1. Preparing the Client’s Cash flow
The first 3 sessions which comprise the first half of the module on client selection dealt with assessing the character of the applicant and the possible level of risk faced by the bank if the latter decides to consider lending to the applicant.
The second half of this module aims to establish the loan amount that an applicant can possibly be able to pay based on his or her cash flows. Central to the discussion of the second half of the module is the Cash Flow Analysis tool.
When the results of the character assessment and cash flow analysis are combined, the account officer is in a better position to recommend the loan amount that should be given to a loan applicant.
In this session we will discuss how the Cash Flow is prepared, what information is included in the cash flow and where specific data is encoded.

2. Objectives At the end of this session, participants will be able to:
Prepare the cash flow of a loan applicant by making use of the information in the CIBI Report and Cash Flow worksheets
Analyze the repayment/debt capacity of a loan applicant on the basis of the present income/ expenses of both the business and the household.
Make a recommendation to the bank Credit Committee on the final loan amount and loan term to be extended to an applicant after considering both the results of the character-risk assessment and cash flow analysis done.

3. What is Cash Flow Analysis?
Cash Flow Analysis is the process of assessing the loan applicant’s income and expenses in order to determine his/her capacity to pay. It is an integral part of the Credit Investigation and Background Investigation (CIBI) report.
The Cash Flow analysis is an integral component of the CIBI Report. Where the first half of the CIBI Report is focused on determining the client’s character, the Cash Flow measures, in more concrete terms, the client’s capacity to pay. No CIBI Report is complete without the Cash Flow Analysis. So, what is the Borrower Cash Flow Analysis?
Show slide and read.

4. Importance of Cash Flow Analysis
Helps the bank determine -
How much should be given as loan
to a client, based on capacity to pay.
How long the term of the loan
should be.
How frequent a client should pay
(repayment frequency)
Without a cash flow analysis, banks would be giving out loans that could either be too small for their client’s requirements (in which case, disgruntled clients would go to other lenders), or too big (in which case, clients will have a hard time repaying their loans).

5. The Account Officer prepares the cash flow
Who Is Responsible for Preparing and Analyzing the Cash Flow of the Client?
The Account Officer prepares the cash
flow
The MFU Supervisor reviews it before it
is submitted for deliberation and approval
of the MF credit committee.
Although the primary responsibility for the preparation of the Cash Flow lies with the AO, the Supervisor must check the veracity/accuracy of the AO’s work to ensure that the bank’s interest is protected.

6. MABS Cash Flow Template
NOTE TO FACILITATOR:
Distribute copies of the Cash Flow Template and the Cash Flow Worksheets so that the participants can see the specific section in these two forms as you discuss them.
Distribute copies of the handout for this section of the presentation only after you finish the presentation to ensure the full attention of the Participants
This slide shows the MABS Cash Flow template that is used for doing the cash flow analysis.
The template have columns labeled DAILY, WEEKLY, MONTHLY AND MONTHLY TOTALS to enable the bank to examine the applicant’s daily, weekly and monthly cash flows. If needed, additional columns can be inserted (e.g. bi-weekly or semi-monthly).

7. Distinct Features of the MABS Cash Flow Template
Integrates cash flows of the business and the household.
TOTAL BUSINESS INCOME
Less: Total Business Expenses
Equals: NET BUSINESS INCOME
Add: OTHER HOUSEHOLD INCOME
Equals: TOTAL NET BUSINESS & OTHER HOUSEHOLD
INCOME
Less: Total Household Expenses
Equals: NET BUSINESS & OTHER HOUSEHOLD INCOME
Times: Adjusted Repayment Capacity Rate
Equals: Adjusted Debt Capacity
Times: Loan Size Multiplier
Equals: MAXIMUM LOAN AMOUNT
Here are some distinct features of the MABS Cash Flow template –
It integrates cash flows of the business and the household
The following steps are taken to determine the cash flow (show slide)
We will go into the detail of how each of these steps are to be accomplished in the latter part of this session.

8. Basic Rules in Preparing the Cash Flow
The cash flow should be based on the applicant’s present income.
The cash flow should only include the applicant’s regular income and expenditures.
All entries should be recorded in the appropriate time columns (daily, weekly, semi-monthly, monthly)
Here are some basic rules that Account Officers must be observed when preparing the Cash Flow –
The cash flow should be based on the applicant’s PRESENT income – which means, future income flows must not be included in the cash flow preparation. If the applicant is expected to harvest coconuts in three months time, the expected proceeds from that sale cannot be included in the cash flow.
The cash flow should only include the applicant’s REGULAR income and expenditures – thus, if the applicant has a son/daughter working abroad who sends them money whenever they have extra funds, this inflow cannot be included in the cash flow since the regularity of remittance cannot be ascertained. However, if the applicant receives a regular remittance (e.g. remittance from merchant marines which are remitted by the shipping companies on a monthly basis), this inflow can be included in the cash flow.
All entries should be recorded in their appropriate columns – Account Officers should be careful when encoding figures in the cash flow; putting income or expense data in the wrong time-frame column could result in either an over-stated or under-stated cash flow.

9. Daily income and expenses should be recorded in the DAILY column; weekly income and expenses in the WEEKLY column; and monthly income and expenses in the MONTHLY column
This slide shows you an example of how the income and expenses should be recorded.

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

11. Procedures for Filling-Up the Cash Flow Forms
Let us now go into the specific steps involved in filling-up the Cash Flow Template.
If you are presenting this material with the use of an LCD projector, On the 2nd click of the mouse the word “Click here” will appear on the lower right-hand corner of the slide. Put your cursor over the word and click to open the link to the section facsimiles of the cash flow worksheets and template.
If you are presenting this material with the use of an Overhead Projector (OHP), reproduce the section facsimiles on acetate and show each acetate as you explain how that section is to be accomplished.

12. At this point distribute copies of the Edna’s Sari-sari and Carinderia Case Problem
Instruct the participants that this is the case problem that will be used for the walk-through session on how to prepare the cash flow
Allow the participants to read the case problem for 10 minutes
When the participants are ready, proceed with the walk-through session

13. How to Use the Cash Flow Worksheets
How are the worksheets used? How important are data in the worksheets in relation to the preparation of the Cash Flow?

14. The Cash Flow Worksheets
Worksheet 1.a : Sales
Worksheet 1.b : Cost computation for Manufacturing/ Processing
Worksheet 1.c : Cost computation for Retail Business
The worksheets allow the Account Officers to put in sales and costs data of the client’s businesses, as well as that of the household. Thus, these worksheets are used as supporting schedules of the Cash Flow – these are:
Worksheet for Sales & Household Income/Expenses;
Worksheet for Manufacturing (or processing businesses); and,
Worksheet for Retail business (buy & sell).
The procedure for filling out these worksheets, and their input-relation to the Cash Flow will be discussed individually.

15. Worksheet 1.a: Sales
Data on business sales (broken down by frequency of sale)
SALES Worksheet
Days
Sari-Sari
Carinderia
Business 3
Monday
750
4,475
Tuesday
500
Wednesday
Thursday
300
Friday
Saturday
Sunday
TOTAL
3,850
31,325
Average1/
550
1/ : Sum of Daily Sales / No. of Operating days
A sample of how Worksheet 1.a is used is presented in this slide –
For businesses that have daily or weekly cash flows, this worksheet provides an easy way of recording sales that may have different flows depending on the day of the week.
It is the average sale of each business that is recorded in the Cash Flow form under their specific time-frames of occurrence (daily or weekly). When the client’s cash flow has a semi-monthly or monthly frequencies, the Account Officer may record this information directly on the Cash Flow. This worksheet is used mainly when there are business cash flows that occur daily or weekly, since establishing the average is much harder – thus, the need for the worksheet.

16. Computation for Carinderia
AO Notes:
Computation for Carinderia
Particulars
Average Spending
No. of Persons
Sales
Breakfast 20 25
500
Lunch 45 40
1,800
Dinner 35 30
1,050
Snacks 15
375
Take-out
750
TOTAL
4,475
Purchases for Sari-sari Store
Weekly
1,750
Semi-monthly
3,000
There is a section in the cash flow form which is refereed to as Account Officer’s Notes or AO Notes. This portion serves as the scratch area of the AOs in the computation of the items in worksheet 1. As shown in this slide, the AO used the portion to note down details about the carinderia sales for breakfast, lunch, dinner, snacks and even for take-outs. The note also contains how many persons patronized the carinderia at certain times of the day and what are their average spending. The note as observed is very useful to derive the structure of the gross sales or income for the carinderia. For the supervisor and the manager, they get a vivid picture of the carinderia operation with the help of this portion of the worksheet.
In the same AO notes portion, the purchases for the sari-sari store were also recorded.

17. Worksheet 1.c: Cost Computation for Retail Business
Records data of purchase cost and selling price of the business’ top 5 fastest selling items
Average price mark-ups are established
Average price mark-ups may be compared to the industry to establish reliability of the information
Price mark-ups may be used to determine cost of sales
Worksheet 1.c is used for determining the cost of sales of retail businesses.
With retail businesses (sari-sari stores, groceries) purchases of goods for re-sale often involve a large number of items. Coming up with the Cost of Sales considering the volume of items involved may be somewhat tedious. Thus, to facilitate the process, by interviewing the client and observing the condition of the business, the Account Officer must determine the top 5 fastest selling item of the business and record the unit cost and selling price of each of these items.
To be able to establish the Total Cost of Sales to be recorded in the Cash Flow, the Account Officer must compute the Average Price Mark-up of the business and compare that figure with the industry average. The industry average price mark-up is used for computing Total Cost of Sales if the computed average price mark-up of the business is higher than the industry. Otherwise, the computed Average Price Mark-up of the business is used in computing for the Total Cost of Sales which will be recorded in the Cash Flow.

18. COST COMPUTATION FOR RETAIL BUSINESS:
Type of Business: Sari-sari Store
Product
Purchase
Quantity
Unit
Selling
Price
Cost
Mark-Up
(A)
(B)
A / B = C
(D)
(D/C)-1 x 100
Pop Cola
408.00
3 cases
5.67
7.00
Karne (baboy)
650.00
5 kgs.
130.00
150.00
LPG
640.00
2 tanks
320.00
345.00
Chicheria
162.50
50 packs
3.25
3.40
TOTAL
1,860.50
458.92
505.40
Ave. Price Mark-up ((Sum D/Sum C) - 1x100)
10.13%
This is not part of Edna’s Case Problem. This is shown only for lecture purposes.
Here we see a sample of how worksheet 1.c is prepared for a retail business.

19. Cost of Purchases : Mini-grocery
Average Daily Sales (A)
17,142.86
Average Price Mark-up (B)
10.13%
Cost of Sales [A / (1 + B)]
15,566.17
A = get data from SALES Worksheet
B = get data from Retail Worksheet
AOs Notes:
Data on Purchases for the Mini-grocery seems grossly understated. For conservatism,
to establish cost of purchases the computed mark-up of 10.13% was applied to the lowest
reported daily sale of P13,000 to derive the adjusted cost of purchase -
13,000 / =
11,804.23
 This is not part of Edna’s Case Problem. This is only for lecture purposes.
Shown in this slide is an example of how the average price mark-up is used to be able to compute for the Cost of Sales.

20. Worksheet 1.b : Cost Computation for Manufacturing/ Processing
Cost of raw materials used in manufacturing or processing
In case of multiple product lines, the cost of each product must be presented separately.
Total cost of raw materials are recorded in the Cash Flow under their designated time-frame columns
Worksheets 1.b and 1.c show detailed breakdown of expenses in the client’s business.
Worksheet 1.b is used to record costs of raw materials for businesses that involve manufacturing or processing (food processing (such as tocino-making) and dressmaking) fall under this category. When one has to further refine/process raw materials to be able to sell them as a finished product, this is what we call manufacturing, or processing. The information presented in this worksheet involve the following - (read bullets)

21. COST COMPUTATION FOR MANUFACTURING & PROCESSING
Raw Materials
Cost/unit
Quantity
Total Cost
DAILY:
Pork
120/kg 8
960
Beef
150/kg 5
750
Chicken
90/kg
720
Fish
75/kg 3
225
Assorted Vegetables
25/kg 2 50
Other Ingredients
150
Total
2,855
WEEKLY
Softdrinks 
168/case 10
1,680
Seasonings 
500
2,180
Others
Labor/Wage 
250/wk
NOTE : Present cost of raw materials by time frame (daily/weekly etc.)
Here is an example of a worksheet for manufacturing. To make it easier for the Account Officer to establish the appropriate time frame column for raw material purchases, it is recommended that these expenses be segregated in the worksheet (as shown in the example on the slide). This will ensure that business expense data related to cost of sales are correctly presented in the cash flow.

22. COST COMPUTATION FOR MANUFACTURING & PROCESSING:
Raw Materials
Cost/unit
Quantity
Total Cost
SEMI-MONTHLY:
Total
MONTHLY
Rice
1,100/cavan 3
3,300
Plastic Bags
200
3,500
Others
Electricity
500
Water
100
LPG
300 2
600
Gasoline (jeepney)
NOTE : Present cost of raw materials by time frame (daily/weekly etc.)

23. Worksheet 2 : Household Income and Expenses
Data on household income (broken down as to source and frequency)
Data on household expenses (broken down by time-frame, frequency and number)
Worksheet 2 (or the worksheet for Household Income and Expenses) is the medium for recording the following information:
(show and read bullets)

24. Income Source Income Amount Frequency TOTAL
HOUSEHOLD INCOME
Income Source
Income Amount
Frequency
TOTAL
Salary
Remittance
Pension
NOTE : Multiply Income amount by the indicated frequency
When the household has multiple sources of non-business income, it is easier to present all of these income sources in the form of a schedule (the form shown in the slide). The income sources may be segregated by frequency (daily, weekly, semi-monthly, monthly), thus, making it easier for the Account Officer to establish in which time-frame column of the Cash Flow each income source should be recorded.

25. HOUSEHOLD EXPENSE Expense No. of Units/ Persons Unit Expense Frequency
TOTAL
School Allowance 1 20
Daily (22 days)
440
Tuition Fee
500
Monthly
Telephone
200
Water 50
Electricity
300 
 Monthly
 300
NOTE : Use this form for expense items involving more than one (1) unit/person and varied frequencies
Another area where mistakes in the cash flow are often made is the section on Household Expense.
There are times when a particular expense involves more than one unit (or person) and this information is not taken into consideration when encoding the data in the Cash Flow. Let us take a look at the example in the slide –
Take the case of School Allowance – the data indicates that 4 children are given an allowance of P50/day for 20 days, or a total daily cost of P200. There are times when the information on the number of children is inadvertently omitted and the expense is merely recorded as a daily expense of P50, thus, grossly understating the cash flow.
There are also instances when expenses under the same category have different occurrences during the month – unless a schedule (such as the one presented in this slide) is presented there is a big possibility that some expenses may be omitted in the Cash Flow. Let us again take a look at our example in the slide –
School Allowance and Tuition Fee may both be categorized under School Expenses. Unless a schedule showing details of all the household expenses is prepared, some expenses under the same category may inadvertently be left out. In this example, you would have the following information encoded under the heading “School Expenses”
Daily Weekly Semi-monthly Monthly Monthly Total
School Expense , ,000

26. Filling up the Main Cash Flow Form
Having completed the discussion on how the worksheets are used, let us now go into the steps involved in filling up the Cash Flow form.

27. STEP 1 : From the cash flow worksheets , transfer the
business and household income and expense data in
their respective cells
Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
Income from Business
Business 1 : Sari-sari Store
550
Business 2 : Carinderia
4,475
Total Business Income
Business Expenses
Raw Materials Purchase
1,750
3,000
Business 2 : Carinderia
2,855
2,180
3,500
Labor
500
Utilities (telephone, water, electric)
600
Gasoline (Jeepney) & LPG
300
Total Business Expense
NET BUSINESS INCOME
Read instruction contained in the slide. Emphasize that this is where the worksheets will become very handy.

28. Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
Other Household Income
Salaries & Wages
Pension
Remittances
Total Other Household Income
Total Business & Household Income
Household Expenses
Food
Education & School Allowance 20
500
Utilities (Light & Water)
550
Medical Expenses
Other Expenses (Grocery & LPG)
Sub-Total
Miscellaneous (10%)
Total Household Expenses
NET BUSINESS & HOUSEHOLD INCOME
Do the same step for the items found in the household income and expense worksheet. Transfer them to where they rightfully belong in the cash flow main form.

29. STEP 2 : Compute for the MONTHLY TOTALS
Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
Computing the Monthly Totals : (Daily x no. of operating days) + (Weekly x 4 weeks) + (Semi-monthly x 2 ) + (Monthly x 1)
Income from Business
Business 1 : Sari-sari Store
550
15,400
Business 2 : Carinderia
4,475
125,300
Total Business Income
Business Expenses
Raw Materials Purchase
Business 1 : Sari-Sari Store
1,750
3,000
13,000
2,855
2,180
3,500
92,160
Labor
500
2,000
Utilities (water, electric, LPG)
600
Gasoline (Jeepney) & LPG
2,600
Total Business Expense
NET BUSINESS INCOME
After all income and expense data have been encoded in the Cash Flow form, compute for the Monthly Totals.
The formula for computing the monthly totals is presented in the green highlighted line; specific samples of individual computations are also highlighted in green.

30. Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
Other Household Income
Salaries & Wages
Pension
Remittances
Total Other Household Income
Total Business & Household Income
Household Expenses
Food
Education & School Allowance 20
500
940
Utilities (Telephone, Water & Electricity)
550
Medical Expenses
Other Expenses (Grocery & LPG)
Sub-Total
Miscellaneous (10%)
Total Household Expenses
NET BUSINESS & HOUSEHOLD INCOME

31.   STEP 3 : Compute the Totals and add the 10% provision
for Miscellaneous Household Expense.
Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
Income from Business
Business 1 : Sari-Sari Store
550
15,400
Business 2 : Carinderia
4,475
125,300
Total Business Income
5,025
140,700
Add figures vertically to get the SUM. Do not add the line TOTALS horizontally to get the SUM TOTAL under the MONTHLY TOTALS COLUMN – each column involves a different time frame, thus, the numbers will never add up.
Business Expenses
Raw Materials Purchase
1,750
3,000
13,000
2,855
2,180
3,500
92,160
Labor
500
2,000
Utilities (Telephone, water, electricity)
600
Gasoline (Jeepney) & LPG
2,600
Total Business Expense
4,930
4,700
110,360
NET BUSINESS INCOME
2,170
(4,930)
(3,000)
(4,700)
30,340  
After all income and expense information have been encoded, compute for the Totals and add the 10% provision for Miscellaneous Household Expense
(EMPHASIZE) Add figures vertically to get the SUM or Total. Do not add the line Totals horizontally to get the SUM TOTAL under the Monthly Totals Column – each column involve different time frames, thus, the numbers will never add up (balance). Why?
The Total under the Daily column represent only 1 day, while the Weekly column represent 7 days, the Semi-monthly column represent 15 days and the Monthly column represent 28/30 days. If the line Total of each of these columns are added, their SUM will never be equal to the SUM of the Monthly Totals Column as computed horizontally because of the different time frames.

32. Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
Other Household Income
Salaries & Wages
Pension
Remittances
Total Other Household Income
Total Business & Household Income
Household Expenses
Food
Education & School Allowance 20
500
940
Utilities (Light & Water)
550
Medical Expenses
Other Expenses (Grocery & LPG)
Sub-Total
1,050
1,490
Miscellaneous (10%) 2
105
149
Total Household Expenses 22
1,155
1,639
NET BUSINESS & HOUSEHOLD INCOME
A 10% provision for Miscellaneous is added to Household Expenses to cover for possible understatements in expense information provided by the applicant, or for errors in computation by the Account Officer.

33. STEP 4 : Compute the NET BUSINESS INCOME by
deducting Total Business Expense from
Total Business Income
Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
Income from Business
Business 1 : Sari-sari Store
550
15,400
Business 2 : Carinderia
4,475
125,300
Total Business Income
5,025
140,700
Business Expenses
Raw Materials Purchase
1,750
3,000
13,000
2,855
2,180
3,500
92,160
Labor
500
2,000
Utilities (water, electric)
600
Fuel (Jeepney) & LPG
300
1800
Total Business Expense
4,730
4,700
109,560
NET BUSINESS INCOME
2,170
(4,730)
(3,000)
(4,700)
31,140
Having completed the computation of the Totals of each income/expense classification, we now compute for the NET BUSINESS INCOME. This is done by deducting Total Business Expense from Total Business income

34. STEP 5 : Compute the TOTAL BUSINESS & HOUSEHOLD
INCOME by adding Net Business Income and
Other Household Income
Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
NET BUSINESS INCOME
2,170
(4,730)
(3,000)
(4,700)
31,140
Other Household Income
Salaries & Wages
Pension
Remittances
Total Other Household Income
Total Business & Household Income
Compute the TOTAL BUSINESS & OTHER HOUSEHOLD INCOME by adding Net Business Income and Other Household Income.

35. STEP 6 : Compute the NET BUSINESS & HOUSEHOLD
INCOME by deducting Total Household Expenses
from Total Business & Household Income
Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
Other Household Income
Salaries & Wages
Pension
Remittances
Total Other Household Income
Total Business & Household Income
2,170
(4,730)
(3,000)
(4,700)
31,140
Household Expenses
Food
Education & School Allowance 20
500
940
Utilities (Light & Water)
550
Medical Expenses
Other Expenses (Grocery & LPG)
Sub-Total
1,050
1,490
Miscellaneous (10%) 2
105
149
Total Household Expenses 22
1,155
1,639
NET BUSINESS & HOUSEHOLD INCOME
2,148
(5,855)
29,501
Compute the NET BUSINESS & HOUSEHOLD INCOME by deducting Total Household Expenses from Total Business and Other Household Income.

36. Procedure for Filling Up the Debt Capacity Analysis Portion of the Cash Flow Template
We have just completed filling up the Cash Flow form. Let us now go into the procedure for accomplishing the Debt Capacity Analysis portion of the Cash Flow Template.
A clear understanding on the procedure for filling up the Debt Capacity Analysis portion of the Cash Flow is crucial. A mistake in this portion of the Cash Flow preparation could mean a client getting a loan much lower than his/her capacity to pay (resulting in client dissatisfaction and turning to other lenders), or a worse scenario, with the bank granting a loan much too big for the client’s capacity to pay (a delinquency problem is imminent in this situation).
NOTE TO FACILITATOR:
Distribute copies of the handout for this section of the presentation only after you finish the presentation to ensure the full attention of the Participants
If you are presenting this material with the use of an LCD projector, On the 2nd click of the mouse the word “Click here” will appear on the lower right-hand corner of the slide. Put your cursor over the word and click to open the link to the section facsimiles of the cash flow worksheets and template.
If you are presenting this material with the use of an Overhead Projector (OHP), reproduce the section facsimiles on acetate and show each acetate as you explain how that section is to be accomplished.

37. STEP 1 : Select the most appropriate column for doing the Debt Capacity Analysis
Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
NET BUSINESS & HOUSEHOLD INCOME
2,148
(4,730)
(3,000)
(5,855)
29,501
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 Debt 25 %
Maximum Loan Amount for _____ weeks/months
How does one select which column to use for the debt capacity analysis?
Remember that when you interviewed the client during the loan application stage, you asked the client the following questions:
What is the maximum installment you can easily pay in a week?, and
How much can you afford to pay every week?
The client’s response to these two questions are shown in Section V (Loan Information) of the Loan Application Form.
Use the time-frame column which the client indicated in the LAF as his/her preferred mode of repayment frequency. This column will be the basis for the Account Officer’s computation of the Debt Capacity Analysis.

38. STEP 2 : Transfer the Net Income values of the various
columns into the selected Debt Capacity Column
and convert their values
Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
NET BUSINESS & HOUSEHOLD INCOME
2,148
(4,730)
(3,000)
(5,855)
29,501
DEBT CAPACITY ANALYSIS
Transferring Net Income Values
If the DAILY column is selected, transfer the converted net income values of Weekly, Semi-monthly and Monthly columns
Converting Net Income values
To convert WEEKLY Net Income values to its daily equivalent, divide the amount by 7 (or the number of effective operating days
To convert SEMI-MONTHLY Net Income values to its daily equivalent, divide the amount by 15days
To convert MONTHLY Net Income values to its daily equivalent, divide the amount by 28 (or the number of effective operating days)
The 2nd step in the analysis is to transfer the Net Income values of all the other columns into the selected Debt Capacity Column (DCC) and convert their values accordingly.
How do you convert the income values?
Converting the Daily Column –
Daily to Weekly : multiply the Net Daily Business & Household Income by 7, or the appropriate number of operating days of the business
Daily to Semi-monthly : multiply the Net Daily Business & Household Income by 15, or the appropriate number of operating days of the business
Daily to Monthly : multiply the Net Daily Business & Household Income by 28, or the appropriate number of operating days of the business
If you are converting a longer time frame (i.e. monthly, semi-monthly, weekly) to a shorter time frame DCC, you simply reverse the process – instead of multiplying the Net Business & Household Income you divide this figure by the appropriate number of days of the selected DCC.

39. Sample : If Weekly Column is selected
Item
Daily
Weekly
(Selected Debt Capacity Column)
Semi-Monthly
Monthly
MONTHLY TOTALS
NET BUSINESS & HOUSEHOLD INCOME
2,148
(4,730)
(3,000)
(5,855)
29,501
DEBT CAPACITY ANALYSIS
Equivalent of DAILY Net Income
10,740
=2,148x5 days
Equivalent of WEEKLY Net Income
=4,730x1
Equivalent of SEMI-MONTHLY Net Income
(1,500)
=3,000/2 weeks
Equivalent of MONTHLY Net Income
(1,463.75)
=5,855/4 days
Amount Available for Debt Service
Adjusted Debt ______ %
Maximum Loan Amount for _____ weeks/months
This slide shows an example of how Net Business & Household Incomes are converted to either the Daily or Weekly columns.

40. Specific guidelines for converting Net Income Values –
Very Important!
Specific guidelines for converting Net Income Values –
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
Why? Columns to the right often refer to longer time frames – future cash flows – and including these figures could overstate the figures of the Debt Capacity Column
Here are some important guidelines that Account Officers must keep in mind when converting Net Income values.
What do we mean when we say that “including future cash flows could overstate the figures of the DCC?” If one were to look at the Cash Flow as a sort of calendar, the daily column represents the present, the weekly columns refer to cash flows that occur at the end of the week (or 7 days from today), the semi-monthly column refer to cash flows that occur in two weeks time (or 15 days from today), and the monthly column represent cash flows that occur at the end of the month (or days from today).
Including net cash flows from the longer time frames into the selected Debt Capacity Column (DCC) of a shorter time-frame would mean that the cash flow expected in that future time is already assumed to be in the hands of the client at this current time.
How does this affect the cash flow? The Debt Capacity Analysis establishes how much the client can afford to pay considering his/her cash flow in that particular period (the selected column/time-frame for the DCC); how much the client can afford to pay directly impacts the computation of the maximum loan amount we can give the client. By including a future cash flow in the analysis, we are assuming that the said funds are available and with the client in the current time and may be used to pay the loan installment. This, however, is not true! Since the cash flow from that future time-frame still has to occur, at the present time the client does not have access to those funds (a clear example of this would be salaries that are paid at the end of the month. If we include the month-end salary in the computation of say the weekly column, this would increase the amount of the loan amortization the client has to pay – in effect, we will be asking the client to pay for a loan amortization with funds that are not yet in the hands of the client– this situation would definitely result in a default of the loan payment due to inadequate funds at the time the amortization is due.
To give us a clearer picture of the implications of including future cash flows in the analysis of the selected Debt Capacity columns, let us take a look at the following illustrations –

41. Let me explain further -
Item
Daily
Weekly
(Debt Capacity Column)
Semi-Monthly
Monthly
MONTHLY TOTALS
NET BUSINESS & HOUSEHOLD INCOME
2,148
(4,730)
(3,000)
5,855
29,501
DEBT CAPACITY ANALYSIS
Equivalent of DAILY Net Income
10,740
Equivalent of WEEKLY Net Income
Equivalent of SEMI-MONTHLY Net Income
(1,500)
Equivalent of MONTHLY Net Income
Amount Available for Debt Service
4,510
Adjusted Debt 25 %
Maximum Loan Amount for _____ weeks/months
Let us assume that the Debt Capacity column selected is weekly and that the values to the right are positive. What is going to happen with the debt capacity analysis of Edna? Following the guideline that positive net cash values to the right (future timeframes) are not to be included, the amount available for debt service would be P4,510.

42.  Let me explain further - Item Daily Weekly Monthly Semi-Monthly
(Debt Capacity Column)
Semi-Monthly
Monthly
MONTHLY TOTALS
NET BUSINESS & HOUSEHOLD INCOME
2,148
(4,730)
(3,000)
5,855
28,701
DEBT CAPACITY ANALYSIS
Equivalent of DAILY Net Income
10,740
Equivalent of WEEKLY Net Income
Equivalent of SEMI-MONTHLY Net Income
(1,500)
Equivalent of MONTHLY Net Income
1,463.75
Amount Available for Debt Service
5,973.75
Adjusted Debt 25 %
Maximum Loan Amount for _____ weeks/months 
Let us assume that the Debt Capacity column selected is weekly and that the monthly value to the right is positive. What is going to happen with the debt capacity analysis of Edna if we include positive values to the right? You will notice that the amount available for debt service has increased.

43. Let me explain further -
Item
Weekly
(Debt Capacity Column)
NET BUSINESS & HOUSEHOLD INCOME
DEBT CAPACITY ANALYSIS
Equivalent of DAILY Net Income
10,740
Equivalent of WEEKLY Net Income
(4,730)
Equivalent of SEMI-MONTHLY Net Income
(1,500)
Equivalent of MONTHLY Net Income
(1,463.75)
Amount Available for Debt Service
3,046.25
Adjusted Debt 25 %
761.56
Maximum Loan Amount for _____ weeks/months
Item
Weekly
(Debt Capacity Column)
NET BUSINESS & HOUSEHOLD INCOME
DEBT CAPACITY ANALYSIS
Equivalent of DAILY Net Income
10,740
Equivalent of WEEKLY Net Income
(4,730)
Equivalent of SEMI-MONTHLY Net Income
(1,500)
Equivalent of MONTHLY Net Income
1,463.75
Amount Available for Debt Service
5,973.75
Adjusted Debt 25 %
1,493
Maximum Loan Amount for _____ weeks/months
The cash flow computation on the left follows the guidelines that excludes positive values to the right of the selected DCC, while the cash flow on the right includes positive net income values to the right of the selected DCC. You will notice that cash flow on the right shows an Adjusted Debt Capacity of P1,493, an installment P731 more than what cash flow on the left. Since the actual cash that the client has on a weekly basis is actually only P694, the client is sure to default on his/her loan payment since cash on hand will always be much smaller than the required loan installment.
Why the default? The client may indeed be able to pay the installment but the payment will always be much lesser than what the scheduled loan amortization (as shown in the cash flow on the right) since the funds that will actually be able to cover for the difference of P731 will only be available at the end of the month.
Term : 3 months (13 weeks)
Interest : 3%/month

44. Including positive net income values from longer time frame columns could unduly bloat maximum loan amounts
For conservatism (considering loans are character-based/collateral free), long time-frame positive values should not be included.
Having seen the effect of adding net income values of long time-frames to the Debt Capacity Analysis –
Including positive net income values from longer time-frame columns could unduly bloat maximum loan amounts
For conservatism, long time-frame positive values should not be included

45. Positive net income value columns could serve as buffer fund should daily or weekly cash flows not turn out as expected.
Long time-frame columns (e.g. semi-monthly, monthly) with positive net income values indicate sufficient cash flow to support expenditures in those periods.
Positive net income values from longer time-frame periods could serve as a buffer fund should daily or weekly cash flows not turn out as expected. In addition, these positive net income values indicate more than sufficient cash flows to support expenditures in those periods; what we actually see here are excess funds which the client could plow back into the business or set aside as savings.

46. STEP 3 : Compute the AMOUNT AVAILABLE FOR DEBT SERVICE by adding up the equivalent Daily, Weekly, Semi-monthly and Monthly Net Incomes
Item
Daily
(Selected Debt Capacity Column)
Weekly
(Selected Debt Capacity Column
Semi-Monthly
Monthly
MONTHLY TOTALS
NET BUSINESS & HOUSEHOLD INCOME
DEBT CAPACITY ANALYSIS
Equivalent of DAILY Net Income
10,740
Equivalent of WEEKLY Net Income
(4,730)
Equivalent of SEMI-MONTHLY Net Income
(1,500)
Equivalent of MONTHLY Net Income
(1,463.75)
Amount Available for Debt Service
3,046.25
Adjusted Debt ______ %
Maximum Loan Amount for _____ weeks/months
Having completed the transfer of appropriate net income values to the selected Debt Capacity Column, we now compute for the AMOUNT AVAILABLE FOR DEBT SERVICE by adding up the equivalent Daily, Weekly, Semi-monthly and Monthly Net Incomes.
The term “Amount available for Debt Service” refers to the client’s net cash inflow that can be used for paying the new loan.
In the example above, the amount available for debt service is P3, per week. This means that the client, after deducting all major business and household expenditures, still has a daily cash surplus of P3, which can be used in paying the weekly loan amortization.

47. STEP 4 : Compute the ADJUSTED DEBT CAPACITY by multiplying the Amount Available for Debt Service by the Adjusted Repayment Capacity Rate (ARCR)
The client’s debt 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.
The term “Adjusted Debt Capacity” refers to the adjusted value of the Amount available for Debt Service. The term “Adjusted Repayment Capacity Rate (ARCR)”, also called the Cash Flow Adjustment Factor by others, is the ratio used to adjust the applicant’s maximum allowable loan amortization, considering the two reasons presented in this slide.

48. In the example below, the ARCR used is 25%
In the example below, the ARCR used is 25%. This means that the lender assumes that only 25% of the client’s debt capacity will be used for paying the new loan. By using a small portion of the client’s debt capacity, the lender is given a higher assurance that the loan is well within the client’s capacity to pay.
Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
NET BUSINESS & HOUSEHOLD INCOME
2,085
(4,730)
(3,000)
(5,855)
30,801
DEBT CAPACITY ANALYSIS
Equivalent of DAILY Net Income
10,740
Equivalent of WEEKLY Net Income
Equivalent of SEMI-MONTHLY Net Income
(1,500)
Equivalent of MONTHLY Net Income
(1,463.75)
Amount Available for Debt Service
3,046.25
Adjusted Debt 25%
761.56
Maximum Loan Amount for _____ weeks/months
In the example we have in this slide, the ARCR used is 25%. This means that the bank assumes that only 25% of the client’s debt capacity will be used for paying the new loan. By using a small portion of the client’s debt capacity, the bank is given a higher assurance that the loan is well within the client’s capacity to pay. At the same time, this leaves sufficient allowance (75%) for unforeseen expenses or emergencies.

49. STEP 5: Compute the Maximum Loan Amount to be given to the client by using the Loan Size Multiplier
Depending on the bank’s policy, the formula for the Loan Size Multiplier may vary
The last step in the process if computing for the Maximum Loan Amount to be granted to the client by using the Loan Size Multiplier.
The Loan Size Multiplier can vary, depending on the bank’s loan policy.

50. Formulas for Loan Size Multiplier
Let’s take a look at formulas for various Loan Size

51. (Adjusted Debt Capacity ) * (No. of Installment Payments)
Policy
Formula
Interest amortized
(Standard)
(Adjusted Debt Capacity) * (No. of Installment Payments (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) Contractual Deposit Rate
Interest amortized / contractual savings 10% of loan principal
(Adjusted Debt Capacity) * (No. of Installment Payments) [(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)]
Different banks have different loan policies. Some banks require microfinance borrowers to have mandatory savings, some discount the interest upon loan release, still others amortize the interest together with the principal payment. To give Account Officers a better understanding of how their bank’s policy affects the computation for Maximum Loan Amounts, presented in this slide are the five most commonly used methods of computing –
(Show table) Each of these Loan Size Multiplier formulas will be discussed individually. Account Officers are advised to identify which of these five formulas are used by their respective banks. To avoid confusion, Account Officers should stick to the Loan Size Multiplier formula that conforms with their bank’s loan policies.

52. Interest amortized (standard)
Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Payments)
1 + (Interest rate per month * No. of months)
Example:
Loan Term: 3 mos. (13 weeks)
Frequency of Payment: Weekly
Interest Rate: 3% per month
Max. Loan Size = (761.56) * (13)
1 + (.03*3)
= 9,900
1.09
= 9,083
This loan multiplier formula assumes that the interest is computed on a flat-rate basis and amortized. It also does not take into account the contractual savings that is usually built-in with the loan amortization (e.g. 10% of the loan installment payment).
Note: Within the 91-day term, the total number of weekly installment payments will only be 13.

53. The computed maximum loan amount is shown in the cash flow template as follows:
Item
Daily
Weekly
Semi-Monthly
Monthly
MONTHLY TOTALS
NET BUSINESS & HOUSEHOLD INCOME
2,085
(4,730)
(3,000)
(5,855)
30,801
DEBT CAPACITY ANALYSIS
Equivalent of DAILY Net Income
10,740
Equivalent of WEEKLY Net Income
Equivalent of SEMI-MONTHLY Net Income
(1,500)
Equivalent of MONTHLY Net Income
(1,463.75)
Amount Available for Debt Service
3,046.25
Adjusted Debt 25%
761.56
Maximum Loan Amount for _____ weeks/months
9,082.85
Having computed the Maximum Loan Amount using the standard formula, presented hereunder is how the final line of the Debt Capacity Analysis portion of the Cash Flow should look like.

54. Interest discounted (deducted up-front)
Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Payments)
Example:
Max. Loan Size = * 13
= 9,900
This is the formula used for computing Maximum Loan Size with interest discounted upon release of the loan proceeds. With this formula it is simply the principal portion of the loan that is amortized over the loan term

55. Interest discounted / contractual savings 10% of loan installment
Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Payments)
1 + Contractual Deposit Rate
With this formula, interest is discounted upon loan release, but this time a 10% mandatory savings (computed on the basis of the loan installment due) is added.
Example:
Max. Loan Size = * 13
1.10
= 9,000

56. Interest amortized / contractual savings 10% of loan principal payment
Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Payments)
1 + [(Interest rate * No. of Months) + Contractual Deposit Rate]
Example:
Max. Loan Size = * 13
1 + [(.03*3) + .10]
= 9, [ ]
= 9,900
1.190
= ,319.56
With this formula, interest is amortized together with the principal amortization. Contractual, or mandatory savings, has been added with the same computed on the basis of the loan principal payment.

57. Interest amortized / contractual savings 10% of loan principal & interest payment
Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Payments)
((1 + (Interest rate * # Months)) * (1 + Contractual Deposit Rate)]
Example:
Max. Loan Size = * 13
((1 + (.03*3)) (1+ .10)
= 9, = 9,900
( ) (1+ .10) (1.09) (1.10)
= 9, = 8,257
1.199
The last formula shows principal and interest being amortized and contractual savings (based on principal & interest payment) being added to loan amortization due.

58. Policy Maximum Loan Amount 9,083 9,900 9,000 8,319.56 8,257
Interest amortized
(Standard)
9,083
Interest discounted (deducted up-front)
9,900
Interest discounted /
contractual savings 10% of loan installment
9,000
Interest amortized /
contractual savings 10% of loan principal
8,319.56
contractual savings 10% of loan principal & interest payment
8,257
Using different formulas for computing the maximum loan amount affect the computed maximum loan amount. Presented in this slides is a comparative matrix of loan amounts.
Which formula does your bank use?