Financial Literacy for Smallholder Sheep Fattening Farmers Training Manual Nahom Ephrem and Jane Wamatu International Center for Agricultural Research in the Dry Areas (ICARDA) Addis Ababa, Ethiopia. December 2021 CGIAR is a global partnership that unites organizations engaged in research for a food-secure future. The CGIAR Research Program on Livestock provides research-based solutions to help smallholder farmers, pastoralists and agro-pastoralists transition to sustainable, resilient livelihoods and to productive enterprises that will help feed future generations. It aims to increase the productivity and profitability of livestock agri-food systems in sustainable ways, making meat, milk and eggs more available and affordable across the developing world. The Program brings together five core partners: the International Livestock Research Institute (ILRI) with a mandate on livestock; the International Center for Tropical Agriculture (CIAT), which works on forages; the International Center for Research in the Dry Areas (ICARDA), which works on small ruminants and dryland systems; the Swedish University of Agricultural Sciences (SLU) with expertise particularly in animal health and genetics and the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) which connects research into development and innovation and scaling processes. The Program thanks all donors and organizations who globally supported its work through their contributions to the CGIAR system. This publication is licensed for use under the Creative Commons Attribution 4.0 International Licence. To view this licence, visit https://creativecommons.org/licenses/by/4.0. Unless otherwise noted, you are free to share (copy and redistribute the material in any medium or format), adapt (remix, transform, and build upon the material) for any purpose, even commercially, under the following conditions: ATTRIBUTION. The work must be attributed, but not in any way that suggests endorsement by the publisher or the author(s). NOTICE: For any reuse or distribution, the license terms of this work must be made clear to others. Any of the above conditions can be waived if permission is obtained from the copyright holder. Nothing in this license impairs or restricts the author’s moral rights. Fair dealing and other rights are in no way affected by the above. The parts used must not misrepresent the meaning of the publication. The Livestock CRP would appreciate being sent a copy of any materials in which text, photos etc. have been used. Editing, design and layout: ICARDA Cover photo — Financial Literary training in Menz, Ethiopia (photo credit: ICARDA/Nahom Ephrem). ISBN: …… Citation: Ephrem N., Wamatu J., Alemayehu F., Anebo D. 2021. Financial literacy for smallholder sheep fattening farmers - Training manual. International Center for Agricultural Research in the Dry Areas (ICARDA), Addis Ababa, Ethiopia: ICARDA. Acknowledgement This work was carried out by ICARDA as part of the Ethiopia SmaRT Project, funded by the CGIAR Collaborative Research Program (CRP), Livestock and the Accelerating Impacts of CGIAR Climate Research for Africa (AICCRA) Project, funded by CRP, Climate Change and Food Security (CCAFS). Sincere appreciation for the substantive content contributions of Fisseha Alemayehu from Amhara Savings and Credit Institution and the Degefe Anebo from Doyogena District Cooperative Development Office. 2 What is financial literacy? Financial literacy refers to a set of skills and knowledge that enable individuals to make informed and effective decisions regarding money matters. It is a combination of financial responsiveness, knowledge, skills, attitude, and behavior that are necessary to make informed financial decisions and ultimately achieve individual financial well-being. Overall Session Learning Outcomes ▪ Planning, prioritization and budgeting form the core of financial discipline. ▪ Ability to evaluate and select the financial services available. ▪ Save and invest for future growth. ▪ Prepare for unexpected risks. ▪ Strong financial management and controls in farmer cooperatives. 3 Content Introduction 5 Session 1. Introduction to Financial Literacy 6 Session 2. Personal/Household Budgeting and Planning 7 Part 1: Choices about spending 8 Part 2: Setting financial goals 9 Part 3: Budgeting 11 Session 3. Savings 12 Session 4. Loans 15 Session 5. Investment 17 Session 6. Risk and Responsibility (Livestock Insurance) 18 Session 7. Financial Management at Cooperative level 19 Further Reading 22 4 Introduction The International Center for Agricultural Research in Dry Areas, in close cooperation with regional agricultural research institutes and partners, implements improved sheep fattening methods and technologies in Ethiopia. The project aims to improve the income of rural farmers from sheep fattening. Sheep farming is one of the lucrative commercial businesses in Ethiopia. With basic knowledge of sheep husbandry and management, farmers and young people in Ethiopia can be successful in sheep fattening and generate good income from the sector. Young people from rural areas who are unemployed or have little land ownership are getting involved in sheep farming. From an economic point of view, farmers seek a balance between production levels and economic outcomes of their livestock systems. However, farmers have made minimal progress towards commercial fattening with clear production goals and financial means. The factors necessary for development of entrepreneurship, such as risk-taking, access to easy finance and coordination between factors of production, are limited. Financial literacy can provide farmers with the knowledge and skills they need to successfully set financial goals, plan and manage their money, as well as build their wealth. These skills will help them manage their daily expenses, expand their entrepreneurial opportunities, and reduce their overall vulnerability. This financial literacy manual has been adapted as a guide for community and development trainers for members of farmer groups involved in sheep production. It is designed to impart basic knowledge, skills, attitudes, and practices for personal and cooperative money management. 5 Session 1. Introduction to Financial Literacy Economic processes in today's world are becoming increasingly complex and involve investments, a wide range of banking products and insurance systems and consequently require an understanding of financial literacy. Even if these new financial services improve the quality of life and business success, rural populations often remain unprepared to use them owing to a lack of knowledge and skills often. This particularly affects risk groups such as farmers, women and the youth. These groups are notoriously prone to the general local psychology and public hysteria that leads them to bypass economic affairs or to expand their knowledge of financial services. In addition, illiteracy in the financial sector tends to have a negative impact on the personal well-being of people and the financial sector. Session Objective The purpose of this session is to help sheep fatteners understand basic financial concepts so that they can better manage their money. This session, will help sheep fatteners better understand their financial situation, by covering areas such as the concept of financial literacy, its benefits and the need to gain financial literacy After this learning session, trainees will be able to: ▪ Define financial literacy ▪ Describe the relevance and importance of financial literacy Pre and post evaluation questions: 1. What is financial literacy? 2. What is the importance of financial literacy? 3. What are the characters/behaviors of a financially literate What is Financial Literacy? Financial literacy refers to a set of skills and understanding that enables individuals to make informed and effective decisions about money matters. It is a combination of financial responsiveness, knowledge, skills, attitude, and behavior that are necessary to make sound financial decisions and eventually achieve individual economic well-being. In general, the cognitive insight into financial modules and skills such as budgeting, saving, investing, borrowing, taxation, and personal finance management is referred to as financial literacy. Hence, lack of these skills is known as being financially illiterate. 6 Why is it important to be financially literate? Sheep fattening farmers, both individual and cooperatives, need financial literacy because, it enables them to: ▪ Understand key financial services and products such as personal or enterprise financial management, budgeting, saving, investing and lending. ▪ Change the way they think about financial services ▪ Access and benefit from financial services. ▪ Have knowledge and skills that enhances understanding of personal finance issues and the ability to apply financial literacy knowledge to manage personal finances. ▪ Predict future spending and investments by setting financial goals. ▪ Make good financial decisions about spending and saving and investing throughout their life or to keep their business running and optimize its performance. ▪ Keep proper records of financial transactions to manage their income and expenses. ▪ Respond competently to changes and risks that could affect the daily financial well-being of their households and businesses. What are the behaviors or characters of a financially literate individual? Financially illiterate people exhibit the following behaviors after becoming financially literate: Financially illiterate Financially literate ▪ Refuse to look into financial affairs and ▪ Access financial services confidently access financial services ▪ Mistrust for financial services and experts ▪ Ask for advice and counseling from experts when it comes to financial services ▪ Live on a day-to-day basis ▪ Make a spending and budget plan and adopt it to manage his/her business ▪ Saving is not related to financial goal and ▪ Have a savings plan with clear objectives and generally borrows for emergencies maintains an emergency savings fund ▪ Can’t choose the right investment ▪ Choose the right investment ▪ Unable to track processes, income and ▪ Keep records to track progress, income and expenses expenses and do not forecast the future and capable to forecast the future Session 2. Personal/Household Budgeting and Planning Making financial decisions is difficult. Individuals and families must make appropriate decisions based on their circumstances. The important thing is that you carefully analyze your options before making a decision, and that you have a strategy in place to deal with the 7 implications. Every household must strike a compromise between basic needs, debt settlement and savings. You need to set economic goals in order to manage your money efficiently. Think about what you want to achieve in life and set goals for yourself that will help you achieve them. If you are working towards something that matters to you and have a plan of action, you are likely to be more successful. Session Objective The aim of this session is to provide sheep fatteners with an understanding of how they and their families should manage their money especially their income and expenses, by understanding the concept of financial planning, budgeting and the importance of these two in their daily lives and business practices. After this session, the trainees will be able to: ▪ Determine how and when to spend money. ▪ Familiarize yourself with the functional plan and what it means. ▪ Understand what budget/budgeting is and what it entails. Pre and post evaluation questions: 1. What do we mean by financial plan/goal? 2. What is the importance of setting a financial plan? 3. What is budgeting and what does it entail. Part 1: Choices about spending By the end of this section, the trainees will be able to: ▪ Familiarize themselves with wanting and needing something. ▪ Identify and prioritize spending. ▪ Understand how to prioritize when spending money. What can you do with your money? It is obvious that people need money for so many reasons that all over the world including your trainees are striving to ensure that they have enough money to cover their daily expenses such as groceries, clothing, running sheep to hold on, pay off debts, pay for school and marriage for themselves or their children, meet future needs for the purchase of a property or a house, and provide for a secure old age. 8 What do we mean by needing and wanting something? A need is something that is needed for survival. It is one thing that is necessary for an individual's healthy life. The needs remain. While a desire is something that a person desires or wants to have. Wishes are entertaining. It is important to strike a balance between needs and wants, with a person planning to have his or her basic needs met before considering luxury. For example, before spending any money on expensive household items, make sure your children's school fees have been paid. Group exercise: The trainees form a group consisting of 5 members (one group only men, other only women only and the rest mixed-sex groups) and discuss and list down the things they need and want in their life. S.N. Needs Wants 1 2 3 4 5 6 7 8 Part 2: Setting financial goals By the end of this session, trainees will be able to: ▪ Familiarize themselves with defining financial goals. ▪ Understand the importance of a financial plan. ▪ Determine how we can set a financial goal. Discussion points ▪ What are your sources of income? ▪ Which of these sources of income are rare or irregular? Why? ▪ How people spend their money? ▪ What expenses do you pay every now and then as opposed to daily or weekly? ▪ What can you do to make your own financial plan? 9 ▪ If you make a large income from time to time, how are you going to use it to pay for year-round expenses? ▪ How do you plan expenses that only arise now and then? ▪ What are the options for improving money management through budgeting? What is a financial plan? As discussed above, money is essential to meeting our basic needs and needs. However, the type or choice of spending is just as important as having money. For example, in order to keep your sheep fattening business going or to let it grow, your money/financial management style should be improved. To do this, it is important to set financial objectives. Financial “A financial plan is a tool to help you goals are the short- or long-term goals you set for decide how to use your money to yourself or your business in terms of how you will achieve your goals.” save and spend money. These can be goals that you want to achieve in the near or long term. Either way, it is much easier to identify your goals in advance to achieve them. Like other expenses, financial goals should be included in your budget so you can take meaningful steps to achieve them while you still have cash left over for other expenses. Calculate how long it will take to complete each goal and how much money you will have to spend in that time What is the importance of setting a financial plan? Setting yourself goals and developing a realistic plan to achieve them can help track your progress and encourage you to move on. It's easier to say that setting financial goals can help you change your future by influencing your current actions. In general, the financial plan/budget preparation will: - ▪ Help determine your future expenses or expenses. ▪ Allows you to be disciplined in your saving and spending. ▪ Helps you avoid a money crisis. ▪ Allows you to feed less financially stressed. To set a financial plan, one should: • Determine what is important, review, and weigh them, from practical and urgent to unusual and distant. • Sort out what is achievable, what will take some time, and what needs to be part of the long-term plan. • Make sure the goals are SMART (Specific, Measurable, Achievable, Relevant and Timely). • Determine the sources of income and the way in which you will spend your money. 10 • Decide how much money you have now and how you will use their money to save and invest to meet your goals. If you don't have enough cash on hand, look for ways to raise extra cash. S.N. Goals Income sources Expenses Short-term Long-term Regular Irregular Regular Irregular 1 2 3 4 5 6 7 ▪ Planning for expenses that are not incurred on a regular basis is critical to effective money management. ▪ If you receive a substantial sum at once, it is important to consider how you can use this money effectively to meet basic needs, save for the future and pay off expenses. Part 3: Budgeting By the end of this session, trainees will be able to: ▪ Define budget ▪ Understand the importance of budget planning ▪ Identify ways to improve their money management through budgeting What is budgeting? Farmers, including sheep fattening farms, usually start out with a lot of hope and excitement into their particular production or business, but without a budget they will struggle to develop a workable plan of action. It is easy for them to get involved in the day-to-day issues of running a business and lose sight of the bigger picture. Successful companies take the time to create and manage budgets, draft and review business plans, and regularly track their financial condition and performance. 11 Budgeting is a strategy of dividing your income between the basic cost of living, savings, and investments over a period of time. It is a tool that helps in making decisions about how to make and “A budget is a breakdown of spend money to achieve desired goals or visions. It is expected earnings and how they will helpful in determining how you will use your income be spent over a set period of time.” to pay for expenses such as living expenses, loan repayments, livestock inputs and how much you can save for the future. What is the importance of budgeting? Budgeting determines the currently available capital, estimates expenses, and forecasts future income. Businesses can compare production outputs versus spending and ensure that resources are available to support business growth and development by referring to the budget. It allows sheep farmers to focus on cash flow, cost reduction, profit management, and return on investment as business owners. Any business success is based on budgeting. It helps in planning and managing finances of the business because planning is worthless without spending control, and without planning, there are no goals to meet. In general, how does budgeting play the following roles in your life and business? It… ▪ Allows you to allocate your income to different types of expenses. ▪ Supports you in making spending and saving decisions. ▪ Encourages careful and disciplined spending. ▪ Allows you to be in control of your financial situation. ▪ Help you organize and manage money more effectively. ▪ Helps you plan and achieve your financial goals. Session 3. Savings Session Objective As entrepreneurs, sheep fatteners have the opportunity to increase their wealth, but they also get into unexpected financial difficulties and must therefore be prepared to avoid risks and setbacks. This session aims to familiarize sheep farmers with the idea of saving and the importance of saving to experience greater financial security Pre and post evaluation questions: 1. What is saving? 2. What is the importance of saving? 3. How do you create a saving plan? 12 At the end of this learning module, trainees will be able to: ▪ Describe the importance, reasons and benefits of savings. ▪ Identify the different forms of savings. ▪ Learn how to create a savings plan. Part 1: What is saving? By the end of this learning session, trainees will be able to: ▪ Define saving. ▪ Understand the importance of saving. Saving is the act of setting aside a portion of current income for future use, be it in the form of cash, sheep or other livestock, or production inputs. In times of scarcity or in an emergency, savings are made. It is done over a “Savings is the process of putting aside period, not all at once. It is possible that you may a portion of one's current income for have to forego current indulgences to save for a future use, or the flow of resources better future. Savings can be in the form of collected in this way over time.” increased bank or cooperative deposits, more sheep or livestock or cash on hand. An individual's willingness to save is influenced by their preferences for future expenses over current consumption, their expectations of future income and, to a lesser extent, the interest rate. Discussion points ▪ What are the main reasons people save? ▪ What are the savings goals for your family or business? ▪ Where and how can we save our money? ▪ What do you have to consider before you decide on our savings options? Where can you save your money? Before deciding where to save your money, please make sure of the following: ▪ It is safe and secure. ▪ It is easily accessible. ▪ A simple process to open an account. ▪ There is good interest rate on the savings. ▪ There is little or no fees on your account (make sure your monthly interest is higher than monthly fees). ▪ The cooperative/group or bank values and treats you well as a client. 13 There are different options where to save your money, including: ▪ In an account with a formal institution for saving money such as a commercial bank, credit institution or micro-depository institution. Banks hold and manage your savings. They are a safe option to keep your money with. They come with a monthly or annual fee. ▪ With a Savings and Loan Association or any other self-help group. People from the same village or farmers group save their money together to make the money grow. SLAs give out loans to members and collect interest. The money generated by the interest repayment is then shared among the members. ▪ With a registered financial cooperative (SACCO). A SACCO is a savings and credit cooperative. This is a legal entity with formal and defined structures and systems. Operations are very formally run by applicable policies and procedures. SACCOs have an account with a commercial institution ▪ Home saving, in a box/tin, under the mattress, or in a hole in the ground inside the house. This is the least secure way of saving. ▪ Assets like sheep or livestock are a savings method of saving because they retain value and can be resold at a later date (for the same amount of money or more). Part 2. Making a saving plan By the end of this learning session, trainees will be able to: ▪ Determine considerations before create a saving plan. ▪ Understand how to create a saving plan. What are saving goals? Savings goals are the short- or long-term goals that you set for yourself or your business to save your excess money or income. These can be goals that you want to achieve in the near or long term. Savings goals can be short-term plans that could be achieved in less than 1 year or long-term goals that could take more than 1 year to be achieved. By setting savings goals, you can: ▪ Decide your spending priorities for the future. ▪ Discipline in spending and saving. ▪ Avoid unexpected shortages of money. ▪ Feel less financial stress. ▪ Harmonize the family and work together towards the same goals How to create savings plan To create a savings plan, you need to look at their income, how much they have available, and determine their savings priorities. Which goals are most important to you? Having a 14 clear plan will help you know what to do, increase your savings discipline, and achieve your savings goals more successfully. To meet your savings goals, you must, decide what you want to save for and find out how much it costs, whether it is buying a house, land, starting/upgrading your sheep fattening business, studying, or saving for your child’s school fees, etc. Make sure you are saving realistic and not over-ambitious. ▪ Start saving now – the sooner you start, the sooner you will get there. ▪ Put your savings in a safe place where you will earn good interest. ▪ Saving regularly and over a longer period. Only then can your money accumulate. Session 4. Loans Session Objective Businesses, including sheep fattening, require financial capital at various stages of operations, e.g. At each stage, however, there seems to be next to no funding. As entrepreneurs, sheep farmers need to find out how to get the most out of the available resources in every possible way. This session is designed to help the farmer understand credit as well as the costs, obligations, and risks of borrowing. Pre and post evaluation questions: 1. What is loan and its importance for business? 2. What are the reasons or times for taking loans or borrowing? 3. Where do we get money to borrow? At the end of this learning session, trainees will be able to: ▪ Understand loans and credit. ▪ Determine the costs and risks of borrowing. ▪ Understand how to meet borrowing obligations. What is a loan? A loan is an amount of money that a person, a group or a cooperative can borrow from banks or other financial institutions in order to financially cope with planned or unplanned events. This creates a debt for the borrower, which he must repay with interest and within a certain period. 15 The recipient and the lender must agree on the terms of the loan before money changes hands. In some cases, the lender requires that the borrower offer an asset as collateral, which is described in the loan document. Loans can be given to individuals, groups, cooperatives or even governments. The main idea behind of taking loans is to raise funds to increase the total amount of money. The interest and fees serve as a source of income for the lender. Loans can be further divided into secured and unsecured, open and closed, and conventional loan types. Secured and unsecured loans; A secured loan is a loan that is secured by some form of collateral. For example, most financial institutions require borrowers to present their title deeds or other documents proving ownership of an asset until they have paid back the loans in full. Other assets that can be pledged as collateral include livestock or other personal property. Conversely, an unsecured loan means that the borrower does not have to offer an asset as collateral. With unsecured loans, lenders are very thorough in assessing the borrower's financial condition. In this way, they can assess the recipient's ability to repay and decide whether the loan will be granted. Open-end and closed-end loans: With an open-ended loan, a person has the freedom to borrow repeatedly. However, a credit limit is the highest amount of money that one can borrow at any one time. Depending on an individual's financial needs, they can use all or part of their credit limit. In the case of closed loans, private individuals are only allowed to take out loans again after they have paid them back. With the repayment of the closed loan, the loan balance decreases. However, if the borrower wants more money, they will have to apply for a new loan from scratch. The process involves submitting documents proving creditworthiness and waiting for approval. Examples of closed-end loans are house loans, land loans, education/student loans. Conventional loans” These are loans that are not insured by government agencies. Before deciding or planning to take a loan, here are some things to consider: ▪ Purpose of the loan. ▪ Total cost of the loan e.g. interest and additional charges. ▪ Payback period ▪ Additional benefits that come with the loan e.g. grace period ▪ The economic returns on the loan. ▪ Repayment period. ▪ Time of disbursement and duration of loan processing for the intended purpose. ▪ Internal controls available to ensure financial discipline. ▪ Compare offers for similar products from other financial providers. 16 Session 5. Investment Session Objective It is true that opportunities come with risks and that investments can sometimes lead to losses. It is for this reason that it is crucial for sheep farmers to educate themselves about investments in order to meet the challenges and opportunities that the market presents for them. The purpose of this session, therefore, is to enable sheep fattening farmers to understand investments and their various forms, and to determine how investment decisions are made Pre and post evaluation questions: 1. What is investment? 2. Why should we invest? 3. What is the best time to invest? At the end of this learning session, trainees will be able to: ▪ Define investments. ▪ Name the different types of investment. ▪ Describe the different reasons why one should invest. ▪ Describe what influences investment decisions. What is investment and its forms? An investment is the purchase of assets that are not consumed today but will be used to build wealth or increase in value in the future and can be sold at a higher price. You have chosen not to spend your money on household expenses, but instead to buy an asset that will make you more money. In short, these are expenses that will make you more money. The difference between saving and investing is that to save, you put “Investment is forgoing today’s money aside for future use, while investing puts consumption for an activity that will money into a productive activity in order to multiply bring you more income in the future.” it. There are 3 common types of investments that are classified according to the time it takes for the investor to generate returns. These include: Short-term Investments: The invested money should soon bring income (income). It usually takes less than two years to obtain the expected returns. 17 Medium-term Investments: These are investments that are expected to have cash flow after two years; it can be a lump sum or a regular flow of money. Examples include developing your business to be more productive. Long-term investments: These are investments that require a lot of money and take a long time to generate income. Your income can flow in once it's completed, but it will be a long time before you get the money you put into the project. It takes a long time to get your money back. This includes investing in breeding animals or buying a farm. What to consider before making an investment decision? Before making an investment decision, the most important points must be understood by the investor, namely: ▪ What are your investment goals – short term capital accumulation, long term financial security? ▪ Do I have the knowledge and skills to make the investment work? ▪ What are the investment costs, do I have the money? ▪ What is its income potential? – Is it good enough for my goal? ▪ How long will the investment produce returns in the short, medium, or long term ▪ What are the risks associated with the investment? Are you ready to take these risks? Session 6. Risk and Responsibility (Livestock Insurance) Session Objective This session aims to familiarize sheep farmers with the concept of risk, its sources and management, as identifying, measuring and managing risk is a key activity for businesses. In this session, trainees will identify the fundamental nature of risk and how different perceptions of risk lead to different decisions about how to deal with risk. risk and how different perceptions towards risk lead to different decisions on how to manage it. Pre and post evaluation questions: 1. What does risk mean to you? 2. What are the sources of danger in your locality and business? 3. What is insurance and why is it important? After this session, trainees should be able to: ▪ Understand insurance. ▪ Familiarize yourself with the importance of insurance. 18 What is insurance? Insurance is a contract under which an insurance company pays a person or a company for specific damage, such as bad weather (drought), an accident, fire or death. An insured person pays a predetermined amount of money (premium) to be compensated when the event occurs. What is the benefit of insurance? Insurance benefits both people and businesses in a number of ways, including: ▪ Protection against uncertainties: This is one of the most important and important advantages of insurance. The insured person or company is compensated against damage under the insurance policy. ▪ Cash flow management: The uncertainty of paying for the losses incurred out of the pocket has a significant impact on cash flow management. With an insurance policy, however, one can counteract this uncertainty without any problems. As a business owner, one should: ▪ Prepare for the unexpected: Purchasing insurance mitigates some of the financial risks associated with unforeseen disasters. For example, if a farmer insures his or her fattening sheep or farm, he or she will be reimbursed for some of the money lost if output is harmed by sudden disasters. ▪ Look for the best service from an insurance company or broker ("shop around"). Consider the conditions, processes, and time it will take to receive compensation in the event of a loss when selecting the insurance company. ▪ Take the necessary action to maintain your insurance coverage or product. Session 7. Financial Management at Cooperative level Session Objective Sheep fattening groups and cooperatives and their members should be aware of and pay particular attention to all financial matters related to the operations and functioning of their collective groups. Members do not require professional qualifications but should have financial training and understand the need for sound financial management for the cooperatives to be successful. This session aims to provide sheep farmers with basic information on cooperative financial management and associated instruments. 19 Pre and post evaluation questions: 1. What are cooperatives? 2. What is cooperative financial management? 3. Why and how do you practice financial management? At the end of this learning session, trainees will be able to: ▪ Define cooperatives and their principles. ▪ Understand cooperative financial management. ▪ Identify the tools for cooperative financial management. ▪ Practice cooperative financial management. What are cooperatives? A cooperative is an autonomous group of people who have come together voluntarily to achieve their common economic, social and cultural needs and goals through a democratically run, jointly owned company. Cooperatives have common characteristics such as: ▪ The members have at least one common interest. ▪ Members strive to improve their economic and social situation through cooperation. ▪ Members use an entity that is jointly owned and operated to provide services or goods. ▪ Regardless of their physical size or activity, cooperatives aim to use the common resources of the members to produce or purchase goods or services for the members. What is cooperative financial management? Cooperative financial management can be defined as managing the finances of a cooperative to provide satisfactory service to its members in accordance with the bylaws. Financial management for sheep fattening cooperatives is all about budgeting and making decisions that enable the cooperative to exist and be financially viable, while also ensuring that its money is spent efficiently. Financial management is crucial for cooperatives in many ways, including: ▪ Establishment of appropriate financial management structures and accounting procedures. ▪ Organize accounting books and journals in a professional manner. ▪ Preparation of monthly, quarterly, and annual budget plans and support in compliance with and adherence to the financial policy of the cooperatives. ▪ Help to follow and respect the financial policy of the cooperative. ▪ Record transactions chronologically and perform a monthly, quarterly, and yearly cash inventory. ▪ Assist in processing payments according to the cooperative's budget plan. 20 ▪ Prepare monthly, quarterly, and yearly financial reports and communicate them to the management committee. ▪ Submit the audit report and findings to members at the general meeting. Components of cooperative financial management a. Financial statements Financial statements are official records of a company's financial activities and status. They are important because they enable the evaluation of previous measures and serve as a basis for the selection of future projects. However, the most important financial accounts for businesses are cash flow, income statements, and balance sheets. A cash flow statement: A financial statement that shows how much money has been generated and spent over a specific period of time. A profit and loss statement: A financial statement that shows how much money was earned and how much money was spent over a certain period of time. A balance sheet: Annual financial statement that shows a cooperative's assets, liabilities, and equity (total value) at a specific point in time. These three statements are always required at the end of the financial year and after the audit has been completed. b. Financial controls The systems, rules, and means by which a cooperative monitors and regulates the management, allocation, and use of funds are known as financial controls. In a cooperative, these are the focus of resource management and operational efficiency. The following are examples of financial controls: Internal control: This is a process that ensures accurate financial reporting, efficient operations, and compliance with applicable rules and regulations. It includes the cooperative's plan as well as any coordination mechanisms used within a sheep fattening operation to protect assets, ensure the integrity and reliability of accounting data, improve operational efficiency, and promote compliance with the cooperative's statutes and regulations. Operational controls, accounting and financial controls, and compliance controls are examples of internal controls. External control: This is bookkeeping and financial control by an external auditor. a. Financial recording Financial accounting is the most important primary level of financial management that enables cooperatives to oversee monetary business transactions by showing the correct picture of assets, liabilities, profits and losses. Keeping financial records is important as it enables cooperatives to: ▪ Prepare proper and timely financial accounts. ▪ Provide data for financial management and business decisions in the cooperative. 21 ▪ Allow for a quick assessment of the cooperative's financial condition at any time. ▪ Allow management to quickly identify places where problems may arise and potential solutions. ▪ Allow the cooperative to calculate the taxes to be paid and fulfill the legal obligations of the country’s tax and cooperative law. ▪ Assist in the providing information to funding or credit organizations. ▪ Increase the likelihood that cooperatives will function sustainably and successfully by providing essential information and details for future financial planning. Further Reading Esayas Mulatu, Jane Wamatu. (1/10/2020). Entrepreneurship and Business Skills Development Training Manual. Beirut, Lebanon: International Center for Agricultural Research in the Dry Areas (ICARDA). https://hdl.handle.net/20.500.11766/12542 Esayas Mulatu, Jane Wamatu. (23/12/2019). Ethiopian Micro-Finance Landscape Report, updated Oct. 2020. https://hdl.handle.net/20.500.11766/10765 Kassie, G. T. Asnake, W. Haile, A. Getachew, T. Wamatu, J. 2020. Collective action for agricultural marketing - Training manual. International Center for Agricultural Research in the Dry Areas (ICARDA), Addis Ababa, Ethiopia: ICARDA. https://hdl.handle.net/20.500.11766/12629 Rahel Wubie, Girma Kassie, Aynalem Haile, Jane Wamatu, Barbara Rischkowsky. (22/12/2018). Business Models for Selected Interventions for the Development of Small Ruminant Value Chains in Ethiopia. Ethiopia: International Center for Agricultural Research in the Dry Areas (ICARDA). https://hdl.handle.net/20.500.11766/9567 Consent Statement: “Personal information including Name, Business title, Email, Phones, Images and GPS points included in this report have been authorized in writing or verbally by the data subject” J. Wamatu 22