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RWANDA COOPERATIVES AGENCY (RCA)
MODULE ONE: ORGANISATION AND MANAGEMENT OF THE
UMURENGE SACCOS
PREPARED BY:
FRIENDS Consult Ltd.
Plot 2052/53, Alandro House
Kalina Zone, Kisugu P. O. Box 24366.
Tel (0414) 349381
Kampala, Uganda.
Email: [email protected]
Website: www.friendsconsult.co.ug
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Table of Contents INTRODUCTION TO THE MODULE ....................................................................................................... 1
1.0 INTRODUCTION TO GOVERNANCE: ........................................................................................ 2
1.1 Meaning and Importance of Governance ...................................................................................... 2
1.2 Contextual Framework of Governance ......................................................................................... 3
1.3 Conditions Necessary For Effective Governance ......................................................................... 3
1.4 Key Governance Documents and Guidelines .................................................................................. 4
1.4.1 Constitution .............................................................................................................................. 4
1.4.2 BNR regulatory documents and requirements.......................................................................... 5
1.4.3 RCA regulatory documents and requirements.......................................................................... 5
1.4.5 Administrative Committee Manual .......................................................................................... 5
2.0 GOVERNANCE STRUCTURE: ...................................................................................................... 6
2.1 Governance Organs: Composition, Roles and Responsibilities. ....................................................... 6
2.2 Reporting Relationships among the Governance Organs ............................................................. 9
2.3 Importance of Separation of Roles and Responsibilities .............................................................. 10
2.4 The Administrative Committee’s general roles in Strategic Leadership .................................... 11
3.0 TOOLS FOR EFFECTIVE AND EFFICIENT GOVERNANCE .................................................. 12
3.1 Organizational Vision, Mission, Goals and Objectives. ................................................................ 13
3.2 Business Plan, Work Plans and Annual Budgets .......................................................................... 14
3.3 Guidelines, Policies and Procedures Manuals ............................................................................... 16
3.3.1 Accounting Policies and Procedures Manual .......................................................................... 16
3.3.2 Internal Control Policies and Procedures Manual .................................................................. 16
3.3.3 Staff Policies and Procedures Manual .................................................................................... 16
3.3.4 Operational Policies and Procedures Manual ......................................................................... 17
3.4 Performance Benchmarks ............................................................................................................. 17
3.5 Periodic and Annual Reports/Accounts ....................................................................................... 18
4.0 INDICATORS OF GOOD GOVERNANCE IN SACCOs ............................................................ 19
5.0 MANAGEMENT’S ROLE IN THE UMURENGE SACCO’S GOVERNANCE ......................... 21
5.1 Business Development ................................................................................................................. 22
5.2 Human Resource Development .................................................................................................. 22
5.3 Collection and Dissemination of information ............................................................................. 23
5.4 Other Responsibilities of management to the Administrative Committee .................................... 23
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6.0 OVERVIEW OF MANAGEMENT ............................................................................................... 23
6.1 Definition of Management .......................................................................................................... 23
6.2 Functions of Management ........................................................................................................... 24
6.3 The Importance of Management in the Performance of Umurenge SACCOs ............................ 25
7.0 PLANNING AND BUDGETING .................................................................................................. 25
7.1 Introduction to planning .............................................................................................................. 26
7.1.1 What is planning? ................................................................................................................... 26
7.1.2 Why do we plan? .................................................................................................................... 26
7.1.3 Who Plans? ............................................................................................................................. 27
7.1.4 Types of plans ........................................................................................................................ 28
7.2 Overview of the planning process ............................................................................................... 28
7.2.1 Scanning the environment ...................................................................................................... 29
7.2.2 Setting goals and objectives ................................................................................................... 29
7.2.3 Premising / Developing Assumptions .................................................................................... 30
7.2.4 Determining Alternative Courses of Action ........................................................................... 30
7.2.5 Evaluating the various Alternative Courses of action ............................................................ 30
7.2.6 Selecting a Course of Action .................................................................................................. 30
7.2.7 Formulating Derivative Plans ................................................................................................. 31
7.3 Budgeting .................................................................................................................................... 31
7.3.1 Purpose of budgeting .............................................................................................................. 31
7.3.2 Who should be involved? ....................................................................................................... 33
7.3.3 Budgeting Process .................................................................................................................. 34
7.4 Implementation/ execution of Plans ............................................................................................ 35
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INTRODUCTION TO THE MODULE
This module introduces the participants to governance, organization and general management of
SACCOs in general and how specifically it can be improved at the Umurenge SACCOs. Special
focus will be on equipping the administrative, credit and supervisory committee members at the
Umurenge SACCOs with the knowledge and skills required to fully execute their respective
duties in supervising and guiding the SACCOs’ staff. The managers and accountants will also be
equipped with skills to manage and thus compliment the three committees in the governance of
the SACCOs. The key areas to be covered in this module will include: governance and its basics,
management, planning, budgeting and organizing and staffing.
By the end of this module, the participants should be in position to:
Explain the meaning of governance and the conditions necessary for the good governance
of the Umurenge SACCOs
Know the key governance organs and their respective roles and responsibilities including
the administrative, credit and supervisory committees
Understand the tools necessary for efficient and effective governance
Identify the indicators of good governance
Understand management’s role in the governance of the Umurenge SACCOs
Appreciate the importance of planning and budgeting for the overall success of the
Umurenge SACCO
Effectively manage and organize the Human Resources of the SACCOs for maximum
productivity
Module Outline:
1. Introduction to governance
2. Governance Structures
3. Tools for effective and efficient governance
4. Indicators of good governance
5. Management’s role in the governance of the Umurenge SACCOs
6. Overview of management
7. Planning and budgeting
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1.0 INTRODUCTION TO GOVERNANCE:
This unit will introduce the participants to the overall module and put governance into
context. The key learning objectives will include:
Explain the meaning and importance of governance in the successful growth of the
Umurenge SACCO
Illustrate and explain the contextual framework of governance of SACCOs.
Explain the conditions necessary for effective governance
The detailed content under this unit will include:
1.1 The meaning and importance of governance
1.2 The contextual framework of governance
1.3 Conditions necessary for effective governance
1.4 Key governance documents and guidelines
1.4.1 The constitution
1.4.2 BNR regulatory documents and requirements
1.4.3 RCA regulatory documents and requirements
1.4.4 Umurenge SACCO bye-laws
1.4.5 Administrative Committee/ Governance organs’ manual
1.1 Meaning and Importance of Governance
Governance is the process through which an organization is directed and controlled to
achieve its intended objectives. Although governance is a collective responsibility of all
the organs of an organisation, the main responsibility for the good governance in the case
of the Umurenge SACCOs falls mainly on the Administrative Committee. The different
organs like the supervisory and credit committees, management and the members’
General Meetings also take responsibility and are accountable for achievement of their
respective objectives. Prudent governance should aim at:
guiding the Umurenge SACCOs in fulfilling their respective visions, missions and
aspirations
guiding management of the Umurenge SACCOs’ strategic direction
effective monitoring and oversight, by the various organs like the committees, of the
implementation of the SACCO’s strategy
protecting the Umurenge SACCOs’ assets, reputation, values and relevance over
time.
Governance is a system of checks and balances between Umurenge SACCO members,
the committee members (administrative, supervisory and credit), SACCO management
and other stakeholders (BNR, RCA etc) who set the standards and objectives of
achievement, and oversee their implementation. At the core of effective governance of
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the Umurenge SACCOs is the firm emphasis on and execution of responsibility and
accountability, in an atmosphere of transparency.
Governance is fluid: involves many players; and evolves over time according to the
SACCO’s legal structure and external context. These notes concentrate on the
fundamental governance principles that rarely change over time.
Sound governance requires good leadership, competence and commitment, guided by the
administrative committees. Although the SACCO may have many stakeholders, the
governance process is under the direction of the administrative committee as the main
organ.
1.2 Contextual Framework of Governance
1.3 Conditions Necessary For Effective Governance
For the Umurenge SACCO to have effective governance, achieve its objectives and grow,
the following conditions are necessary:
Individual administrative committee members must have:
(a) Something at stake: financial and/or reputation
(b) Competencies (leadership/management/technical)
(c) Independent minds and freedom to express their views
(d) Personal integrity
GOVERNANCE
(Internal Accountability)
Administrative
Committee
(Management
Accountability)
Management
(Staff Accountability)
Umurenge SACCO
Membership
(Performance
Accountability)
Regulators : RCA & BNR
(Legal Accountability)
Stakeholders
(Interest Group
Accountability)
External Accountability
External Accountability
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(e) Commitment to the SACCO, so as to avoid detrimental conflicts of interest
(f) Time to participate actively and regularly in the affairs of the SACCO
The responsibilities of committees and management must be clearly defined.
Committees (administrative, supervisory and credit) and management performance
must be regularly assessed in an objective way, and corrective action taken where
necessary.
There must be a high quality MIS providing accurate and timely reports to the
different committees.
The committees and management should exercise openness and self-critical approach
to business and general problem solving.
Active committees to address key issues should be formed and tasked with specific
responsibilities relating to their areas of involvement.
Policies and procedures must be developed to ensure continuity and proper
succession of the administrative committee.
An effective chairperson (administrative committee president) who knows the
business very well and is able to guide, but should be open to views and respectful of
decisions reached by consensus.
There must be effective and active accountability of the administrative committee
itself to the general membership, whose powers in principle should supersede those of
the committee, but who need to delegate most of this power to the committee.
1.4 Key Governance Documents and Guidelines
1.4.1 Constitution or bye-laws
The Constitution is the most important document that sets out the laws and principles that
will govern the Umurenge SACCO. Key contents of the constitution should include the
following;
The name of the Umurenge SACCO
Definitions of terms, titles and phrases used
Headquarters of the SACCO (physical location)
Affiliation to other bodies, groupings or entities
Objectives of the SACCO, and its intended major activities
Membership composition
Administrative Structure: General Assembly, Committees etc
Financial year
Accounts, Finances and Audit- provisions for procedure and reporting
Language of business and meetings
Scope and amendment of constitution or bye-laws
Interpretation and resolution of disputes
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1.4.2 BNR regulatory documents and requirements
There is the National Microfinance policy, the National Microfinance Policy
Implementation Strategy and the National Savings Mobilisation Strategy all of which are
supposed to shape the running and management of the Umurenge SACCO operations.
The SACCO leaders therefore have to be well acquainted with the provisions of those
documents as they relate to the regulation of the SACCO business.
1.4.3 RCA regulatory documents and requirements
There are other important regulatory documents such as the Umurenge SACCOs Strategy
published by the Ministry of Finance and Economic Planning which gives guidelines on
how the Umurenge SACCOs are supposed to operate. The document spells out the
government programme of creating at least one SACCO at every level of the
administrative sector (Umurenge). In addition to the Umurenge SACCO strategy, there is
the government cooperative policy document and Cooperative Act which are to guide in
the running and management of cooperative organisations including the SACCOs. All
these relevant documents have a direct bearing on the smooth running of the Umurenge
SACCOs therefore the leaders and promoters of the said institutions have to be well
conversant with the provisions of these different documents.
1.4.4 Administrative Committee Manual
An Administrative Committee Manual is a more recent addition to tools of good SACCO
governance. Although the law does not require it, the Administrative Committee manual
is very good for the Umurenge SACCO committee members to use for guidance on
procedure, roles, limits and sound practice adherence. It may be prepared by the members
(General Assembly), a hired consultant or the administrative committee itself. Whichever
way the Administrative Committee manual is prepared, it needs to be discussed and
approved by the AGM. The Administrative Committee manual stipulates roles,
privileges, appraisal/evaluation, by laws etc, relevant to the Administrative Committee
and its members (Directors), as well as issues of procedure, protocol, codes of conduct
and ethical issues etc.
Contents of the Administrative Committee Manual
The Administrative Committee Manual lays out:
The institution’s by-laws and policy statements
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A written explanation of the individual, committee and collective responsibilities
of the Administrative Committee, detailing the time and commitment per area of
responsibility
A description of the institution’s Administrative Committee appraisal process
The terms of Administrative Committee appointment, renewal and discharge
Descriptions of the Administrative Committee and institutional structures
2.0 GOVERNANCE STRUCTURE:
Whereas the first topic introduces the participants to governance at the Umurenge
SACCO in general, this section will focus on the structure of governance where we shall
concentrate on the governance organs, their composition, roles and responsibilities,
relationships and finally the rationale for separation of duties and responsibilities.
By the end of this section, participants should be in position to:
Explain the various governance organs, their composition, roles and responsibilities
Report and explain the relationships among the governance organs
Explain the importance of separating the roles and responsibilities
A governance structure refers to the number and types of various organs that a SACCO
puts in place to ensure that the activities and functions are well directed, and the inter-
relationships among these organs. Good governance is the single most important success
factor for any SACCO. As a principle, therefore, every SACCO should ensure that it has
a governance structure that will ensure effective and efficient operations, transparency,
accountability, good reputation, profitability and growth.
2.1 Governance Organs: Composition, Roles and Responsibilities.
The principal governance organ in the Umurenge SACCO is the Administrative
Committee, which reports to and is elected by the members in a General Assembly (GA).
In addition to the administrative committees, the Umurenge SACCOs have also formed
other committees to improve on their governance. These committees are the Credit/
Loans and the Supervisory/ Audit Committee.
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Below are briefs of the different governance organs of the Umurenge SACCO:
General Assembly (GA)
Constitution All fully paid up members of the SACCO. These are the true “owners” of the
institution.
Responsibilities
Approves mission /vision and strategic objectives of the SACCO (unless
they delegate this to the administrative committee)
Protects rights of members or shareholders
Provides overall direction of the SACCO’s operations
Elects the administrative, supervisory and credit committees
Approves accounts of the SACCO
Approves business plan, annual plans, and budgets (unless delegated to the
administrative committee)
Approves operating and lending policies
Approves interest rates policies proposed by the administrative committee.
Approves appointment of auditors and their pay
Undertakes any other general business deemed necessary
Approves any amendments in the constitution
Administrative Committee
As already stated, the administrative committee is the principal governance organ of the
SACCO. As it is not practical for all the members or shareholders of the Umurenge
SACCO to keep oversight, this committee directs the affairs of the SACCO on behalf of
its general membership.
Constitution: The committee’s composition is determined by the General
Assembly which elects its members.
Responsibilities:
Defines and upholds mission /vision and objectives, and policies of
SACCO, and ensures that plans conform to them.
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Reviews and approvals business plans & budgets before presenting
them to the GA (or sometimes before approving them)
Supervises management in the execution of approved plans
Mobilizes resources for the SACCO on behalf of the members
Appoints, appraises and disciplines management
Approves rate of interest and other product costing.
Monitors the activities of committees
Reports to the GA on institutional performance – financial,
operational etc
Supervisory/ Audit Committee
The Supervisory/ Audit Committee’s key role is to check on the consistency
of the actual operations of the Umurenge SACCO and the stated policies,
and to ensure this supports the vision, mission and strategic objectives. The
Audit committee is also usually charged with ensuring that the financial
affairs of the SACCO are handled with prudence, due care and transparency.
In a nutshell they enforce compliance with the SACCO rules, procedures,
policies and regulations as a whole.
Constitution Three to Five members of the SACCO but with strong financial skills, and
one or two others with a deeper understanding of the SACCO and its
business
Responsibilities Checks for consistencies in the SACCO’s financial and operating records
Authenticates the SACCO’s financial reports
Ensures that operating, loan policies and procedures, and expenditure
controls are followed
Ensures prudent Asset and Liquidity controls
Regularly inspects books, records and transaction documents of the
SACCO
Monitors lending operations and loan recovery, especially the related
financial documents and records.
Checks operations of all SACCO’s departments, managers and officers to
compliance with the set rules and standards.
Liaises with internal and external auditors
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Loan/Credit Committee
Savings mobilisation and provision of credit are the major products of the
Umurenge SACCOs. It is, therefore, proper that there should be a committee
to look into the lending operations. For this reason, the Loans or Credit
Committee is usually a vital governance organ in any SACCO.
Constitution Appointed by the Administrative Committee out of the Administrative
Committee members but may co-opt other technical persons from outside the
Administrative Committee as deemed necessary.
Responsibilities
Approving loans (or those above a certain limit)
Reviewing the lending policies and guidelines before approval by the
administrative committee
Monitoring all lending operations and the portfolio quality – from a
strategic standpoint
Helping management to enforce loan recovery in case of stubborn and
overdue borrowers
Approving the plans for and monitoring portfolio growth
Monitoring product development and improvement
2.2 Reporting Relationships among the Governance Organs
As already stated in section 2.1 above, there are different governance organs with
different roles and responsibilities. However, all the activities have to be synchronized
toward achieving the SACCO’s goals. To attain this, there needs to be reporting lines
between and among these organs, with the administrative committee being the supreme
supervising organ since this is responsible of the SACCO’s corporate governance.
Below is the organogram showing the reporting relationships between the governance
organs.
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SACCO GOVERNANCE ORGANS/STRUCTURE
Reporting
Checks
Checks
Checks
Reporting On Loan
Operations.
Key
Reporting relationship
Checking relationship
2.3 Importance of Separation of Roles and Responsibilities
For smooth running of the institution, each organ of the Umurenge SACCO governance
structure needs to effectively and efficiently execute its duties and responsibilities in
accordance with the terms of reference laid down for it in the SACCO’s by-laws and
other procedural manuals. Each organ should work collaboratively with but not usurp the
powers of other organs in handling any of the SACCO’s business. In cases where roles
overlap, the committees should work collaboratively to define responsibilities within
those areas. The SACCO’s Governance Structure should clearly define the separation
of duties and responsibilities of the organs. Particularly, the roles of the three committees
and those of management should be clear and respected. Similarly, the administrative
committee members should refrain from trying to micro-manage the SACCO.
GA
Committee / Board
Management Staff
Supervisory/
Audit
Committee Loans /
Credit
Committee
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2.4 The Administrative Committee’s general roles in Strategic Leadership
In ensuring that the SACCO is well governed, the administrative committee’s role is of
crucial importance. A well informed and skilled committee will support and guide
management for better institutional performance, while a committee that lacks in skills
and knowledge often ends up worsening the governance or stifling the performance of the
SACCO.
The main difference between the normal roles of the administrative committee and that of
management is that the committee should look at strategic, high level issues while
management looks at implementing these strategic aspects and smoothly running the
SACCO for greater viability and sustainability.
The administrative committee has a fiduciary responsibility of running the SACCO on
behalf of the owners or members. Their most effective way of doing this should be to
identify and hire competent management, and adequately task and monitor management.
The table below highlights examples of the committee’s strategic roles compared to the
implementation/ executive roles of management.
PERFORMANCE
AREA
MANAGEMENT ROLE ADMIN COMMITTEE ROLE
Planning,
monitoring &
strategic
leadership/
management
Upholding the vision, mission
and strategic direction
Developing strategic plans, for
Administrative Committee
approval, and thereafter
executing them
Developing operational/
business strategic plans and
executing them
Providing the vision and strategic
direction of the institution
Participation in strategic planning;
Vetting and approving the strategic
plans
Vetting and approving operational/
business plans
Human resource
management
Developing the HR manual
Hiring and firing lower and mid-
level employees
Promotion, discipline etc of
lower level employees
Tasking and evaluating lower
level staff
Ensuring adequate technical skill
mix for the institution
Hiring, tasking, evaluating
rewarding and disciplining the
Managers & Accountants
Approving the HR policies and
procedures manual
Ensuring adequate managerial skill
mix
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PERFORMANCE
AREA
MANAGEMENT ROLE ADMIN COMMITTEE ROLE
Credit Operations Developing, credit policies and
procedures
Refining and innovating
products
Instituting delivery mechanisms
Training credit officers
Getting and addressing customer
concerns
Implementing suitable
supporting back-office functions
Approving the credit policies and
procedures
Approving product refinements and
innovation
Ensuring management adheres to
approved credit policies and
procedure
Monitoring Credit/loan portfolio
performance from a strategic
standpoint
Monitoring that institutional
capacity adequately support
business performance and growth
Finance Setting up and using suitable
financial management systems,
preparing the accounting manual
Annual budget preparation
Producing financial accounts
Ensuring/ implementing
measures to effect a suitable
control environment
Approving the accounting/
Financial Management manual
Approving annual budget and
evaluating their achievement
Approving financial accounts
Strategically monitoring and
checking the control environment
through the audit committee,
internal and external audits
Marketing/
business
development
Developing and implementing
market/ business development
plans
Market intelligence
Client/ customer attitude surveys
On-the-ground and strategic
market scanning
Approving marketing/ BD plans
and monitoring their achievement
Networking to promote the
institution’s image
Gathering strategic level market/
sector intelligence
3.0 TOOLS FOR EFFECTIVE AND EFFICIENT GOVERNANCE
This section introduces the participants to the key tools necessary for the effective and
efficient governance of the Umurenge SACCOs by the governance organs like the
administrative, supervisory and credit committees. By the end of this section, participants
should be able to:
Appreciate the importance of the vision, mission, goals and objectives in
strategically focusing the operations of the Umurenge SACCO.
Understand and be able to use the business plans in guiding as well as monitoring
the performance of the Umurenge SACCO
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Generate work plans, annual budget guidelines from the business plans
Review and formulate the relevant policies and procedures required to effectively
manage and control the operations of their respective SACCOs
The last two sections dealt with the principles, key documents, roles and structures for
good governance. With the principles and structures in place, a SACCO needs effective
tools to ensure that its governance system is well equipped to perform.
For effective and efficient pursuit of good governance, SACCOs need the following
tools:
3.1 Organizational Vision, Mission, Goals and Objectives.
Every SACCO should have a clear statement of its vision, mission, goals and objectives
in order for all those involved in its management/ operations to have a clear sense of
destiny, and for the Administrative Committee to guide or direct management in that
direction.
Vision- This is the ultimate aspiration of the Umurenge SACCO as an institution
and its members. The institutional vision expresses the dreams of the SACCO as an
institution and its members in the long run. An example of an SACCO vision may
run as follows “ a rich and prosperous membership served by a profitable and
sustainable SACCO”
Mission Statement – this is a brief statement that indicates the purpose for which
the Umurenge SACCO was formed, it indicates the direction to which the SACCO
is intended to move, and the clientele it aims to serve. It seeks to answer the
following questions:
1) What business is the SACCO in?
2) What business does the SACCO want to be in?
3) What do we intend to achieve?
4) Who are our clients and stakeholders?
Examples of mission statements could be:
“We aim to excel in meeting the savings and credit service needs of the community
through provision of safe and secure saving deposit services as well as affordable and
easily accessible credit facilities”
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“Through provision of high quality financial services, intend to help our membership excel
and thereby maintain a leading position in the local market;”
Goals – these are medium and long-term aspirations that the Umurenge SACCO wants to
achieve, based on its mission statement and driven by its vision. Examples of a goal
statement may run as follows
Maximize savings and credit services to members while maintaining a healthy portfolio
during the next 6 years
Attaining and maintaining a leading market position by way of clients served and gross
loan portfolio in four years’ time
Objectives are specific quantified targets that the SACCO has set to be achieved in a
short-term period, which will move it in the direction of achieving its goals. Examples
SACCO objectives may include the following:
- To increase savings by 20% per annum over the next five years
- To increase credit services to members by 20% by the end of the year
- To increase income and net profits by 15% per year, etc.
- To increase the number of members from 80 to 200 by the end next year
- To serve 2,000 borrowers and 6,000 savers, with a loan portfolio of Rwf. 1.2 Million
in two years’ time.
- Increase the savings deposits by 200% in the next five years
- To improve the gross income by 155% and net income by 215% in seven years
One goal may have one or more objectives, which are in a sense the more specific targets
contributing to the attainment of the goals
3.2 Business Plan, Work Plans and Annual Budgets
Business Plan
Once the Umurenge SACCO has decided on its Mission, Goals and Objectives, which
give it the direction and reason for its operations, it should develop a business plan. The
business plan presents the future desired achievements and activities of the SACCO in a
wholesome way. The effect of the business plan is to enable those charged with its
governance and management to think ahead and determine the activities to undertake so
that the SACCO can achieve its objectives. The Business Plan may be for 3 – 5 years and
its implementation is usually done through annual plans and budgets.
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A typical Umurenge SACCO’s business plan will include the following:
General Description of the Umurenge SACCO
This would be a summary statement of the type of the SACCO business / operations
being planned, the needs of the members that it seeks to fulfil, what makes the SACCO
different from other SACCOs or institutions, the principal strengths and opportunities of
the SACCO and the threats and weaknesses both present and future.
Statement of Mission, Goals, and Objectives
These are brief statements that indicate the purpose of the SACCO, its reasons for
existence, wider aspirations and desired achievements
Marketing Plan
This takes the form of an analysis of the past, current and future market positions and
market opportunities of the SACCO, and its detailed, deliberate plan of action to
penetrate and expand its clientele.
Operational Plan
This is an analysis and projection of the operations of the SACCO. It includes a
description of the business the SACCO plans to do e.g. saving mobilization, credit
extension and diversification, training etc. The operational plan also as well as quantifies
the targets for performance, and lays out and how the SACCO practically plans to
achieve them.
The Financial Plan
This covers the analysis of financial situation and requirements of SACCO under the
proposed business plan and how the different assets, portfolio growth, logistics and other
relevant expenses will be funded. The financial plan usually includes projections of
income, costs, profits, balance sheet and cash flow, all drawn in line with the business
plan.
Organizational Plan
This is the plan for structuring or restructuring the people, systems, logistical support,
equipment and other physical aspects of the business to effectively support all the other
sections of the business plan.
Work plans and annual budgets
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Work plans are shorter term, more defined and specific statements of purpose, intent and
targets. They are step-by-step approaches in timing and scheduling the implementation of
the various activities spelt out in the business plan. Work plans and budgets should aim at
actualizing the SACCO’s mission, goals and objectives. Management should be guided in
its day-to-day operations by approved annual work plans and budgets drawn in line with
the SACCO’s 3 – 5 year business plans. These should lead to the overall attainment of
the SACCO’s objectives, goals and mission.
3.3 Guidelines, Policies and Procedures Manuals
Manuals that set out the policies and procedures for each major aspect are excellent
governance tools for the Umurenge SACCO. They help both management and the
Administrative Committee in monitoring and ensuring that the operations are well
directed. The most commonly used manuals are:
3.3.1 Accounting Policies and Procedures Manual
SACCOs need to have written Accounting Policies and Procedures Manuals, which
conform to Micro Finance Best Practices and sound accounting principles. These should
be well understood and complied with by the management team, Administrative
Committee and other committee members. This manual sets out guidelines of all the
accounting recording, processing, reporting that the Umurenge SACCO needs to do.
These policies and guidelines should enable the SACCO to keep correct records, produce
correct and timely reports and above all, ensure safe custody of the SACCO’s resources
and assets.
3.3.2 Internal Control Policies and Procedures Manual
The Umurenge SACCO should have internal control and audit systems to guide the
regulators like RCA & BNR and the Supervisory Committee in doing their work. These
systems should ensure that the SACCO’s resources are put to uses that will optimize
returns and ensure that they managed in a safe and sound manner. This manual should
further lay out the guidelines on procedure for regular internal audit and special
investigations (if needed). Additionally, this manual should also highlight guidelines for
field audit, and for ascertaining whether all the other policies and procedures are being
complied with.
3.3.3 Staff Policies and Procedures Manual
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The Umurenge SACCO should have a clear policy on staff recruitment and human
resource development plan. Job titles, job descriptions together with the appropriate
qualifications should be clearly stated. Human resource or personnel management
systems and procedure should be clearly spelt out in this manual. Among the issues
addressed should be policies and procedures for:
Recruitment, probation and confirmation and promotion
Staff records
Discipline, including dismissal
Leave entitlements
Staff grades and classification
Job descriptions, roles and responsibilities
Organizational structure and reporting relationships
3.3.4 Operational Policies and Procedures Manual
Every Umurenge SACCO should have operational policies and guidelines approved by
and acceptable to the administrative committee and/ or its members. These should
address, fairly comprehensively, all products (loans, savings, others) and all areas of
business operations of the SACCO. These should be strictly complied with in all its
lending and other operations. The policies should be capable of assuring the SACCO
high quality portfolio, fair financial returns/ good yield and a fine market reputation. The
Operational Policies and Procedures Manual should also give guidelines on business
development, product delivery methods, client relationship management and related
aspects.
3.4 Performance Benchmarks
Performance benchmarks are agreed targets or other comparative points of reference
against which the Umurenge SACCO should evaluate its performance. The benchmarks
may measure performance in terms of outreach or deposit volumes, portfolio growth/
quality and financial results.
The portfolio performance standards, for instance, measure the danger of the delay or
non-payment of loans. They give an insight into the quality of the SACCO’s outstanding
loan portfolio and an indication about a possibility of loss. Below is a sample of portfolio
performance benchmarks. The same could also be done for other performance measures.
SAMPLE PERFORMANCE BENCHMARKS
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Indicator Meaning Working Minimum
standard
Average
Deposit per
saver
The average balance
per saver
Total value of savings/ total
number of savers
Borrowers to
Savers
How proportion of
the savers are
borrowers
Total Borrowers/ Total
Savers
Delinquency
(Portfolio At
Risk) 30 days)
How common is non-
payment of the due
loans/ How risky is
our portfolio?
Total value of all loans with
arrears element outstanding
for 30 days or more, divided
by the total value of the
gross loan portfolio.
< 5%
Recovery Rate How much of the due
loans are recovered
within 30 days of the
due date?
Total loans (principal)
repaid within 30 days of the
due date, divided by total
that should have been re-
paid.
>95%
Loan Loss Rate
(write-offs)
What is the loan loss
level compared to the
total portfolio?
Total loan principal written
off divided by total gross
value of loan principal in
the portfolio, for a year
< 2%
Return on
Equity
What profit does the
SACCO realize to its
owners or ordinary
capital providers?
Net profit after tax charge
divided by the average
equity for the period
Depends
on
institution
Similar benchmarks could be developed for membership or client numbers, savings
mobilization, gross and net income. All these could be used for monitoring as part of the
SACCO’s governance.
3.5 Periodic and Annual Reports/Accounts
Each SACCO needs to have a reporting system, which ensures timely production of
accurate periodical operating and financial reports. Such reports can be used in the
evaluation of the Umurenge SACCO’s performance and in facilitation of regular
monitoring of operating and financial positions. Such reports might include:
- Savings reports
- Monthly Loan Tracking Reports
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- Monthly, quarterly and annual Trial Balance Sheets, Profit and Loss Accounts, and
Balance Sheet.
- Other operating highlights like number of members, borrowers and amounts lent,
cumulative operating and performance figures, etc.
4.0 INDICATORS OF GOOD GOVERNANCE IN SACCOs
This section covers some of the indicators of good governance in the Umurenge SACCOs
so that stakeholders who will include RCA, BNR and development partners can effectively
monitor their performances. By the end of this section, participants should be able to:
Identify and articulate the key indicators of good governance
Assess the performance of their respective SACCOs against these indicators
The specific indicators to be covered under this section will include but not be limited to;
Consensus building
Transparency
Accountability
Consensus orientation
Efficiency and effectiveness
Equity
Strong and visionary leadership
a) Participatory decision making
The concept of people’s participation in their own development is central for good,
effective and efficient governance of the Umurenge SACCOs. All women and men
who are shareholders/ members should have a voice in the decision-making process
either directly or through the organs that represent them. Such participation should be
fair and free of intimidation, duress or undue influence.
b) Transparency
All processes, decisions and relevant information should be conducted in a
transparent manner and should be accessible to all those concerned.
Governance organs should hold regular meetings to direct the affairs of their
SACCOs. The Committees should meet at least once a month while the General
Assembly should be held at least once a year. Being working committees, the Credit/
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Loans and Supervisory/ Audit Committees should meet regularly to ensure close
supervision of the SACCOs’ leading and general business.
c) Accountability
All decision-makers; Administrative Committee, Supervisory Committee, Audit
Committee and Management must be accountable to their immediate supervisors and
ultimately, to the members (through the General Assembly) and the members of their
communities.
d) Consensus Orientation
In-spite of the uniform membership criteria, there is bound to be differing interests,
views and opinions in the Umurenge SACCO. It is, therefore, very important to
reach broad consensus among the parties concerned on all matters of the SACCOs’
operations. This will best be achieved through an all-inclusive participatory
approach, transparent systems and operations, and full accountability to the members.
People in positions of power, like chairpersons, should be open to differing
viewpoints.
e) Efficiency and Effectiveness
The governance and management organs of the SACCOs must have processes and
procedures which produce results in time, using resources in the most economical
way. The results should meet the needs of clients and stakeholders. This is an
indicator of good governance.
f) Equity (fairness to all)
All members and clients should have equal opportunities to benefit from the
SACCOs’ services in order to improve their economic status and share in the vision
of the society. They should therefore, be equally accorded the SACCOs’
opportunities and services. The basis for equitable participation could either be a
combination of the members’ share capital and saving deposits or any one of them as
it may have been agreed upon. In the governance organs, none should be suppressed,
ignored or shut up when they have suggestions.
g) Respect for Rules, Policies and Regulations
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The legal framework and policies under which SACCOs are regulated and operate
should be respected, strictly and impartially enforced. They should be made known
to all members at all times.
h) Strategic and Visionary Leadership
The SACCOs must have leaders and managers who have a vision for and
commitment to the organization. The leaders and managers should seek and improve
their institutions and do all that is necessary to satisfy the needs of their members and
the communities in which they are located. Their character and past record should be
free of any professional and operational flaws. Such leaders and managers need to
have strategic thinking so that the affairs of the SACCO are managed with a sense of
purpose.
i) Knowledge and Skill in Leadership
The members of the governance organs should be knowledgeable and trainable in the
matters of the SACCOs’ governance and operations. It would be of good if all
members of the governance committee (the Administrative Committee, Audit and
Loans Committees) were holders of at least Ordinary Level Certificate or higher
qualification.
j) Organizational Performance and Growth
SACCO growth both in portfolio size and savings volumes is often an indication of
good governance. Sound Governance will lead to sound management and sound
operations. In return, these aspects will lead to excellence in performance. Continued
growth of the SACCO will result in its survival and sustainability in the long-term. In
the same respect, a poorly governed SACCO will hardly post good performance and
annual growth on a continuous basis.
5.0 MANAGEMENT’S ROLE IN THE UMURENGE SACCO’S
GOVERNANCE
This section focuses on the role of management in the overall governance of the Umurenge
SACCOs. Emphasis will be laid on the complimentary role of the management of the
Umurenge SACCOs in supporting the governance organs to grow the institutions. By the
end of this section, participants should be able to:
Explain the different roles played by the management in the Umurenge SACCOs
governance, high lighting the following;
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o Reporting to the Administrative Committee
o Implementation of strategic decisions
o Custody of technical information
The detailed unit outline will include;
Business development; for the overall development of the SACCO through
exploitation of business opportunities.
Human Resource development; so as to build the capacities of the different staff
within the Umurenge SACCO.
Collection and dissemination of information; in order to keep all the Umurenge
SACCO stakeholders updated with the ongoing progress; general updates.
Other responsibilities to the Administrative Committee
5.1 Business Development
While the governance organs map out ways and strategies and monitors their
implementation, management has the responsibility of ensuring that there is a fast and
effective system and process for business development. Looking for customers,
developing products, refining products and delivery mechanisms and growing the
institution are responsibility of management. In this way, they complement the
governance organs’ governance role.
5.2 Human Resource Development
One of the most important resources of a SACCO is its human capital. This resource
however does not come on a silver platter. It has to be developed over time through
deliberate efforts and therefore necessary to preserve it well. A well managed SACCO
should put in place good Staff motivation policies through:
Definite career pathing
Counselling and guidance
Appraisals, promotions, demotion in a free and fair way
Human resource manual which is followed in all staff related issues
Competitive remuneration
Training and skills improvement
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5.3 Collection and Dissemination of information
Management is, in many senses, well placed to gather relevant information and
intelligence from the market and pass them on to committee members. Because of its
daily involvement with the general membership, management keeps trend of the goings-
on and comes to hear or know of any new developments faster than the committees can.
Thus to enhance the effectiveness of the governance organs, management needs to be
effective in identifying and passing on strategic information to the administrative
committee.
5.4 Other Responsibilities of management to the Administrative Committee
To regularly prepare , accurate accounts and reports
Market scanning and helping out with mapping out the strategic direction
Giving useful feedback and information for decision making
Execution of approved policies
Secretariat services and document custody for the Administrative Committee
6.0 OVERVIEW OF MANAGEMENT
This section enlightens the participants on the meaning of management and the respective
functions of management as well as the management of resources of the Umurenge
SACCOs. By the end of this section, participants should be able to:
Broadly explain the meaning of management
Understand and explain the critical role of good management in the success of the
Umurenge SACCO
Explain the key functions of management
Explain in detail what self management is
Broadly articulate the importance of management in the Umurenge SACCOs
6.1 Definition of Management
Management is defined a process of working with and through others to achieve
organizational objectives in a changing environment. The management process includes
planning, organizing, directing and controlling the activities of the Umurenge SACCO to
achieve specific objectives. Central to this process is the effective and efficient use of
limited resources. The Umurenge SACCO’s resources include human resource, financial
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resources, natural resources, technology, infrastructure, information, machinery,
equipment and time.
Management can also be generally defined as an art or science of getting things done
through people. This definition emphasises that a manager plans and guides the work of
other people. Does this mean that managers do not have any work to do themselves? As
you progressively go through this section, you will learn that manager have a lot of work.
6.2 Functions of Management
Management has the following functions in an organisation: planning, problem solving
and decision making, organizing resources, leading people, controlling and coordinating
systems, processes and structures to achieve goals and objectives.
Planning: This is one of the major tasks of every manager in an organization including
the Umurenge SACCO. It is the basic process of setting and selecting goals, objectives,
and targets and determining how to achieve them. Before a manager does anything else,
he/she must give purpose and direction to the organization. Thus he/she must decide what
needs to be done and who will do it. Planning therefore is the process of selection of
organizational goals and deciding on how the organisation’s resources will be deployed
with a view to achieving those organizational goals.
Problem solving and decision making: In organizations, there are a wide range of
problems that range from simple to complex ones. Problem solving refers to the broad set
of activities involved in finding and implementing courses of action to correct
unsatisfactory or undesirable situations. Problem solving is thus a broad term that
includes both decision making and choice making. Decision making is a process by
which a course of action is selected to deal with a specific problem. Decision making also
includes choice making. Planning, problem solving and decision making are therefore
closely interlinked.
Organising resources: This refers to arranging resources of the organization, both
physical and human, so that each task to be done is ascertained and each person in the
organization is given clear tasks. These tasks are then coordinated and monitored towards
the achievement of a common goal. The most common tool used in organizing is the
organisation chart which clear shows the different authority and reporting lines within the
organisation. It helps to clarify how the different responsibilities in the SACCO are
divided and assigned to the different employees in a bid to deliver the best desired results.
Leading people: The division of work in an organization has consequences of authority,
delegation and responsibility. Owners of business delegate their authority to management
to enable them achieve organizational goals. Managers similarly delegate this authority to
subordinates. These managers have some form of power and influence over the
subordinates.
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The process of directing and influencing the task related activities of group members and
maintenance of group harmony is called leadership: Inspiring people to perform their
tasks willingly to achieve organizational goals.
Controlling: When an organization sets out to achieve certain goals, it normally involves
setting well planned objectives, a good organizational structure, the right people, good
leadership, proper motivation and finally effective control. As planned activities are
implemented, we must ensure that they conform to the plan. We must measure the
performance and compare it with expectation. This is control. An adequate system of
control is essential, if results are to be achieved as planned otherwise revise the plans.
Management control, therefore, is the process through which managers ensure that actual
activities conform to planned activities. Management control can also be defined as a
systemic effort to set performance standards with planning objectives, to design
information feedback systems and to compare actual performance with these
predetermined standards, to determine whether there are any deviations and to measure
their significance and to take any action required to assure that all corporate resources are
being used in the most effective way possible in achieving corporate objectives.
Coordinating: This means the assembly, deployment and direction of materials,
equipment, financial and human resources to ensure the production of goods and services.
This is crucial for all activities to proceed at a common pace.
6.3 The Importance of Management in the Performance of Umurenge
SACCOs
Every Umurenge SACCO has the potential for growth towards self sufficiency level (a
level where the SACCO can cover its costs of operation without external support from
institutions like RCA and any other donors etc). To reach this level it means that the
SACCO is growing its clientele and improving efficiency in the delivery of its services.
To achieve this sustainable growth and stability, the Umurenge SACCO needs visionary
leadership, including effective management. To be effective, management should be
skilled, competent, committed and capable of triggering and overseeing growth.
The role of management is therefore to:
Align the vision, mission and strategy of the institution with operations and
individual staff roles
Enhance commitment through creating an empowering work environment
Cultivate effective teams
7.0 PLANNING AND BUDGETING
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Planning and budgeting are key functions of management. This section therefore seeks to
help the Umurenge SACCO management articulate planning and budgeting as a key
function for management. By the end of this section, the participants should be able to:
Define planning
Explain why it is necessary to plan
Articulate the pillars of planning
Discuss the different types of plans
Discuss the planning process
Define budgeting
Explain the purpose of budgeting
Articulate the budgeting process
Discuss implementation and execution of plans
7.1 Introduction to planning
7.1.1 What is planning?
As already discussed in section 6.2, planning is the basic process of setting and selecting
goals and determining how to achieve them. It is about pre-determining where you want
to go and laying strategies of how to get there even before the journey starts.
7.1.2 Why do we plan?
Everybody in every organisation makes some kind of plan. In most cases, however, it is
poor planning rather than lack of it that results into poor results. Organizations are
established for various purposes and to achieve them, planning is necessary. They are
established with a view of making profits, meeting customer needs, providing
employment, growing and serving a multiplicity of other objectives. Planning therefore
helps one to reduce chances of failure and instead increase chances of success.
Organizations are set up in environments that differ and today, business environment is
dynamic with socio-political and technological changes taking place fast. In such
environments, setting stable goals or objectives becomes difficult. While setting goals is
difficult, achieving them is even more difficult. Planning enables us to:
Look into the uncertain future and map out ways to achieve our purpose using
various planning techniques
Set realistic goals that have been thought out properly
Focus on those aspects that are vital and possible within constraints of the
environment
Forecast future trends to some degree (since planning involves looking ahead)
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Identify the factors that affect our intended goals and work out mitigation
measures
Determine in advance how we are going to do the things we have envisaged to do
Examine our resources and their adequacy for planned activities/ outcomes
Plans are therefore a key function of management, and are generally based on pillars
illustrated below:
7.1.3 Who Plans?
Planning takes place all the time at all levels in any organization, whether conscious or
not. Everybody in the organization should plan his or her work on a day to day basis or
Plans, objectives and
how to achieve them
Which helps to know
Which affects the kind of
leadership we have and
direction
What kind of people we
need and when
What kind of
organisation structure to
have
In order to ensure success of
plans by furnishing standards of
control
How most effectively to
lead people
Necessary
for deciding
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longer. Normally lower level managers and staff involved in operations plan within the
framework of broader, longer term plans. Middle level managers also plan within the
framework of broad overall plans.
Good management tends to plan for long periods (three to five years). This is normally
referred strategic planning. The shorter term plans (one year or less) are referred to as
operational or annual plans, Middle level management tends to focus on operational plans
while top level management focuses on strategic planning.
7.1.4 Types of plans
A typical MFI has different types of plans. Broadly, plans are of the following types:
(i) Strategic/ Business plans – these are of a long time nature. They are usually 3 to 5
years. Strategic plans define broadly where the organization wants to be in future. Some
organizations have plans for longer periods up to 10 years. Due to the volatile nature of
the environment organizations operate in, longer period plans beyond five years are not
advisable.
(ii) Operational plans – these are of a short term nature. Operational plans are derivative
plans. They are derived from the strategic plans and give details of how specific
objectives will be achieved by aligning shorter term activities to the strategic plan. These
plans are usually for one year. They may however range from 6-18 months.
There is also another set of plans described as standing plans. These are standardized
approaches for handling recurrent and predictable situations. These include:
Policies: These are general guidelines for decision making. They set the limits or
boundaries for taking a decision. A policy channels the thinking of people in an
organization so that they take decisions consistent with objectives. For example a
microfinance institution may have a policy of not exceeding a loan amount of 10million.
Standard procedures: A procedure is a detailed set of instructions for performing a
sequence of activities that occur regularly or very often. For example a microfinance
institution has standard procedures of approving a loan. Standard procedures are the
means of carrying out a policy.
Rules/ Regulations: These are statements stipulating specific actions that must or must
not be taken in a given situation. They are either dos or don’ts.
7.2 Overview of the planning process
Planning gives purpose and direction to the organization. It helps decide what, when, how
and why we do certain activities or tasks. Planning goes through a process that involves
scanning the environment, establishing goals, developing premises /assumptions,
determining alternative courses of action, evaluating the various alternative courses,
selecting a course of action, formulating derivative plans and quantifying the plans into
budgets.
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7.2.1 Scanning the environment
Whether it is a new or an on going business the first step in the planning process is to
scan the internal and external environments. Managers should take a preliminary look at
possible opportunities that can be taken advantage of in light of the organization’s
strengths and weaknesses. Scanning the environment also reveals the threats.
7.2.2 Setting goals and objectives
The second step in the planning process is to set goals and objectives. Having realized the
internal strengths and weaknesses as well as external opportunities and threats the
environment the institution is operating in offers, the manager(s) establish organizational
goals. These are broad aims or statements of purpose. The goals provide the basic sense
of direction that forms the activities of the organization.
An organization’s mission is the “unique aim” for its existence. This unique aim sets it
apart from other Organizations. No two organizations can have a similar mission, though
the wording of a mission for two organizations may be similar. .
The term goal refers to the organization’s grand or long term purpose, which is derived
from its mission and which in turn determines mid and short term objectives. Goal is a
broad term that states what is to be achieved as a result of all the organization’s activities.
Organizational objectives are specific targets derived from its goal, which in turn flows
from its mission. Objectives are usually quantitative or otherwise objectively
measurable. Good organizational objectives should be: Specific, Measurable, Achievable,
Realistic and Time-bound (SMART),
Setting organizational goals is the process that defines what the organization plans to
achieve. This is very important since deployment of organizational resources will
respond to this goal definition. For an existing organization, the goal setting process
involves assessing whether the organization is achieving its existing goals or not. To do
this, management asks questions like - What are the gaps? What elements of the goal(s)
are no longer relevant and what new perspectives should be introduced into the goal?
What should be done to address the gaps and challenges? Is it necessary to review the
goals, reduce them or amend them? Are the existing goals achievable, given the
environmental factors and dynamism? These will help the organization make decisions
on what to do with its existing goal(s).
For a new organization or one without existing goals, the goal setting process involves
examining the mission and based on it, determining the organization’s grand, long term
purpose.
In both cases (whether goals are being adjusted or formulated), mid and shorter term
objectives are then derived from the goals.
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7.2.3 Premising / developing assumption
The third step in planning is to establish forecasts and assumptions from the environment
about the events that will affect the objectives and their achievement. For instance, what
will the sales be, how will competition evolve? What might the ongoing regulatory trends
do to the sector? Which factors will affect demand and supply volumes in the future?
What effect might some or all of these have on prices, wages, rates and other revenue/
expenditure elements?
This step also involves assessing the present situation both in terms of the organization
and also the environmental conditions. Forecasts or projections can be made if the
environment is known. Having established the goals and objectives showing what we
want to achieve, we must make assumptions about what is likely to happen.
We may, for instance assume that inflation and interest rates will be at certain levels in
the future. This then enables organization to determine the activities to be undertaken in
order to tap opportunities while controlling risks. Forecasts are not only made about the
external environment but also about the environment internal to the organisation.
7.2.4 Determining Alternative Courses of Action
This is a stage of analysis. It involves using various analytical tools and skills to
generate the different courses of action. When goals have been selected/ formulated and
we know what we require to achieve them, then the various ways of achieving the goals
can be logically determined. These are the strategies, policies and tactics. Strategies are
broad programmes to achieve goals. Policies are broad frameworks to guide thinking
and action, while tactics are operational decisions aimed at efficient resource utilization.
Different courses of action may be adopted to take full range of opportunities available
and to boost organizational health.
7.2.5 Evaluating the various Alternative Courses of action
Having generated the different alternatives the next step is to analyze and evaluate each
in light of the available resources and objectives. This involves anticipating, for each
probable course of action, what would happen if you took one particular course of action.
The necessary factors are examined and likely outcomes assessed. At this stage also,
scanning the environment and forecasting will be done.
7.2.6 Selecting a Course of Action
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This is the actual point of adopting a plan or selecting a strategy, the point of decision
making. As already said, a plan is a predetermined course of action. It is a process of
deciding by selecting one or a few alternatives among many. At this stage, you actually
generate the strategic plan if this process is at top level. If it is at a lower level, you
generate an operational plan.
7.2.7 Formulating Derivative Plans
Once the basic (broader) plan has been made, derivative plans to support it must be made.
If the basic plan was strategic, the operational plans will have to be made. Plans for each
sub-unit in the organizations like product development, finance, personnel will also have
to be made. For an organisation with branches/sub-units, sub-plans are necessary for
each department and branch. This Aids budgeting which is the final stage of the planning
process.
7.3 Budgeting
Budgeting is the final step in the planning process. Budgets are the quantitative
expression of a plan. Budgets give meaning to plans because they show how and where
the financial commitment is to be made, and what financial results are expected from this.
A budget is an estimation or projection of the financial performance and condition of an
organization for a future time period. Therefore put in another way, budgeting is
translating ones plans in monetary terms.
7.3.1 Purpose of budgeting
Budgets have five general purposes:
They put business strategy into operation
They allocate resources
They provide incentives to managers
They help in the control of spending
They communicate plans and expectations
(i) Putting business strategy into operation
This can be achieved through the planning process that involves many people creating
mission statements, analyzing strengths, weaknesses, opportunities and threats (SWOT
analysis), prioritizing initiatives, determining courses of action and allocating resources
to produce a comprehensive strategic plan document.
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Budgets innovatively reflect the organizations’ real strategy-whether that strategy is
implicit or explicit. It shows what the organization thinks is going to happen and what
initiatives it is going to take to harness its external environment, improve internal
environment and thus improve its performance.
In some cases, the budget is the place where funds are set aside for new programs, capital
investments, and all types of enhanced resources. The budget may incorporate new goals
for the organization or deepen/ broaden existing ones.
(ii) Resource allocation
Budgets presume resources are limited. The budget process forces the organization to
take stock of its resources and to determine their limits. It must identify the sources of
funds it can tap and how they will best be used. An organization can structure its
allocations on the basis of units or departments, programs, activities, or managers. In
some cases, particular resources will be tied to particular units or programs, as in grants
or restricted gifts.
(iii) Incentives
Every budget is governed by rules, stated or not stated. These rules encourage certain
behaviours on the part of people in the organization. The behaviours encouraged by the
budget process can benefit or harm the organization, depending in part on how well they
were thought, although unintended effects occur in even the most carefully designed
system. An organization therefore needs to design rules that provide incentives for
managers to make more careful spending decisions throughout the year.
(iv) Control
The traditional view of budgets considers them a tool for controlling spending.
Departments receive budgets that tell them how much to spend, and the central offices do
not let them spend more than what appears in their budget. The assumption here is that
spending will tend to be uncontrolled if it is not cut off and that managers or departments
need a lot of help in knowing when to cut back on spending. In the modern context,
budgets are planning tools that consider income generation, cost allocation and new
opportunity tapping. It is therefore important to remember that the budget is not only an
expenditures control toll but also a tool for watch over the income generation process as
well. The income generation is very important aspect of budgeting which many SACCO
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leaders and managers tend to forget and instead concentrate on expenditure variables yet
both sides require equal attention.
(v) Communication
Budgets are critical vehicles for internal and external communications. The budget
process allows leadership to describe its plans, goals, and assessment of economic
conditions for the rest of the organization. In soliciting budget proposals, leadership can
ask the various parts of the organization for their assessment of relevant conditions, thus
providing new information about the organizations opportunities and threats and
obtaining a reality check on leadership’s vision. Once the budget is set, managers can
take their guidance from it. External groups rely on budgets to understand the
organization’s plans and expectations. Funders want to see budgets that show how the
organization intends to use the money it receives.
The budget shows an organization’s Administrative Committee what management thinks
is going to happen in the coming year and what management intends to do to boost its
outcomes. At the intra institutional level, the branch or departmental budget tells senior
management how the branch/ department heads thinks their units are going to fair. The
budget also allows the Administrative Committee and external groups to assess
management’s ability to oversee finances, serve as a steward for resources, and achieve
objectives. If the budget is unrealistic, it suggests that management does not have a good
plan for maintaining the organization’s financial health
In summary, an effective budget should:
State all of the assumptions
Be understandable and simple
Represent the combined judgment of staff and management
Cover a period for which reliable estimates can be made
Be flexible to permit adjustment
Establish standards of performance
Provide motivation and guide performance
Guide management and staff towards objectives
7.3.2 Who should be involved?
Operational/ activity based budgets must be drawn up by people who have ground
experience. Long term strategic budgets should be drawn by senior management. For an
annual budget, both the strategic and operational angles are needed; therefore field staff,
departmental managers, accounts staff, and senior management should all be involved. A
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budget committee normally coordinates the process. The overall budget (Master Budget)
should be approved by the Administrative Committee.
7.3.3 Budgeting Process
The budget process provides the vehicle for operationalising strategy by making
decisions to allocate funds in line with the strategy. There are differences between
organizations- size, type of mission, number of products/ programs/ projects, to name just
a few factors. Across the variety, the budget process maintains a remarkably consistent
shape. Generally, the budget process consists of three basic phases:
Budget development
Budget monitoring, tracking, and adjustments
Analysis of final results
These phases cross years: Budget development takes place before the budget year in
question starts; Monitoring and adjustment occur throughout the budget year; Final
results are analyzed after the year ends. In most healthy organizations, one of these three
phases is in progress at any given time, and the phases from different years feed back to
each other.
(i) Budget Development
It should start with a set of activities to lay the ground for the next year’s budget.
Managers of the organization should start the process by evaluating its financial position
and reviewing the organization’s strategies. Managers usually begin by looking at the
results from the year that has just ended. Although another complete year-the one current
underway-will occur between the period covered by those results and the year for which
they are preparing a budget, this information is the best at this time, as it covers the most
recent results realized.
(ii) Budget Monitoring, Tracking and Adjustments
Activity related to monitoring and tracking the current year budget usually consumes
more time than budget development. The first task in managing the current year is to
make sure that spending stays with in limits and that the revenue goals are achieved. If
revenues exceed plan, increased spending may be acceptable or necessary. In face of
revenue shortfalls, it does not do the organisation any good to meet its expense budgets.
The process of comparing actual and budgeted outcomes periodically is known as
budgetary control.
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(iii) Analysis of Final results
When the year ends, the budgeted and actual results are tallied. At this point the budget
process has completed the cycle. Only with the final results can the organisation judge
whether its budgeting process has succeeded or failed. The following questions should be
answered:
Did the budgeting process succeed in anticipating events of the year?
Did the process help the organisation identify and respond to conditions as they
changed during the year?
What do the final results tell us that we need to take into consideration for our
planning for next year, and do they suggest an adjustments we need to make in
our plans, goals, or actions during the year that just got started?.
Prior year budget versus actual analyses and full year forecast form the basis of the
ensuing year’s budget.
7.4 Implementation/ execution of Plans
After going through the entire process of planning, the plan(s) should be executed or
implemented. Even the most well thought out plan will remain useless if it is not
executed. In implementing the plan(s), tasks are assigned with deadlines to responsible
individuals and progress is continually assessed against set goals and milestones.
