2. 1 Module 5, Session 1 Preparing the Client’s Non-Farm Cash Flow MICRO AGRI PRODUCT

3. Session Objectives By the end of the session, the trainees are expected to: Learn the basic rules and procedures in preparing a cash-flow Demonstrate skills in preparing the cash flow Use cash-flow analysis in establishing the repayment capacity of an applicant

4. 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. What is Cash Flow Analysis?

5. 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)

6. 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.

7. MABS Cash Flow Template

8. 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

9. 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)

10. 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

11. 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.

12. Procedures for Filling-Up the Cash Flow Forms

13. How to Use the Cash Flow Worksheets

14. The Cash Flow Worksheets  Worksheet 1.a  Worksheet 1.a : Sales  Worksheet 1.b  Worksheet 1.b : Cost computation for Retail Business  Worksheet 1.c  Worksheet 1.c : Cost computation for Manufacturing/ Processing

15. SALES Worksheet DaysSari-SariCarinderiaBusiness 3 Monday7504,475 Tuesday5004,475 Wednesday7504,475 Thursday3004,475 Friday3004,475 Saturday5004,475 Sunday7504,475 TOTAL3,85031,325 Average1/5504,475 1/ : Sum of Daily Sales / No. of Operating days Worksheet 1.a: Sales  Data on business sales (broken down by frequency of sale)

16. AO Notes: Computation for Carinderia ParticularsAverage SpendingNo. of PersonsSales Breakfast2025500 Lunch45401,800 Dinner35301,050 Snacks1525375 Take-out3025750 TOTAL4,475 Purchases for Sari-sari Store Weekly1,750 Semi-monthly3,000

17. 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

18. COST COMPUTATION FOR MANUFACTURING & PROCESSING Raw MaterialsCost/unitQuantityTotal Cost DAILY: Pork120/kg8960 Beef150/kg5750 Chicken90/kg8720 Fish75/kg3225 Assorted Vegetables25/kg250 Other Ingredients150 Total2,855 WEEKLY Softdrinks 168/case101,680 Seasonings 500 Total2,180 Others Labor/Wage 250/wk2500 NOTE : Present cost of raw materials by time frame (daily/weekly etc.)

19. COST COMPUTATION FOR MANUFACTURING & PROCESSING: Raw MaterialsCost/unitQuantityTotal Cost SEMI-MONTHLY: Total MONTHLY Rice1,100/cavan33,300 Plastic Bags200 Total3,500 Others Electricity500 Water100 LPG3002600 Gasoline (jeepney)500 NOTE : Present cost of raw materials by time frame (daily/weekly etc.)

20. 19 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

21. 20 COST COMPUTATION FOR RETAIL BUSINESS: Type of Business: Sari-sari Store Product Purchase Quantity UnitSellingPrice Cost PriceMark-Up (A)(B)A / B = C(D) (D/C)-1 x 100 Pop Cola 408.003 cases 5.67 7.00 Karne (baboy) 650.005 kgs. 130.00 150.00 LPG 640.002 tanks 320.00 345.00 Chicheria 162.5050 packs 3.25 3.40 TOTAL 1,860.50 458.92 505.40 Ave. Price Mark-up ((Sum D/Sum C) - 1x100) 10.13%

22. 21 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 / 1 + 0.1013 = 11,804.23

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)

24. HOUSEHOLD INCOME Income SourceIncome AmountFrequencyTOTAL Salary Remittance Pension NOTE : Multiply Income amount by the indicated frequency

25. HOUSEHOLD EXPENSE Expense No. of Units/ Persons Unit Expense FrequencyTOTAL School Allowance120Daily (22 days)440 Tuition Fee1500Monthly500 Telephone200Monthly200 Water50Monthly50 Electricity300 Monthly 300 NOTE : Use this form for expense items involving more than one (1) unit/person and varied frequencies

26. Filling up the Main Cash Flow Form

27. ItemDailyWeeklySemi- Monthly MonthlyMONTHLY TOTALS Income from Business Business 1 : Sari-sari Store550 Business 2 : Carinderia4,475 Total Business Income Business Expenses Raw Materials Purchase Business 1 : Sari-sari Store1,7503,000 Business 2 : Carinderia2,8552,1803,500 Labor500 Utilities (telephone, water, electric) 600 Gasoline (Jeepney) & LPG300500 Total Business Expense NET BUSINESS INCOME STEP 1 STEP 1 : From the cash flow worksheets, transfer the business and household income and expense data in their respective cells

28. ItemDailyWeeklySemi- Monthly MonthlyMONTHLY TOTALS Other Household Income Salaries & Wages Pension Remittances Total Other Household Income Total Business & Household Income Household Expenses Food Education & School Allowance20500 Utilities (Light & Water)550 Medical Expenses Other Expenses (Grocery & LPG) Sub-Total Miscellaneous (10%) Total Household Expenses NET BUSINESS & HOUSEHOLD INCOME

29. STEP 2 STEP 2 : Compute for the MONTHLY TOTALS ItemDailyWeeklySemi- Monthly MonthlyMONTHLY 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 Store55015,400 Business 2 : Carinderia4,475125,300 Total Business Income Business Expenses Raw Materials Purchase Business 1 : Sari-Sari Store1,7503,00013,000 Business 2 : Carinderia2,8552,1803,50092,160 Labor5002,000 Utilities (water, electric, LPG)550600 Gasoline (Jeepney) & LPG5006002,600 Total Business Expense NET BUSINESS INCOME

30. ItemDailyWeeklySemi- Monthly MonthlyMONTHLY TOTALS Other Household Income Salaries & Wages Pension Remittances Total Other Household Income Total Business & Household Income Household Expenses Food Education & School Allowance20500940 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 STEP 3 : Compute the Totals and add the 10% provision for Miscellaneous Household Expense. ItemDailyWeeklySemi- Monthly MonthlyMONTHLY TOTALS Income from Business Business 1 : Sari-Sari Store55015,400 Business 2 : Carinderia4,475125,300 Total Business Income 5,025140,700 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 Business 1 : Sari-Sari Store1,7503,00013,000 Business 2 : Carinderia2,8552,1803,50092,160 Labor5002,000 Utilities (Telephone, water, electricity) 600 Gasoline (Jeepney) & LPG5006002,600 Total Business Expense2,8554,9303,0004,700110,360 NET BUSINESS INCOME2,170(4,930)(3,000)(4,700)30,340  

32. ItemDailyWeeklySemi- Monthly MonthlyMONTHLY TOTALS Other Household Income Salaries & Wages Pension Remittances Total Other Household Income Total Business & Household Income Household Expenses Food Education & School Allowance20500940 Utilities (Light & Water)550 Medical Expenses Other Expenses (Grocery & LPG) Sub-Total201,0501,490 Miscellaneous (10%)2105149 Total Household Expenses22001,1551,639 NET BUSINESS & HOUSEHOLD INCOME

33. STEP 4 STEP 4 : Compute the NET BUSINESS INCOME by deducting Total Business Expense from Total Business Income ItemDailyWeeklySemi- Monthly MonthlyMONTHLY TOTALS Income from Business Business 1 : Sari-sari Store55015,400 Business 2 : Carinderia4,475125,300 Total Business Income5,025140,700 Business Expenses Raw Materials Purchase Business 1 : Sari-sari Store1,7503,00013,000 Business 2 : Carinderia2,8552,1803,50092,160 Labor5002,000 Utilities (water, electric)600 Fuel (Jeepney) & LPG3006001800 Total Business Expense2,8554,7303,0004,700109,560 NET BUSINESS INCOME2,170(4,730)(3,000)(4,700)31,140

34. STEP 5 STEP 5 : Compute the TOTAL BUSINESS & HOUSEHOLD INCOME by adding Net Business Income and Other Household Income ItemDailyWeeklySemi- Monthly MonthlyMONTHLY TOTALS NET BUSINESS INCOME2,170(4,730)(3,000)(4,700)31,140 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

35. STEP 6 STEP 6 : Compute the NET BUSINESS & HOUSEHOLD INCOME by deducting Total Household Expenses from Total Business & Household Income ItemDailyWeeklySemi- Monthly MonthlyMONTHLY 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 Allowance20500940 Utilities (Light & Water)550 Medical Expenses Other Expenses (Grocery & LPG) Sub-Total201,0501,490 Miscellaneous (10%)2105149 Total Household Expenses22001,1551,639 NET BUSINESS & HOUSEHOLD INCOME 2,148(4,730)(3,000)(5,855)29,501

36. Procedure for Filling Up the Debt Capacity Analysis Portion of the Cash Flow Template

37. STEP 1 STEP 1 : Select the most appropriate column for doing the Debt Capacity Analysis ItemDailyWeeklySemi- Monthly MonthlyMONTHLY 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 Capacity @ 25 % Maximum Loan Amount for _____ weeks/months

38. STEP 2 STEP 2 : Transfer the Net Income values of the various columns into the selected Debt Capacity Column and convert their values ItemDailyWeeklySemi- Monthly MonthlyMONTHLY 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)

39. ItemDailyWeekly (Selected Debt Capacity Column) Semi- Monthly MonthlyMONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME 2,148(4,730)(3,000)(5,855)29,501 DEBT CAPACITY ANALYSIS Equivalent of DAILY Net Income10,740=2,148x 5 days Equivalent of WEEKLY Net Income (4,730)=4,730x 1 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 Capacity @ ______ % Maximum Loan Amount for _____ weeks/months Sample : If Weekly Column is selected

40. Specific guidelines for converting Net Income Values – left areincluded in the analysis  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 right are not to be included in the analysis  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

41. ItemDailyWeekly (Debt Capacity Column) Semi- Monthly MonthlyMONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME 2,148(4,730)(3,000)5,85529,501 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 Amount Available for Debt Service 4,510 Adjusted Debt Capacity @ 25 % Maximum Loan Amount for _____ weeks/months

42. ItemDailyWeekly (Debt Capacity Column) Semi- Monthly MonthlyMONTHLY TOTALS NET BUSINESS & HOUSEHOLD INCOME 2,148(4,730)(3,000)5,85528,701 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 Capacity @ 25 % Maximum Loan Amount for _____ weeks/months 

43. ItemWeekly (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 Capacity @ 25 % 761.56 Maximum Loan Amount for _____ weeks/months ItemWeekly (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 Capacity @ 25 % 1,493 Maximum Loan Amount for _____ weeks/months 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.

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.

46. STEP 3 : Compute the AMOUNT AVAILABLE FOR DEBT SERVICE by adding up the equivalent Daily, Weekly, Semi-monthly and Monthly Net Incomes ItemDaily (Selected Debt Capacity Column ) Weekly (Selected Debt Capacity Column Semi- Monthly MonthlyMONTHLY 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 Capacity @ ______ % Maximum Loan Amount for _____ weeks/months

47. STEP 4 : 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: 1.Unforeseen events or circumstances that would reduce the applicant’s income or increase expenditures (e.g. illness, other household emergencies); and 2.Errors in the assumptions or estimates used in preparing the applicant’s Cash Flow.

48. 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. ItemDailyWeeklySemi- Monthly MonthlyMONTHLY 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 (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 Capacity @ 25% 761.56 Maximum Loan Amount for _____ weeks/months

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

50. Formulas for Loan Size Multiplier

51. 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)]

52. Interest amortized (standard) Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Payments) 1 + (Interest rate per month * No. of months) 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

53. The computed maximum loan amount is shown in the cash flow template as follows: ItemDailyWeeklySemi- Monthly MonthlyMONTHLY 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 (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 Capacity @ 25% 761.56 Maximum Loan Amount for _____ weeks/months 9,082.85

54. Interest discounted (deducted up-front) Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Payments) Example: Max. Loan Size = 761.56 * 13 = 9,900

55. Interest discounted / contractual savings 10% of loan installment Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Payments) 1 + Contractual Deposit Rate 1 + Contractual Deposit Rate Example: Max. Loan Size= 761.56 * 13 1.10 = 9,000

56. Interest amortized / contractual savings 10% of 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] 1 + [(Interest rate * No. of Months) + Contractual Deposit Rate] Example: Max. Loan Size= 761.56 * 13 1 + [(.03*3) +.10] = 9,900 1 + [.09 +.10] = 9,900 1.190 = 8,319.56

57. Interest amortized / contractual savings 10% of 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)] ((1 + (Interest rate * # Months)) * (1 + Contractual Deposit Rate)] Example: Max. Loan Size= 761.56 * 13 ((1 + (.03*3)) (1+.10) = 9,900 (1 +.09) (1+.10)(1.09) (1.10) = 9,900 =8,257 1.199

58. PolicyMaximum Loan Amount Interest amortized (Standard)9,083 Interest discounted (deducted up-front)9,900 Interest discounted / contractual savings 10% of loan installment9,000 Interest amortized / contractual savings 10% of loan principal8,319.56 Interest amortized / contractual savings 10% of loan principal & interest payment8,257