Financial and Banking Awareness Handbook for Youth and Entrepreneurs

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Iraqi Private Banks League

Iraqi Private Banks League
Iraq Private Banks league

Central Bank of Iraq

Central Bank of Iraq
Banking Awareness and Consumer Protection Department

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Table of Contents

• Introduction
• Types of Companies
• Corporate Governance
• Developing an Idea into a Commercial Company
• Preparing Economic Feasibility Studies
• Financial Affairs Management
  • Capital
  • Financing
  • Financial Statements
• Foundations of Financial Affairs Management
  • Financial Planning
  • Debt Management
• Accounts and Banking Services
• Fraud Prevention

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Message from the Governor of the Central Bank of Iraq

Peace, mercy, and blessings of God be upon you.
Paying attention to entrepreneurs and startups is an important step toward contributing to job creation in a society characterized by its youth, education, ambition, and gender equality. To assist young people as they take their first steps in entrepreneurship, we present this book, which summarizes everything necessary to know about establishing small businesses in Iraq from financial, legal, and rich perspectives. May it serve as a useful guide for them in establishing their projects. Success is a feeling whose journey begins with ambition and hope for a better tomorrow.. Think, create, and begin your journey toward your goal. We are with you.. I wish all our youth success and achievement in building their future, which will undoubtedly contribute to building our beloved country, Iraq. And success is from God.

Ali Mohsen Ismail
Acting Governor
Central Bank of Iraq

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Financial Awareness

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Definition of Financial Awareness

• This book aims to increase financial and banking knowledge among entrepreneurs to develop ideas and talents into productive commercial companies, and then maintain the continuity of these companies through sound financial management.
• Financial awareness consists of the skills and knowledge necessary to make sound financial decisions, i.e., the ability to understand and select appropriate options related to managing financial affairs, and familiarity with the credit status.
• Banking knowledge helps companies make good use of available banking services to support and develop the company's financial management within specific risks and costs.
• Business owners must be able to identify the reasons for banking products for their institutions' growth, interact confidently with financial service providers, and possess sufficient knowledge of the relevant legal, regulatory, rights-based frameworks, and resources.

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Types of Companies

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Legal Form of Companies

Before starting any project, the most suitable legal form for managing the company must be chosen.

Sole Proprietorship

The company has a single owner who fully controls all aspects of the company. This individual owner is also responsible for all financial obligations of the business, which are attributed to their personal financial estate.

General Partnership

This type of company consists of two or more partners who agree to share the company's profits and losses at a rate agreed upon during establishment. The partners are responsible for all financial obligations of the company.

Limited Liability Company

A group of individuals invest together, each holding a share in the company's shares, within limited liability restricted to the invested capital only.

Mixed or Private Joint Stock Company

It can consist of many partners, and the company's shares are listed in the financial market and publicly tradable, provided that certain accounting and administrative standards are met to ensure transparency and information disclosure to shareholders.

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Corporate Governance

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Corporate Governance

• It is the system through which the company's operations are managed and controlled by distributing tasks and authorities among all executive departments, with the Board of Directors overseeing them to protect shareholders' financial interests and rights.
• Corporate governance applies to large institutions and family businesses, and the same mechanism applies to small and medium-sized enterprises.
• Example: Appointment and determination of functional roles and authorities for each of the Board of Directors, Managing Director, Chief Financial Officer, Human Resources Manager, Operations Manager, Marketing Manager, Control/Audit Manager, and Sales Manager.
• It provides a framework for monitoring institutional activities and administrative performance, requiring objectives based on transparency and accountability principles.

Achieving Objectives

• Distributing authorities and reducing the likelihood of conflicts between institutional objectives, owners' interests, and family members/participating owners.

Reputation

• A sound governance framework enhances the institution's reputation and increases its ability to obtain credit.

Optimal Use of Resources

• Effective and efficient management of operations, utilization of public resources, and their deployment.

Participation Culture

• Building a culture of participation among employees and stakeholders in formulating policies, making decisions, evaluating operations and services, and complying with laws.

Accountability Culture

• Achieving a culture of accountability and transparency, taking measures to determine production and output responsibilities.

Combating and Fighting Corruption in its Various Forms

• Documenting procedures.
• Establishing a system and instructions that ensure and lead to the documentation of procedures and systems.
• Determining responsibilities, authorities, and relationships within a clear working methodology framework.

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Developing an Idea into a Commercial Project

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Preparing Economic Feasibility Studies

Before starting any commercial project, we must plan the project in advance by preparing an economic feasibility study.
It is a process of collecting information about a proposed project and analyzing it to determine its feasibility after identifying risks and planning the project's profitability. Then, we must know the extent of this project's success or loss compared to the local market and its needs, and then predict the company's ability to remain as a profitable business entity for a specified period of time.

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Elements of Effective Economic Feasibility Studies

• Suppliers
• Competitors
• Market Study
• Location
• Sales
• Customers
• Licensing
• Financing
• Partners
• Expected Profits
• Employees
• Costs
• Products and Services
• Obstacles

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Financial Affairs Management

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Importance of Financial Affairs Management

Financial affairs management is a multidisciplinary approach based on the accounting and financial aspects of the institution. The meaning of managing financial affairs for a given institution is to perform various financial tasks such as planning, determining future expenses, and raising funds to finance the institution's operational activities, in addition to evaluating investments and diversifying preservation.

Capital Consists of

Working Capital

Operating costs for paying salaries and wages, purchasing goods and raw materials, marketing and advertising expenses.

Investment Costs

Purchasing real estate (main company management and branches), purchasing machinery and equipment, decoration costs, purchasing technical, security, and accounting systems.

Need for Financing

After studying the total project costs, we must study the sources of financing to cover financial deficits and pay for project costs:

• Investment and operating costs:
  • Available capital from private sources and partners
    = Financial deficit that must be financed through banking loans or supplier facilities.

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Financial Affairs Management: Sources of Financing

The first thing to plan after studying the project is providing financing sources to pay for investment costs and initial operating costs of the project.

1. Private Funds
   Financing the project from savings and financial support provided by family or friends.

2. Shareholders
   Participation of other shareholders to finance the project with specific shares.

3. Loans and Banking Facilities
   Relying on available loans to finance startups.

4. Commercial Facilities from Suppliers
   Purchasing equipment and raw materials from suppliers on credit/deferred payment.

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Financial Affairs Management: Financial Statements

Sound financial affairs management for a company begins by building the company's financial statements to continuously monitor its financial position. Financial statements are prepared by the Chief Financial Officer and then audited by a licensed public accountant from the supervisory council.

• Income Statement: Also known as the profit and loss statement, it records the institution's financial performance over a specific accounting period. This statement aims to analyze all revenues and expenses to calculate net profit or loss, and show the performance achieved by the institution at the end of the year or fiscal year, and determine growth rates compared to previous periods.
• Balance Sheet: This statement records the institution's assets, liabilities, and equity as of a specific date. Assets include inventory, factories, machinery, and accounts receivable. Liabilities include expenses, accounts payable, and debts due to banks or lending institutions. Equity represents the owners' capital value at year-end, noting that assets must equal the sum of liabilities and equity.
• Cash Flow Statement: The cash flow statement tracks the movement of cash and bank balances over a specific accounting period. Cash flows are classified as investing activities, financing used for funding, operating activities, operating expenses, financing activities, cash used to repay debts, credit lines, and profit distributions.

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Foundations of Financial Affairs Management

• Tax Accounting
  Some consider paying taxes as unwanted costs, but tax payment must be considered a financial and social obligation toward the country. Tax is paid as a percentage of net profit achieved during the year. Compliant companies enjoy many tax benefits: participating in tenders, banking facilities, etc.

• Financial Planning
  Financial planning protects against future financial changes and weak liquidity to meet obligations to creditors and maintain business continuity.
  Cash management – Investment analysis – Financing needs analysis – Balance sheet guidance

• Financial Distress
  Some believe the only reason for a company's discontinuation is accumulated operating losses. However, liquidity distress is a primary reason for a company's inability to survive. Despite sales, the company cannot obtain cash to pay amounts due to suppliers and creditors in the financial cycle – purchasing raw materials – selling goods and services – collecting sales – paying suppliers and creditors.

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Financial Cycle

• Provision and maintenance of assets
  Offices, branches, warehouses
• Purchasing raw materials from suppliers
• Paying salaries, wages, and operating expenses
• Manufacturing goods and services
• Achieving sales (goods – services)
• Collecting from debtors
  Wholesale traders, customers
• Paying creditors
  Due expenses

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Basic Steps for Preparing Financial Estimates

Financial estimates are a crucial step for any individual wishing to start their own business. In addition, forecasting the institution's revenues and expenses is essential to comply with the planned budget.

1. Always making estimates for different scenarios
   Before making estimates, it is important to adopt multiple scenarios that may affect the business (optimistic and cautious) to be prepared for potential market fluctuations.

2. Making well-considered economic assumptions
   Comprehensive estimates require well-considered assumptions regarding market growth opportunities, novelty, or long-term survival. The reality may differ completely from estimates, but business owners are expected to be aware of any potential opportunities that may arise.

3. Detailed expense presentation
   Appropriate estimates must be prepared for all expected expenses in the early stages of business. It is important to distinguish between fixed and variable costs.

4. Estimating all revenues
   It is always preferable to adopt a conservative approach when estimating revenues. This methodology takes into account cases of delayed payments by clients, as without it, ambitious estimates aiming to achieve high revenue levels may be compromised.

5. Evaluating current business potential and risks
   In addition to the institution's financial estimates, it is recommended to review and assess all risks – current and potential – that the institution may face. Precautions must be taken for any unexpected expenses. There are different types of risks that can affect competing institutions:

   • Commercial risks – Pricing, delivery, and service.
   • Operational risks – Product failure, fraud, or cyber attacks.
   • Employment risks – Absence of skilled workers or high hiring costs.
   • Natural risks – Business loss due to natural or human disasters such as earthquakes, fires, or floods.

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Accounts and Banking Services

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