Financial Management
Senior 4 · Entrepreneurship
Financial Management
Lesson 1 of 5
25 min
Mukamana processes honey in Nyaruguru. She buys raw honey from forty beekeepers, who want cash on delivery, filters and bottles it, and sells the jars to three supermarkets in Kigali that pay 60 days after delivery. Last quarter her sales were Frw 9.6 million and her costs Frw 7.8 million, so on paper she made a profit of Frw 1.8 million. Yet at the end of March she could not pay the beekeepers. A bank offered her an overdraft, a cousin offered to buy a share of the business, and her SACCO offered a loan. (Mukamana and her figures are illustrative.)
Think about it: How can a business make a profit and still run out of cash? Before Mukamana chooses between the bank, the cousin and the SACCO, what does she need to know?
Every business needs money before it earns any: to buy stock, pay workers and buy equipment. Finance is about getting that money, using it well and paying it back. It has three branches: personal finance (a household's income, saving and borrowing), public finance (the government's taxes, spending and borrowing) and business finance (how firms raise and use funds). This unit is about business finance.
Two ideas sit under all of finance. First, money has a time value: Frw 100,000 today is worth more than Frw 100,000 in a year, because today's money can earn interest in the meantime. Second, return comes with risk: a saver or investor asks for a higher return before accepting a higher chance of loss.
Definition
Finance: the raising, allocation and use of money over time, taking account of the return it earns and the risk it carries.
Business finance: the funds a business needs and the ways it obtains, uses and repays them. Example: Mukamana's Frw 7.8 million of costs had to be paid before her customers paid her.
Definition
Financial system: the network of institutions, markets, instruments, rules and infrastructure through which money moves from those who have more than they need now (savers, or surplus units) to those who need more than they have (borrowers, or deficit units).
Financial intermediary: an institution that takes funds from savers and lends or invests them, standing between the two sides, such as a bank, a SACCO, an insurer or a pension fund.
Financial market: a place or system where financial instruments are bought and sold. The money market deals in short-term funds (one year or less, such as Treasury bills); the capital market deals in long-term funds (shares and bonds).
Money can reach a borrower by two routes. In direct finance the saver buys the borrower's own security, for example shares or a bond of a company listed on the Rwanda Stock Exchange; the saver then carries the borrower's risk. In indirect finance the saver deposits with an intermediary, and the intermediary decides whom to lend to and carries that risk. Intermediaries do three things savers could not easily do alone: they pool many small deposits into large loans, they transform maturity (deposits that can be withdrawn any day finance loans of several years), and they spread risk over many borrowers.
| Component | What it does | In Rwanda (December 2025) |
|---|---|---|
| Financial institutions | Take deposits, lend, insure, invest savings | 9 commercial banks, 1 development bank, 1 cooperative bank; 70 microfinance institutions, including District SACCOs; 18 insurers; 12 pension schemes |
| Financial markets | Trade short-term and long-term instruments | Money market (Treasury bills, interbank lending); capital market (the Rwanda Stock Exchange) |
| Financial instruments | The contracts that are traded or held | Deposits, loans, shares, bonds, Treasury bills, insurance policies |
| Regulators | License, set rules, supervise, protect customers | The National Bank of Rwanda (banks, microfinance, insurers, pensions, payments) and the Capital Market Authority (capital markets) |
| Infrastructure | Lets money move and information flow | 44 payment service providers, including mobile-money issuers; 1 credit reference bureau |
Counts are for December 2025, from the BNR's Monetary Policy and Financial Stability Statement, March 2026 (Table 15). By then all 416 Umurenge SACCOs were being merged into District SACCOs, which is why the number of microfinance institutions fell from 434 to 70.
Tip
Who, where, what, who watches, and the pipes. Institutions are who handles the money, markets are where it is traded, instruments are what changes hands, regulators are who watches, and infrastructure is the pipes the money runs through. An exam answer on "components of a financial system" should name all five, each with a Rwandan example.
Mukamana's problem was not her honey; it was timing. Her money went out to beekeepers today and came back from supermarkets in two months. Managing that gap, and deciding how to fill it, is financial management.
A financial manager, or the owner in a small firm, aims at five objectives that sometimes pull against each other:
Profitability and liquidity often conflict: cash kept in the drawer earns nothing, but cash all tied up in stock and credit sales leaves nothing to pay wages. The next lesson looks at the functions a financial manager performs to balance them.
Definition
Financial management: planning, raising, using and controlling the funds of a business so that it can pay its debts when due and earn the best return for its owners at an acceptable risk.
Liquidity: the ability to pay short-term obligations on time. Solvency: having total assets greater than total liabilities.
Worked example 1: what an intermediary earns
In 2025 Rwanda's banks paid a weighted average deposit rate of 9.20% a year and charged an average lending rate of 15.84% a year (BNR, March 2026). A bank collects Frw 100 million from 400 savers and, keeping Frw 20 million back as cash and liquid reserves, lends Frw 80 million to entrepreneurs at those average rates. Find the interest the bank pays, the interest it earns and its gross interest margin. (The bank and amounts are illustrative; the rates are the real 2025 averages.)
Interest paid to savers:
Interest earned from borrowers:
Gross interest margin:
The interest spread is percentage points. The margin is not profit: it must pay staff, branches and systems, and cover loans that are never repaid. Interpretation: the spread is the price borrowers pay for the pooling, maturity transformation and risk-bearing the bank provides.
Worked example 2: profit is not cash
In Mukamana's quarter, sales were Frw 9.6 million, all on 60-day credit. During the quarter she collected only Frw 5.1 million, which was owed from the previous quarter's sales. All Frw 7.8 million of costs were paid in cash. She began the quarter with Frw 1.2 million in the bank. Find her profit and her closing cash.
Profit counts sales when they are made:
Cash counts money when it moves:
Conclusion: the business is profitable but short of Frw 1.5 million in cash. Its customers owe it Frw 9.6 million, so the gap is temporary. A short-term source, such as an overdraft, fits it better than selling part of the business, which would give away a share of every future profit to solve a two-month problem.
Warning
Common mistakes. Treating profit and cash as the same thing: a business can be profitable and illiquid, as Mukamana was. Confusing finance with accounting: accounting records and reports what happened; finance uses that information to decide what to do next. Calling the Rwanda Stock Exchange a financial intermediary: it is a market where buyers and sellers of securities meet, and the investor carries the risk.
Marginal Revolution University, "What are Financial Intermediaries?" (short). As you watch, note the two problems intermediaries solve for savers and borrowers who do not know each other, and match each to a Rwandan institution from the table above.
Practice
Key points
Sources and credits
Written by Ganzaa: the Nyaruguru case, the flow-of-funds diagram, the table, the worked examples and the practice items. People, businesses and amounts are illustrative (2026); the rates and institution counts are BNR's. This lesson uses CC BY-SA material and is shared under CC BY-SA 4.0.
Quick check
A pension fund collects workers' contributions and uses part of them to make a long-term loan to a hotel company. Which route of the financial system is this?
