• TABLE OF CONTENTS
HIDE
 Front Cover
 Title Page
 Copyright
 Foreword
 Acknowledgement
 Table of Contents
 Module 7: Financial management
 Session 1: Financial management...
 Session 2: Financial management...
 Session 3: Financial management...
 Session 4: Managing a research...
 Session 5: Generating funds through...
 Back Cover














Group Title: Management of agricultural research : a training manual
Title: Management of agricultural research
ALL VOLUMES CITATION THUMBNAILS PAGE IMAGE ZOOMABLE
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00084651/00008
 Material Information
Title: Management of agricultural research a training manual
Physical Description: 11 v. : ; 30 cm.
Language: English
Creator: Asopa, V. N
Beye, Gora
Food and Agriculture Organization of the United Nations
Publisher: Food and Agriculture Organization of the United Nations
Place of Publication: Rome
Publication Date: 1997
 Subjects
Subject: Agriculture -- Research -- Management -- Developing countries   ( lcsh )
Agricultural research managers -- Developing countries   ( lcsh )
Genre: international intergovernmental publication   ( marcgt )
bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Bibliography: Includes bibliographical references.
Statement of Responsibility: prepared by V.N. Asopa and G. Beye.
 Record Information
Bibliographic ID: UF00084651
Volume ID: VID00008
Source Institution: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 39160428
lccn - 98210567
isbn - 9251040915 (module 1)

Table of Contents
    Front Cover
        Front Cover
    Title Page
        Page i
    Copyright
        Page ii
    Foreword
        Page iii
    Acknowledgement
        Page iv
    Table of Contents
        Page v
        Page vi
        Page vii
        Page viii
    Module 7: Financial management
        Page 1
        Page 2
    Session 1: Financial management 1: Components and information needs
        Page 3
        Page 4
        Session guide
            Page 5
            Page 6
        Exhibits
            Page 7
            Page 8
            Page 9
            Page 10
            Page 11
            Page 12
            Page 13
            Page 14
            Page 15
            Page 16
            Page 17
            Page 18
            Page 19
            Page 20
            Page 21
            Page 22
            Page 23
            Page 24
        Case study
            Page 25
            Page 26
            Page 27
            Page 28
        Reading note
            Page 29
            Page 30
            Page 31
            Page 32
            Page 33
            Page 34
            Page 35
            Page 36
            Page 37
            Page 38
    Session 2: Financial management 2: Planning and budgeting
        Page 39
        Page 40
        Session guide
            Page 41
            Page 42
        Exhibits
            Page 43
            Page 44
            Page 45
            Page 46
            Page 47
            Page 48
            Page 49
            Page 50
            Page 51
            Page 52
            Page 53
            Page 54
        Reading note
            Page 55
            Page 56
            Page 57
            Page 58
            Page 59
            Page 60
            Page 61
            Page 62
            Page 63
            Page 64
            Page 65
            Page 66
            Page 67
            Page 68
    Session 3: Financial management 3: Project design and implementation
        Page 69
        Page 70
        Session guide
            Page 71
            Page 72
        Exhibits
            Page 73
            Page 74
            Page 75
            Page 76
        Reading note
            Page 77
            Page 78
            Page 79
            Page 80
            Page 81
            Page 82
            Page 83
            Page 84
    Session 4: Managing a research institution with uncertain finances
        Page 85
        Page 86
        Session guide
            Page 87
            Page 88
        Exhibits
            Page 89
            Page 90
            Page 91
            Page 92
            Page 93
            Page 94
        Case study
            Page 95
            Page 96
            Page 97
            Page 98
            Page 99
            Page 100
            Page 101
            Page 102
            Page 103
            Page 104
    Session 5: Generating funds through consulting as an institutional activity
        Page 105
        Page 106
        Session guide
            Page 107
            Page 108
        Case study
            Page 109
            Page 110
            Page 111
            Page 112
            Page 113
            Page 114
            Page 115
            Page 116
            Page 117
            Page 118
            Page 119
            Page 120
            Page 121
            Page 122
            Page 123
            Page 124
            Page 125
            Page 126
            Page 127
    Back Cover
        Page 128
Full Text






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Prepared by
V.N. Asopa
Indian Institute of Management
and
G. Beye
Research and Technology Development Service
Research, Extension and Training Division, FAO
























FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS
Rome, 1997






















































M-67
ISBN 92-5-104097-4








All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying or otherwise, without the prior permission of the
copyright owner. Applications for such permission, with a statement of the
purpose and extent of the reproduction, should be addressed to the Director,
Information Division, Food and Agriculture Organization of the United Nations, Viale
delle Terme di Caracalla, 00100 Rome, Italy.


FAO 1997


The designations employed and the presentation of material in this
publication do not imply the expression of any opinion whatsoever
on the part of the Food and Agriculture Organization of the United
Nations concerning the legal status of any country, territory, city or
area or of its authorities, or concerning the delimitation of its
frontiers or boundaries.












FOREWORD


There has been a tremendous development of agricultural research in developing countries
over the past few decades, during which time investment in agricultural research from both
national resources and international assistance has increased markedly. However, agricultural
research institutions are generally managed by veteran agricultural research workers promoted
for seniority rather than for management training and skills. Further, there are few courses
available on the management of agricultural research, and solutions and models used in the
developed world may not be appropriate for developing countries.
FAO has actively participated in strengthening the national agricultural research
systems of developing countries, and has stressed the importance of effective organization and
management for efficient research systems. The need for training in this area is great, and
resources particularly trained human resources are limited. FAO has therefore developed
a training programme on agricultural research management to support the training of trainers,
with the expectation of a multiplier effect, and to facilitate a common perception of the
structure and terminology of management, thus enhancing communication and understanding
among agricultural research managers in discussing management problems, solutions and
opportunities.
This training manual has been prepared as a basic reference resource for national
trainers, to help them structure and conduct their own courses on management at the institute
level. A separate manual will cover project and programme management. This manual is
based on the four structural functions of management: planning, organizing, monitoring and
controlling, and evaluating, each of which is covered in individual modules. Within each
module, the manual addresses pervasive management functions, including motivating,
leading, directing, priority setting, communicating and delegating, which are at all times a
concern to all managers. Topics such as leadership, motivation, human resources
management, policies and procedures are treated separately in individual sessions.
This manual as been designed for participatory learning through case studies, group
exercises, presentations by the participants and participatory lectures. Throughout the
manual, particular effort has been made to use the cases studied to capture the unique and
rich experience of developing country research managers in tackling policy, programme and
the day-to-day problems of managing research institutions and systems.
This publication is intended primarily for managers of agricultural research institutes
in developing countries and for higher education institutions interested in launching in-service
training courses on research management. However, it is hoped that agricultural research
managers everywhere will also find it useful. The manual provides a course structure with
contents that can be built upon and enriched. Users are therefore encouraged to send
suggestions for its improvement.



Louise O. Fresco

Director


Research, Extension and Training Division







iv Module 7- Financial management


ACKNOWLEDGEMENTS



The task of preparing a training manual on Agricultural Research Institute Management began
with the FAO Expert Consultation on Strategies for Research Management Training in
Africa, held at the International Livestock Centre for Africa (ILCA), Addis Ababa, Ethiopia,
12-16 December 1983. Following the recommendations of the consultation, and on the basis
of the curriculum design adopted, FAO embarked upon the preparation of this manual. In
the process of its preparation, many agricultural research managers and management
specialists have contributed. Besides the two main consultants, namely Dr Ronald P. Black,
Denver Research Institute, University of Denver, USA, who prepared the first draft, and Dr
V.N. Asopa, Professor at the Indian Institute of Management, Ahmedabad, India, who
prepared the current version of the manual, the contribution of the following specialists in
various fields must be singled out: Ramesh Bhat, J. Casas, A.K. Jain, F.S. Kanwar,
V. Martinson, Gopal Naik, P. Nath, R.K. Patel, T.P. Rama Rao, S.K. Sharma,
E.S. Tayengco, and J.S. Woolston. FAO expresses its gratitude to them all.


Special thanks are due to the International Service for National Agricultural Research
(ISNAR), which has willingly made available its valuable experience and relevant materials
throughout the preparation of the manual.


FAO also thanks all those authors and publishers who have allowed the use of
copyright material from their publications, even though the courtesy is recognized in each
case.


This manual has been prepared under the responsibility of the Research Development
Centre, Research and Technology Development Division, FAO, with the guidance of:
Mohamed S. Zehni, former Director; and J.H. Monyo, E. Venezian and B. Miller-Haye,
past Chiefs of the Research Development Centre. Scientific supervision was provided by
G. Beye, Senior Officer, now Chief, Research Technology Development Service.








Training manual for institute management







TABLE OF CONTENTS

The previous Modules were:

INTRODUCTORY MODULE
INTRODUCTION TO THE MANUAL AND ITS PURPOSE
Appendix 1 Management orientation and decision making
Appendix 2 Case method
Appendix 3 Summary of course contents
Appendix 4 Illustrative schedule for a workshop on agricultural research institute
management
Appendix 5 Management training
Appendix 6 Planning and management of short-duration, executive development
programmes

Module 1 INSTITUTIONAL AGRICULTURAL RESEARCH:
ORGANIZATION AND MANAGEMENT
Session 1. MANAGEMENT: THOUGHT AND PROCESS
Session 2. OBJECTIVES AND ORGANIZATION OF AGRICULTURAL RESEARCH
Session 3. ORGANIZATION OF INTERNATIONAL RESEARCH
Session 4. ORGANIZATION OF NATIONAL AGRICULTURAL RESEARCH SYSTEMS

Module 2 RESEARCH PLANNING
Session 1. PRINCIPLES OF RESEARCH PLANNING
Session 2. THE INSTITUTE-LEVEL PLANNING PROCESS
Session 3. SETTING GOALS AND OBJECTIVES
Session 4. FROM OBJECTIVES TO AN OPERATIONAL PLAN
Session 5. PARTICIPATORY PLANNING EXERCISE
Session 6. CASE STUDY: PLANNING AGRICULTURAL RESEARCH IN MUGHAL
SULTANATE

Module 3 ORGANIZATIONAL PRINCIPLES AND DESIGN
Session 1. ORGANIZATIONAL THEORIES
Session 2. STRUCTURE OF AN ORGANIZATION
Session 3. ORGANIZATIONAL DESIGN AND CHANGE
Session 4. CASE STUDY: ESTABLISHMENT OF A DIRECTORATE OF RESEARCH AT
SORONNO UNIVERSITY OF AGRICULTURE
Session 5. CASE STUDY: ORGANIZATIONAL CHANGE AT SAMARU, NIGERIA

Module 4 LEADERSHIP, MOTIVATION, TEAM BUILDING AND
CONFLICT MANAGEMENT
Session 1. LEADERSHIP
Session 2. MOTIVATION
Session 3. TEAM BUILDING
Session 4. THE IRRI AGRICULTURAL EQUIPMENT PROGRAMME CASE STUDY: IRRI
MANAGEMENT COMPARES IRRI WITH DEVELOPING COUNTRY RESEARCH
INSTITUTES
Session 5. CONFLICT MANAGEMENT
Session 6. CONFLICT MANAGEMENT CASE STUDY: DR AGADIR








vi Module 7- Financial management


Module 5 MANAGING HUMAN RESOURCES
Session 1. RECRUITING AND MAINTAINING STAFF IN THE RESEARCH ENVIRONMENT
Session 2. THE PROFESSIONAL STAFF
Session 3. HUMAN RESOURCES MANAGEMENT EXERCISE
Session 4. PERFORMANCE APPRAISAL
Session 5. PERFORMANCE APPRAISAL CASE STUDY: SUZENE KOPEC
Session 6. EXERCISE IN DESIGNING PERFORMANCE EVALUATION FORMATS

Module 6 MANAGEMENT INFORMATION SYSTEMS, COMPUTERS AND
NETWORK TECHNIQUES
Session 1. MANAGEMENT INFORMATION SYSTEMS (MIS)
Session 2. MIS EXERCISE
Session 3. COMPUTERS AS MANAGEMENT TOOLS
Session 4. NETWORK TECHNIQUES
Session 5. PERT AND CPM EXERCISE


This Module comprises:

Module 7: FINANCIAL MANAGEMENT
Page

Session 1. FINANCIAL MANAGEMENT 1: COMPONENTS AND INFORMATION NEEDS 3
Session guide: Financial management in an agricultural research institute 5
Case study: National Institute of Food Research 25
National Institute of Food Research 25
Advice to a reluctant director 26
Dr Ibokone ponders 27
Reading note: Financial Management 1: Components and information 29
Basic financial information 29
Financial management 31
Financial and cost analysis 34

Session 2. FINANCIAL MANAGEMENT 2: PLANNING AND BUDGETING 39
Session guide: Planning and budgeting 39
Reading note: Planning and budgeting 55
Cost analysis 55
Components of cost 56
Planning and budgeting 57
The budgeting process 59
Control 63
Internal and external auditing 65







Training manual for institute management


Session 3. FINANCIAL MANAGEMENT 3: PROJECT DESIGN AND IMPLEMENTATION 69
Session guide: Project design and implementation 71
Reading note: Financial Management 3: Project design and implementation 77
Project design and activity implementation 77
Break-even analysis of projects 79
Financing of projects 79
Recurrent-cost problems 80
Computerization of financial functions 80
Electronic spreadsheets 81
Database management systems 81
Summary 82
Literature sources used 83

Session 4. CASE STUDY: FARO ARROYA 85
Session guide: Managing a research institute with uncertain finances Case
study: Faro Arroya 87
Case study: Faro Arroya 95
Faro Arroya 95
Animal Research Institute 97
Organization of research 97
Research farms 100
Problems faced by ARI 101
Re-orientation of research 103
Meeting with the foreign visitor 103
What the institute needed 104
Some dilemmas 105

Session 5. GENERATING FUNDS THROUGH CONSULTING AS AN INSTITUTIONAL
ACTIVITY. CASE STUDY: FOOD TECHNOLOGY RESEARCH INSTITUTE OF
DONGAL 107
Session guide: Generating funds through consulting as an institutional activity 109
Case study: Food Technology Research Institute of Dongal 111
Food Technology Research Institute of Dongal 111
Historical background 112
Buildings for FTRI 112
Organization 113
Scientific divisions 115
Team approach 116
Research work 116
Consultancy services programme 117
Types of consultancies 118







viii Module 7 Financial management


Appendix 1 The Food Processing Industry in Dongal 119
Appendix 2 Consultancy Regulations of the Council for Scientific and
Industrial Research, Dongal 123


The remaining Modules are:

Module 8 RESEARCH-EXTENSION LINKAGE
Single Session: RESEARCH-EXTENSION LINKAGE

Module 9 INFORMATION SERVICES AND DOCUMENTATION
Session 1. SCIENTIFIC AND TECHNICAL INFORMATION IN A DEVELOPING-COUNTRY
RESEARCH INSTITUTION
Session 2: INFORMATION AS AN INPUT TO RESEARCH
Session 3: INFORMATION AS AN OUTPUT OF RESEARCH
Session 4: COOPERATION IN NATIONAL PROGRAMMES
Session 5: EXERCISE ON BARRIERS TO THE FLOW OF INFORMATION

Module 10 INSTITUTE EVALUATION
Single Session: INSTITUTE EVALUATION







Training manual for institute management 1


This module on financial management in the context of an agricultural research institute
covers basic financial management techniques and control concepts. The concepts discussed
cover various dimensions of financial management.
The module comprises five sessions:
1. FINANCIAL MANAGEMENT 1: COMPONENTS AND INFORMATION NEEDS
2. FINANCIAL MANAGEMENT 2: PLANNING AND BUDGETING
3. FINANCIAL MANAGEMENT 3: PROJECT DESIGN AND IMPLEMENTATION
4. CASE STUDY: FARO ARROYA
5. GENERATING FUNDS THROUGH CONSULTING AS AN INSTITUTIONAL ACTIVITY CASE
STUDY: FOOD TECHNOLOGY RESEARCH INSTITUTE OF DONGAL


The module covers basic financial information, components of financial management,
planning and budgeting, control, project and activity design and implementation, and
computerization of financial functions. In addition, the case studies focus on management
of research institutes with uncertain financial support and the need for generating supple-
mentary funds through external consultancy contracting as an institutional activity.
The theoretical discussion of issues in financial management is quite detailed. Depending
upon the profile of participants, their interests and time availability, the session can be
divided into two or three shorter sessions. The trainer might choose to look at both case
studies, or either of them, so long as issues such as uncertain finances and need for
generation of additional funds are adequately emphasized.










Training manual for institute management 3


DATE


TIME


Plenary participatory lecture


OBJECTIVES
At the end of this session, participants should be able to appreciate:
1. Various forms used for the presentation of financial information pertaining to
a research organization.
2. Different components of financial management, and the role of the top
executive in managing these components.
3. Planning and the financial resources of the organization.


Module 7 Session 1


Financial management 1:
Components and
information needs


FORMAT


TRAINER







4 Module 7 Session 1 Financial management 1: Components and information needs


INSTRUCTIONAL MATERIALS


Why financial management for an agricultural
Income and expenditure account
Income and expenditure account (illustration)
Balance sheet
Balance sheet (illustration)
Components of financial management
Statements and indicators that help in analysis
Sources and uses of funds
Costs of service statement
Diagnostic indicators
Common-sized ratio statement (illustration)
Common-sized ratio statement (illustration)
Time index of expenses
Time index of grants received
Time index of real expenses
Index of level of achievements of plans
Coefficient of effectiveness
Recurrent-cost recovery coefficient


research institute?


REQUIRED READING

Case study: National Institute of Food Research.
Reading note: Financial management 1: Components and information.




BACKGROUND READING

None.




SPECIAL EQUIPMENT AND AIDS

Overhead projector and chalkboard


Exhibit 1
Exhibit 2
Exhibit 3
Exhibit 4
Exhibit 5
Exhibit 6
Exhibit 7
Exhibit 8
Exhibit 9
Exhibit 10.
Exhibit 11
Exhibit 12
Exhibit 13
Exhibit 14
Exhibit 15
Exhibit 16
Exhibit 17
Exhibit 18







Training manual for institute management 5


FINANCIAL MANAGEMENT IN AN AGRICULTURAL RESEARCH INSTITUTE


The case study on the National Institute of Food Research focuses on the crucial role of
financial management in a research institute, particularly when funds are scarce and their
availability uncertain. The Reading note on Financial management in an agricultural
research institute should be discussed in this context.
Ask participants "Why financial management?", particularly in a research organization.
Show EXHIBIT 1 and emphasize how critical financial resources are to the growth of an
organization. EXHIBIT 1 provides an analysis of performance, helps in planning and
budgeting of activities, and enables control.
Basic financial information consists of (i) an income and expenditure account, and (ii)
a balance sheet. Show EXHIBIT 2 on the income and expenditure account. It provides
information on the performance of an organization, covering all operations, revenues
generated and expenditure incurred. Show EXHIBIT 3. The income and expenditure account
is based on accrual assumption and depreciation principles. Accrual assumption facilitates
matching of costs to revenue. Distinguish the accrual assumption from the cash basis of
accounting, which records transactions on the basis of cash inflows and cash outflows. Use
of the accrual system is essential for careful planning of activities. Discuss the depreciation
principle, which enables distribution of the cost of an asset in a systematic and rational
manner over its estimated useful life. Define (i) cost, (ii) book value and (iii) salvage value.
Discuss the straight-line method of depreciation.
Ask participants why depreciation should be considered in non-profit organizations.
Observe that depreciation represents the cost of using assets to produce goods or services.
By charging depreciation, the value of an asset will be correctly recorded in the balance
sheet.
Show EXHIBIT 4. Balance sheet provides information on assets and liabilities of an
organization. Emphasize that in a balance sheet (i) there is a clear distinction between capital
and revenue expenditure, and (ii) capital grants are treated as contributions and not income.
Show EXHIBIT 5 as an illustration of a balance sheet.
Financial management is done through analysis of existing financial statements,
developing additional data, decision making based on subsequent analysis, and comparing


Module 7 Session 1

Session guide







Module 7 Session 1 Financial management 1: Components and information needs


results with expectations. This approach has four components (EXHIBIT 6). Each of these
will have to be discussed.
The first component is financial and cost analysis. This is related to the transformation
of financial data into a form which can provide insights into the past, present and future
operation of the organization (EXHIBIT 7). This involves analysing financial statements.
Statement of sources and applications of funds (EXHIBIT 8) provides insights into (i) how
funds have been moving, sources of the funds and their uses, (ii) sources of dependencies and
associated trends, (iii) potential areas for generating funds, and (iv) identifying areas or
activities which have been major consumers of funds, and suggesting control mechanisms.
As an illustration show EXHIBIT 8 and discuss the various items included in it.
A Cost of Service Statement (EXHIBIT 9) provides information on direct and indirect
costs, broken down under various headings. This statement can help management control
costs.
Diagnostic indicators help in drawing inferences about the effectiveness and efficiency
of use of resources. These diagnostic indicators could be (i) coefficients, indicating
relationships between different but comparable data; (ii) ratios, showing the relationship of
a part to the whole; and (iii) indices, expressing the relationship between actual and planned
resource use. Five diagnostic indicators are used in financial management (EXHIBIT 10).
Discuss these indicators individually. Common-sized ratio statements can be prepared
by using the income and expenditure and the balance sheet statements. Items can be
expressed as percentages of the total. Show EXHIBITS 11 and 12 to illustrate common-sized
balance sheets and income and expenditure statements.
Time indices of expenses and grants received provide comparisons with the base year and
highlight changes over time (EXHIBIT 13). Similarly, time indices of grants received
(EXHIBIT 14), real expenses (EXHIBIT 15) and level of achievement of plans (EXHIBIT 16) can
be computed.
Coefficients of effectiveness (EXHIBIT 17) relate expenses for wages and salaries with
other expenses. In a research institute, this is quite an important measure of how much is
actually spent on scientific work.
If recurrent costs can be recovered, the recurrent-cost recovery coefficient can be
calculated (EXHIBIT 18). This concludes the discussion on financial analysis.








TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 1


WHY FINANCIAL MANAGEMENT FOR AN
AGRICULTURAL RESEARCH INSTITUTE


* Financial resources are critical to the growth of an
organization


* Allows efficient and effective utilization of
resources


* One basis for analysis of performance


* Planning and budgeting for activities


* Significance of effective control systems


* Internal and external control systems


* Project formulation and design









TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 2


INCOME AND EXPENDITURE ACCOUNT


* The basic objective of this statement is to provide
the information necessary to understand how an
organization has performed during a given period




* In deriving these statements, we generally follow
the principles of
accrual assumption of matching costs with
revenue, and
provision of depreciation









TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 3


Income and expenditure account illustration:
National Institute of Food Research

(in thousands of dollars)
1992 1993
EXPENDITURE
Expenses in respect of properties
Maintenance expenses 12.28 14.76
Municipal tax 3.98 5.48
Establishment expenses
Salaries and allowances 532.22 599.64
Consultancy and research/projects 28.68 37.32
Travelling expenses 7.24 7.64
Supplies, services and contingencies 170.29 166.39
Expenditure on various courses and workshops arranged
Post-graduate programme 59.45 65.40
Workshops and seminars/training programmes 188.00 246.07
Legal expenses 2.18 3.36
Auditing fee 0.53 0.79
Miscellaneous expense
Publication expenses 6.95 8.83
Telephone and dispatch 3.24 4.27
Expenses on development activities 8.52 13.69
Other expenses on research and consultancy
Ad hoc research staff salary 113.05 124.78
Other expenses
Scholarships and fellowships 16.26 19.02
TOTAL 1152.82 1317.44
Surplus carried over to balance sheet 2.34 2.25


INCOME
Rent realized 9.24 9.71
Interest realization on loans and advances to staff 0.26 0.73
Grant from the Min. of Education sanctioned in year: Amount received 614.40 694.45
Less: Amount transferred to
Representing expenditure on non-recurring items 73.69 93.46
House building advance fund 12.00 12.00
For purchase of EPABX 15.00
For purchase of computers 10.00 10.00
518.71 563.99
Add : Amount transferred on balance unspent during the previous period 13.63 2.34
532.34 566.33
Income from other sources
Post-graduate programme 66.78 71.19
Workshops, seminars and other training programmes 219.83 293.03
Consultancy and research projects 179.77 200.37
Scholarship and fellowship money from various agencies 12.93 12.99
Miscellaneous receipts 68.40 90.82
Grants for specific research project 32.13 35.68
Transfer from reserves
Contribution to research project from Ford Foundation grant 2.52 6.40
Contribution from the Research Fund to meet excess from Min. of Agric. 20.96 32.44
TOTAL 1155.16 1319.69








TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 4 1


BALANCE SHEET


* The balance sheet provides information as of a
given date about the assets which the organization
owes to outsiders





* Assets are in the form of stored purchasing power,
money claims, tangible movable and non-movable
items





* In contrast, liabilities of the organization represent
capital grants received from government and other
agencies, and debts payable by the organization on
account of purchases and operating expenses













TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 5


Balance sheet illustration:

National Institute of Food Research

(in thousands of dollars)
1992 1993
ASSETS
Fixed assets
Land and buildings 1730.21 1797.64
Furniture, fixture, equipment and vehicles 439.77 558.14
Books purchased from library fund 57.60 68.23
Computers, equipment and books 114.62 162.67
Other fixed assets 21.42 26.12
Stores at cost 6.45 5.12
Investments
Long-term fixed deposits 96.61 119.45
National deposit receipts 17.85 17.85
Short- & long-term deposits with banks 1246.53 1318.24
Loans and advances
Loan scholarships 0.86 0.89
Advances to employees
House building 30.75 43.77
Other advances 69.76 43.20
Deposits
Security deposits 3.07 3.33
Telephone deposits 1.79 1.29
Income outstanding
Interest 35.99 33.56
Other income 8.61 25.68
Grants due from the Ministry of Education 46.41 50.88
Due from students 5.26 0.61
Cash and bank balance 64.21 120.43
3997.77 4397.10

1992 1993
FUNDS AND LIABILITIES
Earmarked funds 3385.02 3736.77
Lands and buildings 2010.73 2144.15
Academic activities 405.65 461.63
Student aid 85.06 88.23
Furniture and equipment 707.03 837.26
Fund for purchase of EPABX 15.00
Funds for purchase of computers 72.66 71.64
Faculty and staff development 103.89 118.86
Grants from international agencies 203.73 204.97
For building expenditure 113.10 113.10
Books and computers 81.11 81.16
Fund for AGRI Journal 9.52 10.71
Liabilities for expenses and other items 72.50 36.25
Deposits and sundry credit balances 310.37 393.05
Income and expenditure account Balance as per last balance sheet 37.44 26.15
Less: Amount transferred to grant from the Ministry of Education in 13.63 2.34
income and expenditure account
Add: Surplus as per income and expenditure 2.34 2.25
3997.77 4397.10








TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 6


COMPONENTS OF FINANCIAL
MANAGEMENT





FINANCIAL AND COST ANALYSIS


PLANNING AND BUDGETING


VARIANCE ANALYSIS AND CONTROL


PROJECT AND ACTIVITY PLANNING










TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 7


STATEMENT AND INDICATORS THAT HELP
IN ANALYSIS


* Sources and uses of funds statement


* How funds have been moving, sources and uses
during the year


* Enables management to identify the sources on
which the organization is dependent, and trends in
these sources

* Exploration of areas which have the potential to
generate funds in the future

* Helps management to identify areas or activities
which have been major consumers of funds, and to
suggest control mechanisms







TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 8


SOURCES AND USES OF FUNDS:
NATIONAL INSTITUTE OF FOOD RESEARCH



$ 'OOOs %
USES
Additions to fixed assets 250.29 54.83
Investments 94.55 20.71
Outstanding grants 19.11 4.19
Decrease in liabilities 36.25 7.95
Decrease in surplus carried to the
balance sheet 0.09 0.00
Increase in cash balance 56.22 12.32
456.51 100.00
SOURCES
Non-plan expenditure 351.75 77.05
Grants from international agencies 1.24 0.28
Other inflows (deposits, etc.) 82.92 18.14
Recovery of loans and advances 15.95 3.50
Recovery of dues from students 4.65 1.03
456.51 100.00








TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 9


COST OF SERVICE STATEMENT





* This statement contains information about costs
incurred in providing various services rendered by
the organization










TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 10


DIAGNOSTIC INDICATORS


* Common-sized ratio statement

* Time indices of expenses and grants received

* Time index of real expenses

* Index of level of achievement of plans

* Coefficients to analyse operating performance







TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 11


COMMON-SIZED RATIO STATEMENT ILLUSTRATION:
NATIONAL INSTITUTE OF FOOD RESEARCH

1989 1990
ASSETS
Fixed assets 58.74 59.09
Investments 34.04 33.10
Loans and advances 3.08 2.44
Deposits 0.12 0.11
Income outstanding 2.28 2.50
Due from students 0.13 0.01
Cash and bank balance 1.61 2.74
100.00 100.00
FUNDS AND LIABILITIES
Earmarked funds 84.67 84.98
Grants from international agencies 5.10 4.66
Liabilities for expenses and other items 1.81 0.82
Deposits and sundry credit balances 8.36 9.48
Income and expenditure account 0.06 0.05
100.00 100.00


derived from the


Notes: All figures are percentages of total. Figures are
balance sheet shown in Exhibit 2.







TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 12


COMMON-SIZED RATIO STATEMENT ILLUSTRATION:
NATIONAL INSTITUTE OF FOOD RESEARCH


1989 1990
EXPENDITURE
Expenses in respect of properties 1.39 1.54
Establishment expenses 49.18 48.85
Supplies, services and contingencies 14.74 12.61
Costs for various courses and workshops arranged
Post-graduate programmes 5.15 4.96
Workshops, seminars and training programmes 16.27 18.65
Miscellaneous expenses 1.88 2.34
Other research and consultancy expenses
Ad hoc research staff salary 9.79 9.46
Other expenses
Scholarships and fellowships 1.41 1.44
Surplus carried over to balance sheet 0.20 0.17
100.00 100.00
INCOME
Rent and interest realized 0.82 0.77
Grant from the Ministry of Education 46.08 42.94
Income from other sources
Post-graduate programmes 5.78 5.39
Workshops, seminars and training programmes 19.02 22.20
Consultancy and research projects 15.57 15.18
Scholarships and fellowships from various agencies 1.12 0.98
Miscellaneous receipts 5.92 6.88
Grant for specific research project 2.78 2.70
Transfer from reserves 2.90 2.94
100.00 100.00

Notes: All figures are expressed as a percentage of the total income and
expenditure account shown in Exhibit 1.







TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 13


TIME INDEX OF EXPENSES




Time index of Expenses in a given period
expenses Expenses in the base period










TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


TIME INDEX OF GRANTS RECEIVED



Grants received in the current
Time index of period
grants received Grants received in the base
period


EXHIBIT 14







TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


EXHIBIT 15


TIME INDEX OF REAL EXPENSES



Expenses in the given period as
based on prices prevailing in the
Time index base period
of real
expenses Expenses in the base period






TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


Index of level of Actual expenses
achievement of plans Planned expenses


I EXHIBIT 16







TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


.1


COEFFICIENT OF EFFECTIVENESS


Expenses other than wages
Coefficient of and salaries
effectiveness Expenses on wages and
salaries


F EXHI!BILT1 7






TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 1


/EXHIBIT 18


RECURRENT-COST RECOVERY COEFFICIENT



Recurrent-cost recovery Revenue receipts
coefficient Recurring costs






Training manual for institute management


NATIONAL INSTITUTE OF FOOD RESEARCH


It was immediately after the farewell party for Dr Ranzon, who the next day was to take over
as Deputy Director of the Council for Scientific and Industrial Research (CSIR). He had
been Director of the National Institute of Food Research (NIFR) for nearly a decade, and had
handed over to Dr Ibokone a few hours earlier. They were together in the Director's office.
Outside, it was raining heavily.


NATIONAL INSTITUTE OF FOOD RESEARCH
NIFR was established in 1968 by the Government of Nara Visa, to assist the local food
industry to improve and diversify its operations. NIFR consequently undertook research into
problems of food processing, preservation, storage, marketing and distribution, and advised
on food analysis, quality control, product improvement and development.
At the time of establishment of NIFR, heavy capital investment was taking place in many
activities in the country, including the construction of fruit and vegetable processing plants,
abattoirs, meat and fish processing plants, and enlarging the fishery fleet, cold storage
facilities and grain and cocoa stores. NIFR was therefore conceived as a means to help the
development of these and related industries, and also as a means of contributing to
agricultural productivity.
Products developed by NIFR included instant fufu, wines from local fruits, refined and
deodorized shea butter, composite bread and biscuits, corned goat, and ration packs for the
Nara Visa army. Other products included smoking ovens, dryers and a cassava grater.
The main source of support for NIFR came from the Department of Food of the Nara
Visa Ministry of Agriculture. In the early stages, NIFR received assistance from the United
Nations Development Programme (UNDP) through a UNDP/FAO project. Under the
project, a coordinated programme of applied research was conducted in storage, processing,
preservation and marketing of fruits, with the aim of contributing towards the development
of the food industry of the country. Although this project ended in September 1970, some
of the activities still continued. NIFR received occasional grants from international agencies,
and some support from the local food processing industry.
NIFR also assisted the government in planning and implementing official policy
concerning development of the national food industry and increasing agriculture productivity.


Module 7 Session 1

Case Study








26 Module 7 Session 1 Financial management 1: Components and information needs


Over time, NIFR had developed good linkages with the local food processing industry
through consultancy and training services. It had also prepared some feasibility studies. Its
research work was disseminated through publications.
NIFR was organized into scientific and administrative divisions: the common pattern for
most research institutes at that time. Committees provided the means for research
coordination, administration and joint consultation. NIFR was able to attract highly qualified
professional staff, who had acquired international recognition for their research work. There
were about 65 full-time scientists working for NIFR, supported by administrative staff.


ADVICE TO A RELUCTANT DIRECTOR
Even though Dr Ibokone had been receiving briefings during the last fortnight, after the
change of director had been confirmed, he could not resist asking Dr Ranzon, "What do you
think is the most crucial thing a director has to do in order to be successful?" The silver-
haired scientist, who had over time become a highly appreciated administrator, did not take
long to answer: "Do not be a reluctant director. Be in control of things. You must manage
your finances as you would manage your scientists, physical facilities, administrative staff,
sponsors and users. Do not think your duty is only to generate funds. You have to do, that
but that is not enough. You have to somehow stretch the available resources."
Dr Ranzon paused for a minute and, without waiting for a response from Dr Ibokone,
continued: "We prepare budgets to get government grants, which come through in due
course, although after substantial cuts. The ministry keeps advising us to manage with
whatever funds they can provide. They frequently observed that we should generate funds
internally by cutting down on some of the activities or through more efficient and effective
utilization of resources. In the early years I did not take them seriously, until I realized that
there was some wisdom in their remarks. Whenever decisions involved finances, I sought
information from the Accounts Officer and relied on that. Often the information given by
him was inadequate. The budget exercise was a formality. Budgets were prepared on the
anticipated expenditure statements submitted by divisional heads, without much discussion,
let alone participation. Many times, particularly towards the end of the financial year, I was
confronted with over-expenditure and empty coffers and so had to postpone several items of
expenditure to the next financial year. On several occasions, for want of funds, we had to
abandon experiments half way through. Controls were minimal, and monitoring very little.
Over time, I came to realize that budgeting should in fact be an ongoing exercise, and not
an annual ritual. Budget can be used as an instrument of control. There has to be an
information system capable of giving information on costs and returns on an ongoing basis.
Given the uncertainty in delivery of budgetary support from the government, and irregular
availability of funds from other sources, it is all the more necessary to manage our finances
properly. What we have is basically an accounting system', while what we need is a system
for financial management. I had planned to set up a financial management system, but,
regrettably, I have not been able to do so. If you move in that direction, I will give you all
the support from CSIR ... "
Dr Ibokone was listening to Dr Ranzon with rapt attention. The old man was
experienced, wise, forthright and, above all, sincere. In many ways, Dr Ranzon was the



1. See Tables 1 and 2 in the Reading note, which are the same as Exhibits 3 and 5 in the Session guide.








Training manual for institute management


dean of the scientific community in the country, having first distinguished himself as an
outstanding researcher and then as an efficient administrator. Darkness had set in and the
rain had stopped. They walked out together through the imposing gate of NIFR.


DR IBOKONE PONDERS
At his home, Dr Ibokone pondered over Dr Ranzon's remarks. He recalled Dr Ranzon's
reference to a 'reluctant director.' That was somewhat true. He had not been very
enthusiastic about becoming Director of NIFR. In the usual course of events, the directorship
should have gone to the Deputy Director, but that post had been vacant for two years, after
the previous incumbent emigrated to the USA. The promotion of Dr Ranzon, although not
a surprise, had come a bit sooner than expected. Dr Ibokone was offered the directorship
because of his seniority and very strong recommendations from Dr Ranzon. They had been
colleagues for over a decade, and respected one another. Dr Ibokone was rather reluctant
to accept the offer because he felt that he did not have administrative experience. Besides,
he feared that he would be bogged down in administrative work to the extent that the scientist
in him would become dormant. He was quite happy with his work, having distinguished
himself in the international scientific community. He had published several papers and
chaired many international committees. He was known to be a prominent biochemist. In
spite of his initial reluctance, Dr Ibokone agreed to become Director, allowing himself to be
persuaded by Dr Ranzon and the fact that his wife was also keen that he accept the offer.
Dr Ibokone had no doubt that financial management was at the core of NIFR's
management. He resolved to set up a good financial management system in the institute.
Even though he may have been reluctant to accept the position, he was not going to be a
'reluctant director.'










Training manual for institute management 29


FINANCIAL MANAGEMENT 1:
COMPONENTS AND INFORMATION


Management of resources plays a critical role in the growth and development of an
organization. It goes far beyond the mere recording of transactions and preparation of
reports. There is much more emphasis on effective and efficient utilization of financial
resources and exploring the possibility of generating funds from various sources. The top
executive of an organization has also to concerned about the effectiveness of the control
system in helping achieve the objectives and directing the organization towards fulfilling its
mission.


BASIC FINANCIAL INFORMATION
Almost all organizations that are accountable to their stakeholders record day-to-day
transactions in their account books. In these account books, all transactions are first
classified and then summarized. Using the summarized information, the organization
develops and prepares financial statements, which help management in measuring the
performance of various activities and assessing the financial position of the organization. The
statements also draw the attention of management towards those factors which are necessary
to maintain the promises of the organization in meeting its objectives.
The two basic financial statements prepared by an organization are the income and
expenditure account, and the balance sheet.


Income and expenditure account
The income and expenditure account statement provides information on how the organization
has performed during a given period, which is generally one year. The statement
summarizes all revenue earned and expenditure incurred during the given period. In deriving
these statements, two principles are generally followed:
accrual assumption, namely matching costs with revenue, and
provision for depreciation.


Module 7 Session 1

Reading Note







30 Module 7 Session I Financial management I: Components and information needs


Accrual assumption is fundamental to the preparation of an income and expenditure
account. The objective is to facilitate the matching of costs with revenue relative to a
particular period. This principle assumes increasingly greater importance in modern
management, where availability of funds is a major constraint, requiring each organization
to get the best possible use out of them. In contrast, the cash basis of accounting is recording
only cash inflows and outflows. The transaction is recorded only when cash is involved. If
we follow a cash basis of accounting, a meaningful comparison of the operating and financial
performance is not possible, particularly in a situation when there are a large number of
unpaid bills or a large amount of revenue has not been collected. For example, if the
maintenance bills for a period totalled $ 30 000 and the organization has paid only $ 25 000
during the period, in the cash basis of accounting only $ 25 000 would be recorded, while
$ 30 000 would be recorded under the accrual system.
As agricultural research institutes become more conscious of the need to prepare and use
budgets as control mechanisms, the accrual system assumes more importance. It is very
difficult for an organization to effectively use budgets without using the accrual system. A
accrual basis also helps management to measure the cost of activities accurately, which is a
more correct way of recording expenses.
Depreciation is a means to reflect the actual value of an asset. All organizations use
assets to produce goods or services. The value of these assets, except land, is likely to
decrease as time passes. Depreciation represents the diminution in the value of fixed assets.
The Committee on Terminology of the American Institute of Certified Public Accountants
defines depreciation as: "Depreciation accounting is a system of accounting which aims to
distribute the cost or other basic value of a tangible capital asset (less salvage value, if any)
over the estimated useful life of the asset, in a systematic and rational manner. It is the
process of allocation. Depreciation for the year is the portion of the total charge under such
system that is allocated for the year."
The systematic and rational manner of distributing the cost of the asset may be done in
various ways. One approach is to write off the value of the asset using the following
formula:
Cost salvage value
Annual depreciation amount charged = Cost salvage v
Number of useful years
The cost is the expense incurred in purchasing the asset. It is also the book value of the asset
in the year of its purchase. The net book value will continuously decline as the organization
charges depreciation each year. The salvage value is what the organization expects to
recover by selling the asset at the end of its useful life. The above formula ensures that equal
amounts are apportioned over the life of the asset, and is called the 'straight line' method of
depreciation. There are other methods of charging depreciation.
Until recently there was some controversy concerning charging depreciation in the books
of non-profit organizations, but now depreciation accounting has become a generally accepted
accounting principle. By not charging depreciation, managements may be misled into
thinking that actual costs were less than what they really are. Depreciation represents the
cost of using the asset for producing goods or services. Charging of depreciation is more
important where the organization is selling its services to outside agencies, more particularly
to the government. In such situations the organization may be required to work out a
'reimbursement formula,' which should certainly take into account depreciation charges. If







Training manual for institute management 31


depreciation is regularly charged in the account books, the organization should have no
difficulty in negotiating the formula. Another reason for charging depreciation is to avoid
an overstatement of the value of assets in the balance sheet.
The income and expenditure sheets should be prepared on the basis of explicit inclusion
of depreciation costs. The basic objective is to charge the cost of a fixed asset over its
estimated life. If depreciation is ignored, the costs of providing services are distorted.
To illustrate this, the NIFR income and expenditure accounts for 1992 and 1993 are
given as Table 1.


Balance sheet
The balance sheet is considered to be a window on the business, through which one can look
inside and obtain significant details about the financial position of the organization. This
statement provides information as of a given date about assets and liabilities. Assets
represent the economic resources which are going to generate future benefits and are
possessed by the organization. They could be stored purchasing power (cash), money claims
(investment in securities, stocks, etc.) and tangible movable and fixed items (buildings,
equipment, machinery, etc.). Liabilities represent capital grants received from government
and other agencies and debts payable by the organization on account of purchases and
operating expenses. Two basic principles are followed when preparing the balance sheet of
the organization:
a clear distinction is made between capital and revenue expenditure; and
capital grants are treated as contributions and not income in the year in which they are
received.
Capital and revenue items should be distinguished under all circumstances, according to
the nature of the transaction. In the absence of this distinction, the surplus or deficit figure
in the income and expenditure account is distorted, and the balance sheet will not provide a
correct picture of the financial position of the organization.
Capital grants are most often received in order to create specific facilities. They are
not repayable and hence the organization does not create any liability for repayment of these
amounts. As noted above, these grants are not treated as income in the year in which they
are received, because they cannot be classified as revenue receipts. The balance sheet is
prepared on the basis of treating these items as deferred liability during the tenure of the
project. When the project is complete, the project cost is transferred to the contribution
account. This account is similar to owners'funds in a commercial organization.
Table 2 in this case study gives the balance sheet of the organization for two years.


FINANCIAL MANAGEMENT
The preparation of financial statements is important as they provide insight into operating and
financial performance of the organization. However, preparation of these statements is not
by itself sufficient for efficient management of financial resources. The finance function is
concerned with meeting the organization's obligations. This is analysed by preparing cash
flow statements. In addition, the chief executive has to ensure that the organization has made
provision for funds needed to meet its recurring expenses and capital or development









32 Module 7 Session 1 Financial management 1: Components and information needs






Table 1 NIFR income and expenditure account for the year ending 31 March 1993

(in thousands of dollars)
1992 1993
EXPENDITURE
Expenses in respect of properties
Maintenance expenses 12.28 14.76
Municipal tax 3.98 5.48
Establishment expenses
Salaries and allowances 532.22 599.64
Consultancy and research/projects 28.68 37.32
Travelling expenses 7.24 7.64
Supplies, services and contingencies 170.29 166.39
Expenditure on various courses and workshops arranged
Post-graduate programme 59.45 65.40
Workshops and seminars/training programmes 188.00 246.07
Legal expenses 2.18 3.36
Auditing fee 0.53 0.79
Miscellaneous expense
Publication expenses 6.95 8.83
Telephone and dispatch 3.24 4.27
Expenses on development activities 8.52 13.69
Other expenses on research and consultancy
Ad hoc research staff salary 113.05 124.78
Other expenses
Scholarships and fellowships 16.26 19.02
TOTAL 1152.82 1317.44
Surplus carried over to balance sheet 2.34 2.25


INCOME
Rent realized 9.24 9.71
Interest realization on loans and advances to staff 0.26 0.73
Grant from the Min. of Education sanctioned in year: Amount received 614.40 694.45
Less: Amount transferred to
Representing expenditure on non-recurring items 73.69 93.46
House building advance fund 12.00 12.00
For purchase of EPABX 15.00
For purchase of computers 10.00 10.00
518.71 563.99
Add : Amount transferred on balance unspent during the previous period 13.63 2.34
532.34 566.33
Income from other sources
Post-graduate programme 66.78 71.19
Workshops, seminars and other training programmes 219.83 293.03
Consultancy and research projects 179.77 200.37
Scholarship and fellowship money from various agencies 12.93 12.99
Miscellaneous receipts 68.40 90.82
Grants for specific research project 32.13 35.68
Transfer from reserves
Contribution to research project from Ford Foundation grant 2.52 6.40
Contribution from the Research Fund to meet excess from Min. of Agric. 20.96 32.44
TOTAL 1155.16 1319.69









Training manual for institute management 33





Table 2 NIFR balance sheet as of 31 March 1993
(in thousands of dollars)
1992 1993
ASSETS
Fixed assets
Land and buildings 1730.21 1797.64
Furniture, fixture, equipment and vehicles 439.77 558.14
Books purchased from library fund 57.60 68.23
Computers, equipment and books 114.62 162.67
Other fixed assets 21.42 26.12
Stores at cost 6.45 5.12
Investments
Long-term fixed deposits 96.61 119.45
National deposit receipts 17.85 17.85
Short- & long-term deposits with banks 1246.53 1318.24
Loans and advances
Loan scholarships 0.86 0.89
Advances to employees
House building 30.75 43.77
Other advances 69.76 43.20
Deposits
Security deposits 3.07 3.33
Telephone deposits 1.79 1.29
Income outstanding
Interest 35.99 33.56
Other income 8.61 25.68
Grants due from the Ministry of Education 46.41 50.88
Due from students 5.26 0.61
Cash and bank balance 64.21 120.43
3997.77 4397.10

1992 1993

FUNDS AND LIABILITIES
Earmarked funds 3385.02 3736.77
Lands and buildings 2010.73 2144.15
Academic activities 405.65 461.63
Student aid 85.06 88.23
Furniture and equipment 707.03 837.26
Fund for purchase of EPABX 15.00
Funds for purchase of computers 72.66 71.64
Faculty and staff development 103.89 118.86
Grants from international agencies 203.73 204.97
For building expenditure 113.10 113.10
Books and computers 81.11 81.16
Fund for AGRI Journal 9.52 10.71
Liabilities for expenses and other items 72.50 36.25
Deposits and sundry credit balances 310.37 393.05
Income and expenditure account Balance as per last balance sheet 37.44 26.15
Less: Amount transferred to grant from the Ministry of Education in 13.63 2.34
income and expenditure account
Add: Surplus as per income and expenditure 2.34 2.25
3997.77 4397.10







34 Module 7 Session 1 Financial management 1: Components and information needs


expenditure. The finance manager has to look beyond the data and information provided in
the annual financial statements and must obtain insights into existing or developing problems
and the financial consequences of such problems. To effect this requires a systematic
approach, and the approach used in financial management in fact defines its components. It
is very simple: analyse the financial statements, develop additional data, make decisions based
on subsequent analysis, and finally examine whether the results confirm expectations. The
four components of this approach are:
financial and cost analysis,
planning and budgeting,
variance analysis and control, and
project and activity planning.


FINANCIAL AND COST ANALYSIS
This component of financial management is related to the transformation of financial data into
a form that can be used to obtain insights into developing and existing problems having
financial consequences. The objective of the analysis is to examine where was the
organization in the past, where is it now, and where it could be in the future. Both financial
and qualitative information may prove to be useful in doing this analysis. The analysis may
also be used to monitor the financial position of the organization, evaluate the need for
additional resources, and determine additional financial requirements. The various
parameters considered in an analysis of a financial statement are discussed briefly below.


Sources and applications of funds
The income and expenditure account and the balance sheet provide information about the
operations during the year, and the stock of assets and liabilities of the organization.
Management would like to have information on the origin and application of these funds, i.e.,
the various sources of income and which activities or areas have consumed those funds. For
this purpose, management prepares a summary called a statement of sources and application
of funds. This statement:
shows the sources and uses of funds, and their movement during the year;
enables management to identify the sources on which the organization is dependent, and
also possible trends in these sources;
highlights areas which have the potential to generate funds in the future; and
helps management identify the areas or activities which have been major consumers of
funds, and indicates possible control mechanisms.
Table 3 gives the sources and uses of funds statement of NIFR for the year 1992-93.
Details about additions to fixed assets can be obtained from the balance sheet. This
detailed information can also be incorporated in the statement of sources and uses of funds.
'Non-plan expenditure' represents funds received from government and other sources to
finance recurring costs.








Training manual for institute management 35


Table 3 NIFR sources and uses of funds
$ '000s %
USES
Additions to fixed assets 247.85 54.58
Investments 94.55 20.82
Outstanding grants 19.11 4.21
Decrease in liabilities 36.25 7.98
Decrease in surplus carried to the balance sheet 0.09 0.02
Increase in cash balance 56.22 12.38
454.07 100.00
SOURCES
Non-plan expenditure 351.75 77.47
Grants from international agencies 1.24 0.27
Other inflows, such as deposits, etc. 82.68 18.21
Recovery of loans and advances 13.51 2.98
Recovery of dues from students 4.89 1.08
454.07 100.00



Cost of service statement
Information about the costs incurred in providing various services rendered is summarized
in this statement. It should include all costs incurred by departments. These are called direct
costs. The statement will also include all indirect costs which have been incurred by other
departments, and which have been apportioned to the department for which the cost statement
is being prepared. Cost information may be further classified as salaries and wages,
travelling expenses, stores and stationery, etc. The statement helps management to control
costs incurred on each activity or service.


Diagnostic indicators
It is very important to develop some key indicators which can be used in drawing inferences
about the effective and efficient operational use of resources. These indicators can be
expressed in terms of coefficients, ratios or indices. A coefficient is the relationship between
different but comparable data; a ratio describes the relation of a part to the whole; and an
index is the relation between the actual and planned values of a particular item. It is very
difficult to establish norms for measuring the efficiency of agriculture research institutes
because they pursue a variety of objectives, and in most situations the output is not really
quantifiable. Nevertheless, despite the often intangible nature of agricultural research
outputs, there are some indicators that can be used, although with some caution, including:

common-sized ratio statements;

time indices of expenses and revenues;
time indices of real expenses;
indices of level of achievements of plans; and
coefficients to analyse operating performance.
Common-sized ratio statements can be prepared by using the income and expenditure and
balance sheet statements. All items in these two statements can be expressed as percentages
of the total. In the balance sheet, each item is expressed as a percentage of total assets,
whereas the income and expenditure items are expressed as percentages of total income or








36 Module 7 Session 1 Financial management 1: Components and information needs


expenditure. The time series behaviour of these percentage values provide important insights
into the efficiency of operations and movements of funds. Such insights cannot be derived
from a mere review of raw figures. To illustrate this, Tables 4 and 5 provide the NIFR
common-sized balance sheet and common-sized income and expenditure account. The
common-sized statements have been prepared in summary form. Since all figures are
expressed as percentages, they display their relative importance.

Table 4 NIFR common-sized balance sheet

1992 1993
ASSETS
Fixed assets 59.28 59.54
Investments 34.04 33.10
Loans and advances 2.54 2.00
Deposits 0.12 0.11
Income outstanding 2.28 2.50
Due from students 0.13 0.01
Cash and bank balance 1.61 2.74
100.00 100.00
FUNDS AND LIABILITIES
Earmarked funds 84.67 84.98
Grants from international agencies 5.10 4.66
Liabilities for expenses and other items 1.82 0.82
Deposits and sundry credit balances 7.76 8.94
Income and expenditure account 0.65 0.59
100.00 100.00

Notes: All figures are expressed as a percentage of the respective total. For the full balance sheet, see Table 1.




Time indices of expenses and revenues supplement the common-sized ratio statements.
The indices are expressions of change with reference to a base year, and can be prepared for
different types of expenses, using the formula:


Time index of expense =


Expense in a given period

Expense in the base period


An index can provide important insights into changes in expense items. Improvements or
deteriorations can be easily distinguished. The index provides information on the magnitude
of absolute changes in expenses, whereas the common-sized statement does not indicate how
expenses have been changing over time. This supplemental information can throw light on
the efficiency of operations, and uses and applications of finances during the period.

Similarly, other indices can also be prepared. For example, to obtain an index of grants
received, the calculation would be:


Time index of grants received =


Grants received in a given period

Grants received in the base period


Indices for revenue and expense items can also be prepared, and often provide a deeper
understanding of changes taking place.








Training manual for institute management 37


Table 5 NIFR common-sized income and expenditure account

1989 1990
EXPENDITURE
Expenses in respect of properties 1.39 1.54
Establishment expenses 49.18 48.85
Supplies, services and contingencies 14.74 12.61
Costs for various courses and workshops arranged
Post-graduate programmes 5.15 4.96
Workshops, seminars and training programmes 16.27 18.65
Miscellaneous expenses 1.88 2.34
Other research and consultancy expenses
Ad hoc research staff salary 9.79 9.46
Other expenses
Scholarships and fellowships 1.41 1.44
Surplus carried over to balance sheet 0.20 0.17
100.00 100.00
INCOME
Rent and interest realized 0.82 0.77
Grant from the Ministry of Education 46.08 42.94
Income from other sources
Post-graduate programmes 5.78 5.39
Workshops, seminars and training programmes 19.02 22.20
Consultancy and research projects 15.57 15.18
Scholarships and fellowships from various agencies 1.12 0.98
Miscellaneous receipts 5.92 6.88
Grant for specific research project 2.78 2.70
Transfer from reserves 2.90 2.94
100.00 100.00

Notes: All figures are expressed as a percentage of the respective total. Based on Table 1.


Time index of real expenses

Often the indices do not correctly reflect inefficiencies. Because of the overall general trend
in prices, the changes do not correctly reflect the controllability of the factors. To distinguish
between real changes and nominal changes, we can calculate a separate index for real
expenses using the expression:
Expenses in the given period, based on prices

Time index of real expenses prevailing in the base period
Time index of real expenses =
Expenses in the base period



Index of level of achievements of plans

It is very important for management to assess whether plans have been achieved. For this
purpose the following indicator may be used:


Index of level of achievement of
planned expenses


Actual expenses

Planned expenses


Using the above index, management can examine the effectiveness of plans and control
expenses. An index value of greater than one would indicate that actual expenses have been







38 Module 7 Session 1 Financial management 1: Components and information needs


more than planned, and hence require control. A similar index can be developed for revenue
items, as follows:


Index of level of achievement of Actual revenues
planned revenues
Planned revenues


Coefficients to Analyse Operating Performance
In order to analyse the operating performance of the organization, development of coefficients
by relating different sets of financial data will be useful. To illustrate, information about
manpower has significant bearing. It also affects the achievement of the objectives for which
the organization has been set up. One coefficient for assessing the effectiveness of manpower
is:

Expenses other than wages and salaries
Coefficient of effectiveness
Expenses on wages and salaries


This coefficient indicates the degree to which the scientists and staff are supplied with the
consumables, supplies, transportation and other inputs (i.e., all expenses other than salaries
and wages) to facilitate their operation. This may also be used to assess any imbalance in
current expenditure.
The organization should also monitor how efficient it is at recovering recurrent costs.
For this purpose the following coefficient can be used:

Revenue receipts
Recurrent-cost recovery coefficient
Recurring costs







Training manual for institute management 39


DATE


TIME


Plenary participatory lecture


OBJECTIVES
At the end of session, participants should be able to appreciate:
1. The budgeting process, including drawing up budgets, the role of budgets in
controlling expenditure, and the extent to which budgets can be used in creating a
sense of responsibility in the heads of the various functional areas of an
agricultural research institute.
2. Variance analysis.
3. The roles of internal and external audit.


Module 7 Session 2


Financial management 2:
Planning and budgeting


FORMAT


TRAINER







Module 7 Session 2 Financial management 2: Planning and budgeting


INSTRUCTIONAL MATERIALS


Why cost analysis?
Cost classification
The planning process
Sources of deficit
What is a budget?
Conditions for implementing a budgetary control system
The role of a budget committee
Dimensions of overall budgets
Control
Variance analysis
The scope of audit
How to find the problem areas


REQUIRED READING

Case study: National Institute of Food Research. (see Module 7 Session 1)
Reading note: Financial management 2: Planning and budgeting




BACKGROUND READING

None.





SPECIAL EQUIPMENT AND AIDS

Overhead projector and chalkboard


Exhibit 1
Exhibit 2
Exhibit 3
Exhibit 4
Exhibit 5
Exhibit 6
Exhibit 7
Exhibit 8
Exhibit 9
Exhibit 10
Exhibit 11
Exhibit 12







Training manual for institute management


PLANNING AND BUDGETING


Initiate discussion on cost analysis. Ask participants "Why should we analyse costs?" Show
EXHIBIT 1. Observe that some costs cannot be measured or accurately priced.
Show EXHIBIT 2. Classify costs as total, average or marginal, and define each one
of them. Use data from the reading note and illustrate the computation of each cost type.
Costs can also be classified as fixed or variable, according to how they change with
volume of output. In discussing fixed costs, distinguish between committed and discretionary
costs. Another way of classifying costs is by whether they are capital or recurrent.
Recurrent costs are likely to go up as activity levels increase.
Now discuss planning and budgeting. Ask participants "Why should an organization
plan and budget?" Show EXHIBIT 3. Observe that without planning the organization is like
a black box: there is no knowledge of what is happening inside it, or of the working of inter-
relationships and interdependencies. Planning provides better management of resources and
helps identify potential financial resource problems in the form of expected deficit
(EXHIBIT 4). Deficit may arise because of inefficient utilization of resources, an unsustain-
able scale of activities, or inadequate funding. Observe that inadequate funds are an
important constraint in managing research institutes. This issue is further discussed through
a case study: the Food Research Institute, Dongal.
Now initiate discussion on the budgeting process. A budget converts the effects of
all activities into a common denominator to facilitate the development of an integrated plan.
It becomes the basis for utilizing available resources. Show EXHIBIT 5 to emphasize the wide
dimensions of a budget.
Successful implementation of budgetary controls requires that certain conditions are
met (EXHIBIT 6). A clear statement of goals and objectives provides direction and motivation
to individuals and groups. Short-term budgets and plans enable movement towards achieving
long-term goals and objectives. A budgeting system has to be established in order to have
an effective control system with respect to fulfilment of assigned responsibilities. Ask
participants to give some examples of budget centres in their institutes. Library, computer
centre, research programmes and central stores would be some examples. Each of these can
be treated as a cost centre, as well as a responsibility centre. Costs have to be controlled.


Module 7 Session 2

Session guide







Module 7 Session 2 Financial management 2: Planning and budgeting


Distinguish between engineering costs which can be estimated with a high degree of
reliability and discretionary costs which depend upon management judgment.
Accounting controls are an integral part of a budgetary control system whose
effectiveness depends on timely availability and supply of information.
Clear communication of (i) goals and objectives, (ii) means for implementing budgets,
and (iii) the responsibilities of each departmental head is essential for successful
implementation of a budgetary control system. Emphasize the need for flow of accurate and
relevant information. Also discuss emphasize conflicts in resource allocation, and how the
conflicts can be resolved through effective communication.
Coordination is essential in budgetary control system. It helps in successful
implementation and in overcoming conflicts. The joint effort of all departmental heads is
required in preparing the budget. This can be achieved through a committee, possibly for
budget or for planning, or for both (EXHIBIT 7). Such a committee could assume
responsibility for all aspects of budget administration.
Ask participants how the budget is administered in their institutes.
Conclude the discussion on budgeting by showing EXHIBIT 8.
Initiate discussion on control. Show EXHIBIT 9. Controls are exercised through
variance analysis and audit (both internal and external). Variance analysis helps measure
deviations, comparing what had been desired and budgeted for, and what has been actually
achieved (EXHIBIT 10). An unfavourable variance outcome indicates a weakness in the
operation, while a favourable variance figure provides insights into capitalizing positive
aspects of activities. The variance may be due either due to changes in price or to quantity
usage (EXHIBIT 10). Efforts should be made to separate the influence of rising prices from
price variance. Observe that variance may be due to changes in the scale of activities and
operations.
Introduce the concept of A-B-C analysis. Category A items would include all high-
value items, and variance in relation to them prompts careful scrutiny. For B and C category
items, which are of comparatively lower value, only large variances need be investigated.
Auditing is well known. Ask participants what auditing systems they have in their
institutes. Auditing is a systematic process of evaluating transactions to ensure compliance
with prescribed policies and procedures. Show EXHIBIT 11 and discuss the scope of audit and
concerns to be covered by audit.
Discuss different forms of audit, namely compliance, operational and programme.
Financial audit is the most common form practised in all organizations, perhaps because it
is statutory.
Internal audit is always useful in taking preventive actions in relation to faulty
practices. Show EXHIBIT 12 and discuss how to identify problem areas, and the process of
detailed examination.







TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 2


EXHIBIT 1


WHY COST ANALYSIS


Making choices for optimum utilization of resources


Improving the efficiency and effectiveness of
existing resources


Evaluating performance


Measuring the value of output










TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 2


EXHIBIT 2


FIXED COSTS


VARIABLE COSTS


TOTAL COSTS


CAPITAL COSTS


RECURRING COSTS







TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 2


EXHIBIT 3


PLANNING PROCESS




Clear statement of goals and objectives

Creating budget centres

Developing accounting controls

Communication

Budget administration







TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 2


EXHIBIT 4


SOURCES OF DEFICIT


Inefficient use of resources

Scale of activities

Inadequacy of funding








TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 2


EXHIBIT 5


WHAT IS A BUDGET?





"It is the only comprehensive approach to managing so
far developed which, if utilized with sophistication and
good judgment, fully recognizes the dominant role of
the manager and provides a framework for
implementing such fundamental aspects of scientific
management as management by objectives, effective
communication, participative management, dynamic
control, continuous feedback, responsibility
accounting, management by exception and managerial
flexibility."
Welsh, 1976.







TRAINING MANUAL FOR INSTITUTE MANAGEMENT E
Module 7 Session 2 EXHIBIT 6













CONDITIONS FOR IMPLEMENTING A
BUDGETARY CONTROL SYSTEM





1. Statement of goals and objectives


2. Creating budget centres


3. Developing accounting control


4. Communication


5. Coordination


6. Budget administration







TRAINING MANUAL FOR INSTITUTE MANAGEMENT EIIT 7
EXHIBIT 7
Module 7 Session 2














ROLE OF BUDGET COMMITTEE





Provide general guidelines for preparing budgets
and offer technical advice


Receive and review budgets from each budget
centre, suggest changes, reconcile differing views
and resolve conflicts, if any


Coordinate all budgetary activities


Approve budgets


Initiate action and follow-up





TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 2


EXHIBIT 8


DIMENSIONS OF THE OVERALL BUDGET


E Ish-
Researh and other
rerants
Noin-planr
Planpla
Academic programme
Research progrmnmes and
Training and consultancy
se8rvios
Masinteance and estates
TeDephone and despalch
Central stores
Library
Computer osntre
Extension, plus publicatons
i Matenals Equip.,
alaries suppliess machnes their


Stores


1







TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 2


EXHIBIT 9


CONTROL




VARIANCE ANALYSIS

INTERNAL AUDIT

EXTERNAL AUDIT






TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 2


VARIANCE ANALYSIS




Variance due to changes in prices
= (Actual price Budgeted price) x Actual quantity used




Variance due to quantity usage
= (Actual quantity used Budgeted quantity) x Budgeted price


I EXHIBIT 10







TRAINING MANUAL FOR INSTITUTE MANAGEMENT 11
Module 7 Session 2











THE SCOPE OF AUDIT





The adequacy and reliability of the information and
control system


The fairness of financial statements and
performance reports issued by management with
the intent of disclosing the current conditions and
for results of past operations and programmes of
organization


The efficiency of operations


The effectiveness of programmes to accomplish
their intended results


The faithfulness of administrators and operating
personnel in adhering to prescribed rules and
policies and complying with legislative interests








TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 2


EXHIBIT 12


The process of detailed examination:


* Identify the problem


* Determine whether the circumstances are unique or
widespread


* Significance of deficiency and faults in terms of
costs, adverse performance and other effects


* Ascertain causes


* Identify persons or factors in the organization
responsible for deficiency and faults


* Determine possible lines of corrective or preventive
action and formulate constructive
recommendations


Survey of various activities
Review of management reports
Review of inspection reports
Physical examination
Test examinations of transactions
Discussion with persons concerned










Training manual for institute management 55


FINANCIAL MANAGEMENT 2:
PLANNING AND BUDGETING


COST ANALYSIS
Analysis of cost information reveals the performance of various programmes and activities.
It also becomes a basis for planning and controlling the performance of activities. Cost
analysis is useful in:
making choices among alternatives and planning for optimum utilization of resources;
improving the efficiency and effectiveness of the present resources;
evaluating the performance of the executives handling the various programmes or
activities, and controlling costs; and
measuring the value of output, for which a simple value may not exist.
Before further exploring cost analysis, some common terms and jargon needs clarification.
We will also explore a cost analysis problem typical of an agriculture research institute.
Cost is a foregoing or a sacrifice, measured in terms of money, incurred or
potentially to be incurred to achieve a specific objective. As noted earlier, the basic objective
of cost analysis is to help the top executive to choose among alternatives and related resource
use, hence from an economist's point of view cost as a sacrifice may be treated as the
opportunity foregone in using resources in one way rather than in another. Measurements
of such sacrifice in monetary terms is very useful, as it provides the basis for measuring such
opportunity costs. However, in many instances, particularly the circumstances under which
agriculture research institutes operate, monetary measurements do not indicate actual costs.
The instances may be:
when resources are not priced (e.g., grants received by the research institute and on
which no charge is payable); or
where prices charged do not accurately reflect the scarcity value of resources, or their
value when used elsewhere (e.g., scientists involved in research).


Module 7 Session 2

Reading note








56 Module 7 Session 2 Financial management 2: Planning and budgeting


COMPONENTS OF COST
The organization uses inputs, such as land, buildings, people, etc., to produce outputs like
goods and services. Inputs are measured in terms of monetary value and represent the cost
of producing those outputs. It is very important to have some classification of costs to
facilitate the analysis. For this purpose, the cost concept is defined in various ways.
Total cost provides a single measure of the aggregate resource requirements for a
particular scale of activity. Since most organizations would like to decide the scale
of activity at which to operate, information about total cost is important.
Average cost is the cost per unit of output. This is calculated by dividing total costs by
output.
Marginal cost measures the amount of cost which the organization would be required to
incur to produce one additional unit of output.
The three cost concepts are very popular, but the application of these concepts in cost
analysis, particularly in the case of research institutes, is not really straightforward.
To facilitate useful analysis of cost information, costs can be classified according to
whether:
they vary with change in volume of output produced; or whether
they yield immediate results rather than long-term consumption benefits.
The first classification is typically scale-related cost, and such costs are classified as fixed or
variable. The second classifies costs according to whether they are developmental or capital
in nature and bring long-term benefits to the organizations, or costs are recurrent in nature.


Fixed costs
Costs which do not vary with change in the volume or scale of activities are classified as
fixed costs. Fixed costs generally constitute committed or discretionary components.
Whenever research institutes start a new activity on a long-term basis, they make
commitments towards the costs which cannot be changed in the short term. The committed
component of fixed costs generally arises out of an organization's commitments for long-term
activities. Costs, such as rent of buildings, salaries of permanent staff, etc., are generally
unavoidable and cannot be controlled in the short run. A major proportion of recurring costs
are committed costs and cannot be influenced in the short term. If an organization wants to
control such costs, the only way is through better design of projects and activities.
In contrast, discretionary costs depend on management's discretion or its policy.
Funds allocated to research and development, training of people, travel, etc., are examples
of discretionary fixed costs. These costs are decided by management, and therefore they are
also known as managed or programmed costs. The nature of these costs is such that there
is no way of ascertaining the optimum standard output expected from inputs. Management's
subjective judgment is needed to establish the 'right' amount of discretionary costs in a given
situation.


Variable costs
Costs which vary with change in volume or scale of activities are called variable costs.








Training manual for institute management


In most situations it may not be possible to clearly classify costs as fixed or variable.
They often possess qualities both fixed and variable. The fixed component of mixed costs
represents the minimum unavoidable amount for any given level of activity. Costs such as
maintenance, telephones, repairs, etc., are examples of mixed costs.


Capital or developmental costs
In the beginning, when a project is initiated, all costs associated with the establishment or the
basic infrastructure are called capital or development costs. Generally these costs include:
cost of land;
construction of buildings;
purchase of capital equipment; and
investment in human resources (i.e., initial training).


Recurrent costs
Costs which are incurred in order to keep the activity going and in maintaining assets or
facilities are defined as recurrent or operating costs. The following are generally included
in this category:
salaries and wages;
equipment maintenance and spare parts;
supplies of consumables; and
electricity, water and other basic utilities.
Recurrent costs are incurred for the duration of the planned activity. They are likely to
increase during the later phases of a programme as maintenance costs are likely to increase.


PLANNING AND BUDGETING
For administrative purposes, the organization is divided into a number of departments. Each
department interacts with the others and cannot function independently. The sum total of
activities of all departments helps the organization to achieve its objectives and goals.
Management may choose to treat all inter-
a, e t a Figure 1 Consequences of inadequate planning
actions as 'black-box' events and not
prepare plans for future activities and
programmes. In that case the net results DEFICIT NOT KNOWN
and interrelationships would not be known.
The process of bridging the gap, if any, AD HOC R
AD HOC REQUESTS
would be done in an ad hoc manner. The
process would look like something like
Figure 1. ARBITRARY APPROVALS AND CUTS


Arbitrary cuts may be imposed on
the supposition that there is more scope for
improvements and efficiency. In reality,


IMPACT ON SERVICES







58 Module 7 Session 2 Financial management 2: Planning and budgeting


that may not be the case, and services may get affected. The cuts will have an impact on the
goals and objectives of the organization.
The organization should react to such shocks and surprises in some systematic
manner. Management must have advance information on possible deficits. For this reason
it has to plan and prepare budgets. Planning may also help the organization to establish
concrete goals for motivating people to perform better, and provide standards for measuring
performance. Without planning, the organization is like a black box: not knowing how things
are happening and how interrelationships and interdependencies work. Planning alerts
management to potential problems, and the result is better management of resources.
Analysis of deficits helps management to identify reasons and take corrective actions.
Sometimes it is argued that all non-profit organizations will have deficits. This may be true,
but then how much? All organizations incur certain costs in order to perform their activities.
To meet these costs, the organization gets funds from government or other agencies.
Whatever activity the organization is performing, it has cost implications (Figure 2). Deficits
arise because of a number of reasons, including those considered below.
Figure 2 Advantages of planning


Inefficient utilization of resources Planning can alert management as to whether or
not resources are being used effectively and efficiently. If there are inefficiencies, this can
be overcome by improving performance. For this the organization requires to:
clearly state the objectives of the activity or programme;
prepare budgets for each activity or programme;
have better communication and coordination of activities; and
control the performance of activities by providing effective measures for performance.


Problems identified
in advance

SU1L


I

Reduce or increase
activities







Training manual for institute management 59


The scale of activities can be another reason for deficits. This arises when the
organization is trying to perform more than it is capable of within the given amount of
resources. In such situations, management of deficits becomes difficult. To overcome this
problem, the scale and level of activities should be regulated.
Inadequate funding appears usually as the problem of scarcity of resources to perform
a given level of activity. Management may be required to identify potential sources of
revenue in case financial resources are not adequate. Sometimes, because of seasonal and
other constraints, projects have to be initiated. New projects are initiated in anticipation of
funds available. Budgeting may help management to explore the possibility of stretching
funds from other projects. In cases of non-availability of funds, the project may have to be
shelved or the scale of the project reduced. A detailed budgeting exercise may help
management to utilizing funds in the most effective manner by synchronizing cash inflows
and outflows.


THE BUDGETING PROCESS
A budget is a statement which indicates a coordinated plan of activities. The effects of all
activities are expressed in monetary values so as to facilitate the development of an integrated
plan. A budget provides the basis for utilizing scarce resources and directing operation of
the organization for achieving specific objectives. The objective is not only to reduce the
impact of uncertainty but also to determine priorities in use of the resources. After approving
the budget, the people involved in preparing the budget should be motivated to achieve the
targets and thus help management to realize expectations.
Welsh (1976) expresses the utility of budgeting in the following words: "It [the
budget] is the only comprehensive approach to managing so far developed which, if utilized
with sophistication and good judgment, fully recognizes the dominant role of the manager and
provides a framework for implementing such fundamental aspects of scientific management
as management by objectives, effective communication, participative management, dynamic
control, continuous feedback, responsibility accounting, management by exception and
managerial flexibility."
For successful implementation of a budgetary control system, certain conditions must
be fulfilled, including:
a statement of goals and objectives;
creating budget centres;
developing accounting controls;
communication;
coordination; and
budget administration.


Statement of goals and objectives
All resources have an economic cost and are also scarce. As a result, the organization has
to give some thought to prioritizing the allocation of resources. The organization should be
very clear in describing the long-term objectives of the organization, which in turn decide







Module 7 Session 2 Financial management 2: Planning and budgeting


these priorities. A clear statement of goals and objectives provides direction and motivation
to individuals and groups in channelling their efforts towards a common goal. It is important
that the short-term objectives are realistic and should consider all variables, such as
availability of faculty, research staff, administrative support, etc. Whenever there is a change'
in these variables, they must be incorporated into the plans and budgets.


Creating budget centres
One objective of preparing the budget is to see that goals are achieved in a coordinated and
efficient manner. To accomplish this, the organization has to create a sound structure by
defining in clear terms the authority and responsibility of each departmental head. The
activity and performance of each head is evaluated in terms of assigned authority and
responsibility. The organization could use several criteria to define a budget centre,
including:
a designated departmental head is responsible for attaining results in relation to the
operations within that centre;
the outputs by way of services and inputs required are clearly defined; or
each budget centre is distinct from one another.
For instance, NIFR could create the following budget centres:
Research programme
Training and consultancy services
Library
Computer centre
Central stores
Maintenance and estate
Telephone and despatch
Extension, including Publications
Departmental heads should be asked to submit a budget for their activities planned during the
coming year. While creating such responsibility, each department or budget centre could be
treated as a cost centre. Cost centres are responsibility centres, for which inputs or costs are
measured in terms of monetary units, but for which outputs are not measured in monetary
terms. The basic objective of creating such cost centres is to control the activities of the
organization.
It would be useful to understand the nature of costs. Costs are of two types:
engineered costs and discretionary costs. Engineered costs include items for which estimates
can be obtained with a reasonable degree of reliability. For example, cost associated with
the use of fertilizers is an example of engineered cost. On the other hand, discretionary costs
are those for which estimates cannot be arrived at. They generally depend upon
management's judgment.
Each departmental head should be responsible for costs or expenses incurred by his
or her department. Cost information is important in planning and control. Performance








Training manual for institute management


should be evaluated by comparing actual costs with budgeted costs, and is called analysis of
variance. This technique is discussed in the next section.
It is very important that management educates staff regarding responsibility centres,
the usefulness of the budgetary control system, and the role it plays in achieving objectives.
The involvement and cooperation of the employees is sought and developed through the
education process.


Developing accounting controls
The recording of transactions should not be just for the purpose of preparing financial
statements but should be so developed that significant information for planning and control
is produced simultaneously. Accounting controls are an integral part of the budgetary control
system. The controls ensure that transactions are implemented only by those authorized to
do so by management. Records are maintained; they also describe the accountability of
resources, a physical examination and count of organization resources to make it sure that
accounts and records are correct, and access to resources is through documented management
authority. The effectiveness of a budgetary control system depends on timely availability and
supply of information, and good accounting controls ensure this availability.
Development of accounting controls will revolve closely around creating responsibility
accounting centres. The system should produce an accounting report for each centre and the
data should be useful in the planning and control process.


Communication
It goes without saying that there should be top management support in making the budgetary
control system successful. Top management should not only educate all involved concerning
the usefulness of the system, but also communicate the goals, objectives, means of
implementing the budget, and responsibilities of each departmental head. The success of the
budgetary control system depends very much on the kind of information which forms the
input to the whole process. Management should take care that it creates an atmosphere which
leads to a flow of correct and relevant information. The people involved in the process
should be encouraged to discuss and draw attention to all facts relevant to the given situation.
One problem which management faces is the accuracy of information supplied by
various departments. This problem relates to the need to assess accurately the predictability
of future outcomes. This problem is implicit in all planning systems, and can be minimized
by emphasizing a reasonable degree of accuracy in prediction. Another problem is related
to the kind of interdepartmental conflicts which may arise during the budgeting process.
These conflicts generally originate in resource allocation. Through effective communication,
the organization can resolve some resource allocation conflicts. The follow-up procedure -
to ensure that there is effective implementation of the budget is also a part of
communication.


Coordination
The development of a budgetary control system is an activity which requires coordinated
efforts from different departments and at various levels. To ensure that staff become








62 Module 7 Session 2 Financial management 2: Planning and budgeting


involved and participate in a useful and meaningful manner, all efforts need to be
coordinated. Since different departments are involved, conflicts are likely to arise. The
organization should develop mechanisms to resolve such conflicts without affecting the basic
objectives. Management must also ensure that people actively participate in the budgeting
process. It is only through active participation that staff feel committed, motivated and
encouraged to work towards the common goals and objectives.


Budget administration
The complexities involved in preparing the budget and implementing the budgetary control
system are many. Management has to put in an effort to ensure that the basic objectives of
budgeting are achieved. As discussed earlier, a joint effort on the part of all departmental
heads is required in preparing the budget. Management must provide an opportunity to all
members to participate in deciding goals and objectives, setting priorities, developing future
action plans and formulating general and specific policies. To achieve this, the organization
needs to develop some formal mechanisms. One mechanism is to constitute a Budget or
Planning and Policy Committee. Management can delegate the task of budget administration
to this committee. Budget administration should include setting of priorities, preparing the
budgets and follow up. All budget centre heads should be members of this committee.
Management should also appoint one coordinator to the committee. The major functions of
this committee would be to:
provide general guidelines for preparing the budget and offer technical advice;
receive and review budgets from each budget centre, suggest changes, reconcile
differences and resolve conflicts, if there are any;
coordinate all budgetary activities;
approve budgets; and
initiate follow-up action.
Through the budget committee system, management ensures that the heads of activities
prepare budgets in a coordinated manner and that control mechanisms are effectively
implemented. The budget committee should also ensure that there is no conflict among the
different activity heads, and should resolve them if there are any.
The budget committee should draw a detailed time schedule for budget preparation,
submission, discussion, modification and final approval. These schedules should be strictly
adhered to; this will ensure that the budgetary control system is effectively implemented.
Sharing of information is an important activity of the budget committee system. Carefully
designed formats for preparing the budget and reporting budget performance will highlight
actual versus planned levels of activities. The budget committee should also decide about the
frequency of submitting reports on actual performance; primarily this depends upon how
critical is a particular activity.
The department or cost centre should be required to submit a detailed budget,
indicating establishment expenses and other expenses (Figure 3). Establishment expenses
would generally include salaries, wages and other staff-related costs. Each cost centre would
indicate both plan and non-plan expenditure: non-plan expenditure is incurred on ongoing
activities and programmes and is generally recurring, while plan expenditure is on new
activities and programmes. Total plan expenditure is what is spent on capital and revenue







Training manual for institute management 63


Figure 3 Dimensions of the overall budget


Es Ish-m Stores

/ esearch and other
/ ___ grants
SNon-plan

Fan/ /

Academic programme

Research programmes and
projects /
Training and consultancy
services
Maintenance and estates

Telephone and despatch

Central stores

Ubrary

Computer centre

Extension, plus publications
Matertataiquip.,
alaries uppiesg rnachInes Othw



items. Details of plan expenditure for new activities and programmes are discussed in the
next session. Once departmental budgets are obtained, the information can be conformed and
collated to provide the basis for the institute budget.


CONTROL
Planning is a process of stating what we want to achieve, and trying to achieve what has been
planned. Future outcomes are controlled on the basis of what has been achieved in past.
Control is possible only if we have established criteria against which the actual
accomplishments can be compared. The indices developed for the purpose of evaluating
planned tasks and actual accomplishments (Session 1 of this module) provide important
insights into achievement efficiency of planning. However, a detailed investigation of the
outcome of these indices is required. The ultimate objective would be:
to ensure that plans are achieved; or
to lay emphasis on what can be achieved.







Module 7 Session 2 Financial management 2: Planning and budgeting


To ensure that plans are achieved requires that activities and operations of the organization
are coordinated in such a manner that the achievement of plans is given more emphasis. Any
departure from the planned figure is treated as serious, and a detailed examination of factors
causing such deviation is undertaken. Emphasizing what can be achieved can be an outcome
of changed circumstances which have made such achievements possible now.


Variance analysis
Planning and control are future-oriented activities. However, past achievements cannot be
altogether ignored, because it is on the basis of past achievements that one draws expectations
about the future. This is known as variance analysis. The objective is to strengthen the
control process in the future by eliminating negative elements and encouraging positive ones.
The analysis draws attention to weaknesses of operations in the past and forces management
to make a concentrated effort to minimize them. In situations where variance is favourable,
insights into capitalizing positive aspects of activities are provided.
For looking into the reasons for variance, we have to primarily investigate two
dimensions. One is the prices paid for various items purchased by the organization, and the
other is the quantities of the items used. The actual price and actual quantities used are
compared with the budgeted prices and budgeted quantities to assess the variance: first, that
arising from price variation, and, second, that from usage. The following expressions can
be used in evaluating total variance.
Variance because of = (Budgeted price actual price) x actual quantity used
change in price
Variance because of = (Budgeted quantity actual quantity) x budgeted price
quantity usage
Positive variance in both would imply that the actual price or actual quantity is less than that
originally budgeted, and hence the variance would be favourable. In contrast, negative
variance implies that the actual state of affairs exceeds the budgeted figures, and hence the
variance is unfavourable.
The sum of the two variances would be the total variance. The aim of breaking the
total variance into two components is to separate the influence of changes in prices from
changes in quantities used.
When analysing variance, two points are important. The first is that change in the
scale of activities and operations has an effect on variance. Suppose that a research
organization has a research project and plans to employ 10 people temporarily to cultivate
50 plots of land. For a variety of reasons, the project actually employs 18 people and
cultivates 100 plots. The actual value is likely to be greater because of a change in the scale
of activity. This should not be seen as negative variance. Variance has to be adjusted for
a change of scale. Similarly, quantity variances may not be because of inefficient use of
resources. The second point to note is that it is very important to separate the influence of
rising prices from price variance. A comparison of prices with the base period price may
help the analysis. After including these two adjustments if necessary, one can look into the
factors responsible for variance.
One practical difficulty which management may face in doing such an analysis is the
existence of a large variety of costs and associated variances. It may not be possible to keep







Training manual for institute management 65




track of all variances, both small and large. It would be useful to analyse the variances of
those items which involve big sums or have relatively large variances. Management could
design the classification system based on grouping all the various costs into A, B or C
categories. This is called A-B-C analysis. Class A would include all high-value items.
Variances for this class must be investigated in detail. Only large variances would be
investigated in the other two categories.


INTERNAL AND EXTERNAL AUDITING
The basic objective of any control system is to provide information about how well things are
going and to indicate how better results might be achieved. There will always be an
unending search for the best. Each control system should provide feedback about less costly
or more efficient ways of working. The organization cannot allow all activities to take place
without following general rules, procedures and policies. To make the control system more
effective, the organization draws up in advance, policies and procedures which guide and
govern decisions and their implementation. These procedures and policies are generally
adopted to promote efficient operation and conserve scarce resources. It is very important
for management to see that all actions comply with the agreed procedures and policies.
Sometimes donor agencies also force the organization to follow a broad set of rules to guide
and govern decisions regarding use of funds.
Auditing is a systematic process of evaluating transactions to determine an
organization's compliance with prescribed policies and procedures. The objective of auditing
is to minimize the likelihood of fraud, misappropriation, waste or inefficiency. The audit
procedure should ensure that activities are performed efficiently. The audit report should
indicate whether the organization is moving towards the desired goals.
The audit process is conducted by a competent and independent authority, which
systematically examines the financial records and other information. In particular, attention
is focused on:
the adequacy and reliability of information and control system;
the fairness of financial statements and performance reports issued by management with
the intent of disclosing present conditions and assessing results of past operations and
programmes of the organization;
the efficiency of operations;
the effectiveness of programmes in accomplishing their intended results; and
the faithfulness of administrators and operating personnel in adhering to prescribed rules
and policies and complying with legislative interests.
The audit process broadly speaking has four elements: financial, compliance, operational
and programme audits. These are considered below.
The financial audit examines financial records and controls with the purpose of ascer-
taining whether funds have been used legally and honestly, whether receipts and
payments have been recorded properly, and if financial statements are complete and
reliable.







66 Module 7 Session 2 Financial management 2: Planning and budgeting


The compliance audit examines whether management has followed policies and
procedures and whether it has adhered faithfully to legal and administrative
requirements.
The operational audit examines the efficiency of operations and the effectiveness of
operating policies, procedures, practices and controls in promoting operational
efficiency.
The programme audit judges the effectiveness and accomplishments of a programme.
The most pervasive types of audit conducted by most institutions are the financial and
compliance audits. The other two types of audit generally termed performance audit are
desirable under current conditions.
The organization may get its operations audited by an outside agency or appoint an
internal committee, or a combination. In most situations, outside auditing is mandatory;
sometimes auditors are appointed by the government or the donor agency. When auditing
is done internally, the organization sets up an internal audit committee to examine on a
regular basis the fairness and authenticity of transactions. The major advantage of setting up
an internal team is that control in the organization is strengthened significantly at less cost.
It can prove very useful where internal controls are weak. Management should not treat the
internal audit committee as a rubber stamp. Rotation of membership of the committee is very
helpful.
An internal audit committee should identify problem areas through a combination of
approaches, including:
surveys of various activities;
reviews of management reports;
reviews of inspection reports;
physical examinations;
sample test examination of transactions; and
discussions with persons concerned.
For example, the stores and purchase department is of considerable importance in many
organizations. In surveying purchasing activities, management should address some key
points, such as:
the quantity and quality of materials purchased;
the procedure followed to obtaining the best prices; and
the method of determining whether the correct quantities and quality are actually
received.
Problem identification may sometimes indicate that less-than-optimal practices are being
followed by the organization. If that is so, further examination would be necessary.
Discussing specific findings and suggesting ways to improve lie at the heart of internal audit.
This requires analysis of pertinent information, detailed examination of causes, effects and
corrective actions, and accumulation of supporting material evidence. Steps in the process
could include:
identifying a problem;







Training manual for institute management 67


* determining whether the circumstances are unique or general;
* evaluating the significance of deficiencies and faults in terms of costs or adverse effects
on performance;
ascertaining causes;
identifying the person or persons responsible for the deficiency or faulty operation; and
determining possible lines of corrective and preventive action, and formulating
constructive recommendations.
Internal audit is an independent appraisal activity. For effective internal auditing,
independence is vital. Usually government and donor agencies would like if not actually
require to have the opinion of auditors, external or internal, if not both. Both internal and
external audits are prerequisites to sound control system and accountability. The basic
objective of getting an operations audit from independent, external auditors is to obtain
complete independence and impartiality in audit opinions.




LITERATURE SOURCES USED IN PREPARING THE READING NOTES


Anthony, R.N., & Herzlinger, R.E. 1975. Management Control in Non-Profit
Organizations. Homewood, IL: Irwin.
Anthony, R.N., & Reece, J.S. 1977. Management Accounting Principles. Bombay, India:
D.B. Taraporevala.
Horngren, C.T. 1977. Cost Accounting: A Managerial Emphasis. 4t ed. Englewood
Cliffs, NJ: Prentice-Hall.
Dearden, J. 1973. Cost Accounting and Financial Control Systems. Reading, MA:
Addison-Wesley.
Gross, M.J., & Warshauer, W. 1979. Accounting Guide for Non-Profit Organizations.
New York, NY: John Wiley.
Henke, E.O. 1971. Accounting for Non-Profit Organizations. Belmont, CA: Wadsworth.
Howell, J. (ed) 1985. Recurrent Costs and Agricultural Development. London: Overseas
Development Institute.
Pandey, I.M. 1992. Financial Management. New Delhi: Vikas Publishing House.
Turk, I. 1984. Accounting Analysis of the Efficiency of Public Enterprises. Lublijiana:
International Centre for Public Enterprises in Developing Countries.
Vargo, R.J. 1977. Readings in Governmental and Non-Profit Accounting. Belmont, CA.:
Wadsworth.
Welsh, C. 1976. Budgeting, Profit Planning and Control. New Delhi: Prentice-Hall of
India.










Training manual for institute management


DATE


TIME


FORMAT


TRAINER


Plenary participatory lecture


OBJECTIVES
At the end of this session, participants should be able to appreciate:
1. The care to be exercised by top management in the design of projects and
programmes of the institute, particularly when such decisions may lead to
acquisition of.fixed assets and hence involve capital expenditure.
2. Strategies for mobilizing resources for the development and growth of the
organization.
3. Benefits of computerizing the finance function.


Module 7 Session 3

Financial management 3:
Project design and implementation







Module 7 Session 3 Financial management 3: Project design and implementation


INSTRUCTIONAL MATERIALS

Exhibit 1 Recurrent-cost coefficient
Exhibit 2 Break-even analysis
Exhibit 3 Portfolio of financing sources


REQUIRED READING

Case study: National Institute of Food Research. (see Module 7 Session 1)
Reading note: Financial management 3. Project design and implementation.


BACKGROUND READING

None.


SPECIAL EQUIPMENT AND AIDS

Overhead projector and chalkboard







Training manual for institute management 71


PROJECT DESIGN AND IMPLEMENTATION


The next issue to be discussed is project design and implementation. Project budgeting and
monitoring is an important component of this. Recurrent costs have to be provided over the
life of the project. Show EXHIBIT 1 and discuss the recurrent-cost coefficient. Guidelines
could be stipulated for recurrent costs. Capital costs have to be estimated carefully.
Dovetailing different sources of finance for a project is a must.
Now introduce the concept of break-even analysis of projects. Show EXHIBIT 2.
Break-even analysis is an approach which helps to identify the level of activity at which funds
allocated to a project are just sufficient to recover the operational costs. In an agricultural
research institute this may not be directly relevant.
Show EXHIBIT 3 to initiate discussion on financing of projects. For a research
organization, the portfolio of financial resources usually consists of government grants and
aid flows.
Research organizations like all other organizations face recurrent-cost problems,
which have adverse implications for scientific work. Thus revenue mobilization is a
continuous process which research managers have to pursue.
This session should be concluded by stressing the need for computerization of the
finance function. Note that computerization will be discussed in detail in another session.
Computerization should enable fast processing of data and can be used to identify
interdependencies in financial and accounting variables. Mention the use of electronic
spreadsheets and database management systems.


Module 7 Session 3

Session guide











TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 3


EXHIBIT 1


RECURRENT-COST COEFFICIENT










TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 3


EXHIBIT 2


I


BREAK-EVEN ANALYSIS


Grants sanctioned for the project


* Fixed grants, e.g., grants received from the
government
* Variable receipts, e.g., fees charged for services
rendered





Costs associated with the project


* Fixed costs
* Variable costs







TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 3


EXHIBIT 3


INTERNAL SOURCES OF FUNDS


Government grants
* Plan expenditure
* Non-plan expenditure

Aid flows
* From domestic agencies
* From international agencies

Borrowing from national and international agencies
* Nominal-interest or interest-free loans ('soft loans')
* Market-interest loans ('commercial' or 'hard' loans)










Training manual for institute management 77


FINANCIAL MANAGEMENT 3:
PROJECT DESIGN AND IMPLEMENTATION


PROJECT DESIGN AND ACTIVITY IMPLEMENTATION
The design of projects, programmes and activities is critical to the future of an organization.
Management has to evaluate the financial dimensions of new projects and activities very
carefully. Selection of better, financially viable projects ensures optimal allocation of scarce
long-term resources.
Each project generally requires resources in terms of land and buildings, equipment,
staff and, in some situations, foreign exchange. Most of the decisions related to initiating
new projects are irreversible in nature. Resources employed in one project cannot be put to
an alternative use. In selecting new projects, management must ensure that the new venture
fits within the overall objectives of the organization. There should be a perfect match
between what the organization is currently doing and what it intends to do in future. This
will also be decided in the context of the administrative capability of the organization.


Project budgeting and monitoring
Most new projects and programmes involve investment of funds, for which estimates must
be made very carefully. A major part of these investments would involve equipment and
other fixed assets.
Each project involves recurrent costs for maintaining and operating the project. The
recurrent-cost implications must be assessed carefully in advance of selecting a project.
While designing new projects and programmes, management should take into account not
only current but also future commitments. A balance must be achieved between these two
commitments. During the design phase, the financial dimensions of the project must be
considered and discussed in detail. A project can lead the organization to disaster if it is
based on unsound financial suppositions.
The previous sessions in this module described aspects of budget preparation. In the
same way, the organization must prepare budgets for each proposed activity. These budgets
should have a long timeframe and project details should include information about:







78 Module 7 Session 3 Financial management 3: Project design and implementation


capital or development costs;
recurrent costs; and
sources of funds.
The capital cost of a project must be estimated very carefully. The experience of most
organizations is that actual capital costs turn out to be much higher than projected.
Projections of operating and maintenance costs should include factors such as inflation, likely
growth and expansion of the activity, etc. Finally, the budget must provide information about
different sources of funds for financing the project.
Almost every project has a capital expenditure component. Once the capital
expenditure phase is over, the project requires recurrent expenses to maintain and run the
project. The organization should prepare separate budgets for capital and recurring costs
because:
there are always technical differences in financial administration of capital expenditure
and recurrent-cost expenditure;
the bulk of capital expenditure is very often financed by external sources, whereas a more
of the recurrent costs would be financed through internal accruals, and hence the
controls for the two would be different; and
factors causing recurrent costs to grow are not related to capital expenditure.
The capital budget of a project should always be set relative to the recurrent expenditure
budget and the rate at which it should grow. Management should always aim to check that
there is no overspending. The relationship between recurrent and capital expenditure can be
quantified as follows:

Net annual recurrent expenditure
Recurrent-cost coefficient =
Total capital expenditure

This coefficient relates the annual recurrent costs of the project to the total capital
expenditure. A higher coefficient indicates that the organization would be required to raise
a larger amount of money to meet the recurrent costs. This coefficient can be very useful
in situations where the organization is in an early phase of development and with a
comparatively high dependence on external finance or loans.
To examine whether a project is going in the right direction, management can:
lay down guidelines for recurrent costs, not just for the year for which the estimates are
under preparation, but for a longer period. While projecting the upper limit for
recurrent costs, the organization should consider real growth rates and expected
inflation;
set non-monetary ceilings for recurrent costs such as human resources employment, thus
providing an effective way to monitor whether a project is proceeding as expected;
estimate accurately the time needed to bring the project to its operational stage; and
examine administrative capabilities for project implementation.







Training manual for institute management 79


BREAK-EVEN ANALYSIS OF PROJECTS
The organization should critically evaluate all new projects. Critical evaluation is necessary
to emphasize internal controls and justify the costs. One of the important dimensions of this
evaluation is to find the operating level which justifies the costs implicit in the activity.
There will always be a scale of activity below which the costs do not justify starting the
proposed activity. The knowledge of this level of activity is necessary for decision making.
Break-even analysis is an approach which helps management to identify the critical level of
activity, namely the break-even level, which is that level of activity at which funds allocated
to the project are just sufficient to cover costs of operation. If the activity is operated below
this level, the project will incur losses. In order to find this break-even level, management
requires information on:
funding sources sanctioned for the project, which usually are
fixed grants, such as grants received from government, and
variable receipts, such as participation fees charged; and
costs associated with the project, which again will be
fixed costs, and
variable costs.
The break-even level of activity would be identified by equating the two revenue and two cost
components. This is an important tool in project analysis. One can also find break-even
levels under different revenue levels.


FINANCING OF PROJECTS
Financing is an important component of project design. When designing a project, the
organization must make a realistic assessment of both the fiscal requirements and the probable
availability of funding.
Sources of funds include:
internal sources, such as
government grants,
plan expenditure, and
non-plan expenditure;
aid flows, including
domestic agencies, and
international agencies; and
borrowing from national and international agencies, including
interest-free loan sources,
interest-bearing loans, but at less than commercial rates (i.e., soft loans), and
commercial loans at market interest rates.







80 Module 7 Session 3 Financial management 3: Project design and implementation


When assessing resource availability, the organization should consider all relevant factors.
For example, availability of funds from internal sources depends upon the internal capability
of the organization. In general, internal funds would in part cover recurrent cost. For large
funding requirements, the organization cannot depend on internal generation. Support from
government would depend on priorities and allocations.
It is important that deficits are closely monitored, and it also very important to be
aware of inflation, as it can play havoc with budget management and can easily render a
project non-viable by rapidly shifting the break-even premises.


RECURRENT-COST PROBLEMS
Management has to ensure that activities or programmes operate in the ways and at levels that
were initially planned. In general, programmes or activities are more likely to face problems
as the project progresses. A common major problem area is recurrent-cost expenditure, as
grants are often insufficient cover all aspects. Some effects of insufficient funds include:
inability to produce output because of lack of staff or equipment;
shortages of consumable supplies;
no qualified staff to operate equipment or machinery;
poor maintenance of buildings, equipment, facilities, etc.;
transport constraints; and
a large number of positions unfilled due to recruitment freezes.
One can immediately visualize the consequences: reduced efficiency, reduced service quality
and quantity, reduced utilization of facilities, reduced equipment life due to poor
maintenance, and low staff morale.
Factors contributing to recurrent-cost problems include:
dramatic changes in the environment;
overall budgetary constraints;
poor budgetary planning; and
imbalances in resource allocation.
Revenue mobilization efforts can redeem the organization from recurrent-cost problems
arising from changes in external factors. If the problem arises because of poor budgetary
planning and mis-allocation of resources, management has to identify ways and means to
redeploy all resources to optimize efficient and effective utilization.




COMPUTERIZATION OF FINANCIAL FUNCTIONS


Financial management involves recording and analysis of large number and wide variety of
transactions. Timely use of information generated by various reports and statements is
critical to the success of the finance function. Manual systems of recording transactions and







Training manual for institute management


producing reports are very time consuming, with numerous shortcomings. As the number
of transaction increases, the recording and processing system may be affected because of
errors arising from overloading. The major disadvantage of a manual system is that, because
of interdependencies in financial and accounting variables, a small revision or a minor change
may involve lot of work. Conducting sensitivity analysis of various programmes or activities
may prove to be a Herculean task.
In recent years, information processing technology has developed enormously in
capacity and sophistication. Computerization of financial functions and accounting is no
longer restricted to big organizations: even small organizations can profit from use of a small
personal computer. The widespread use of computers for financial functions is the outcome
of the low prices of commonly available, standard software packages. Software packages
which have really made the use of computers easy for financial purposes are electronic
spreadsheets and database management systems.


ELECTRONIC SPREADSHEETS
Using an electronic spreadsheet, one can do detailed analysis of accounting and financial
information. The word spreadsheet also called a ledger sheet or worksheet derives from
the standard accountancy sheets of paper printed with several columns for recording financial
transactions, keeping track of funds and commitments, and performing some computations.
Just as on paper, the spreadsheet has rows and columns. Each row-column intersection forms
a cell into which numbers can be entered and further processed by specifying the
relationships between various individual and groups of cells. This type of electronic
spreadsheet is useful for doing financial analysis, creating budgets, etc., which require a
tabular form of presentation of information. Each piece of information can be accessed easily
and further computations carried out. Verifications and revisions are simple. The
spreadsheet will not produce accounting reports automatically as it does not understand
accounting procedures and rules: it is merely a tool to perform calculations, but optimized
for calculations typical of an accounting environment.
Lotus 1-2-3 and Excel are two well-known spreadsheet software packages for personal
computers. Others include MultiPlan, SuperCalc, Paradox and Quattro.


DATABASE MANAGEMENT SYSTEMS
Another important category of software is that used to manage databases. One very well
known database management software package is dBase IV, the latest in a series of
increasingly sophisticated packages. This programme uses data files in highly structured
formats so that sorting, updating, indexing, accessing selected records, locating data,
generating reports, adding or deleting information, etc., are easy and quick.
Major advantages of using such software include:
the ability to identify and exploit a large number of interdependencies;
the timely availability of information, as the processing of transactions is very fast;
reliability of information as, assuming the input data are correct and the interrelationships
established are valid, the results are reproducible;
lower costs in terms of human resources training; and







Module 7 Session 3 Financial management 3: Project design and implementation


the ability to perform sophisticated analyses and to do sensitivity analysis.
However, the effective use of computers for financial functions requires a more sophisticated
and specialized form of database management system, namely a management information
system (MIS). MIS is an integrated human-machine system that can provide information in
support of planning and control functions. MIS provides support to largely structured
planning and control tasks through routine reports.



SUMMARY


Management of resources plays a critical role in the growth and development of an
organization. The organization should strive for effective and efficient utilization of financial
resources. The organization should also be concerned about the effectiveness of the control
system in achieving its objectives and fulfilling its mission.
Preparation of financial statements, such as balance sheets and income and
expenditure accounts, is important as they provide insights into the operating and financial
performance of the organization. In preparing these statements, the organization should use
an accrual system of accounting. Financial functions include analysis, planning and
budgeting, control, and project and activity planning. Analysis involves preparing statements
of the sources and uses of funds, developing diagnostic indicators, preparing cost of service
statements, and deriving common-sized ratio statements, other coefficients and indices.
Analysis of cost information can provide many insights into the performance of various
programmes and activities. It also becomes the basis of planning and controlling. The
classification of cost information into variable, fixed, capital and recurring costs helps the
analysis a great deal. Planning of activities is important and is done by preparing budgets.
For successful implementation of budgetary control, certain conditions have to be fulfilled.
These are preparing statements of goals and objectives, creating budget centres, developing
accounting controls, communication, coordination and budget administration. Control ensures
that plans are achieved. Variance analysis and internal and external audits strengthen the
control process.
The designs of projects, programmes and activities are critical to the future of an
organization. Since most new projects and programmes involve significant investments,
estimates must be arrived at very carefully. Each project involves recurrent costs for
maintaining and operating the project, and so the recurrent-cost implications of a project must
be assessed well before the project's approval. One of the important dimensions of new
project evaluation should be to determine the operating level of activities which justify the
costs incurred. This can be done by performing a break-even analysis. Financial
management involves the recording and analysis of a wide variety of transactions. Timely
use of information generated by various reports and statements is critical to the success of
the finance function. Computerization of the finance function should ensure timely
availability of reliable and accurate information.







Training manual for institute management 83


LITERATURE SOURCES USED IN PREPARING THE READING NOTES


Anthony, R.N., & Herzlinger, R.E. 1975. Management Control in Non-Profit
Organizations. Homewood, IL: Irwin.
Anthony, R.N., & Reece, J.S. 1977. Management Accounting Principles. Bombay, India:
D.B. Taraporevala.
Horngren, C.T. 1977. Cost Accounting: A Managerial Emphasis. 4th ed. Englewood
Cliffs, NJ: Prentice-Hall.
Dearden, J. 1973. Cost Accounting and Financial Control Systems. Reading, MA:
Addison-Wesley.
Gross, M.J., & Warshauer, W. 1979. Accounting Guide for Non-Profit Organizations.
New York, NY: John Wiley.
Henke, E.O. 1971. Accounting for Non-Profit Organizations. Belmont, CA: Wadsworth.
Howell, J. (ed) 1985. Recurrent Costs and Agricultural Development. London: Overseas
Development Institute.
Pandey, I.M. 1992. Financial Management. New Delhi: Vikas Publishing House.
Turk, I. 1984. Accounting Analysis of the Efficiency of Public Enterprises. Lublijiana:
International Centre for Public Enterprises in Developing Countries.
Vargo, R.J. 1977. Readings in Governmental and Non-Profit Accounting. Belmont, CA.:
Wadsworth.
Welsh, C. 1976. Budgeting, Profit Planning and Control. New Delhi: Prentice-Hall of
India.










Training manual for institute management 85


DATE


TIME


Group discussion


OBJECTIVES
At the end of this session, participants should be able to appreciate:
1. Difficulties in managing a research organization which has the basic scientific
infrastructure but no funds to conduct research.
2. Re-orientation of research priorities to utilize available resources.


Module 7 Session 4


Managing a research institute
with uncertain finances


FORMAT


TRAINER







86 Module 7 Session 4 Managing a research institute with uncertain finances


INSTRUCTIONAL MATERIALS

Exhibit 1 Organizational chart of ARI
Exhibit 2 Overall research programme by Division
Exhibit 3 Escalation of building costs
Exhibit 4 Development funds received
Exhibit 5 ARI research projects proposed for 1989



REQUIRED READING

Case study: Faro Arroya



BACKGROUND READING

None.



SPECIAL EQUIPMENT AND AIDS

Overhead projector and chalkboard







Training manual for institute management


MANAGING A RESEARCH INSTITUTE WITH UNCERTAIN FINANCES


CASE STUDY: FARO ARROYA
The case covers several issues, but the most important is managing a government research
institute where funds are a major constraint so much so that they hardly suffice to pay for
the salaries of the staff. The infrastructure for research, although existing or partially
developed, is scarcely used for want of scientific supplies and logistic support. Reading Faro
Arroya, one might conclude that all that the institute has is the staff and nothing else. On the
surface, this may appear to be a reasonable conclusion, but it is not quite so. The institute
had re-oriented its mission in the face of an adverse financial situation. The existing state
of affairs prevented scientists from doing sophisticated research, so they re-oriented their
research priorities toward solving the immediate problems of the farmers. This they could
do rather successfully, or so they claimed.
With an improving economic situation, the institute could generate additional funds for
various activities. This would strengthen scientific activities at the institute, but would there
be a danger of the orientation also changing? Circumstances forced the Animal Research
Institute (ARI) to conduct research which could be quickly diffused. Should the institute
continue its present orientation, i.e., solving farmers' problems? How would it manage that?
In discussing this case, the resource person should emphasize that ARI is not the only
institute of its kind to have suffered the consequences of deteriorating economic
circumstances, although it represents an extreme case. Areas like Dongal, which
predominantly depend upon export of primary commodities, are bound to go through phases
of growth and recession. Availability of funds, particularly for research, is a major problem
in all developing countries, although the severity may vary. Strategically, a research institute
should create enough infrastructure during periods of growth so that externally sponsored
research projects could be attracted to maintain the pace of the research activities at the
institute. The leadership role of Faro Arroya, particularly the question why would one want
to manage an institute like that with no tangible rewards in sight, is pertinent.


Module 7 Session 4

Session guide







88 Module 7 Session 4 Managing a research institute with uncertain finances




The important issues for discussion are:
(i) How does one really manage an institute like ARI?
(ii) Can funds be generated outside of government support? If so, how?
(iii) What should be the mission of the institute?
(iv) Will the institute be able to maintain a judicious balance between sophisticated and
farmer-oriented problem solving research? What strategies should be adopted to
ensure this?








ORGANIZATION CHART


DIVISIONS OF ADMINISTATIAOl




SECTIONS 1. Gen. Administration
2. Staff Welfare and
Canteen
3. Museum
4. Library
5. Estates
6. Transport
7. Security


Accounts
and
Stores


1. Veterinary Bacteriology


1. Farmer Educat


Items 2. Pigs 2. Veterinary Parasitology 2. Farm Animal St
B. Animal Manage- 3. Poultry 3. Veterinary Entomology 3. Farm Plannin
ment 4. Small (Laboratory) 4. Veterinary Pathology Management
Ruminants Animals 5. Veterinary Services and 4. Commercial PI
Pigs Case Studies
Poultry L
Small (Labora- CONSULTANCY AND
tory) AnimalsEXTE
EXTENSION SERVICES


ion
atistics
ig and

reject


Internal Audit







TRAINING MANUAL FOR INSTITUTE MANAGEMENT EXHIBIT 2
EXHIBIT 2
Module 7 Session 4





OVERALL RESEARCH PROGRAMME BY DIVISION



Animal breeding and genetics
Selection and multiplication of local breeds
Upgrading local stock through cross-breeding
Effect of climatic stress and plane of nutrition on breeding
performance of livestock
Breeding and maintenance of small mammals
Genetic improvement using improved strains of livestock and poultry
for the production of poultry, milk and eggs
Dual-purpose breeding programme as a system of cattle development
Breeding poultry for high crude fibre diet tolerance for diets based on
agro-industrial by-products

Animal nutrition and husbandry
Evaluation of agro-based industrial by-products (wheat bran, rice
bran, spent brewers' grains, cocoa husk, straw, Leucaena glauca)
as feed for farm animals to replace expensive, imported materials
Nutrient requirements of farm animals
Analysis of feedstuffs
Pasture development and evaluation, including:
selection, breeding and seed multiplication; field gene bank
pasture management for ruminant production
natural pasture/rangeland improvement (oversowing; sod seeding)
Dry season feeding of livestock, including dry season pastures
Management of hatchery, breeding farms, feeding and breeding
Determination of the most productive legume-based natural
pasture systems and sown pasture mixtures

Animal health and disease prevention
Studies on sources of viral, bacterial, protozoan, helminth and
arthropod infections
Sources of infections; trial of local material for culturing helminth
eggs; screening of imported anthelminthic drugs and their proper use
under local conditions; methods of controlling helminth infections; on-
farm studies of proper usage in tick infestations

Farm management, economics and extension
Improving farm animal performance







TRAINING MANUAL FOR INSTITUTE MANAGEMENT
Module 7 Session 4


EXHIBIT 3


ESCALATION OF BUILDING COSTS

(in dodes)
Administration Laboratory
building block
Original estimate 2 362 800 776 708
Already spent 373 172 605 291
Proportion of work
remaining
Estimated additional
11 800 000 44 000 000
funds needed




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