incurrence of obligations in the course of the
ordinary activities of the cooperative when those outflows result in decreases in surplus.
They vary according to the industry, services provided, and structure of the cooperative.
They should be categorized to determine the costs incurred to operate each phase of the
cooperative.

Categories of Expenses:
a. Selling/ Marketing Costs - Costs incurred in the promotion/distribution and selling of
products and services of the cooperatives.
b. Administrative Cost - Expenses incurred related to general administration and
management of the cooperative/enterprise.

4. Subtracting total expenses from gross revenue gives the net income (or loss) of the
cooperative over the given period of time.

The year-end income statement should note the portion of net income distributed to members
as cash patronage refunds and the portion that remains as allocated reserves.

THE BALANCE SHEET (Statement of financial condition)

The balance sheet is used to report the financial position of the cooperative at a given point in
time, usually at the end of a month, quarter, or year.

It shows the assets owned by the cooperative balanced against its liabilities and member equity.

Elements of the Statement of financial condition:

1. Assets
Economic Resources of Cooperatives that are recognized and measured in conformity
with Philippine Financial Reporting Standard taking into consideration cooperative laws,
principles and practices in the Philippines.
2. Liabilities
Economic Obligations that are recognized and measured in conformity with generally
accepted accounting principles taking into consideration cooperatives' laws, principles
and practices in the Philippines.
3. Equity
Excess of a cooperative's assets over its liabilities.
STATEMENT OF CASH FLOWS
As its name indicates, only those accounts that result in cash flowing in or out of the
cooperative during the accounting period are included on the statement of cash flow.

This report shows the change that occurred in amount of cash from the opening to the closing
of the cooperatives balance sheets.

Categories on the Statement of Cash Flows:

1. Cash flow from operations
It gives the net cash from providing goods and services to members and all other cash
flows not from investment or financing transactions.
2. Cash flow from investment transactions
It include the purchase or sale of property and equipment, the purchase or redemption
of equity in other organizations, and payments from long-term investments.
3. Cash flow from financing transactions
It include the acquisition or redemption of loans, the sale of capital stock, redemption of
member equities or payment of patronage refunds.

Uses of financial statements analysis:

1. Provides help in predicting the cooperatives future earnings and dividends along with
the risks associated with it.
2. Determines if progress is being made toward cooperative goals.
3. For potential investors (ex, in bonds), to gauge the cooperatives ability to make timely
payments of interest and principal.
4. For potential members, examines the statements to monitor cooperatives performance.

Ratio analysis is a financial technique that involves dividing various financial statement numbers
into one another. This analysis is used as a means to gain insight regarding a firms strengths and
weaknesses. The ratios can then be examined to determine more easily the trends and reasons
for changes in financial statement quantities.

Tools and techniques of Financial Analysis:

1. Liquidity Ratios
Liquidity ratios indicate the ability to meet short-term obligations to creditors as they
mature or come due. This form of liquidity analysis focuses on the relationship between
current assets and current liabilities, and the rapidity with which receivables and
inventory turn into cash during the normal business operations.

The peso amount of a firms net working capital or its current assets minus current
liabilities, is sometimes used as a measure of liquidity.

Two popular examples of liquidity ratios:

 Current Ratio (is a measure of a companys ability to pay off its short-term debt
as it comes due).
Formula:

Quick Ratio/Acid Test Ratio (composed of quick assets only, it means, excluding
inventory in the numerator by dividing it to total current liabilities).
Formula:

2. Asset Management ratios

These ratios indicate the extent to which assets are turned over, or used to support
sales. These are also sometimes referred to as activity or utilization ratios and each ratio
in this category relates to financial performance on the statement of comprehensive
income (income statement) with items on the statement of financial position (balance
sheet).
Example of Asset Management Ratios:
Total Asset Turnover (it indicates how efficiently the firm is utilizing its total
assets to produce revenues or sales).
Formula:

3. Profitability ratios
These ratios indicate the firms ability to generate returns on its sales, assets, and equity.

Examples of Profitability ratios:

Net Profit Margin
Formula:

Return on Total Assets (measures the return on investment in assets after a firm has
covered its operating expenses, interest costs and tax obligations).
Formula:
 4. Cost-volume-profit Analysis

Cost-volume-profit Analysis represents another tool used by managers for financial

planning purposes. It can be used to estimate the firms operating profits at different
levels of unit sales. A variation, called break even analysis, can be used to estimate how
many units of product must be sold in order for the firm to break even or have a zero
profit.

Formula:
Earnings/Income before interests and Taxes (EBIT) = Sales Variable Costs Fixed Costs
Or
EBIT = (Selling Price per item X numbers of units to be sold) (Variable cost X number of
units to be sold) Fixed Cost

LO5. Explain the basics of budgeting.

Financial analysis using ratios goes hand in hand with successful financial planning. An
established cooperative should conduct a financial ratio analysis of past performance to aid in
developing realistic future plans.
Financial planning is an important aspect of the firms operations because it pr vides road maps
for guiding, coordinating, and controlling the firms actions to achieve its objectives.

Two key aspects of the financial planning process:

1. Cash planning
Cash planning involves preparation of the firms cash budget.
2. Profit planning
Profit planning involves preparation of pro forma statements.

The financial planning process composed of:

1. Long-term, or strategic, financial plans.
Long-term (strategic) financial plans lay out a companys planned financial actions and
the anticipated impact of those actions over periods ranging from 2 to 10 years.

2. Short-term, or operating, plans and budgets.

Short-term (operating) financial plans specify short-term financial actions and the
anticipated impact of those actions. These plans most often cover a 1- to 2-year period.
Generally, the short-term plans and budgets implement the firms long- term strategic
objectives.

Cash Planning: Cash Budgets

The cash budget, or cash forecast, is a statement of the firms planned inflows and
outflowsofcash.Itisusedbythefirmtoestimateitsshort-termcashrequirements, with particular
attention to planning for surplus cash and for cash shortages.

Typically, the cash budget is designed to cover a 1-year period, divided into smaller time
intervals. The number and type of intervals depend on the nature of the business.

Components of the Cash budget:

1. Cash receipts include all of a firms inflows of cash in a given financial period. The most
common components of cash receipts are cash sales, collections of accounts receivable,
and other cash receipts.
2. Cash disbursements include all outlays of cash by the firm during a given financial
period. The most common cash disbursements are:
Cash purchases Fixed-asset outlays
Payments of accounts payable Interest payments
Rent (and lease) payments Cash dividend payments
Wages and salaries Principal payments (loans)

Not only is the cash budget a great tool to let management know when it has cash shortages or
excesses, but it may be a document required by potential creditors. It communicates to them
what the money is going to be used for, and how and when their loan will be repaid.

Profit Planning: Pro Forma Statements

Whereas cash planning focuses on forecasting cash flows, profit planning relies on accrual
concepts to project the firms profit and overall financial position.

Three inputs are required for preparing pro forma statements:

1. Financial statements for the preceding year.
2. The sales forecast for the coming year.
3. A variety of assumptions must also be made.
Preparing the Pro Forma Income Statement
A simple method for developing a pro forma income statement is the percent-of- sales method.
It forecasts sales and then expresses the various income statement items as percentages of
projected sales.

Preparing the Pro Forma Balance Sheet

A number of simplified approaches are available for preparing the pro forma balance sheet.
Probably the best and most popular is the judgmental approach,11 under which the values of
certain balance sheet accounts are estimated and the firms external financing is used as a
balancing, or plug, figure.

It is difficult to forecast the many variables involved in preparing pro forma statements. As a
result, investors, lenders, and managers frequently use the different financial techniques to
make rough estimates of pro forma financial statements.

Capital budgeting is the process of evaluating and selecting long-term investments that are
consistent with the firms goal of maximizing owner wealth.

Five distinct but interrelated steps:

1. Proposal generation
Proposals are made at all levels within a business orga- nization and are reviewed by
finance personnel. Proposals that require large outlays are more carefully scrutinized
than less costly ones.
2. Review and analysis
Formal review and analysis is performed to assess the appropriateness of proposals and
evaluate their economic viability. Once the analysis is complete, a summary report is
submitted to decision makers.
3. Decision making
Firms typically delegate capital expenditure decision making on the basis of peso limits.
Generally, the board of directors must authorize expenditures beyond a certain amount.
Often managers are given authority to make decisions necessary to keep the production
line moving.
4. Implementation
Following approval, expenditures are made and projects implemented. Expenditures for
a large project often occur in phases.
5. Follow-up
Results are monitored, and actual costs and benefits are com- pared with those that
were expected. Action may be required if actual out- comes differ from projected ones.