UNIT 3: MONEY MANAGEMENT

Key Unit competence: 

To be able to manage money responsibly and keep financial records.

Case study:

Elizabeth and Kabayiza are married with two children, aged three and five.
Kabayiza works full-time in manufacturing and Elizabeth works four days a
week as a nurse. When they got married, they were renting and maintained
two separate accounts as well as a joint account for bills. Now they own a
home and are paying off a mortgage and saving determinedly for the future
so that they can afford private education for their children by the time they
enter high school.

Referring to the story above and your knowledge about entrepreneurship
skills learnt and competences developed before, answer the questions below.

a) Why do Elizabeth and Kabayiza need money?
b) What are the best ways of the couple to save money?
c) Why do they need to save money?
d) Explain the moral lesson that you learn from the above case study

3.1. Meaning of money, savings and saving goals

Using the knowledge acquired in O’level, explain the meaning of the following
terms as used in entrepreneurship:
a) Money
b) Savings
c) Saving goal

• Money

Money is anything that is generally accepted as a medium of exchange and
repayment of debts.

Money is one of the most important inventions of modern times. It has undergone
a long process of historical evolution.

Stages in the evolution of money

1st Stage: Barter trade: Human beings passed through a stage when money was
not in use and goods and services were exchanged directly for goods and services.
Such exchange of goods or services for goods or services is called barter exchange.

2nd Stage: Commodity money: The inconveniences and drawbacks of barter trade
led to the gradual use of a medium of exchange. In the historical study of money,
it is found that all sorts of commodities like seashells, pearls, precious stones,
tea, tobacco, cow, leather, cloth, salt, wine, etc. have been used as a medium of
exchange (i.e. money).

3rd Stage: Metallic money: Inadequacy of commodity money led to the evolution of
metallic money (gold and silver). The problem of uniformity of weight and purity of
precious metals led to private and public coinage.

4th Stage: Paper money: This process was finally taken over by the state as one of
its essential features and ultimately commodity money gave way to paper money
which means currency notes. Nowadays, the use of paper money has almost
become universal along with coins made of copper, bronze or nickel, etc.

5th Stage Bank money: The process of evolution of some better medium of exchange
still continues. As the volume of transactions increased, even paper money started
becoming inconvenient because of the time involved in its counting and space
required for its safe keeping. This led to bank money or credit money in the form of
cheques, drafts, bills of exchange, credit cards, etc.

• Savings 

Savings is the portion of income not spent on current expenditures. Because a
person does not know what will happen in the future, money should be saved to
pay for unexpected events or emergencies. An individual’s car may breakdown,
their dishwasher could begin to leak, or a medical emergency could occur. Without
savings, unexpected events can become large financial burdens. Therefore, savings
helps an individual, family or business become financially secure.

• Saving goals

Money can also be saved to purchase expensive items that are too costly to buy
with monthly income. Buying a new house, clothes, purchasing an automobile, or
paying for a vacation, etc. can all be accomplished by saving a portion of income.
We usually save for:

– Basic needs,
– Household expenses,
– Education,
– Emergencies/safety,
– Retirement/security,
– Family wellbeing,
– Esteem,
– Self-actualization

Using the knowledge and skills acquired in year 1, Unit 3: Setting entrepreneurial
goals, set a SMART saving goal.

3.2. Where to save

In your community, you have probably heard people and business people talking
about where they save a portion of their earnings. Identify where to save money
according to what you have heard normally people talking about.

Some savers place their money in a jar, coffee can or a piggy bank which all are not
safe and not encouraged. It is wise to store money in financial institutions like bank
depository institution. The following are examples of where to save money:

• Banks: Through opening up different savings account, one can save his/
her money. For instance, if you find a bank or credit union that offers a free
savings account, you can open up several savings accounts.  Then every time
you get an income, you can put money into each of these accounts for every
specific thing that you are saving for. This way you can keep your money safe
from accidentally being spent, and it will be there when you need it.

• Assets: Individuals can save money through investing in fixed assets. A good
example can be when someone invests his/her money in rental houses (real
estates). The stock market may be down, but your tenants will still be paying
some rent every month.

• Securities: Securities are generally classified as either equity securities
such as stocks or debt securities such as bonds and debentures. The sale
of securities to investors is one of the primary ways that publicly-traded
companies drive new capital for operations. People or businesses can save
their money through buying available securities at the market.

• Small savings groups: This is when someone joins a group comprised of
15-25 self-selected individuals who save together and take small loans from
those  savings.  Savings groups  provide members the opportunity to save
frequently in small amounts, access to credit on flexible terms, etc.

• Starting a business: Saving can be through starting up a business that may
generate incomes and profits in future time.

KABASHA won entrepreneurship competition. He received a cheque of
5,000,000Rwf as a reward, but he doesn’t have a ready plan for that money won.

Required:

Advise KABASHA to identify where to save his money to avoid needless
expenditure.

3.3. Managing money

Read the following extract, and answer the questions thereafter.

Extract (Money Management-How to make your money go further)

The way you spend your money today will determine what you have in six months
from now, a year from now, five years from now, and in your lifetime. You control
your financial destiny. You are responsible for the amount of money you earn
and for the amount of money you spend. Successful money managers control
the way they spend their money. They use money to accomplish the things that
are important to them. Good money managers manage their money rather than
letting it dribble away from them. 

Required:

Do you have control of the way you spend your money? If yes, how do you do it?
Do you live within your income, or do you have to borrow money or use savings
to meet your regular monthly expenses? Yes/No. Explain your answer

Money management is the process of budgeting, saving, investing, spending or
otherwise overseeing the financial usage of an individual or group. The ability to
manage money has to be learned, developed, and practiced on a daily basis. There
are eight steps to successful money management:

1. Get organized.
2. Decide what you want to do with your money.
3. Look at all available resources.
4. Decide how much money you are worth.
5. Find out how much money you make.
6. Find out how much money you spend.
7. Set up a plan for spending your money and stick to it.
8. Evaluate your spending plan
The following are essentials for good money management:
• Keeping financial records
• A simple cash book
• Financial forecast
• A simple cash flow plan
• Practicing money management habits E. g. re-use, recycle, repair and reduce.

KEEPING FINANCIAL RECORDS

Good financial recordkeeping enables business organizations to plan properly and
also check for misappropriations of resources. Everyone in business must keep
records. Keeping good records is very important to your business. A simple cash
book, financial forecast and a simple cash flow plan are very important for money
management.

• A simple cash book

The simple cash book (also known as single column cash book) is a cash book
that is used to record only cash transactions of a business. It is very identical to
a traditional cash account in which all cash receipts are recorded on left hand
(debit) side and all cash payments are recorded on right hand (credit) side in a
chronological order.

The single column cash book has only one money column on both debit and credit
sides titled as “amount” which is periodically totaled and balanced like a T-account.
As stated earlier, a single column cash book records only cash related transactions.
The entries relating to checks issued, checks received, purchases discount, and
sales discounts are not recorded in single column cash book.

Format of Simple Cash Book:

The purpose of four columns used on both sides of a single column cash book is
briefly explained below:
Date: The date column of the cash book is used to record the year, month and actual
date of each cash transaction. This column ensures the chronological record of
each business transaction involving receipt or payment of cash.
Details: The details column is used to record the account titles to be debited or
credited as a result of each cash transaction. This column is sometimes titled as
“particulars”.
Ledger Folio: This column is used to write the page number of each ledger account
named in the description column of the cash book.
Amount: The amount column of single column cash book is used to record the
money value of each cash transaction.
Note: The debit side (receipt side) of a single column cash book is always heavier
than the credit side (payment side) because we cannot pay more cash than what
we receive during a period.

Example:

The Student business club at one of Associate nursing school uses a single
column cash book to record all cash transactions. It engaged in the following cash
transactions during the month of September 2019.
Sep.01: Cash in hand at the beginning of the month Rwf 4,654.
Sep.02: Paid salaries to employees for the last month Rwf 3,000.
Sep.05: Cash received from S & Co. for a previous credit sale Rwf 2,720.
Sep.06: Merchandise purchased for cash Rwf 1,400.
Sep.07: Merchandise sold for cash Rwf 4,700.
Sep.10: Office furniture purchased for cash Rwf 3,080.
Sep.12: Stationery purchased for cash Rwf 170.
Sep.15: Merchandise sold for cash Rwf 9,000.
Sep.17: Cash paid to A & Co. for a previous credit purchase Rwf 1,780.
Sep.20: Merchandise purchased for cash Rwf 2,460.
Sep.21: Merchandise sold for cash Rwf 4,680.
Sep.24: Cash received from S & Co. for a previous credit sale Rwf 2,400.
Sep.28: Cash paid for office rent Rwf 1,600.
Sep.30: Merchandise sold for cash Rwf 7,200

Required:  Record the above transactions in a single column cash book (simple
cash book)

Solution:

The Student business club’s simple cash book for the month of September 2019

• Financial forecast

“Forecast” means to form an opinion beforehand i.e. to make a prediction. Thus
financial forecasting means a systematic projection of the expected action of
finance through financial statements. It is a kind of plan which will be formulated at
a future date for a specified period.

The merits of the financial forecasting are noted below:

– It can be used as a control device in order to fix the standard of performances
and evaluating the results thereof
– It helps to explain the requirement of funds for the firm together with the
funds of the suppliers
– It also helps to explain the proper requirements of cash and their optimum
utilization is possible and so surplus/excess cash, if any, invested otherwise.

Elements of Financial Forecasting:

Financial forecasting involves preparation of proforma financial statements and
also the preparation of Cash Budget.

Therefore, it includes the preparation of:

a) Pro-forma income statement: Pro forma income statement is the statement
prepared by the business entity to prepare the projections of income
and expenses which they expect to have in the future by following certain
assumptions such as competition level in the market, size of the market,
growth rate

b) Pro-forma balance sheet: This summarizes the projected future status
of a company after a planned transaction, based on the current financial
statements.

c) Cash budget: A cash budget is an estimation of the cash flows for a business
over a specific period of time. This budget is used to assess whether the
entity has sufficient cash to operate

• A simple cash flow plan

Cash flow plan is a statement that provides valuable information about a company’s
gross payments and receipts and allows insights into its future income needs. Cash
flow statement is important because:

– Cash from operating activities can be compared to the company’s net income
to determine the quality of earnings. If cash from operating activities is higher
than net income, earnings are said to be of “high quality.”

– This statement is useful to investors because, under the notion that cash is
king, it allows investors to get an overall sense of the company’s cash inflows
and outflows and obtain a general understanding of its overall performance.

– If a company is funding losses from operations or financing investments by
raising money (debt or equity) it will quickly become clear on the statement
of cash flows

Why is it necessary for an entrepreneur to make a Cash flow statement?

– It helps to identify the source of cash inflows in the business and also identify
how cash was used

– It helps management in proper cash planning to avoid excess cash or cash
deficits in the business

– It reports the total amount of cash used during a given period in long term
investment activities such as purchase of fixed assets

– It shows the amount of cash received from various financing sources such as
long term loans and sale of shares

– It helps management to avoid liquidity problems by anticipating when cash is
expected to flow in and plan payments accordingly

– It helps investors to understand how a company’s operations are running,
where its money is coming from and where it is spent. 

FORMAT OF CASH FLOW STATEMENT

At the end of that given period, the business will have a surplus if cash inflows
are more than the cash outflows or deficit if cash inflows are less than the cash
outflows.

Example: Prepare Didi’s cash flow for the month of January, February, March and
April 2006, given the following information below:
Cash balance b/d or b/f in January was 15000,000Rwf
Monthly rent income was 5000,000Rwf
Monthly credit sales to be paid in the next month were 4000,000 Rwf
Sold a business van in February 14,500,000 Rwf
Monthly commission received was 3000,000Rwf
Monthly cash sales 10,000,000 Rwf
Monthly cash purchases 12,000,000Rwf
Bought a truck in January 800,000 Rwf
Monthly salaries and wages 5000,000Rwf
Bought machinery worth 15,000,000Rwf, payment of 8,000,000 Rwf was made in
January and the balance was paid in two equal installments during the month of
February and March.

Solution

DIDI’S CASH FLOW STATEMENT FOR JANUARY, FEBRUARY, MARCH AND APRIL

PRACTICING MONEY MANAGEMENT HABITS

With the cost of goods and materials rising, using resources efficiently and
reducing your business’ waste makes good financial sense. It’s also better for the
environment. The cost of sending waste to landfill is increasing, and so are the
restrictions on what you can send. You can face penalties if you do not handle
waste appropriately or have the right paperwork before it leaves your premises.

You can save money and make your business more efficient by focusing on how
you reduce, reuse, recycle or recover and repair in your business, and how you deal
with the waste that remains.

1. Reducing waste
Cutting the amount of waste your business has to handle is the most cost-effective
and environmentally-friendly method of dealing with waste.
There are a number of areas you could focus on:
Procure carefully - buy only what you need, control stock and streamline processes
across departments. Buy equipment in bulk to reduce packaging and consider the
product›s durability and lifespan - replacing equipment less often will reduce the
waste you create.
• Look for easy wins - seemingly trivial changes can produce significant savings,
such as printing and photocopying double-sided, refilling printer cartridges,
switching off lights and electrical equipment, and using rechargeable
batteries.
• Review your processes  - ensure that equipment and materials are used
efficiently and packaging is kept to a minimum.
• Product design  - keep the amount of materials you use in products to a
minimum.
• Packaging design and use - make sure you use as little packaging as possible
to achieve an adequate level of protection for your products.
2. Reusing waste
You may be able to reuse materials and equipment in your own business or another
organization. 

For example, consumers can refill a purchased bottle of water with water from
home to minimize the number of plastic bottles being discarded.

Reusing your own business waste can reduce your costs as you won’t need to buy
raw materials or pay to dispose of the waste. You may also be able to generate
income from materials and goods that are valuable to another organization.

3. Recycling waste

Recycling is the third-best waste management option for your business, after
reducing and reusing waste. Even so, recycling is important because it reduces the
amount of waste sent to landfill and reduces the need to use new raw materials.
Recyclables include glass, newspaper, aluminum, cardboard and a surprising array
of other materials.

4. Repair

 The business can repair broken materials and equipment such as lamps instead
of buying new ones.

Discuss and suggest strategies or how you will cut costs/expenses using the
4Rs (reducing, recycling, repairing and reusing) in your student business club.
Prepare a new projected cash flow statement after applying the suggested
strategies.

Read the following dialogue and answer the questions that follow;
Peter: Does what you know now about money management affect your
future?

Peace: Of course what you know today affects tomorrow. You couldn’t drive a
car without a license, and that is why you need to begin learning about how to
spend your money wisely today.

Peter: How does your attitude towards money change as you age?

Peace: Five-Year-Old: Come On mom, can I have some money to buy that ring?
Fourteen-year-old: Mom, I want 10,000Frw to buy designer label top and those
cool pants.

Eighteen-Year-old: Shoot, I know how I can get money for college. I will ask
mom.

Forty-Year-Old: I need to save for my retirement. No excessive spending.
Questions

i. With examples explain how your money management affects your future
wellbeing.

ii. Where do you think a person can save?