NNPC FSTP Technicians

1. NNPC FSTP Technicians Employability Skills Course Code: Lesson

2. Contents Financial Numeracy

3. Summary 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.

4. Course Outline • 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) 

5. Course Outline • Spending • Budgeting/Cash Flow • All about Money • Shopping

6. Course Outline • Saving/Investing • The shrewdness of saving • Comparing savings accounts • Saving for a rainy day • Socially responsible investment funds • Funding the future – Investments

7. Course Outline • Protecting/Insuring • Know your rights • Avoid risk : insure! • Risk assessment • The game of risk

8. Course Outline • Borrowing • Credit uncovered • Getting loan from finance houses • Getting bank loans • Getting loans from credit unions

9. Learning Outcomes 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

10. What is Numeracy?

11. Financial 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

12. Budgeting

13. What is a Budget • 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.

14. Budgeting • 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

15. Why Budget? • 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

16. Benefits of Budgeting 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.

17. Aims of Budgeting

18. Types of Budgets • 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)

19. Cash Budget • 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

20. 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

21. A Typical Cash Budget

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

23. Cash Budget Example Analysis of records shows that debtors settle according to the following pattern:

24. Cash Budget Example Extracts from the purchase budget were as follows:

25. Cash Budget Example • 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.

26. Solution Workings…

27. Solution

28. Solution

29. Note the following in the Example • 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

30. Conditions for Successful Budgeting • 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.

31. Cash Flow Management

32. Cash Flow • 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

33. Some Parameters Determined by 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

34. Cash Movement Cash flow can either be: • Cash Inflow (Receipt of Cash) • Cash Outflow (Payment of Cash)

35. Profits Do Not Equal Cash 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.

36. Sources of Cash Flow • 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.)

37. An Example of a Basic Cash Flow Statement

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

39. Cash Flow Forecasts • 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

40. Cash Flow Forecasts

41. Money Management

42. Introduction • 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

43. Demand for Money • 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).

44. Supply 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.

45. Some Key Factors are: • 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).

46. The Value of Money • 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.

47. Factors That Determine Value of Money • The price level • The supply level of money • Inflation or Deflation • Volume of Production in the economy

48. Time 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

49. Interest • 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

50. Compound 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.