VII. Case study: trading in a cereal shop
A cereal shop is a cereal trade venture that is set up and managed (in our particular case, in the countryside) by a group of villagers, firstly, to increase their incomes and, secondly, to ensure village food security. It is a profit-making activity (income-generating) even though it contributes to food security by ensuring that cereals are available year-round. It is not a cereal bank, where the primary aim is food security and profit-making is of secondary importance.
Shop organization reflects the way the group is organized; i.e. a general assembly and a management committee. The general assembly formulates policies and takes important decisions, while the management committee, comprising three to five members, depending on the size of the venture, sees to the smooth running and day-to-day management of the shop. It is the implementation body.
A cereal shop's management documents are:
- the cash book
- the stock book
- the receipt book
- the purchase book
- the sales book, and
- the credit book.
All these documents are kept by the treasurer and the cereals shop stock-keeper who monitor purchases, storage, sales, bookkeeping and cash management under the supervision of the management committee's chairman and members.
Training should start before the operation gets underway and should continue at least throughout the first financial year. Training prior to start-up should cover the aims of a cereals shop, the shop's management bodies, purchasing, sales and storage operations and introductory bookkeeping.
Once the operation has got underway more thorough and specialized training will be necessary. The stock-keeper will have to get practical training in storage techniques and stock card keeping. The treasurer will familiarize him or herself with cash and receipt book keeping and purchase and sales monitoring. This training will be provided for all management committee members so that anyone will be able to step in if another is absent or unable to work for any reason.
Lessons in simple arithmetic will be given to enable management committee members to:
- calculate cost prices
- fix selling prices
- work out profits.
The cereals shop group project will no doubt need to borrow funds from a bank, a development project or an NGO to finance its initial stock, in addition to providing its own capital and other funds from its own resources. Training in credit and credit mechanisms, e.g. knowing how to make a credit application and how to negotiate with the lender to fix the terms of credit (amount, interest rate, repayment amount, etc.) is indispensable.
The next step is marketing: purchasing and sales. Training for farmers will teach them how to buy and resell in the light of market conditions, calculate purchase and sales prices and monitor the revolving fund.
For instance, commodities should be purchased when the producer prices are at their lowest (i.e. at harvest time), stored (following simple techniques and making sure that storage conditions are appropriate), and sold when market prices are at their highest (for instance just before or during the lean season). Make sure that the selling price includes storage, maintenance and handling costs. This is how we maximize profits.
Let us look at a few definitions and some rules of calculation:
- Purchase price: This is the price at which we obtain cereals from the farmer (or the intermediaries). A cereal shop's cereal purchase price is the price at which the cereals are sold by the producer or intermediary;
- Cost prince: This is the purchase price plus all other expenses or costs;
- Selling price: This is the cost price plus the shop's profit.
Purchase and selling prices vary with cereal supply and demand. At harvest time supply is higher than demand, so prices drop. That is the time to buy. At the approach of or during the lean season, however, supply falls and prices rise. That is when we should sell our stocks.
- Profit: This is the difference between the selling price (SP) and the cost price (CP):
P = SP - CP
Once the management committee has been formed and organized (who does what 1), basic training provided for the committee members, the problem of storage overcome (store built or rented), the cereal market study completed, and credit to finance the initial stock obtained, the shop may begin purchasing and selling, following a strict management system.
(The committee may comprise:
- a Chairman, to coordinate committee activities and monitor operations.
- a Treasurer, in charge of financial operations and bookkeeping and related documents: cash journal, receipt book, etc.
- a stock-keeper/sales assistant, to manage the stock (keep the stock cards and sales book), make sure that foodstuffs are properly stored, and deal with day-to-day sales.
- buyer(s) in charge of purchasing on the various markets in the area and keeping the purchase books.)
All the management documents (printed forms) and other facilities (safe, strong box) should be ready before the operations get underway.
Each operation is recorded as we described above, in chronological order. Do not postpone this task.
* The journal or cash book: see model
This book is kept by the treasurer. All cash receipts and disbursements are recorded, including details of the relevant documentary evidence (reference no.), the designation and the amount (receipts in the receipts column, and disbursements in the expenditure column). The totals (receipts and expenditure) will be shown at the bottom of every page. The balance will be obtained by subtracting the total expenditure from the total receipts. This will enable us to check that the entries have been correctly made.
The chairman of the shop's management committee checks the cash book (entries and documentary evidence) and makes sure that the theoretical balance (in the book) corresponds to the cash actually in hand (in the safe). This check may be done regularly (weekly or monthly, for instance) or on a random basis.
* Stock cards: see model
These are kept by the stock-keeper/sales assistant. A separate card is kept for each type of commodity: rice, millet, sorghum or maize. It is filled in and checked, like the cash book, except that these operations are in kind.
An inventory is done regularly to check the general stock situation (the balance shown on the stock sheet for each item is checked against the stock actually in the store). If the stock is properly managed, these two tally. If they do not, we must find out why (check documentation, entries, etc.).
* Receipt books: see model
These are used by the treasurer to issue receipts to the storekeeper/sales assistant for the day's takings, prior to entering the amount in the receipts column of the journal. Bear in mind that a cash receipt is documentary evidence.
* Purchase books: see model
This is kept by the storekeeper/sales assistant who adds up the total quantities of each type of cereal purchased by the purchasing teams and the amounts spent on these purchases. This is done on a daily basis.
The treasurer (or chairman) checks these operations (he divides the sum spent by the unit price). Once this has been done, the quantities purchased are entered on the relevant stock cards.
* Sales books: see model
These are kept by the stock-keeper/sales assistant, who adds up the total amount of each type of cereal sold and hands over all the takings to the treasurer against a cash receipt.
The quantities sold (i.e. that have left the store) are entered on the relevant stock cards.
The cereals are usually sold for cash, except on rare occasions to particularly trustworthy clients. This is not a cereal bank, but a cereal shop - a profit-making activity. Put up a notice that clients can easily see saying something like:
NO CREDIT SALES
At the end of the financial year:
The shop should draw up the real operating account.
* Real operating account: see model
The cost column (on the left of the table) will show the following quantities and costs:
- cereal purchases
- storage costs
- pesticide costs
- transport costs
- salaries (or bonuses) where applicable
In the right-hand "commodities" column we add up the sales proceeds. Do not forget to add up the value of any remaining stocks.
The difference between the costs and the proceeds gives us the bottom line of the financial year:
- a profit when the proceeds are higher than the costs;
- a loss when the costs are higher than the proceeds.
* The balance sheet:
This may be established at any time. It shows the shop's financial situation at a given time. Below is an example of a balance sheet:
(Where are the shop's assets?)
(Where do the shop's assets come from?)
Cash in till
These accounts are called situation accounts, as they tell us at a glance exactly what the shop possesses (furniture, merchandise, cash) and its situation vis-à-vis third parties (suppliers, banks, etc.).
N.B.: The bottom line of a balance sheet should always tally with the bottom line of the operating account. If it doesn't, that means there is an error in the financial accounts.
Using profits: When good management and dynamic managers produce a profit at the end of the financial year it must be decided what is to be done with the profit. The group's general assembly has the power to decide how they are to be used (see Chapter X).
Part of the profit is usually set aside to make the shop self-funding sooner, and part may be distributed to members in proportion to their contribution in running the shop.
It is always advisable to reinvest rather than spend the profits.