CGAP Training Business Planning for MFIs Slides
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Transcript of CGAP Training Business Planning for MFIs Slides
BUSINESS and DEVELOPMENT PLANNING and FINANCIAL MODELING for MFIs with MICROFIN
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EXPECTATIONS and FEARS
1- Introduce yourself
2- Talk informally about your expectations for the workshop
3- Prepare a drawing which reflects your group's expectations
4- EVERYONE in the group must present someone or some part of the drawing! Everyone must say something!
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OVERALL WORKSHOP GOAL
Mastering the planning process and using Microfin for operational and financial projections to be able to create a clear
development plan that will allow the institution to achieve its double mission:
commercial and social.
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Specific workshop Objectives
1. To define steps of a strategic plan based on market approach and apply them in your MFI to achieve the double mission of microfinance
2. To conduct research to determine who and where the clients are
3. To analyze the environment and determine the opportunities and threats it provides
4. To assess your own institution, identifying strengths and weaknesses
5. To create a strategy and build an operational plan based on that strategy
6. To design financial products and delivery systems that support the strategy and are achievable given the environment and the MFI’s capacity
7. To generate a financial strategy using Microfin that demonstrates an understanding of how to project income and expenses as well as financial sources and flows.
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Planning helps:
• Translate the institution's mission into actions and secure the future of the institution
• Provide a roadmap to achieve financial sustainability and social viability
• Set priorities• Allocate resources• Create tools to measure success• Get input and ideas from all parts of the MFI• Coordinate actions of different parts of the MFI• Respond to changes in environment.
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Business planning for microfinance institutions
bothstrategic planning
and operational planning
To achieve profitability,
financial sustainability
and social viability
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Strategic planning
formulates and articulates broad goals in line with the mission, based on an assessment of the current situation
Operational planning
projects how to pursue these goals
Financial projections
express the plan in financial terms
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Business Planning Framework
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Mission and goals
Market and clients
Context analysis
Institutional Assessment
Financing sources
Financial ManagementStrategy
Strategy
Products
Marketing channel
Financing Strategy
Financial Management
Planning as an ongoing
management tool
STRATEGIC PLANNING OPERATIONAL PLANNING
Mission statement
a declaration which articulates:
• PURPOSE
• VALUES
• CLIENTS
• SERVICES PROVIDED
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"Deconstructing the mission"
MissionProvide affordable financial and non-financial services in the long term to micro and small businesses and to vulnerable families to improve their living conditions.
Analysis
Provide financial and non-financial services
affordable
in the long term
to micro and small businesses
to vulnerable families
to improve their living conditions
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diversity of servicesLoans, savings, BDS
speed, proximityreasonable priceslow entry barriers
MFI's sustainability / client retention
between 1 and 20 employees
up to USD 4 / day / person
meet various needs: basic needs (food, clothing, education, health, etc.)housing, leisure, social lifea stable futurethrough a stable activity which generates income to meet these expenses
Diversity of target clients
Social Performance Pathway
Intent and Design
What mission and goals for the MFI?
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Operations
Are systems and activities adequate to achieve these goals?
Social Performance Pathway - SPTF
ResultsImmediate results: Is the MFI reaching its target population? Is it meeting target clients' needs?Outcomes: Is client situation improving?Impact: Can the improvement be attributed to the MFI?
Our purpose is to:
• Reinforce significantly the economic base of the low income self-employed in Liberty
• By offering increased access to lending and savings services in urban areas.
We therefore intend to combine: • Cost-efficient methodologies, • Exemplary customer service,And to become a financially sustainable institution.
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LEDA'S MISSION
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LEDA's Goals
To fulfill our mission we want to achieve the following in the next five years:
2. Provide appropriate savings and lending products in urban areas.
3. Expand outreach by providing savings and credit services to a significant proportion of the households in our target market.
4. Become a financially sustainable independent MFI accessing a broad variety of financing resources.
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1. Target a poor population, by considering their vulnerability level and by helping them improve their "economic base".
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Who does LEDA serve?
LEDA serves low income self-employed in urban areas.
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Segmenting markets
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SEGMENTATION METHODS Geographic
(rural, urban, peri-urban)
Demographic (age, income, gender)
Behavioral
(e.g. use of informal services / risk of multiple borrowing; possible forms of collateral, etc.).
Psychographic / Capacities(interests, values, opinions, attitudes, level of schooling)
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Effective Segmentation for planning is…
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Accessible
Exploitable
Measurable
Based on growth potential / on creditworthy clients
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Microfinance CLIENTS
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Nature of the business
Demand / use of specific financial services
Income and assets
Diversity of income sources
Work experience
Cultural control of cash
Gender and age
Family status and structureLanguage and literacyReputation in the communityAttitude toward product
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Context Analysis
How will foreseeable
external challenges affect our capacity to
achieve our goals?
OPPORTUNITIESCan we take advantage of our
environment's specificities?
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THREATSWill our ability to pursue our goals
be jeopardized by changes in our operating environment?
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Institutional Assessment
• A crucial look inside: given our resources and our internal organization, can we meet our clients needs?
STRENGTHS What are our strengths and
how can we capitalize on them?
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WEAKNESSES What are our weaknesses and
where do we focus our development efforts to turn
them into strengths?
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Context Analysis
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Social, Economic and Environmental Factors
Technological developments
Demographic changes
Competition Collaborators
Regulatory Factors andGovernment Policies
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Institutional Assessment
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Financing
Financial management
Human Resources management
Other financial and non-financial services
Board and management issues
Administration
Credit and savings products
Organizational structure
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Defining strategy…
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Deciding the objectives and activities • to provide the right products • to the appropriate segments of target clients,
especially formerly excluded clients,• in a responsible and cost efficient manner • to achieve the MFI's social and commercial goals.
Derived from comparing:
• mission and goals • assessments of clients' needs and markets • opportunities and external threats • institutional strengths and weaknesses
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Choosing a Strategy
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Product and Market Options
Context Maximize opportunities, overcome threats
Institutional Development
Build on Strengths
Improve Weaknesses
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Setting Specific Objectives
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Specific measurable statements
They stem from strategic objectives and "operationalize" them - They are concrete, precise and measurable and show the path to achieve the overall goal.
Defining Activities
States specifically HOW objectives will be obtained
Identifies what the MFI must DO to implement the objective
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Objectives et Activities (example)
Overall Goal: Provide appropriate lending and savings products in urban areas.
• Specific Objective A : Provide lending products likely to meet the needs of a growing number of urban clients who will remain in the program.
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Activities: • Understand target clients' needs• Redesign current group lending• Develop individual loans• Train staff in new loan terms and conditions • Review pricing structure
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Business Planning and Financial Modeling Framework
STRATEGIC PLANNING
OPERATIONAL PLANNING
FINANCIAL MODELING
Mission and GoalsStrategy Model Setup
Initial Balances
Markets and Clients Defining Products and services
Analysis of products and services
Context analysis Specifying marketing Channels
Projecting Credit and Savings Activity
Institutional Assessment Institutional Capacity and Resources
Estimating
Financing SourcesDeveloping a Financing Strategy
Analyze Financing by Source
Financial ManagementMonitoring and Analyzing Financial Projections
Financial statements and projected indicators, client follow-up
StrategyBusiness Planning as an management On-going Tool
Variance analysis
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Microfin Overview
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Financial modeling tool specifically designed for MFIs
Relates directly to operation planning points
Able to Generate 5-year projectionsMonthly Detail for years 1 and 2Quarterly Detail for years 3 to 5
or monthly for 5 years depending on version
Projections for various levels of details:By branch-level, regional level or institutional level
Model is contained in a single Excel File
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Microfin Features
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Products and Services
Marketing Channels & Projections
Institutional Resources & Capacity
Financing
Financial management
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Flowchart of Microfin.xls ModelThis page describes the overall flow of information in the Microfin model. Use File Print to print this page for reference purposes.
MODEL SETUP
Model Setup Page The Model Setup page contains basic information which feeds into all other pages in the model[Model Setup]
PRODUCTS
Financial Products Definition Page
Product information is used for all branch activity
[Products] Note: The branch pages below are replaced by the PROGRAM page in "consolidated" mode
MARKETING CHAN.
Branch 1 Activity (Program)
Branch 2 Activity. . .
Branch "n" ActivityData is input on activity levels for all products, on staffing levels, and on all operational expenses
INST. RES. & CAP.[Program] Additional pages only available in Branch or Regional mode
Institutional Res. & Capacity Set-up
[Inst.Cap.]
Head Office Information (Admin)
Branch activity is summed from the branch office pages, and head office (Admin) expenses are input and allocated to the
branch offices& Aggregate Info
[Admin] [Graphs]Cost of Funds
FINANCING
Financing SourcesSources of financing are identified to meet requirements, their costs are identified, and
liquidity requirements are set[Fin.Sources]
InvestmentIncome
Financing Flows and Investment Strategy
After planning financing flows, income from investment of excess funds and cost of funds are fed back to the Head
Office / Admin page[Fin.Flows]
FINANCIAL MANAGEMENT
Summary Report
Financial StatementsFinancial statements are generated automatically, based on
information input elsewhere in the model Income Statement
Adjusted Inc. Statement
Balance Sheet
Cash Flow
Ratio Analysis
Graphs Page
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Demonstration Key Points
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A single file – many worksheets
Toolbar, Link and Go To Buttons
INPUT = blue and gray cells
F9 - Calculation
WHITE cells = OUTPUT
Graphs
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DON'T! use the space bar to erase information. Use the DEL key instead.
DON'T! use "cut and paste" to move data from one cell to another.
Use the Edit / Undo command to reverse the mistake.
Or exit without saving and retrieve your latest copy.
DO! Remember to hit F9 to recalculate the model
DO! Remember to save your work periodically.
Use the File / Save command or Ctrl+S
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Wrong Entry?
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Always use only the DEL key to erase information.
Use the Edit / Undo command to reverse a mistake, or
Exit without saving and retrieve your latest copy.
Never cut, copy, move or paste data.
DO! Remember to hit F9 to recalculate the model
DO! Use the File / Save command to save your work periodically.
BASIC RULES FOR MICROFIN
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1. Modeling of individual branches
2. Loan Product Projections Approach
3. Institutional Information
4. Inflation Information
5. Historical Financial Statements
6. Financial Indicators Analysis
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SEDA Ratios - Summary
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FY00 FY99 Income Statement Analysis
Return on Total Assets 37.8% 33.5% Operating Margin (ROA) -3.8% -15.1% Adjustments to Operating Margin 8.1% 8.0% Net Margin (Adjusted ROA) -11.9% -23.1% Profitability Operational Sustainability 91% 69% Financial Sustainability 76% 59% Return on Equity -7.1% -26.4% Adjusted Return on Equity -22.4% -40.5% Efficiency and Productivity Yield on portfolio 44.9% 41.8% Operating Costs / Avg Portfolio 40.8% 51.8% Borrowers per Loan Officer 318 289 Loan Portfolio per Loan Officer 48,205 43,111 Average cost of debt 12.4% 12.6% Overhead percentage 50.1% 52.6% Loan Officers as percent of total staff
65% 60% Portfolio Quality Ratios Portfolio at Risk > 30 days 10.9% 8.0% Loan Write-off Ratio 1.3% 2.0% Reserve Ratio 3.6% 4.0% Growth and Outreach Percentage growth in portfolio 36.1% 34.7%
FY10 FY09
RISQUE ÉLEVÉ
Aims of Designing Successful Products
A valuable and desired service to a significant and growing number of clients
To achieve the institution's social goals and sustainability
Characteristics of CAREFUL Product DesignProducts need to:
maximize value and minimize costs for clients be adapted to client needs be granted responsibly so as to generate improvements in clients'
situations (reducing vulnerability, creating value) and thus building loyalty be carefully priced to be affordable for clients and while covering the
institution’s costs. achieve high rates of on-time repayments of loans
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Designing Savings ProductsWhat are the key characteristics that differentiate one
savings product from another?
Discuss and present several scenarios that would result in various savings products to meet client needs
.
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Minimum and maximum balance,Length of deposit,Withdrawal policies and interest rate,Re-investment ratio or reserve rate,Link to other products and services
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Loan Product Design
Matching Product Characteristics to Market Segment
Type of economic activity
Product Characteristic
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Microfin Product Definition Overview
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Number and names of products
Product definition summaryUseful for comparing multiple products
Loan product definition
Several independent loan products
Compulsory Savings Definition
Voluntary Savings product definition
Several independent savings products
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Microfin Loan product definition
Average loan amount
Repayment conditions
Compulsory savings
Pricing structure
Analysis
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Microfin Compulsory Savings Product Definition
LINKED to Loan Product
Balances are based on loan activity
Control of savings
Interest rate paid
Reserve percentage
Indexing of savings
Factors
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Microfin Savings Product Definition
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Voluntary SavingsBalances are established on PROGRAM/BRANCH page
Factors
Controlled by MFI
Interest rate paid
Reserve percentage
Indexing of savings
GROWTH STRATEGY
0 1 2 3 4 5
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Years
Microfin Program/Branch Page
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Loan Projection Input SectionLoan Projection Output
Savings Projection Section
Financial ProductsFinancial CostsLoan Loss Provision and Write OffLoan Officer AnalysisNumber of branchesProgram/Branch Level Staffing
Program Level Fixed Assets
Loan Projection Section
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Initial Balances
Number of Active loans
Retention Rates
Graphs
ANALYSIS
Savings Projection Section
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Graphs Analysis
$ Aggregates
$ Average Savings per depositor
$ Number of Depositors
Voluntary Savings
Compulsory Savings
Institutional Capacity
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Credit and savings activities + other products :
Portfolio management
Human Resources :loan officer caseloads
Administration :Branch and administrative expenses
Fixed asset acquisition
Board and Management issues : management
CROSSWORDS: COMPLETE THE GRID
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CLUES
1. -------- Sources, the places where we find money to fund our plan
2. -------- Assessment
3. ---------- Analysis
HINT for the Hidden word:What we are having!!!
1 2 3
A LOAN LOSS RESERVE
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Income Statement Balance Sheet
Portfolio
(Reserve)
A LOAN LOSS RESERVE is an accounting entry that represents the amount of outstanding principal that is not expected to be recovered by a microfinance institution.
recorded as a negative asset on the Balance Sheet
A LOAN LOSS PROVISION
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A loan loss provision is the amount expensed on the Income Statement
it accumulates over time in the Balance Sheet as the loan loss reserve
Income Statement Balance Sheet
ProvisionPortfolio
(Reserve)
WRITE-OFFS
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Portfolio
(Reserve)
LOAN LOSSES or WRITE-OFFS occur only as an accounting entry. They do not mean that loan recovery should not continue to be pursued.
They decrease the reserve and the outstanding portfolio on the Balance Sheet. They have no effect on the Income Statement
Income Statement Balance Sheet
Write-off
Step 1 : PORTFOLIO AGING AND RESERVE CALCULATION
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Number of payments in arrears
Outstanding Balance (A)
Reserve Rate % (B)
Target Reserve (A) x (B)
Current loans 955,000 0%
1-30 days past due 85,000 10%
31-60 days past due 18,000 25%
61-90 days past due 20,000 50%
91-120 days past due 22,000 75%
more than 120 days past due
12,500 100%
Total Portfolio 1,112,500
Loan loss Reserve Ratio =
Total Reserve------------------------ =
Portfolio Outstanding
Step 2 : Calculation of PROVISION
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DETERMINE PROVISIONS
Target reserve - Current reserve (from balance sheet) 32,000
= Required provision for year ….
Expense: On the:
Step 3 : WRITE-OFFS
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Determination of Write-off Amount
Write off all loans over 120 days
Balance Sheet Before write-off
After write-off
Gross Portfolio Outstanding - Loan Loss Reserve = Net Portfolio Outstanding
Step 1 : PORTFOLIO AGING AND RESERVE CALCULATION
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Loan loss Reserve Ratio =
Number of payments in arrears
Outstanding Balance (A)
Reserve Rate % (B)
Target Reserve (A) x (B)
Current loans 955,000 0% -
1-30 days past due 85,000 10% 8,500
31-60 days past due 18,000 25% 4,500
61-90 days past due 20,000 50% 10,000
91-120 days past due 22,000 75% 16,500
more than 120 days past due
12,500 100% 12,500
Total Portfolio 1,112,500 52,000
Total Reserve------------------------ =Portfolio Outstanding
52.000x100 / 1.112.500 = 4,67%
Step 2 : Calculation of PROVISION
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Expense: 20 000 On the income statement
DETERMINE PROVISIONS
Target reserve 52,000 - Current reserve (from balance sheet) 32,000
= Required provision for year …. 20,000
Step 3 : WRITE-OFFS
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Determination of Write-off Amount
Write off all loans over 120 days 12 500
Balance Sheet Before write-off
After write-off
Gross Portfolio Outstanding 1 112 500 1 100 000 - Loan Loss Reserve (52 000) (39 500) = Net Portfolio Outstanding 1 060 500 1 060 500
LOAN OFFICER VARIABLES considered by Microfin
Caseload for entry-level, intermediate, and senior loan officers
Number of months for loan officers to progress from one level to the next
Minimum hiring size (to group them for training)
Transferring in/out, promotions
CASE
LOAD
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Loan Officers - the PRIMARY LINKAGE between INCOME and EXPENSES
Caseload
Average
outstanding balance
Portfolio
Effective Interest
Rate
Income
Financing Costs
Loan Officer
Officer training &
Remuneration
Loan Loss Provision
Expenses
Supervisor ratios
Salaries
Transport / Supplies
Other Operating
Expenses
Microfin CharacteristicsStaffing projections at the Program/Branch level
Link between the institutional capacity page and the Program/Branch page
Job titles and staffing projectionsSalary and benefit amounts and adjustments
Links between staff and other entities
Choosing a round-up buffer and using it in hiring projections
Other operational expense projectionsJob titles and staffing projectionsLink to inflation rateLink to other elements
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Plan Income statementOperating expenses/Program/Branch
Operating expenses/Admin/Head office
Program/Branch level operating expenses
Admin/Head office leveloperating expenses
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Loan officer analysisStaff compositionSalaries and benefitsOther operating expensesAnalysis of planned fixed assets
Administrative staff Other administrative operating expenses Analysis of administrative fixed assets Analysis of other administrative assets
Fixed assets
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Fixed Assets are monitored on the Balance Sheet
Gross Fixed Assets- Accumulated Depreciation
= Net Fixed AssetsMonthly Depreciation:
Appears as an non-cash expense on the Income Statement Increases the Accumulated Depreciation on the Balance Sheet
Write-offs: Fully depreciated assets are written off the Balance Sheet Gross Fixed Assets are reduced Accumulated Depreciation is reduced Net Fixed Assets remain unchanged
Fixed assets – Exercise
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1. We purchase a vehicle for 6,0002. The life of this vehicle is 5 years 3. After one year, calculate the accumulated depreciation
Before AfterGross fixed assetsAccumulated depreciationNet fixed assets
4. Calculate the accumulated depreciation for the 4th and 5th year
Year 4 Year 5Gross fixed assetsAccumulated depreciationNet fixed assets
Fixed assets – Exercise
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1. We purchase a vehicle for 6,0002. The life of this vehicle is 5 years 3. After one year, calculate the accumulated depreciation
Before AfterGross fixed assets 6,000 6,000Accumulated depreciation 0 (1,200)Net fixed assets 6,000 4,800
4. Calculate the accumulated depreciation for the 4th and 5th year
Year 4 Year 5Gross fixed assets 6,000 6,000Accumulated depreciation (4,800) (6,000)Net fixed assets 1,200 0
Fixed Asset Planning and Management in Microfin
Inst.Cap Page step 1
Names of categoriesBase cost for future
Projected life (min 5 yrs)
Admin/Branch Page
* Initial book value of fixed assets on hand
* Accumulated depreciation of fixed assets on hand
* Number of units on hand, grouped by remaining life
step 2
step 3
step 4
Automation linkages
Acquisition projections (replacement and growth)
* Cost projections (including inflation)
* Depreciation projections
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A Financial Strategy ensures:
adequate funds are always available to finance the projected level of activities
the composition of these sources meets institutional objectives
the institution makes sound use of any excess funds
the institution manages its financial risk
restrictions on use of funds are respected and maintained
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Financing Sources
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Debt Financing Equity Financing
Savings Compulsory savings
Voluntary savings
Loans Concessional loans Commercial loans
Share Capital of the MFI (investor equity and members’ social capital in financial cooperatives)
Grants (or Donor Equity)
Retained EarningsOn financial products
On investments
Restricted and Unrestricted Sources and Uses of Funds
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Restricted Resources
Restricted for Operations Restricted for portfolio Restricted for Other Assets
Restricted Grants Percent of Savings Restricted Loans Restricted Grants
Restricted Loans Restricted Grants
Unrestricted Resources Income Unrestricted Grants Unrestricted Loans Equity Investments A percent of savings
FINANCIAL LEVERAGE
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Cash 100 000 Savings accounts 1 000 000Portfolio 1 000 000 Equity 100 000Total assets 1 100 000 Liabilities + Equity 1 100 000
What is the indebtedness ratio (or leverage) of this institution?
Answer: 10/1
Where are most of its Assets?
Like most MFIs all its assets are invested in the loan portfolio.
What happens if a natural disaster occurs and 20% of this institution’s loans become unrecoverable?
Financial Flows in Microfin
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Portfolio Financing Month 1 Month 2 Month 3 Month 4
Beginning Balance 50,000 10,000 7,000 -
Change in portfolio Plus loan repayments Less loan disbursements
50,000 52,000 54,000 56,000
90,000 95,000 100,000 105,000
Balance Before use of restricted financing 10,000 (33,000) (39,000) (49,000)
Debt Financing of Portfolio Change in available savings Change in Portfolio loans
- - - -
- 40,000 - -
TOTAL CHANGE IN DEBT FINANCING 40,000
Equity Financing Of Portfolio New Restricted Grants for Portfolio
TOTAL CHANGE IN EQUITY FINANCING
Balance before use of unrestricted financing 10,000 7,000 (39,000) (49,000)
Unrest. funds used for portfolio - - 39,000 20,000
Ending rest. resources, portfolio 10,000 7,000 - (29,000)
Microfin: Financial Sources Page
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Names of all sources of financing
Initial balances of all financing sources
Restrictions on initial cash balances
Minimum liquidity targets
Interest rates paid on borrowed funds
Market rate cost of funds
Calculation of costs for borrowed funds
Microfin: Financial Flows Page
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Optional default funding sources
Monthly inflows and outflows for all sources
Short- and Long-Term investments
Calculation of investment income
Financing flow for operations
Financing flow for portfolio
Financing flow for other assets
Financing flow for unrestricted
"SUMMARY REPORT" PAGE
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Balance Sheet
Income Statement
Cash flow Projections
Financing Sources
Ratio Analysis
Other MICROFIN FEATURES
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Preparing Branch and Regional Projections
Loan Officer Layoffs / Transfers
Scenario Manager Page
User Defined Sheet
Indexed Financial Products
Client Cost Page
Default Financing
Retention Rate Analysis
Transferring data
Freezing Graphs