Microfinance in ActionSession 2

Dr. Phyllis SantaMaria

Gabriel Flores

Welcome to MFIA Session Two!

• Warm-up exercise: re-introductions (1 min ea.)

– Name, where you‟re from, profession/organisation

• Why are you here on this course?

• What do you want to accomplish through this course:

– On the course

– Personally

– Professionally

– In your projects

• Your Talent profile

• Who your buddy is for the Microenterprise study

2

After tonight‟s session, you will be able to...

• Describe the key aspects of a sustainable enterprise

• Gather the needed data to create a balance sheet and

profit & loss statement – and interpret the

information

• Prepare your presentation for Session 3 on your

Microenterprise study

• Commit to which Five Talents project you‟d like to

work on

3

Consider in pairs...

• How do you know an enterprise is sustainable?

• Some questions you can look at as you explore:

– What is meant by sustainable?

– Why is/isn‟t it necessary to be sustainable?

– From whose perspective should it be “sustainable”?

– Over what time period?

– How is it measured? How is it verified?

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A sustainable enterprise – our description

• Consistently delivers offerings aligned with its

Purpose

• Creates positive social impact for all People

• Uses resources effectively to sustain the Planet

• Is self-sufficient, generating more value than it

consumes - a Profit

• Its strategies and actions have 30 years‟ Perspective

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Three phases towards sustainability

1. Start up: proven concept, brand attraction and operating team (transition to phase 2)– Core funding for at least 24 months

– Individuals should plan to be self-sustaining for 24 months

– Success rates according to Small Business Association (USA)• 66% of new enterprises survive the first two years

• 44% survive five years

– Loyal customer base and track record of two years‟ accounts

2. Management: market connections, tradable market value, bankable asset (transition to phase 3)

– Establishing core processes

– Independent of founders, owners or specific teams

3. A sustainable organisation: cash flow structure, licensable system– Well-defined succession plan

– Meets all „5 Ps‟: Purpose, People, Planet, Profit and Perspective

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Focus for today: „Profit‟ in a „Start Up‟

Starting at Grassroots – David Kamau‟s story

David‟s info goes here...

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What David learned from his brother

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Watch the following YOUTUBE Video:

http://youtu.be/yRfw5grDfHc

Practical Enterprise Course on „Profit‟

Cash in/cash out

91000 Kenyan Shillings = $11.64/£7.21

Microfinance without Borders © 2009

The end-of-day Cash Balance

Practical Enterprise Course on „Profit‟

Cash in/cash out

Microfinance without Borders © 2009

Separating Business and Personal Record Keeping Business 1, Business 2, Personal Cashbook in columns

Income

Income Expenses

Cash in Cash outDate Item

Business 1 Business 2 Personal Date ItemBusiness 1 Business 2 Personal

23/11 Cash B/F 1500 2000 750 23/11 Potato

purchase

1000

Potato sales 1250 School

fees

2000

Used clothes

sales

750 Iron for

used

clothes

750

Gift from

friend

500 Potato

Transport

250

Merry-go-

round

2000 Lunch 100

TOTALS 2750 2750 3250 TOTALS 1250 750 2100

24/11 Cash B/F 1500 2000 1150

Practical Enterprise Course

‘Home Play’ Week 1

• Buy yourself a cash book.

• Keep cash in and cash out for one week.

• Share what you have learned with family members.

• Ask them to help you with your cash in and cash out.

• Interview someone about how they keep their cash in and cash out.

© 2010 Bronze

Module

1

See notes

Consider in pairs...

• How could this cash in/cash out be useful to a micro

enterprise? To a family?

• How does this compare to how you keep track of

your money?

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Balance Sheet review from Rural Finance No. 4

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Equity & Liabilities (Sources) Assets (Uses)

Equity (the owner’s capital) FIXED ASSETS: Tools, equipment and buildings

Borrowed money (the loans) Cash in hand and in the bank

Retained profits (reserves) Growing crops, stored crops, livestock

Goods obtained on credit from suppliers

Stocks of materials, work in progress or finished goods

Advance deposits from customers on goods to be supplied

Money owed by customers buying on credit

The Balance Sheet for a Micro Enterprise

Where has the money come from?

What are its uses?

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The Profit and Loss Account for a Micro Enterprise

Profit and Loss review from Rural Finance No. 4

A B

PROFIT

Income/ Revenue Expenses/ Costs

Sale of goods Purchase of goods

Interest from money kept in bank

Payment of rent

Bad debts

A Total Income B Total Costs

Profit =( A-B)

Where has the money come from? SALES

How much has it cost for sales?

Balance Sheet concepts from Rural Finance No. 7

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Equity & Liabilities (Sources) Assets (Uses)

Equity (the owner’s capital) Loans to customers

Borrowed money (the loans) Cash in hand

Retained profits (reserves) Money in the bank

The Balance Sheet for a Money Lender

Where has the money come from?

What are its uses?

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The Profit and Loss Account for a Money Lender

Profit and Loss concepts from Rural Finance No. 7

A B

PROFIT

Income/ Revenue Expenses/ Costs

Interest from loans Books and stationery

Interest from money kept in bank

Interest on borrowed money

Bad debts (loan loss)

A Total Income B Total Costs

Profit =( A-B)

Where has the money come from? SALES

How much has it cost for sales?

Lessons from the Money Lender example

• Financial service is a business like any other.

• Money is a product like maize, books, crafts.

• Financial statements are made for a money lender, a savings and loan group, a rural bank and a microfinance institution in a similar way to any enterprise

• The tools of financial analysis can be applied to these accounts

• We‟ll look at ratios specific to microfinance….

Retained profits to see how business is doing

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MUMFI exercise: balance sheet

A researcher interviews MUMFI’s manager on 31st March, 2010 and first collects the information she needs to construct a balance sheet.

• An international donor agency provided a capital grant of $2,000,000 to start MUMFI.• They borrowed another $1,500,000 from a local development bank at start up and put it into a one

year fixed term deposit account in a local commercial bank.• MUMFI head office has four Land Cruisers and each field office has two motorcycles. The value of all

these vehicles on 31st March is $300,000.• The computers and furniture in the offices are worth $200,000.• MUMFI organise their clients into groups and so far they have 500 self help groups with a total of

10,000 members. Group members are required to save and during this first year of operation the average total deposits were $500,000.

• During the year, MUMFI had an average amount of loans outstanding with clients (the loan portfolio) of $1,000,000.

• The total of cash and current account balances held with banks on 31st March is $500,000.

Fill out the balance sheet for MUMFI. If the assets are greater than the liabilities, then you must enter a figure “for retained profit” to make it balance. If liabilities are greater than the assets, then the balancing figure is negative and represents accumulated losses.

MUMFI exercise: balance sheet (Classroom

said)...

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The Balance Sheet for MUMFI on 31st March 2010

Equity & Liabilities/Sources Assets/Uses

Capital grant (equity) Money in deposit account

Loan Vehicles

Savings deposits Computers and furniture

Loan portfolio

Cash and current account

Total Total

MUMFI exercise: balance sheet

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The Balance Sheet for MUMFI on 31st March 2010

MUMFI exercise: profit and loss account

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PROFIT

A B

The researcher goes on to collect the information she needs to produce a profit and loss account for MUMFI.

MUMFI has established five field offices each with five field staff, a manager and two office staff. The total bill for running the field offices is $300,000 a year.The cost for headquarters staff and administration is $500,000 a year.The cost of running all the vehicles is $70,000 a year.They have decided to depreciate vehicles and equipment at an annual rate of 10%, making a total annual depreciation charge of $50,000.MUMFI pays 6% annual interest on savings accounts. They paid out approximately $30,000 to their savings clients in the last year.They also pay 10% annual interest on the $1,500,000 they have borrowed from the development bank.They have invested the borrowed money in a fixed term deposit account where it earns 20% annual interest.They charge an effective rate of interest of 30% on the loans they give and that generated an income of $300,000 during the last year.

Can you complete the profit and loss account for her? You will have to work out the 10% interest paid on the loan and the 20% interest earned on the fixed term deposit.

MUMFI exercise: profit and loss account

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Income/ Revenue Expenses/ Expenditure/Costs

Interest from fixed term deposit a/c

300,000 Interest on loan 150,000

Interest from loans to clients

300,000 Interest on savings 30,000

Field office salaries 300,000

Vehicle running costs 70,000

Head office costs 500,000

Depreciation 50,000

Total Income (A) 600,000 Total Expenses (B) 1,100,000

Gross Profit or (Loss) (A-B) -500,000

The Profit and Loss Account

PROFIT

A B

MUMFI exercise: calculate some ratios

The researcher needs some more information to calculate some ratios to help with improving MUMFI’s performance. Could you help her with the information she has so far?

1. What are the administrative expenses, which are $920,000, as a percentage of the average loan portfolio of $1,000,000? This ratio shows the cost of lending.

%

2. What is the operating income of $600,000 as a percentage of the operating expenses of $1,100,000?This shows the level of operational self-sufficiency.

%

3. What is the return on capital in MUMFI? Calculate the loss of $500,000 as a percentage of the total assets of $3,500,000.

%

MUMFI exercise: calculate some ratios

The researcher needs some more information to calculate some ratios to help with improving MUMFI’s performance. Could you help her with the information she has so far?

1. What are the administrative expenses, which are $920,000, as a percentage of the average loan portfolio of $1,000,000? This ratio shows the cost of lending.

92 %

2. What is the operating income of $600,000 as a percentage of the operating expenses of $1,100,000?This shows the level of operational self-sufficiency.

55%

3. What is the return on capital in MUMFI? Calculate the loss of $500,000 as a percentage of the total assets of $3,500,000.

-14%

BREAK: What insights have you gained?

• About „profit‟ for an organisation to become

“sustainable”?

• About your own finances and your record keeping

system? What about helping others keep records?

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Homeplay: Review your Microenterprise Study

with Q&A

1. Why study a Microenterprise in the MFIA?

2. What is a Microenterprise?– A small business with fewer than 5 employees (5+ is OK!)

– Registered as a sole trader, partnership or limited company (by guarantee or shares)

3. Who is involved in a Microenterprise?– Who is the owner? Who are the employees/team?

– Who are the customers and other stakeholders?

4. Where are they found? When do they operate?– Are they seasonal? Do they rely on repeat business?

– Do they work alone or collaborate with other businesses?

5. How do they sustain themselves? – What are their challenges?

– How do they know they‟re profitable (or not)?

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For your Presentation...

• The Name of the Microenteprise

• Why you chose to study this particular one

• Criteria for your evaluation1. Why are they in business, history

2. What they offer, solutions, their unique selling proposition (USP)

3. Who are the team members and their skills; Info about the market sector(s) in which they operate, their niche

4. When do they operate? Where are they found (online/offline/location, etc.); How they manage customer services; With whom and how do they connect with service providers, advocates, partners – e.g. how do they fit in the business ecosystem

5. How do they operate? What are their processes? How does their business work? What is their financial model?

For your Presentation...

6. Their financial reports1: Balance sheet

7. Their financial reports 2: Profit and loss statement

8. Key ratio 1: Owner’s equity

9. Key ratio 2: average amount of profit owner has reinvested in

business each year

10. Key ratio 3: % Rate of return = Profit ÷ Capital invested ×

100

BONUS: Recommendations you would/could make to the

Microenterprise…

Score your presentation based on criteria 1-10.

Template overview

How to do your Microenterprise Study

• Choose a buddy

• Go through the online lessons in Rural Finance: http://www.microfinancelessons.com/– Lesson 4: Financial Reality of Business Enterprise

– Lesson 5: Collecting and Analysing Financial Information from Microenterprises

– For extra credit ;-) : Lesson 6: Can they afford to borrow? Rates of return and the cost of money

• Interview a Microenterprise owner

• Interview top tips:– Introduce yourselves and stress that you‟ve come to learn from the business – not to give

advice or teach anything. Convince them that you‟re not the „tax [wo]men‟.

– Praise the business and its products/services.

• Collect the following information:– Brief description of the business and its owner

– Reason why they started it, its history, the number of jobs it is creating and the owners‟ opinion about its main strengths/problems

– Financial information as discussed in Lessons 4 & 5 in Rural Finance

– Reference the five questions we just used to explore Microenterprise

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Microfinance in Action CourseMicroenterprise Study TEMPLATE

<YOUR NAMES>

Introduction

• INTRODUCE YOURSELVES – A BIT OF

BACKGROUND – WHY YOU‟RE HERE ON THE

COURSE

Background on the Microenterprise

• The Name of the Microenteprise

• Why you chose to study this particular one

• Background information – Why are they in business, history

– What they offer, solutions, their unique selling proposition (USP)

– Who are the team members and their skills; Info about the market sector(s) in which they operate, their niche

– When do they operate? Where are they found (online/offline/location, etc.); How they manage customer services; With whom and how do they connect with service providers, advocates, partners – e.g. how do they fit in the business ecosystem

– How do they operate? What are their processes? How does their business work? What is their financial model? What are their financial reports/data?

Your Micrenterprise‟s numbers

Balance Sheet (Snapshot):

From RURAL FINANCE LESSON 4

Your Micrenterprise‟s numbers

Profit & Loss Sheet (Periodic):

From RURAL FINANCE LESSON 4

Your Analysis

Analysing the Data - Ratios:

• Equity

• Profit

• R.O.R.

From RURAL FINANCE LESSON 5

Your Learnings & Recommendations

Key lessons you learned:

Recommendations you would/could make to the

Microenterprise...

Introduction to our Partner MFI for projects

Purpose & Mission

41

How we operate

Who we work with

Where we work

50

Credit-led Microfinance:

Indonesia

India

Peru

Philippines

Tanzania

Uganda

Savings-Led

Microfinance:

Bolivia

Kenya

Sudan & South Sudan

Burundi

Myanmar

Our impact

Headline figures

100% of clients

received business

training 37,658 clients

Loans in

circulation

£1,461,208

Average loan £56

8,124 new clients in 2011

12 Countries 93%

repayment

rate

Savings portfolio £404,476

Current challenges

• Social impact measurement

• Mobile money

• Sustainable funding

Current challenges

Social impact measurement

Uganda Results• Recommendations

• 2 Months‟ internship sponsored by Vodafone to design programme (MWB graduate)

• Funding to partially implement social impact measurement in Uganda

Challenge

Mobile money Tanzania

Challenge Results

Current challenge: sustainable

funding

CARE-PLAN-BARCLAYS ‘Banking on Change’ to reach 400k people in 11 countries through VILLAGE SAVINGS & LOAN ASSOCIATIONS

This course‟s challenges

CARE-PLAN-BARCLAYS ‘Banking on Change’ to reach 400k people in 11 countries through VILLAGE SAVINGS & LOAN ASSOCIATIONS

READY TO TAKE ACTION?

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ACTION: Register for TWO sessions of the UK

MF Club

Lillian Mwikali

What happens when

Savings Groups grow

up?

Wed 27 Feb, 7 – 8.30 pm

Allen and Overy

One Bishops Square

EC1 6AD

Dr Robert Stone

The Great Debate:

Banks or MFIs?

Thur 14 March, 6.30 – 8.00 pm

Reed Smith

The Broadgate Tower

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Are you now able to...

• Describe the key aspects of a sustainable enterprise

• Gather the needed data to create a balance sheet and profit & loss statement – and interpret the information

• Prepare your presentation for Session 3 on your Microenterprise study

• Declare which Five Talents project you‟d like to work on

… not sure? Collaborate with others!

62

Also Remember...

• Complete your Talent profiling, if not already done

• Schedule your profile debrief with Gabriel today so

that it takes place in the next two weeks

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Contact Information

• Dr. Phyllis SantaMaria:

– Mobile: +44 7715 004 303

– Landline: +44 207 839 0844

– Email: phyllis@microfinancewithoutborders.com

• Gabriel Flores

– Mobile: +44 7834 528 966

– Email: gabriel@microfinancewithoutborders.com

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