NNPC FSTP Technicians

NNPC FSTP Technicians

Employability Skills

Course Code:

Lesson

Financial Numeracy

Contents

The course is designed to equip candidates with ability to create saving plans and budgets, make informed investment decisions and recognize which insurance policy to undertake.

Summary

• Introduction• What is Numeracy and what can I do with it

• Importance of Numeracy

• What is Financial Numeracy

• Financial literacy fact sheet(Budget and cash flow, Inflation, Insurance, Investment funds, Money, On-line banking, Paying with a card, Social finance, Loans, Understanding risk)

Course Outline

• Spending• Budgeting/Cash Flow

• All about Money

• Shopping

Course Outline

• Saving/Investing• The shrewdness of saving

• Comparing savings accounts

• Saving for a rainy day

• Socially responsible investment funds

• Funding the future – Investments

Course Outline

• Protecting/Insuring• Know your rights

• Avoid risk : insure!

• Risk assessment

• The game of risk

Course Outline

• Borrowing• Credit uncovered

• Getting loan from finance houses

• Getting bank loans

• Getting loans from credit unions

Course Outline

Upon Completion of this Course Students will be able to:

• Take control of spending through budgeting and informed consumer purchasing practice

• Set up a savings plan as well as recognize and make wise investment decisions

• Define insurance and recognize the importance of insurance as well as recognize what to insure and what not to

Learning Outcomes

What is Numeracy?

• Numerical activities associated with the study and or management of money affairs

• Has to do with • individuals

• corporations (profit-seeking or non-profit seeking)

• governments including their parastatals and agencies

Financial Numeracy

Budgeting

• A plan for future activities, describing all of a business in financial terms

• A statement of monetary plans that is prepared in advance of a forthcoming period

• usually cover a one year period

• The yardstick by which an organization’s performance is measured.

What is a Budget

• The process of preparing, compiling, and monitoring financial budgets

• A key management tool for planning and control

• Key stages to budgeting are:• Preparing• Writing• Monitoring

• Applicable to organizations and individuals

Budgeting

• Budgets help an individual, department and organizations achieve planned objectives.

• Budgets also help to illustrate the financial responsibilities of organizations to several groups of people

Why Budget?

Budgeting for activities will provide the following benefits for individuals and businesses:

•Control over resources

•Improved allocation and use of resources

•Increased efficiency translates into increased profitability

•Maintain competitive advantage

•Reduce uncertainty on specific events (as the only certain thing about the future is that the future is uncertain)

•Ability to capitalize on identified opportunities (as will be seen later in Cash budgeting)

•Basis for analysis against actual performance

•Variance analysis provide tool for individual and management decision making.

Benefits of Budgeting

Aims of Budgeting

Aims Description

Planning To aid the planning of an organization/individual in a systematic and logical manner that adheres to the long term strategy

Co-Ordination To help co-ordinate the activities of the various parts of the organization and ensure that they are consistent.

Communication To communicate more easily the objectives, opportunities and plans of the business/individual to the various team managers.

Motivation To provide motivation for managers to try to achieve the organizational and individual targets.

Control To help control activities by measuring progress against the original plan, adjusting where necessary.

Evaluation To provide a framework for evaluating the performance of managers/individuals in meeting targets.

• Sales Budget (peculiar to manufacturing and trading concerns)

• Production Budget (peculiar to a manufacturing outfit with emphasis on such elements as labor, materials, overheads)

• Budget for services (various number of individual budgets each addressing a distinct service and depending on the size of the organization)

• Summary Budget (principally the Master Budget and the Cash Budget)

Types of Budgets

• Perhaps the most important of all the budget types

• Shows the effect of budget activities-selling, buying, paying wages, investing in capital and so on- on the cash flow of an individual or organization

• Used to:• Ensure you do not hold excess cash• Ensure you do not suffer cash deficiency

Cash Budget

• Determine the optimum cash balance to maintain

• Determine what investment outlets are available for anticipated excess liquidity

• Determine in advance the appropriate sources and costs to be paid for obtaining liquidity for anticipated cash deficiency

Cash Budget

A Typical Cash Budget

Period 1 Period 2 Period 3 Period 4

Opening Cash Balance b/f+ Receipts from Debtors+ Sales Proceeds+ Any Loans Received+ Proceeds from Shares Issued+ Any other Cash Receipts

xxx xxx xxx xxx

= Total Cash available-Payments to Creditors-Cash Purchases-Wages & Salaries-Capital Expenditure-Taxation-Any Other Cash Disbursement

= Closing Cash Balance c/f

The opening cash balance on 1st January was expected to be N30, 000. The sales budgeted were as follows:

Cash Budget Example

Months Amount (N)

November 80,000

December 90,000

January 75,000

February 75,000

March 80,000

Analysis of records shows that debtors settle according to the following pattern:

Cash Budget Example

60% within the month of sales25% the month following15% the 2nd month following

Extracts from the purchase budget were as follows:

Cash Budget Example

Months Amount (N)

December 60,000

January 55,000

February 45,000

March 55,000

• All purchases are on credit and past experience shows 90% are settled in the month of purchase and the balance settled the month after

• Wages are N15, 000 per month and overheads of N20, 000 per month (including N5, 000 Depreciation) are settled monthly.

• Taxation of N8, 000 has to be settled in February and the company will receive settlement of an insurance claim of N25, 000 in March.

Required: prepare a cash budget for January, February and March.

Cash Budget Example

Workings…

Solution

Receipts From Sales January CashNovember (15% x 80,000) 12,000 December (25% x 90,000) 22,500 January (60% x 75, 000) 45,000 79,500 February Cash December (15% x 90,000) 13,500 January (25% x 75,000) 18,750 February (60% x 75, 000) 45,000 77,250 March Cash January(15% x 75,000) 11,250 February (25% x 75,000) 18,750 March (60% x 80, 000) 48,000 78,000

Solution

Payments for purchases January CashDecember (10% x 60,000) 6,000 January(90% x 55,000) 49,500 55,500 February Cash January (10% x 55,000) 5,500 February (90% x 45,000) 40,500 46,000 March Cash February(10% x 45,000) 4,500 March (90% x 55,000) 49,500 54,000

Solution

Cash Budget January February March N N N

Opening Balance 30,000 24,000 17,250

Receipts from sales 79,500 77,250 78,000

Insurance Claims - - 25,000

Total Cash Available 109,500 101,250 120,250

Payments:

Purchases 55,500 46,000 54,000

Wages 15,000 15,000 15,000

Overheads (less depreciation) 15,000 15,000 15,000

Taxation - 8,000 -

Total Payments 85,500 84,000 84,000

Closing Balance c/f 24,000 17,250 36,250

• The closing cash balance for one period forms the opening balance for the subsequent period

• In each of the months, excess liquidity was anticipated. Plans can therefore be made ahead to invest the excess cash. In the case of deficit, proactive plans will also be made to fund the shortage, possibly through overdrafts or other forms of financing

• Depreciation was ignored because it does not form actual cash outlay but an internal charge for use of assets of the organization. In other forms of budgeting, this will be considered

Note the following in the Example

• The involvement and support of top management (or family members/spouse in case of personal budgeting)

• Clear cut of definition of long term, corporate objectives within which the budgeting system will operate

• Setting of SMART goals

• A realistic organizational structure with clearly defined responsibilities

• Genuine and full involvement of all stakeholders

• An appropriate accounting and information system

• Regular revisions of budgets and targets (where necessary)

• Flexibility in budget administration.

Conditions for Successful Budgeting

Cash Flow Management

• Cash flow is the movement of money into or out of a business, project, or financial product.

• It is usually measured during a specified, finite period of time

• Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation

Cash Flow

• Project's rate of return or value: The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return and net present value.

• Problems with a business's liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable

Some Parameters Determined by Cash Flow

Cash flow can either be:

•Cash Inflow (Receipt of Cash)

•Cash Outflow (Payment of Cash)

Cash Movement

Cash is all about the timing of cash inflows and outflows. When focusing on liquidity, accounting issues such as accruals and profits are not considered. For instance, it is only cash sales that generate inflows, credit sales can increase profit in accounting terms but with no attendant cash inflow until payments are made for the sales.

Profits Do Not Equal Cash

• Operational Activities (inflow or outflow from the daily, normal, routine activities of the individual/business)

• Investment Activities (an outflow that secures long term inflow of wealth)

• Financing Activities (an inflow in the form of loans, shares issues etc. with attendant future outflows in form of interests, dividends etc.)

Sources of Cash Flow

An Example of a Basic Cash Flow Statement

Description Amount (N) Total (N)Sales (paid in Cash) 30,000 Materials Purchased - 10,000 Labour - 10,000 Cash flow from Operational Activities 10,000 Incoming Loan 50,000 Loan Repayment - 5,000 Taxation - 5,000 Cash flow from Financing Activities 40,000 Purchased Equipment - 10,000 Buy-Over of a smaller Business unit - 15,000 Sale of Obsolete Machinery 7,500 Cash flow from Investing Activities - 17,500 Total Cash Flow for the Period 32,500

Which of these companies is in a better financial position and why

Company A Company B

Year 1 Year 2 Year 3 Year 1 Year 2 Year 3Cash flow from operations +20M +21M +22M +10M +11M +12MCash flow from financing +5M +5M +5M +5M +5M +5MCash flow from investment -15M -15M -15M 0M 0M 0M

Net cash flow +10M +11M +12M +15M +16M +17M

• Show the expected receipts and payments during a forecast period

• Vital management control tool, especially during times of recession

• Show four positions which elicit appropriate decision from management as shown below

Cash Flow Forecasts

Cash Flow Forecasts

Cash Position Appropriate Management Action

Short-Term Surplus Pay Accounts payables early to obtain discountMake Short Term Cash Investments

Short-Term Deficit Increase Account PayableReduce Account ReceivablesArrange an overdraft

Long-Term Surplus Make Long-Term investmentsExpand business frontiersDiversify businessReplace/update non-current assets

Long-Term Deficit Raise Long Term Finance (e.g. Share Capital issue)Consider shut down/disinvestment opportunities.

Money Management

• Money is anything that is generally acceptable as a medium of exchange and in the settlement of obligations.

• It is anything generally acceptable as a means of payment

Introduction

• The total amount of money which all individuals in the economy wish, for various reasons, to hold.

• The main reasons why people desire to hold money are:• Transaction Motives (for day to day transaction or current

expenditure)• Precautionary Motive (for meeting up with unforeseen or

unexpected expenditures)• Speculative Motives (for meeting up with emerging

business needs/seizing advantage of investment opportunities, especially when it has to do with speculations).

Demand for Money

• This refers to the amount of money in circulation in an economy at a given period of time. Many factors affect the money available for use in any economic system per time.

Supply for Money

• Bank lending Rate (the higher the rate of interest, the lower the volume of money in circulation as borrowing will be discouraged)

• Cash Reserve (this is the percentage of cash the commercial banks are expected to keep with them)

• Economic Situation (CBN cuts supply of money during inflation and increase it during deflation)

• Reserve Requirements of the CBN (if the total reserve supplied by the CBN is high, money supply will also be high and vice versa).

Some Key Factors are:

• The quantity of goods and services which a given amount of money can buy.

• The purchasing power of money.

• During inflation, the value of money drops when prices fall, the value of money increase.

The Value of Money

• The price level

• The supply level of money

• Inflation or Deflation

• Volume of Production in the economy

Factors That Determine Value of Money

• Money has value over time

• An amount of money now has a greater value than that same amount of money sometime in the future

• If you have ‘X’ Naira now, you can make it to work for you so you obtain ‘X plus’ Naira in the future

• Lenders of money want to be compensated financially for parting with present consumption

Time Value of Money

• The vital factor used to quantify the time value of money

• Compensation cash a lender for parting with current consumption

• Charged even if no inflation is anticipated and it is certain that the money will be received.

• The price one pays for money in the financial markets

Interest

• Charged and added to the principal from period to period

• Both principal and interest forming the basis for the next period interest calculation.

• Interest is being earned on interest.

• Fundamental in determining the type of investments to personally undertake.

Compound Interest

One area in which compound interest principle is applied is where a single lump sum is deposited, for example in a savings or deposit account at a specified interest rate per period. The deposit is allowed to grow undisturbed while the interest is assumed to be reinvested.

Compound Interest

Assume an amount of N100, 000 is put in a fixed deposit account for 3 years at the rate of 12% per annum. If the amount was left untouched, what will be the value of the investment at the end of the third year?

Example of Interest Calculation from Investment

Solution 1: Step by Step Approach

Value at the end of:

Year 1: 100, 000 (1.12)=112, 000

Year 2: 100, 000(1.12)(1.12)= 100,000 (1.12)2=125, 440

Year 3: 100, 000(1.12)(1.12)(1.12)= 100,000 (1.12)3=140,493

FVn=P0 (1+r)n

Where:

FV= Future Value

n =Number of years of investment

P0= Principal Sum

r= Applicable Interest rate.

Solution 2: Generalized Formula

If in the example above, the year of investment changes to 10 years, then the Future Value will become:

FV10 =100, 000 (1+0.12)10

FV10 =100, 000 (1.12)10

=N310, 585

Solution 2: Generalized Formula

Saving and Investing

• Before spending on anything it is always good to determine what value the expenditure will add to our circumstances.

• In capital investment decision-making by firms, the concept of Net Present Value (NPV) is always applied.

• The concept calculates the present value of the cash flows to be generated by the capital project over its useful life, discounted by the cost of capital employed in executing the project.

• The general rule is to accept any capital project with a positive NPV and reject anyone with a negative NPV.

• A similar concept is necessary in our personal decision making on expenditure.

Introduction

• All savings accounts are interest yielding

• Some executive savings account have checking facilities although the cheques cannot go for clearing

Maintaining Savings Accounts

All commercial banks offer the services of savings account and there are different types

•Some savings account require the holder to leave a minimum balance over a period of time in the account and qualify for higher interest rates

•All savings account enjoy the benefits of online banking

•Another form of savings account is the fixed deposit account, with a higher amount to open, higher interest rate an untouched for a period of time ranging from 30-180 days


• Money can also be placed on call with commercial banks at an interest rate higher than the savings account rate but lower than the fixed deposit rate. In this case, the customer can liquidate at any time without prior notice

• Some current accounts now have the feature of savings accounts in the sense that they accrue interest payment if a certain minimum balance is maintained over a specified period of time


• A reasonable amount of money can also be deposited with the banks that pool together such funds from various retail customers and issue to blue-chip companies as commercial papers (CP) and banker acceptances (BA). These are high interest yielding securities and tax-exempt for the individual investors

• Other forms of short-term (money market) Investment Avenue are available in banks and can be explored upon proper enquiries.


• The act of putting money into use in order to generate further wealth, usually on a long term basis

Investments

• The scrutiny, assessment and appraisal of the available investment options in order to determine the one with the most appropriate returns

Investment Analysis

• Investment Funds

• Money Market Investments (including low risk government treasury bills, fixed deposit etc.)

• Investment in Real Estate

• Investment in Landed properties

• Investment in the Stock Market

• Cautious Investment in Hard Currencies

• Offshore Investments

• Pension/Savings Plan with an Insurance company

• Investment in a Thrift and Loan Society

Some of the Commonly Available Investment Outlets include:

• Neglecting Your Finances (lack of attention and hoping things will sort themselves out- they never do)

• Leaving Heirs Unprepared (not teaching heirs how to responsibly managed inherited wealth)

Common Failings in Personal Financial Planning

• Failing to plan the Estate (many people do not have any plan in place at all)

• Leaving Assets Unprotected (No insurance cover for properties)

• Mismanaging Cash flow (lack of discipline in spending. Expending on frivolities and non-essentials to show class or oppress)


• Not Minimising Taxes on Wealth (neglecting expert advice in managing tax matters when assets increase and get complex)

• Mismanaging debts (misuse of credit cards, loans, executing long term projects with short term debts etc)

• Choosing Wrong Investment Strategy (not properly weighing risks associated with various investment options)


• Mismanaging Windfalls (consuming extravagantly some unexpected extras that come your way)

• Loaning beyond what you can forego to family members (the risks of non repayments are higher with family members)


• Always take informed decisions on purchases, especially capital expenditures

• Do not spend more than 40% of your monthly income on debt repayment

• Pay yourself by saving at least 10% of your annual income

• Explore the opportunity of making your savings as a direct deduction from source

Tips to Savings and Wealth Creation

• Your life insurance coverage should be 8-10 times your annual income

• Always set up an emergency fund to cover 3 months worth of your expenses

• Have a personal budget and do not buy by impulse. Stick to your financial plans

• Ensure your current assets cover your current liabilities.

Tips to Savings and Wealth Creation

Insurance Business

• A form of risk management primarily used to hedge against the risk of a contingent, uncertain loss

• The equitable transfer of the risk of a loss, from one entity to another, in exchange for payment

The primary purpose of insurance is to provide economic protection from identifiable risks that may occur during a specified period

What is Insurance?

• An insurer or insurance carrier: a company selling the insurance;

• The insured or policyholder: the person or entity buying the insurance policy.

• Premium: The amount to be charged for a certain amount of insurance

• Indemnity: the Compensation paid

• Policy: the contract , which details the conditions and circumstances under which the insured will be financially compensated.

Terminologies

Categories of Insurance Cover

Category Risk type

General (also called non-life) • Property Damage• Fire• Accident• Fidelity• Burglary & theft• Disability• Etc.

Life (also called long term) Death

• Involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur

• Insured entities are protected from risk for a fee

• The business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept.

Profit = earned premium + investment income - incurred loss - underwriting expenses.

How Insurance Work

A risk is the potential that a given threat will exploit vulnerabilities of an asset or a group of assets to cause loss or damage to the asset.

Understanding Risks

Risk management is the process of identifying vulnerabilities and threats to an organization’s (or individual) assets in achieving set objectives and deciding what counter measures if any, to take in reducing the risk to an acceptable level or completely eliminating the risk.

Total Risk = Threats x Vulnerability x Asset Value

Risk Management

Depending on the sector of the economy where a business operates or the environmental conditions of an individual, risks can be of as many varying types as possible

Types of Risks

• Credit Risk (failure of a party to pay obligations when due)

• Treasury Risk (liquidity risk, foreign exchange fluctuation risks etc.)

• Operations Risk (mismanagements, falsifications, frauds, cash-in –transit, forged cheques, robbery etc.)

• Environmental Risk (political. Natural disaster, wars etc.)

• Business Risk (policy, legal etc.)

• etc.

In the banking sector for instance, typical risks could include:

• Identity Theft• Hacking• Password compromise etc.• Data security etc.

In the modern business world of e-commerce, there are many associated risks which include

• Plan the risk management approach (determine in advance the risk aversion that will apply)

• Identify and record the risks (identified risks are recorded in a risk register)

• Assess the risks (the probability that the risk will occur and the consequence of occurrence)

• Plan and record risk responses (avoidance, reduction, transference, absorption- if the consequence can be coped with).

• Implement risk management strategies

• Review the risk management approach and actions for adequacy

Approaches to Risk Management

Cost-Benefit analysis has to come into play in making this decision and it also points to the importance of Financial Numeracy. Bearing in mind that buying an insurance Policy is not free as the insured will have to pay a premium, one needs to consider which risks to:

•Insure/Transfer

•Mitigate

Do I have to Insure Every Risk?

• Avoid/Reject• Accept• Ignore

The cost of insuring any risk should not be more than the benefit to be derived from avoiding the risk. Individuals have to establish a Risk Acceptance Criteria (RAC) to determine what level of risks they can live with

Do I have to Insure Every Risk?

Obtaining / Raising Finance

As in strategic business management, individuals also need finance to support their short and long term aspirations. To function efficiently and effectively, we need a proper understanding of all the major sources of funds available, their characteristics, their advantages and disadvantages both on a standalone basis and in relation to one another.

However you raise money, the criteria are the same. Lenders/Investors will want to know whether you can show a clear path to profitability.

Introduction

• Bank Overdraft• Allows cheques to be drawn in excess of the

balance in the current account

• Can be quickly arranged with the bank and offers a level of flexibility

• Should not exceed approved limit

• The customer only pays interest when it is overdrawn

Sources of Short Term Finance

• Trade Credit (applicable to businesses)• Credit arising from deferred payments for goods

supplied to the business

• May necessitate a loss of cash discount but has no fixed interest like bank overdraft


• Bankers Acceptance (applicable to businesses)

• A form of guarantee by the bank and can be used to finance domestic and international trade

• Bought and sold on a discount basis

• Maturity period ranges from 30-180 days


• Short term loans• A loan for a fixed amount for a specified period of

time

• Offered with a variety of payment schedules

• Often the interest and capital repayment are predetermined.


• Leasing • Hiring an asset for use for a specified period of

time rather than buying

• Such assets may include office equipment, cars, computer, office space etc.


These are mostly applicable to business organizations but some individuals can also explore some of the opportunities. The list is not exhaustive.

Sources of Long Term Finance

• Long Term Loan from the bank• A good example for an individual is a mortgage loan

that will be paid back over a long period of time (10-20 years)

• Businesses can also access long term loans for strategic projects

• This will have to be covered with acceptable collateral. In the case of businesses, other requirements will include, a business plan, 5 years financial summary, a projected Profit and Loss account and summary balance sheet for 5 years, audited financial statements for 5 years etc.


• Equity Funds• Applicable to limited liability companies

• Can be obtained either through retained earnings or issuing of fresh shares


• Bonds/Debentures• Long term loans from individuals or corporate

bodies backed up by signed documents (bonds)

• Carries a fixed interest rate

• Holders of the bonds are given preference over shareholder in interest payments and in settlement in the event of liquidation


• Social Finance• Social finance is an approach to managing money that

delivers a social dividend and an economic return.

• Social finance includes community investing, social impact bonds, and sustainable business and social enterprise lending. Outcome-based philanthropic grant making and program-related investments - sometimes referred to as venture philanthropy- also fall under the umbrella of social finance

• These approaches to investment and funding share the twin focus of stimulating positive social and environmental returns for investors and the larger world.


• Venture Capital• A risk capital, normally provided in return for an

equity stake

• Provides long term, committed share capital to help unquoted companies grow and succeed

• Very good for business expansion


• Perhaps the best way to obtain finance is to have a targeted savings plan towards the project/activities to be executed.

• It entails personal discipline/sacrifice but eliminates the rigors and interest payment commitments attached to borrowing.

• With a good savings plan in place, virtually anything can be achieved in terms of financing.

Raising Finance Through Personal Savings

Documents

NNPC FSTP Technicians