CGAP Training Business Planning for MFIs Slides

BUSINESS and DEVELOPMENT PLANNING and FINANCIAL MODELING for MFIs with MICROFIN

1

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!

BP1-O1 2

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.

BP1-O2 3

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.

BP1-O3 4

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.

BP2-O1 5

Business planning for microfinance institutions

bothstrategic planning

and operational planning

To achieve profitability,

financial sustainability

and social viability

BP2-O2 6

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

BP2-O3 7

Business Planning Framework

8BP2-O4

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

BP3-O1 9

"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

BP3-O1Opt 10

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?

11BP3-O2

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.

BP3-O3

LEDA'S MISSION

12

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.

BP3-O4

1. Target a poor population, by considering their vulnerability level and by helping them improve their "economic base".

13

Who does LEDA serve?

LEDA serves low income self-employed in urban areas.

BP3-O5 14

Segmenting markets

BP3-O6

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)

15

Effective Segmentation for planning is…

BP3-O7

Accessible

Exploitable

Measurable

Based on growth potential / on creditworthy clients

16

Microfinance CLIENTS

BP3-O8

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

17

Context Analysis

How will foreseeable

external challenges affect our capacity to

achieve our goals?

OPPORTUNITIESCan we take advantage of our

environment's specificities?

BP4-O1

THREATSWill our ability to pursue our goals

be jeopardized by changes in our operating environment?

18

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?

BP4-O2

WEAKNESSES What are our weaknesses and

where do we focus our development efforts to turn

them into strengths?

19

Context Analysis

BP4-O3

Social, Economic and Environmental Factors

Technological developments

Demographic changes

Competition Collaborators

Regulatory Factors andGovernment Policies

20

Institutional Assessment

BP4-O4

Financing

Financial management

Human Resources management

Other financial and non-financial services

Board and management issues

Administration

Credit and savings products

Organizational structure

21

Defining strategy…

BP4-O5

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

22

Choosing a Strategy

BP4-O6

Product and Market Options

Context Maximize opportunities, overcome threats

Institutional Development

Build on Strengths

Improve Weaknesses

23

Setting Specific Objectives

BP4-O7

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

24

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.

BP4-O8

Activities: • Understand target clients' needs• Redesign current group lending• Develop individual loans• Train staff in new loan terms and conditions • Review pricing structure

25

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

BP5-O1 26

Microfin Overview

BP5-O2

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

27

Microfin Features

BP5-O3

Products and Services

Marketing Channels & Projections

Institutional Resources & Capacity

Financing

Financial management

28

BP5-O429

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

29

Demonstration Key Points

BP5-O5

A single file – many worksheets

Toolbar, Link and Go To Buttons

INPUT = blue and gray cells

F9 - Calculation

WHITE cells = OUTPUT

Graphs

30

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

BP5-O6 31

Wrong Entry?

BP6-O1

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

32

1. Modeling of individual branches

2. Loan Product Projections Approach

3. Institutional Information

4. Inflation Information

5. Historical Financial Statements

6. Financial Indicators Analysis

BP6-O2 33

SEDA Ratios - Summary

BP6-O334

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

BP7-O1 35

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

.

BP7-O2

Minimum and maximum balance,Length of deposit,Withdrawal policies and interest rate,Re-investment ratio or reserve rate,Link to other products and services

36

Loan Product Design

Matching Product Characteristics to Market Segment

Type of economic activity

Product Characteristic

BP7-O3a 37

Microfin Product Definition Overview

BP7-O4

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

38

Microfin Loan product definition

Average loan amount

Repayment conditions

Compulsory savings

Pricing structure

Analysis

BP7-O5 39

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

BP7-O6 40

Microfin Savings Product Definition

BP7-O741

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

BP8-O142

Years

Microfin Program/Branch Page

BP8-O2 43

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

BP8-O344

Initial Balances

Number of Active loans

Retention Rates

Graphs

ANALYSIS

Savings Projection Section

BP8-O4 45

Graphs Analysis

$ Aggregates

$ Average Savings per depositor

$ Number of Depositors

Voluntary Savings

Compulsory Savings

Institutional Capacity

BP9-O146

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

BP9-O247

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

BP9-O3a48

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

BP9-O3b49

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

BP9-O3c50

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

BP9-O4a51

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

BP9-O4b52

DETERMINE PROVISIONS

Target reserve - Current reserve (from balance sheet) 32,000

= Required provision for year ….

Expense: On the:

Step 3 : WRITE-OFFS

BP9-O4c53

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

BP9-O4Sol 54

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

BP9-O4Sol55

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

BP9-O4Sol56

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

BP9-O557

BP9-O658

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

BP10-O1 59

Plan Income statementOperating expenses/Program/Branch

Operating expenses/Admin/Head office

Program/Branch level operating expenses

Admin/Head office leveloperating expenses

BP10-O2 60

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

BP11-O1 61

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

BP11-O2 62

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

BP11-O2 63

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

BP11-O364

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

BP12-O1 65

Financing Sources

BP12-O2 66

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

BP12-O3 67

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

BP12-O4 68

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

BP12-O5 69

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

BP12-O670

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

BP12-O771

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

BP13-O1 72

Balance Sheet

Income Statement

Cash flow Projections

Financing Sources

Ratio Analysis

Other MICROFIN FEATURES

BP15-O173

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

Getting Help!

BP14-O2 74

www.microfin.com

microfin@yahoogroups.com Online help file