PDF Basic Financial Management and Ratio Analysis for MFIs Toolkit

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Basic Financial Management and Ratio Analysis for MFIs Toolkit

March 2008

Mennonite Economic Development Associates

Ruth Dueck Mbeba

Microsave ? Market-led solutions for financial services

Acknowledgements

MEDA acknowledges the contribution and input of David Cracknell of MicroSave Africa in writing and development of the overall toolkit. Many thanks to the helpful input and support from MEDA staff in making this effort possible, especially to Trudy Rejeski. A learning toolkit is never "final" as new techniques, tools and resources become available and are shared with one another. Participant feedback and comments will assist to continually improve this toolkit and its resources.

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MFI Basic Financial Management and Ratio Analysis for MFIs

Table of Contents

page i

Introduction ..............................................................................................................1 1. Accounting Overview ....................................................................................2

Accounting Conventions or Guidelines .............................................................................. 3 Micro-Finance Accounting and Management Information Systems .................................. 6 The Chart of Accounts ........................................................................................................ 7 Policies and Procedures .................................................................................................... 10 Qualified, Trained and Motivated Staff ............................................................................ 10 External and Internal Audits ............................................................................................. 11 The Accounting Cycle ...................................................................................................... 11 Trial Balance..................................................................................................................... 12 Reconciliations.................................................................................................................. 12 Accounting Adjustments................................................................................................... 12 Draft Financial Statements................................................................................................ 13

2. The Financial Statements and Operational Reports................................14

The Financial Statements.................................................................................................. 14 Cash Flow Statements....................................................................................................... 18 Cash Flow Projections ...................................................................................................... 20 The Portfolio and Operational Reports ............................................................................. 20 Understanding the Relationships - Provisions for Loan Losses, Allowance for Loan Losses and Write-offs ....................................................................................................... 21 Accounting for Loan Write-Offs ...................................................................................... 25

3. Basic Financial Ratios .................................................................................26

Using Financial Indicators or Ratios................................................................................. 26 What are Ratios? ............................................................................................................... 26 What are the Key Areas to Measure? ............................................................................... 27 Profitability and Sustainability ......................................................................................... 27 Asset and Liability Management ...................................................................................... 29 Portfolio Quality ............................................................................................................... 32 Efficiency and Productivity .............................................................................................. 34

4. Basic Financial Ratio Analysis ...................................................................37

Where to Go From Here ................................................................................................... 39 Bibliography ..................................................................................................................... 40

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MFI Basic Financial Management and Ratio Analysis for MFIs

page ii

Figures:

Figure 1.1: Accounting Debits and Credits ............................................................................................ 6 Figure 1.2: Accounting System and Client Portfolio System (MIS) Microfinance ............................... 7 Figure 1.3: Sample Chart of Account Structure ..................................................................................... 8 Figure 1.4: Accounting Cycle .............................................................................................................. 11 Figure 2.1 Understanding Relationships between Financial Statements ............................................. 18 Figure 2.2 Portfolio Management Report Schedule ............................................................................. 21 Figure 2.3 Sample Aging Report ......................................................................................................... 22 Figure 2.4 Understanding the Relationships between Loan Losses and Write-Off Accounts ............. 23 Figure 2.5 Illustration of Accounting for the Allowance for Loan Losses and Provisions .................. 24 Figure 2.6 Illustration of Accounting for Loan Write-offs .................................................................. 25

List of Handouts:

Section 1: Section 2:

Accounting Overview 1.1 Session Plan

Financial Statements and Operational Reports 2.1 Sample Income and Expense Statement 2.2 Sample Balance Sheet 2.3 Sample Cash Flow Statements 2.4 Sample Audited MFI Statements - India 2.5 Sample Cash Flow Projections 2.6 Sample Portfolio Reports 2.7 Sample Non-Financial Data

Section 3:

Basic Financial Ratios

3.1 SEEP Microfinance Ratios 3.2 Comparing Performance Using BenchMarking 3.3 MicroBanking Bulletin Benchmarks for Asia 3.4 Calculating Effective Interest on Loans

Section 4:

Financial Ratio Analysis

4.1 CGAP Focus Note 22 ? MFI Rating Systems 4.2 CAMEL Rating Technical Note ? ACCION 4.3 GIRAFE Rating Methodology- Planet Rating 4.4 PEARLS Rating - WOCCU 4.5 Course Evaluation

List of Exercises

Section 1: Accounting Overview 1.1 Sample Transactions ? Balance Sheet

Section 2: Financial Statements and Operational Reports 2.1 Financial Statement Relationships 2.2. Accounting for Loan Provisions and Write-Offs

Section 3: Basic Financial Ratios 4.3 ACME-MDI Case Study Part I

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MFI Basic Financial Management and Ratio Analysis for MFIs

3.1 Team Activity ? A "Financial Bee" 3.2 Case Study ? Delinquency Management 3.3 Competition and Efficiency vs. Effectiveness

Section 4: Financial Ratio Analysis 4.1 ACME-MDI Case Study 4.1 ACME-MDI Case Study ? Ratios template 4.2 Ratios and Trends 4.2 Ratios and Trends ? Sample Answers 4.3 Sensitivity Analysis

page iii

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