Module 5, Session 1 Preparing the Client’s Non-Farm Cash Flow

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

2. Session ObjectivesBy 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

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.

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)

5. Who Is Responsible for Preparing and Analyzing the Cash Flow of the Client? • The Account Officer prepares the cash flow • The MFUSupervisor reviews it before it is submitted for deliberation and approval of the MF credit committee.

6. MABS Cash Flow Template

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

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 appropriatetimecolumns (daily, weekly, semi-monthly, monthly)

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

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

12. How to Use the Cash Flow Worksheets

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

14. Worksheet 1.a: Sales • Data on business sales (broken down by frequency of sale)

16. 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

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

22. 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)

25. Filling up the Main Cash Flow Form

26. STEP 1 : From the cash flow worksheets , transfer the business and household income and expense data in their respective cells

28. STEP 2 : Compute for the MONTHLY TOTALS

30. STEP 3 : Compute the Totals and add the 10% provision for Miscellaneous Household Expense.  

32. STEP 4 : Compute the NET BUSINESS INCOME by deducting Total Business Expense from Total Business Income

33. STEP 5 : Compute the TOTAL BUSINESS & HOUSEHOLD INCOME by adding Net Business Income and Other Household Income

34. STEP 6 : Compute the NET BUSINESS & HOUSEHOLD INCOME by deducting Total Household Expenses from Total Business & Household Income

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

36. STEP 1 : Select the most appropriate column for doing the Debt Capacity Analysis

37. STEP 2 : Transfer the Net Income values of the various columns into the selected Debt Capacity Column and convert their values

38. Sample : If Weekly Column is selected

39. Specific guidelines for converting Net Income Values – • Positive balances to the left of the selected Debt Capacity Column areincluded in the analysis since these refer to cash flows that have already been received by the client • Positive balances to therightof theselected Debt Capacity Columnare 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 Very Important!

40. Let me explain further -

41. Let me explain further - 

42. Let me explain further - Term : 3 months (13 weeks) Interest : 3%/month

43. 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.

44. 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.

45. STEP 3 : Compute the AMOUNT AVAILABLE FOR DEBT SERVICE by adding up the equivalent Daily, Weekly, Semi-monthly and Monthly Net Incomes

46. 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.

47. 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.

48. 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

49. Formulas for Loan Size Multiplier