CGAP Training Business Planning for MFIs Slides

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CGAP Training Business Planning for MFIs Slides

  1. 1. BUSINESS and DEVELOPMENT PLANNING and FINANCIAL MODELING for MFIs with MICROFIN 1
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. Business planning for microfinance institutions both strategic planning and operational planning To achieve profitability, financial sustainability and social viability BP2-O2 6
  7. 7. 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
  8. 8. Business Planning Framework 8BP2-O4 Mission and goals Market and clients Context analysis Institutional Assessment Financing sources Financial Management Strategy Strategy Products Marketing channel Financing Strategy Financial Management Planning as an ongoing management tool STRATEGIC PLANNING OPERATIONAL PLANNING
  9. 9. Mission statement a declaration which articulates: • PURPOSE • VALUES • CLIENTS • SERVICES PROVIDED BP3-O1 9
  10. 10. "Deconstructing the mission" Mission Provide 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 services Loans, savings, BDS speed, proximity reasonable prices low 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 life a stable future through a stable activity which generates income to meet these expenses Diversity of target clients
  11. 11. 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 Results Immediate 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?
  12. 12. 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
  13. 13. 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
  14. 14. Who does LEDA serve? LEDA serves low income self-employed in urban areas. BP3-O5 14
  15. 15. 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
  16. 16. Effective Segmentation for planning is… BP3-O7 Accessible Exploitable Measurable Based on growth potential / on creditworthy clients 16
  17. 17. 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 structure Language and literacy Reputation in the community Attitude toward product 17
  18. 18. Context Analysis How will foreseeable external challenges affect our capacity to achieve our goals? OPPORTUNITIES Can we take advantage of our environment's specificities? BP4-O1 THREATS Will our ability to pursue our goals be jeopardized by changes in our operating environment? 18
  19. 19. 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
  20. 20. Context Analysis BP4-O3 Social, Economic and Environmental Factors Technological developments Demographic changes Competition Collaborators Regulatory Factors and Government Policies 20
  21. 21. 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
  22. 22. 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
  23. 23. Choosing a Strategy BP4-O6 Product and Market Options Context Maximize opportunities, overcome threats Institutional Development Build on Strengths Improve Weaknesses 23
  24. 24. 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
  25. 25. 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
  26. 26. Business Planning and Financial Modeling Framework STRATEGIC PLANNING OPERATIONAL PLANNING FINANCIAL MODELING Mission and Goals Strategy 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 Sources Developing a Financing Strategy Analyze Financing by Source Financial Management Monitoring and Analyzing Financial Projections Financial statements and projected indicators, client follow-up Strategy Business Planning as an management On-going Tool Variance analysis BP5-O1 26
  27. 27. Microfin Overview BP5-O2 Financial modeling tool specifically designed for MFIs Relates directly to operation planning points Able to Generate 5-year projections Monthly Detail for years 1 and 2 Quarterly 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
  28. 28. Microfin Features BP5-O3 Products and Services Marketing Channels & Projections Institutional Resources & Capacity Financing Financial management 28
  29. 29. BP5-O4 29 Flowchart of Microfin.xls Model This 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" Activity Data 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 Sources Sources of financing are identified to meet requirements, their costs are identified, and liquidity requirements are set [Fin.Sources] Investment Income 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 Statements Financial 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
  30. 30. 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
  31. 31. 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
  32. 32. 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
  33. 33. 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
  34. 34. SEDA Ratios - Summary BP6-O3 34 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
  35. 35. 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 Design Products 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
  36. 36. Designing Savings Products What 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
  37. 37. Loan Product Design Matching Product Characteristics to Market Segment Type of economic activity Product Characteristic BP7-O3a 37
  38. 38. Microfin Product Definition Overview BP7-O4 Number and names of products Product definition summary Useful for comparing multiple products Loan product definition Several independent loan products Compulsory Savings Definition Voluntary Savings product definition Several independent savings products 38
  39. 39. Microfin Loan product definition Average loan amount Repayment conditions Compulsory savings Pricing structure Analysis BP7-O5 39
  40. 40. 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
  41. 41. Microfin Savings Product Definition BP7-O7 41 Voluntary Savings Balances are established on PROGRAM/BRANCH page Factors  Controlled by MFI  Interest rate paid  Reserve percentage  Indexing of savings
  42. 42. GROWTH STRATEGY 0 1 2 3 4 5 BP8-O1 42 Years
  43. 43. Microfin Program/Branch Page BP8-O2 43 Loan Projection Input Section Loan Projection Output Savings Projection Section Financial Products Financial Costs Loan Loss Provision and Write Off Loan Officer Analysis Number of branches Program/Branch Level Staffing Program Level Fixed Assets
  44. 44. Loan Projection Section BP8-O3 44 Initial Balances Number of Active loans Retention Rates Graphs ANALYSIS
  45. 45. Savings Projection Section BP8-O4 45 Graphs  Analysis $ Aggregates $ Average Savings per depositor $ Number of Depositors Voluntary Savings Compulsory Savings
  46. 46. Institutional Capacity BP9-O1 46 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
  47. 47. CROSSWORDS: COMPLETE THE GRID BP9-O2 47 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
  48. 48. A LOAN LOSS RESERVE BP9-O3a 48 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
  49. 49. A LOAN LOSS PROVISION BP9-O3b 49 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 Provision Portfolio (Reserve)
  50. 50. WRITE-OFFS BP9-O3c 50 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
  51. 51. Step 1 : PORTFOLIO AGING AND RESERVE CALCULATION BP9-O4a 51 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
  52. 52. Step 2 : Calculation of PROVISION BP9-O4b 52 DETERMINE PROVISIONS Target reserve - Current reserve (from balance sheet) 32,000 = Required provision for year …. Expense: On the:
  53. 53. Step 3 : WRITE-OFFS BP9-O4c 53 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
  54. 54. 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 ------------------------ = 52.000x100 / 1.112.500 = 4,6
  55. 55. Step 2 : Calculation of PROVISION BP9-O4Sol 55 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
  56. 56. Step 3 : WRITE-OFFS BP9-O4Sol 56 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
  57. 57. 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-O5 57
  58. 58. BP9-O6 58 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
  59. 59. Microfin Characteristics Staffing projections at the Program/Branch level Linkbetween the institutional capacity page and the Program/Branch page Job titles and staffing projections Salary 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 projections Job titles and staffing projections Link to inflation rate Link to other elements BP10-O1 59
  60. 60. Plan Income statement Operating expenses/Program/Branch Operating expenses/Admin/Head office Program/Branch level operating expenses Admin/Head office level operating expenses BP10-O2 60 Loan officer analysis Staff composition Salaries and benefits Other operating expenses Analysis of planned fixed assets Administrative staff Other administrative operating expenses Analysis of administrative fixed assets Analysis of other administrative assets
  61. 61. Fixed assets BP11-O1 61 Fixed Assets are monitored on the Balance Sheet Gross Fixed Assets - Accumulated Depreciation = Net Fixed Assets Monthly 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
  62. 62. Fixed assets – Exercise BP11-O2 62 1. We purchase a vehicle for 6,000 2. The life of this vehicle is 5 years 3. After one year, calculate the accumulated depreciation Before After Gross fixed assets Accumulated depreciation Net fixed assets 4. Calculate the accumulated depreciation for the 4th and 5th year Year 4 Year 5 Gross fixed assets Accumulated depreciation Net fixed assets
  63. 63. Fixed assets – Exercise BP11-O2 63 1. We purchase a vehicle for 6,000 2. The life of this vehicle is 5 years 3. After one year, calculate the accumulated depreciation Before After Gross fixed assets 6,000 6,000 Accumulated 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 5 Gross fixed assets 6,000 6,000 Accumulated depreciation (4,800) (6,000) Net fixed assets 1,200 0
  64. 64. Fixed Asset Planning and Management in Microfin Inst.Cap Page step 1 Names of categories Base 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-O3 64
  65. 65. 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
  66. 66. 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 Earnings On financial products On investments
  67. 67. 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
  68. 68. FINANCIAL LEVERAGE BP12-O4 68 Cash 100 000 Savings accounts 1 000 000 Portfolio 1 000 000 Equity 100 000 Total 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?
  69. 69. 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)
  70. 70. Microfin: Financial Sources Page BP12-O6 70 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
  71. 71. Microfin: Financial Flows Page BP12-O7 71 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
  72. 72. "SUMMARY REPORT" PAGE BP13-O1 72 Balance Sheet Income Statement Cash flow Projections Financing Sources Ratio Analysis
  73. 73. Other MICROFIN FEATURES BP15-O1 73 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
  74. 74. Getting Help! BP14-O2 74 www.microfin.com microfin@yahoogroups.com Online help file

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