ACCOUNT OFFICER’S BASIC 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 Objectives 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 BUSINESS Less: Total Business Expenses Equals: Net Business Income Add : HOUSEHOLD INCOME Equals: Total Net Business & Household Income Less : Total Household Expenses Equals : Net Business & Household Income Times : Adjusted Repayment Capacity Rate Equals : Adjusted Debt Capacity Times : Loan Size Multiplier Equals : MAXIMUM LOAN AMOUNT

9 Amount BUSINESS Daily Weekly Semi- monthly Monthly MONTHLY TOTALS Business Sales Business 1: Sari-sari Store 1, Business 2: Chorizo 2, Business 3: Boarding House 3, Total Business Sales 1, , , 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, , Business 2: Chorizo 2, , Business 3: Boarding House 3, Total Business Sales 1, , , , 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 ANALYSIS Select the most appropriate column for doing the Debt Capacity Analysis ItemDailyWeekly Semi- Monthly Monthly MONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME (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 _____ % 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.

ItemDailyWeekly (Debt Capacity Column) Semi- Monthly Monthly MONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME861 4,000(500)3,1405,232 DEBT CAPACITY ANALYSIS 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 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!

ItemDailyWeekly (Debt Capacity Column) Semi- Monthly Monthly MONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME861 4,000(500)3,1405,232 DEBT CAPACITY ANALYSIS 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 785 3,140 / 4 Amount Available for Debt Service 10,562 Adjusted Repayment 35 % 3,697 Maximum Loan Amount for 12 weeks/months 41,265 Term : 3 months Interest ; 2.5%/month DEBT CAPACITY ANALYSIS – INCORRECT!

ItemWeekly (Debt Capacity Column) NET BUSINESS & HOUSEHOLD INCOME 4,000 DEBT CAPACITY ANALYSIS 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 35 % 3,422 Maximum Loan Amount for 12_ weeks/months 38,199 ItemWeekly (Debt Capacity Column) NET BUSINESS & HOUSEHOLD INCOME 4,000 DEBT CAPACITY ANALYSIS 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 785 Amount Available for Debt Service 10,562 Adjusted Repayment 35 % 3,697 Maximum Loan Amount for 12 weeks/months 41,265 Let me explain further: Let me explain further:

DEBT CAPACITY ANALYSIS SIMPLE COLUMN-TO-COLUMN GUIDE IN MOVING THE NET INCOME/LOSS ItemDailyWeeklySemi- Monthly Monthly NET BUSINESS & HOUSEHOLD INCOME +/ - DEBT CAPACITY ANALYSIS 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 ______ % 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 ItemDaily (Selected Debt Capacity Column ) Weekly (Selected Debt Capacity Column Semi- Monthly Monthly MONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME8614,000(500)3,1404,732 REPAYMENT CAPACITY ANALYSIS 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 ______ % Maximum Loan Amount for _____ weeks ((ARC x No. of payments/(1+(Total Interest)))

ADJUSTED REPAYMENT CAPACITY Compute by multiplying the Amount Available for Debt Service by the 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) ItemDaily (Selected Debt Capacity Column ) Weekly (Selected Debt Capacity Column Semi- Monthly Monthly MONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME861 4,000 (500)3,1404,732 REPAYMENT CAPACITY ANALYSIS 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 35% ARCR 3,422 Maximum Loan Amount for _____ weeks ((ARC x No. of payments/(1+(Total Interest)))

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

Thank you!