Livelihood Evaluation Module

Understanding Money
We all need money for clothes, shoes, salt, light, soap, travel, medicines, tools and many other small
things even if we produce our own food. Income is the money coming in as a result of selling things
we have collected or produced, or payments for services we have supplied to people. We may get
wages by working for other people or we may charge people for the use of our assets or services.
Income can be shared within a family through gifts. Saving happens when we do not spend all the
money we have at a certain moment and put the unspent amount safely somewhere until we need
it.

In poor, rural families incomes are irregular and small. There are many times when a rural family
needs more money than it has. For example, when someone needs to buy inputs for crop growing or
for a major family event like wedding or if they want a bicycle or buffalo. The main problem is to find
a safe place to store savings for these families.

If we don't have savings and we need money urgently, then we need to find someone to give us
some money to help out. Friends and relatives can help out in this way or we can borrow some
money.

Activity 1
Help trainees list down the sources of their income and the items on which they spend. Help them
list how and where they save or borrow.

Understanding Cashflow
Cash flow means how money comes in and goes out of your life. We can look at this pattern for a
day, week, month or year. The difference between what comes in and what goes out determines
whether we have a surplus which we can save or whether we have a deficit which we need to cover
by using savings or borrowings.

Activity 2
Draw a tree with many roots and branches. Label all the roots with different ways you and your
family earn and all the branches with different ways you and your family spend. Put the most
essential expenditure on lower branches. Help the trainees compare their cash flow trees with
others and discuss on:

 The different types of expenditure and how each of them decides what to spend on.
 Differences between cash flow trees of men and women? How do these differences affect
the household?
 Most important and reliable sources of income?
 Are there some types of expenditure they can do without?
 Are savings planned or they just happen?
 Are you more subsistence-oriented or more market-oriented?
 Activities popular for producing cash and for food?
Economic Analysis
When you do any activity for your livelihood, it is like a business where profit is your income and can
be used to pay for food and other family requirements. The economic analysis helps us evaluate the
activities we do for our livelihood. They can be done at the start to decide whether to take up a
particular livelihood activity or not. And, any time in between to measure the performance of a
particular livelihood activity, do course correction, and further improvements.

Now, you will go through some important terms in Economic Analysis. Consider, that you are the
owner of a small bakery shop and try to understand these terms.

Initial Investment
Initial investment is the amount required to start a particular livelihood activity. In our example, the
money that you will put in at the initial start of your shop, in the form of rent and your first delivery.
This is the money you saved in the past.

Fixed Cost
A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or
services produced or sold. In your shop, the wages you pay to any workers employed or the various
bills you pay doesn’t depend upon your sales. It’s fixed and is not dependent on your profit or loss
from the shop.

Variable Cost
Variable costs are costs that change as the quantity of the good or service that a business produces
changes. In your shop, you will require some raw materials and also some products to sell. The
amount spent on these things depends upon the sale that you make. These types of expenses are
known as variable costs.

Revenue
Revenue is the income that a business has from its normal business activities, usually from the sale
of goods and services to customers. The total value of sales from your bakery shop can be referred
to as the revenue.

Profit/Loss
Profit and loss represent the profitability of a business. For a specific period, the difference between
your revenue (sales) and your cost is your profit. If your cost exceeds your sales, your business is
running at a loss.

Break-even
The break-even point is the point at which cost and revenue are equal: there is no net loss or gain. In
your shop, you put in the money for a week and created products, now when the money from your
sales equals the money you invested that point is called the break-even point.

Activity 3
Help trainees list down their costs and the sources of revenue and ask them to do the following:
  Divide their costs into fixed and variable.
 Assuming a given amount of goods or services produced, compute the total cost.
 Find out the amount of goods or services to be sold to reach the break-even point.
 Finally, try to compute the profit/loss by taking out the total revenue that can be generated.

Record Keeping
The activity of recording and organizing all the documents and information related to your
business activities. Record Keeping is a primary stage in accounting which tells us how to keep a
record of monetary business transactions with the objective of keeping permanent track of all the
transactions.
Consider a new example, Satyam limited is a small shop in a market in Lucknow. He is trading in
clothes and having main inflow and Outflow as follows:

 Inflows: Sale proceeds from Customer

 Outflows: Material Purchase from vendors and payment of related expenses

For recordkeeping purposes, Satyam limited will have to maintain daily cashbooks for maintaining
the petty cash and bank balances. At the end of the year, they have to prepare Profit and Loss A/c
and Balance sheet to verify the profitability during the year. It is one of the simplest ways of
maintaining the records of the business transaction.

Depreciation
It is defined as the reduction of the recorded cost of a fixed asset in a systematic manner. The
reduction in the value of any tangible asset you own is called Depreciation. In the case of a cloth
shop, you will keep machines for stitching and other purposes. The value of these machines will
depreciate over time.

Opportunity cost
In simple terms, the opportunity cost is the benefit not received as a result of not selecting the next
best option. For example, when you will start your shop by making the initial investment you are
letting go of your freedom to spend that money over some other prospect.

Balance sheet
A balance sheet shows what the business owns (assets), owes (liabilities), and is worth on a given
day.  The balance sheet is a financial statement that every business must prepare.  In order to invest
wisely, knowledge of a balance sheet is crucial. The basic formula regarding this is:
What you own = What you owe + Your Investment

This formula is intuitive: your shop has to pay for all the things it owns by either borrowing money
(you owe this) or put money from your savings.
For example, if you take out a loan of ₹4,000 from a bank, the cash you own will increase by ₹4,000.
Also, the amount you owe will increase by ₹4,000, balancing the two sides of the equation. If you
take ₹8,000 from your savings and invest it in your shop, the cash you own will increase by that
amount, as will your investment on the right side of the equation.

Income and expenditure statement

Also known as the profit and loss statement or the statement of revenue and expense, the income
statement primarily focuses on the company’s revenues and expenses during a particular period.

Net Income = (Total Revenue + Gains) – (Total Expenses + Losses)

This is the economic analysis that we did in the previous section. Recording the cost and revenue
data for a period (annually, semi-annually, or quarterly) and keeping it in a tabulated form
constitutes Income and expenditure statement.

Activity 4
Ask trainees list down their assets, liabilities, and the amount that they invested from their savings
and help them to do the following:

 List down the assets that depreciate and assume a percentage of depreciation for them.
 List down the assets, liabilities, and amount invested in a balance sheet format.
 Make their balance sheet that is satisfying the accounting formula.

Banking
The banking industry handles finances in a country including cash and credit. Banks are the
institutional bodies that accept deposits and grant credit to the entities and play a major role in
maintaining the economic stature of a country. There are various types of banks in our country.

A commercial bank makes money by lending to individuals and businesses. It gets the money to
lend from deposits consumers make in the bank. Small businesses rely on commercial banks for a
variety of services that make it easier to do business and grow a company. The most important
service provided by them is loans.

To exercise these facilities offered by the bank, you need to open a bank account. It’s a simple
process. You just need to provide your photo ID, address proof ID, and fill-up the form. There are
various schemes for loans that can be availed by opening such an account.

Even in case, you are not literate and don’t know how to sign, you can still exercise the facilities of
a bank. You can go to the Bank and submit all the photo ID & address proof ID to open the account.
With the LTI (Left Thumb Impression) of an illiterate person, the account will be opened. For all
transactions, in all other accounts, the banker goes by signature verification. Whereas in the case of
people who can’t sign, Banker goes by photo verification as thumb impression is not possible to
decipher. Unlike others, for any transaction in the Bank, the 'illiterate' person has to come in person.
Risk Management
Risk management is the process of identifying, assessing, and controlling threats to a business's
capital and earnings. These threats, or risks, could stem from a wide variety of sources, including
financial uncertainty, legal liabilities, strategic management errors, accidents, and natural disasters.
Every business and organization faces the risk of unexpected, harmful events that can cost the
company money or cause it to permanently close. Risk management allows organizations to attempt
to prepare for the unexpected by minimizing risks and extra costs before they happen.

Risk
In simple terms, risk is the possibility of something bad happening. Any business faces a certain
amount of risk during its operations, its called business risk. Business risk implies uncertainty in
profits or danger of loss and the events that could pose a risk due to some unforeseen events in the
future, which causes business to fail.
A very basic example could be any natural calamity like flood, earthquake, or drought.

Insurance
Insurance is a means of protection from financial loss. It is a form of risk management, primarily
used to hedge against the risk of a contingent or uncertain loss. An entity that provides insurance is
known as an insurer, insurance company, insurance carrier, or underwriter. A person or entity who
buys insurance is known as an insured or as a policyholder. The insurance transaction involves the
insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer
in exchange for the insurer's promise to compensate the insured in the event of a covered loss. For
example, if you own a bakery shop, insurance can protect it from future mishappenings like a fire or
burglary.

There are various types of insurance your shop can have:

 Shop Insurance: A shop insurance policy is a specially designed insurance policy that
provides coverage for a shop’s contents and the property. This shop insurance for small
to medium-sized shops covers burglary along with any mishaps due to natural calamities,
accidental fire, etc. just like fire insurance.
 Motor Insurance: If you own any vehicle for delivery or picking up raw materials, you need
to insure it in case of any mishappenings.
 Stock / Goods Insurance: A separate insurance policy can also be purchased to cover only
goods in the shop. These policies are designed to cover the loss of stock due to fire,
earthquake, and various other perils. This is recommended for businesses based on storing
goods.

Activity 5
 Ask trainees to think about their business and what types of risk they face.
 Help them in listing down those risks.
 Tell them about the insurances that are available for various types of risk.
 Also, help them in prioritizing which insurance is more important and is worth their money.