Financial Management

1
Financial Management

• Part I
• Basic Aspects of Book Keeping

2
Content of Presentation

• Definition and Function of Financial Management
• Important Principles
• Important Procedures
• Common Practices
• Book keeping Tools
• Possible Problems
• Specific Issues
• Depreciation
• Tariff
• Type of Income and Expenses

3
Definition and Function of Financial Management

• Financial management is practice of recording and
  reporting any fund flow in the form of cash or
  non-cash, either income or expenses, either
  account receivables or debts in a structured way
  and sequentially
• The function of financial management is to ensure
  that the scheme is financially sustainable
  meaning cash-in exceeds cash-out sufficiently to
  ensure long term operation

4
Important Principles

• Share of Control. There should not be only one
  person controlling the flow of money
• Plan the budget. Be rational with the budget
• Implement best practices. Double checking, proof
  of transactions etc.
• Monitoring. Customers should monitor
• Safety. Use bank to save money
• Prepare for the worst. Prioritize saving instead
  of spending
• Initial connection fee is not to finance
  operational costs but provides finance for
  repairs prior to accumulating savings derived
  from tariff collection

5
Important Procedures

• Double Approval. Two people are needed to approve
  spending
• Double Checking. Check every transaction at least
  twice
• Budget Planning. Plan the budget early
• Proof of Transactions. Keep proof of transactions
  - dont lose them !
• Petty Cash. Small amount of money easily
  available for day to day expenses
• Recording and Archiving. Keep and secure all
  proofs

6
Common Practices

• Practical Financial Management is usually called
  Book Keeping. Common practices of book keeping
  for MHP management are
• Recording of monthly electricity sales (its not
  only fees but also kWh)
• Recording of income and expenses
• Recording of inventory
• Routine financial reporting
• Budget planning
• Debt and Account Receivables recording
• Bank account recording

7
Book Keeping Tools

• Customer card
• Monthly electricity fee recording book
• Ledger/cash flow book
• Inventory book
• Debt book
• Account receivable book
• Monthly financial report form
• Bank account book
• Binder/folder to keep receipts/proof of
  transactions

8
Financial Management Issues

• Compiling all transaction records (proof of
  transactions/receipt etc.)
• Recording transactions in the ledger
• Reporting financial status
• Determination of tariff
• Budget planning and
• Dividend or share of profit distribution (not all
  cases)

9
Specific Issues - Depreciation

• The importance of depreciation
• All equipment at a certain time will have to be
  replaced
• The older the equipment the less value the
  divestment price
• The older the equipment the higher its
  maintenance costs
• The older the equipment the more often break
  downs are experienced

10
Depreciation

• Value of Depreciation
• Anticipating earlier mentioned problems, all
  equipment must have a depreciation value
• Depreciation value is in the form of back up fund
  in case the equipment needs replacing

11
Specific Issues - Tariff

• Revenue from tariffs must be sufficient to cover
  regular repayment of loans (where necessary)
  and routine operational costs.  It should also
  facilitate the accumulation of funds (savings) to
  finance regular maintenance repairs as well as
  savings for emergency situations (major
  replacement of equipment). At least 40 of total
  revenue should be used for savings. If there is
  no loan to be repaid then more than 40 of income
  should go to the savings account at the bank.
• Tariffs should be increased according to changes
  of relevant prices (e.g. spare part prices,
  average cost of living, etc). An easy approach
  is to index link the tariff to the price of
  fuel such as kerosene. If the price of kerosene
  rises then the tariff be increased by the same
  percentage increase.

12
Specific Issues - Tariff

• Implementation of tariff depends on the policy of
  the local community. There are a number of
  options such as
• Consumers pay a Tariff based on actual
  consumption of kWh. This approach requires that
  kWh meters are installed for all consumers
• Flat tariff for specific categories. For example
  220 VA connection will be charged IDR 50.000 per
  month while 110 VA connection will be charged
  only IDR 25.000 per month
• Flat tariff for each type of electrical
  appliance. For example the first  20 Watt
  Fluorescent lamp will be charged IDR 15 .000 per
  month, the second lamp 20.000 per month and all
  further lamps 25.000 per months whilst a 14 inch
  Color TV set will be charged IDR  40.000 per
  month and so on (social tariffing) 

13
Type of Income and Expenses

• Income
• Monthly electricity fee
• Other income
• Other electricity service
• New connection fees
• Donations
• Divestment revenue
• Interests
• Payment of account receivables etc.

14
Type of Income and Expenses

• Expenses
• Wages
• Maintenance Costs
• All routine maintenance costs
• All repair costs
• All equipment investment costs
• Operational Costs
• Transport and communication costs
• Office supplies

15
Type of Income and Expenses

• Other costs
• Debts payment
• Credit instalments
• Major repair costs
• Meeting/celebration costs
• Depreciation
• Dividend
• Village donation
• Tax