account officer’s basic training preparing the client’s cash flow

ACCOUNT OFFICER’SBASIC TRAINING

Preparing the Client’s Cash Flow

• Cash flow analysis is a process of assessing the loan applicant’s income and expenses

• It determines the client’s capacity to pay

• It is an integral part of the CIBI report

3

ObjectivesObjectives

At the end of this session, Account Officers will be able to:

1. Use the business information in the CIBI Report as inputs for the preparation of the Cash Flow

2. Prepare the Cash Flow of the loan applicant on the basis of present income/expenses of both the business and the household.

3. Prepare the Debt Capacity Analysis, determine the repayment mode and compute for the maximum loan amount of a loan applicant.

4. Make a recommendation to the Credit Committee on the loan amount and loan terms for loan applicants.

• Cash flow analysis gives the bank ideas on:

HOW MUCH loan a prospective client can afford to pay (capacity to pay).

HOW LONG should the term of the loan be.

HOW FREQUENT the client would be able to pay.

The Account Officer prepares the cash flow, while the MFU Supervisor reviews and validates it before submission for final review and approval.

• Should be based on client’s PRESENT income.

• Should only include the client’s REGULAR income and expenditures.

• All entries should be recorded in the APPROPRIATE TIME COLUMNS (daily,weekly,semi-monthly, monthly).

INCOME FROM BUSINESSLess: Total Business ExpensesEquals: Net Business IncomeAdd : HOUSEHOLD INCOMEEquals: Total Net Business & Household IncomeLess : Total Household ExpensesEquals : Net Business & Household IncomeTimes : Adjusted Repayment Capacity RateEquals : Adjusted Debt CapacityTimes : Loan Size MultiplierEquals : MAXIMUM LOAN AMOUNT

Item Daily Weekly Monthly MONTHLY TOTALS

Income from Business Business 1: Business 2: Business 3:

Total Business Income Business Expenses Raw Materials/Purchase Business 1: Business 2: Business 3: Salaries and Wages Rent Utilities Transportation Expenses Fuel Business Taxes & Licenses Other Business Expenses

Total Business Expenses NET BUSINESS INCOME Other Household Income Salaries & Wages Pension Remittances from other family members Other Income Sources

Total, Other Household Income

TOTAL BUSINESS & HH INCOME Household Expenses Food House Rent Education and School Allowance Utilities Transportation Medical Expenses Insurance premium Other Loan Payments Other Expenses

Sub-Total Add: Miscellaneous Expenses

Total Household Expenses NET BUSINESS & HH INCOME DEBT CAPACITY ANALYSIS Equivalent of DAILY Net Income Equivalent of WEEKLY Net Income Equivalent of MONTHLY Net Income Amount available for debt service Adjusted Debt Capacity @ ____% ARCR Max. Loan Amount for ____ months/weeks

9

Amount

BUSINESS Daily Weekly Semi-

monthly Monthly MONTHLY TOTALS

Business Sales

Business 1: Sari-sari Store 1,000.00

Business 2: Chorizo 2,000.00

Business 3: Boarding House 3,000.00

Total Business Sales

1,000.00 2,000.00 - 3,000.00

• Daily income and expenses should be recorded in the DAILY column;

• Weekly income and expenses in the WEEKLY column; and • Semi-monthly income and expenses in the SEMI-

MONTHLY column• Monthly income and expenses in the MONTHLY column

10

Amount

BUSINESS Daily Weekly Semi-

monthly Monthly MONTHLY TOTALS

Business Sales

Business 1: Sari-sari Store 1,000.00 28,000.00

Business 2: Chorizo 2,000.00 8,000.00

Business 3: Boarding House 3,000.00 3,000.00

Total Business Sales

1,000.00 2,000.00 - 3,000.00 39,000.00

To convert entries into their monthly totals, multiply a daily entry by the relevant number of days (e.g. 28 days), weekly entries by four, and semi-monthly entries (if a column for semi-monthly entries is inserted in the worksheet), by two. Monthly entries are the same as their monthly totals.

• All entries should be converted into their monthly equivalents in the column for MONTHLY TOTALS

DEBT CAPACITY ANALYSISDEBT CAPACITY ANALYSISSelect the most appropriate column for doing

the Debt Capacity Analysis

Item Daily Weekly Semi-Monthly

Monthly MONTHLY TOTALS

NET BUSINESS & HOUSEHOLD INCOME 861 4000 (500) 3,140

DEBT CAPACITY ANALYSIS

Equivalent of DAILY Net Income

Equivalent of WEEKLY Net Income

Equivalent of SEMI-MONTHLY Net Income

Equivalent of MONTHLY Net Income

Amount Available for Debt Service

Adjusted Repayment Capacity @ _____ %

Maximum Loan Amount for 12 weeks/months((ARC x No. of payments/(1+(Total Interest)))

• Positive balances to the left of the selected Debt Capacity column are included in the analysis since these refer to cash flows that have already been received by the client

• Positive balances to the right of the selected Debt Capacity column are not to be included in the analysis.

• It could bloat the maximum loan amount.• For conservatism (considering that loans are character-based

and collateral free) long time-frame positive values should not be included.

• The values could serve as buffer fund should daily or weekly cash flows do not turn out as expected

• These values indicate sufficient cash flow to support expenditures in those periods.

Item Daily Weekly(Debt Capacity

Column)

Semi-Monthly


NET BUSINESS & HOUSEHOLD INCOME 861 4,000 (500) 3,140 5,232


Equivalent of DAILY Net Income 6,027

Equivalent of WEEKLY Net Income 4,000

Equivalent of SEMI-MONTHLY Net Income (250)

Equivalent of MONTHLY Net Income 0

Amount Available for Debt Service 9,777

Adjusted Repayment Capacity @ 35 % 3,422

Maximum Loan Amount for 12 weeks/months((ARC x No. of payments/(1+(Total Interest)))

38,199

Term : 3 months

Interest ; 2.5%/month

DEBT CAPACITY ANALYSIS – CORRECT!DEBT CAPACITY ANALYSIS – CORRECT!

Item Daily Weekly(Debt Capacity

Column)

Semi-Monthly







Equivalent of MONTHLY Net Income 785 3,140 / 4



Maximum Loan Amount for 12 weeks/months

41,265

Term : 3 months

Interest ; 2.5%/month

DEBT CAPACITY ANALYSIS – INCORRECT!DEBT CAPACITY ANALYSIS – INCORRECT!

Item Weekly

(Debt Capacity Column)

NET BUSINESS & HOUSEHOLD INCOME 4,000





(250)




Maximum Loan Amount for 12_ weeks/months

38,199

Item Weekly

(Debt Capacity Column)

NET BUSINESS & HOUSEHOLD INCOME 4,000





(250)




Maximum Loan Amount for 12 weeks/months 41,265

Let me explain further:Let me explain further:

DEBT CAPACITY ANALYSISDEBT CAPACITY ANALYSISSIMPLE COLUMN-TO-COLUMN GUIDE IN MOVING THE NET INCOME/LOSS

Item Daily Weekly Semi-Monthly

Monthly

NET BUSINESS & HOUSEHOLD INCOME +/ - +/ - +/ - +/ -


Equivalent of DAILY Net Income Bring down +/ - +/ - +/ -

Equivalent of WEEKLY Net Income - Bring down +/ - +/ -

Equivalent of SEMI-MONTHLY Net Income - - Bring down +/ -

Equivalent of MONTHLY Net Income - - - Bring down

Amount Available for Debt Service

Adjusted Repayment Capacity @ ______ %

Maximum Loan Amount for _____ weeks/months

Daily- Green Weekly- Red Semi-Monthly- Blue Monthly- Violet

AMOUNT AVAILABLE FOR DEBT SERVICE

Compute by adding up the equivalent Daily, Weekly, Semi-monthly and Monthly Net Incomes/Losses

Item Daily(Selected Debt

Capacity Column)

Weekly(Selected Debt

Capacity Column

Semi-Monthly



REPAYMENT CAPACITY ANALYSIS






Adjusted Repayment Capacity @ ______ %

Maximum Loan Amount for _____ weeks((ARC x No. of payments/(1+(Total Interest)))

ADJUSTED REPAYMENT CAPACITYADJUSTED REPAYMENT CAPACITY

Compute by multiplying the Amount Available for Debt Service Compute by multiplying the Amount Available for Debt Service by the by the Adjusted Repayment Capacity Rate (ARCR)Adjusted Repayment Capacity Rate (ARCR)

The client’s repayment capacity, represented by the Amount Available for Debt Service, should be adjusted for:

Unforeseen events or circumstances that would reduce the applicant’s income or increase expenditures (e.g. illness, other household emergencies); and

Errors in the assumptions or estimates used in preparing the applicant’s Cash Flow.

ADJUSTED REPAYMENT CAPACITY

Compute by multiplying the Amount Available for Debt Service by the Adjusted Repayment Capacity Rate (ARCR)

Item Daily(Selected Debt

Capacity Column)

Weekly(Selected Debt

Capacity Column

Semi-Monthly



REPAYMENT CAPACITY ANALYSIS






Adjusted Repayment Capacity @ 35% ARCR 3,422

Maximum Loan Amount for _____ weeks((ARC x No. of payments/(1+(Total Interest)))

Policy Formula

Interest amortized(Standard)

(Adjusted Debt Capacity) * (No. of Installment Payments

1 + (Interest rate per month * No. of months)

Interest discounted (deducted up-front)

(Adjusted Debt Capacity ) * (No. of Installment Payments)

Interest discounted / contractual savings 10% of loan installment

(Adjusted Debt Capacity) * (No. of Installment Payments)

1 + Contractual Deposit Rate

Interest amortized / contractual savings 10% of loan principal

(Adjusted Debt Capacity) * (No. of Installment Payments)

1 + [(Interest rate * No. of Months) + Contractual Deposit Rate]

Interest amortized / contractual savings 10% of loan principal & interest payment

(Adjusted Debt Capacity) * (No. of Installment Payments) ((1 + (Interest rate * No. of Months)) * (1 + Contractual

Deposit Rate)]

22

Lending to Microenterprises without analyzing the cash flow …

… is like playing darts blind-folded. Determining how much loan the bank should give to a client is left to CHANCECHANCE.

Thank you!

account officer’s basic training preparing the client’s cash flow

Documents

business information

total business sales

net business incomeadd

total business expensesequals

semimonthly income

maximum loan

semimonthly entries

daily income