Financial Management
Senior 4 · Entrepreneurship
Financial Management
Lesson 2 of 5
25 min
Ndayisaba runs an egg wholesale business from a stall at Kimironko market in Kigali. Each week he buys about 800 trays from poultry farms in Bugesera, which he pays within seven days, and sells them to walk-in buyers for cash and to six hotels that pay a month after delivery. Business is growing, and in one week he faces four questions. Should he buy a second-hand delivery van? If so, should he pay for it from savings, a bank loan or a partner's money? How much of last year's profit can he take home? And will there be enough cash in June, when the van deposit and the farm bills fall in the same month? (Ndayisaba and his figures are illustrative.)
Think about it: Which of his four questions is about the long term, and which about the next few weeks? Who in a large company would answer them?
In a large company these questions go to a finance director; in a small firm the owner answers them, often without noticing that they are separate decisions. Textbooks group the work into a few core decisions and several supporting functions.
| Function | The question it answers | In Ndayisaba's business |
|---|---|---|
| Financial planning and forecasting | How much money will we need, when, and for what? | A cash budget for April to June; a sales forecast for the hotels |
| Investment decision (capital budgeting) | Which long-term assets should we buy? | Is a van worth its cost? (Lesson 5 shows how to appraise it.) |
| Financing decision | Where should the money come from, and in what mix of owners' funds and debt? | Savings, a bank loan or a partner (Lesson 3) |
| Working capital management | How much stock, credit and cash should we hold day to day? | How many trays to keep; how long to let hotels take to pay |
| Profit allocation (dividend decision) | How much profit should go to the owners and how much stay in the business? | What he takes home versus what pays for the van |
| Financial control | Are we doing what we planned? If not, why? | Comparing actual sales and costs with the budget each month; checking receipts |
| Records, reporting and compliance | Can we show the true position to owners, lenders and the tax authority? | Books of account, annual statements, tax returns to the Rwanda Revenue Authority |
| Risk management | What could go wrong, and how do we protect the business? | Insuring the van; not depending on one hotel for most sales |
Definition
Investment decision (capital budgeting): choosing which long-term assets or projects to put money into. Financing decision: choosing the sources of funds and the mix of owners' capital and borrowing, called the capital structure. Dividend decision: choosing how much profit to pay out to owners and how much to keep as retained earnings.
Definition
Budget: a plan for a future period expressed in money. A cash budget forecasts the cash coming in (receipts) and going out (payments) month by month, so that a shortage can be seen before it happens.
Working capital: current assets minus current liabilities, the money tied up in day-to-day operations:
Financial control: comparing actual results with plans, finding the reasons for differences (variances) and acting on them.
Money in a trading business goes round a cycle: cash buys stock, stock is sold, often on credit, and the customer's payment turns back into cash. The longer the cycle, the more cash is tied up and the more finance the business needs. The cash conversion cycle measures it in days:
Ndayisaba pays the farms on day 7 but receives the hotels' money only on day 35, so each tray's cost is financed by him for 28 days. If the hotels paid in 14 days instead, the cycle would fall to days and much less cash would be locked up. This is why the financial manager watches credit terms as closely as sales.
Tip
Three decisions, one goal. Remember the core as "What to buy, how to pay for it, what to share": the investment, financing and dividend decisions. Working capital is the fourth, the everyday one. All four aim at the same goal: a business that stays liquid today and grows in value over time.
Worked example 1: a three-month cash budget
Ndayisaba expects sales of Frw 12.0 million in April, 13.5 million in May and 15.0 million in June. 40% of sales are for cash; the hotels' 60% is received the following month. March's credit sales of Frw 6.6 million will be received in April. Eggs cost 75% of sales and are paid for in the month bought. Rent, wages and transport cost Frw 1.8 million a month, and a van deposit of Frw 4.0 million is due in June. Cash at 1 April is Frw 0.9 million. Prepare a cash budget (in thousands of Frw).
| Frw '000 | April | May | June |
|---|---|---|---|
| Cash sales (40%) | 4,800 | 5,400 | 6,000 |
| From last month's credit sales (60%) | 6,600 | 7,200 | 8,100 |
| Total receipts | 11,400 | 12,600 | 14,100 |
| Eggs (75% of sales) | 9,000 | 10,125 | 11,250 |
| Rent, wages, transport | 1,800 | 1,800 | 1,800 |
| Van deposit | 0 | 0 | 4,000 |
| Total payments | 10,800 | 11,925 | 17,050 |
| Net cash flow | 600 | 675 | (2,950) |
| Opening cash | 900 | 1,500 | 2,175 |
| Closing cash | 1,500 | 2,175 | (775) |
For example, May's receipts are , and June's closing cash is . Brackets show a negative figure.
Decision: the budget warns, three months early, of a Frw 775,000 shortfall in June. Ndayisaba can arrange an overdraft now, ask the van seller to split the deposit, or ask the hotels to pay faster. Without the budget he would have found out in June.
Worked example 2: sharing profit and checking liquidity
Ndayisaba has registered his business as a private company with 2,000 shares. Profit after tax for the year is Frw 6,000,000. At the year end, current assets are Frw 9.0 million (cash 0.8, stock 1.2, money owed by hotels 7.0) and current liabilities are Frw 4.5 million. The board decides to pay out 40% of the profit. Find the dividend per share, the retained earnings, the working capital and the current and quick ratios.
Interpretation: the business can cover its short-term debts twice over, so it is liquid. But most of its current assets (7.0 of 9.0 million) are money the hotels still owe; if a hotel pays late, the real cash position is far weaker than the ratio suggests. Keeping Frw 3.6 million of profit in the business reduces the need to borrow for the van.
Warning
Common mistakes. Putting profit in a cash budget: a cash budget contains only cash moving in and out, so depreciation and credit sales not yet received are left out. Thinking a higher current ratio is always better: too much stock or too much credit given ties up cash that could earn a return. Paying out all profit as dividends and then borrowing to replace equipment, when retained earnings would have been cheaper.
FOG Accountancy Tutorials, "Intro to Financial Management: The Three Key Decisions (Part 2)". As you watch, write one example of the investment, financing and dividend decision for a business you know in Rwanda.
Practice
Key points
Sources and credits
Written by Ganzaa: the Kimironko case, the functions table, the working-capital timeline, the cash budget, the worked examples and the practice items. People, businesses and figures are illustrative (2026). This lesson uses CC BY-SA material and is shared under CC BY-SA 4.0.
Quick check
A hotel's board must decide whether to borrow from a bank or sell new shares to pay for ten new rooms. Which function of financial management is this?
