MicroStart: A Guide for Planning, Starting and Managing a Microfinance Programme.
CHAPTER THREE
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G. RATIOS

1. Performance Ratios
2. Operating Efficiency Ratios
3. Financial Strength
4. Cash Flow

(1) Performance Ratios

Accounting provides you with an ongoing history of financial activity. Ratios will allow you to examine financial relationships to diagnose the well-being of your project.

Ratios measure performance through comparisons of results. For example, in January your operating expenses may have totalled $1,000 and the number of active clients was 50. You can describe this ratio as $20 per client served. In February your expenses rose to $1,200 and clients to 75. The cost per client was $16 - a definite improvement in efficiency.

These four key ratios should be monitored on a monthly basis to measure performance. The chart which follows describes the purpose of each indicator and gives a range of acceptable ratios. To calculate ratios, consult the legend of values:



INDICATOR MEASUREMENT RATIO
Delinquency How commonplace is non-payment? UPD PAST DUE
Total UPB*

Guideline: < 5%

Portfolio at Risk How much could you lose if all delinquent borrowers defaulted? Once overdue, the UPB is at risk, not just a single installment. UPB of all Loans
WITH A PMT
OVERDUE
Total UPB

Guideline: < 15%

Aging of Delinquent Payments How far behind are people in repaying their loans? UPB of all
Loans with PMT
30 DAYS PAST DUE
Total UPB

Guideline:
30 days = < 5%
60 days - < 2.5%
90 days = < 1%

Loan Loss Rate (Write-offs) How many loans must you abandon with PMT because of non-payment? Write-off twice yearly the full balance of all loans overdue by 180 days or more. UPB of all Loans
180 DAYS PAST DUE
Total UPB

Guideline: < 2%



(2) Operating Efficiency Ratios

The most successful and sustainable organizations are those that learn to operate most efficiently. Your project should aim to deliver the greatest number of loans incurring the lowest expense without sacrificing the quality of service. This will assure compliance with any funding conditions imposed by donors and will maximize your eligibility to borrow from commercial credit sources. The chart below presents some measures of efficient operations:



INDICATOR MEASUREMENT RATIO
Cost per dollar lent What is the average cost per loan? In a mature programme costs will continually drop. TOTAL EXPENSES
Total Loans $ Disbursed

Goal: 15 per $1
disbursed

Cost per client What is the average cost per borrower? TOTAL EXPENSES
Total Active Borrowers

Goal: Should continually
decrease over time

Self-sufficiency Are costs covered by income? This should improve over time. TOTAL REVENUES
Total expenses

Goal: 100% or more

Loan staff efficiency How many loans are managed by the average Field Agent? If you have part-time staff, use full-time equivalents in your calculation. Number of Loans
OUTSTANDING
Total Field Agents

Goal: 250

Office staff efficiency How many clients are served by the management team? Number of Loans
OUTSTANDING
Total Office Staff
Goal: 1,000 for a
team of 4


It is useful to view these ratios in comparison over time. Strive for month-to-month improvements in efficiency. Concentrate your efforts to reverse negative trends.

Allow the ratios to suggest solutions. For example, if the average cost per borrower is improving, but revenues do not cover expenses, concentrate on adding more borrowers or consider an increase in interest.

(3) Financial Strength

Financial statements give you a snapshot of net worth and a recap of surplus or deficit spending. But what else can they tell you? These three ratios will measure financial strength or weakness and help you adjust your planning for subsequent periods.



INDICATOR MEASUREMENT RATIO
Productive assets How much of your asset base is at work to generating income? NET WORTH
Total Assets

Guideline: 15%

Debt to equity How much of your current net worth is debt? How much of your value is borrowed? LOANS PAYABLE
Net Worth

Guideline: < 12.5%

Liquidity Are there adequate funds to cover the next period? CASH
Projected disbursements

Guideline:
3 months of operating
expenses and 6 months
of new lending



(4) Cash Flow

Each of the ratios explained here can help you to adjust your planning for future periods. The most important item to consider is liquidity - the sufficiency of cash on hand to cover anticipated expenses and lending activity.

You have gathered sufficient historical information about your finances. You have examined the indicators and trends. You can now create a cash flow projection.

The cash flow projection is similar to a budget. A budget typically plans average monthly expenses for a time period. A cash flow projects revenues and expenses month by month as they are expected to occur Examine each month of your projection. Do some months in the cycle require more cash than others? What happens if lending increases? Decreases? If more defaults occur? If expenses are lower? How much cash is required to survive the period without running out?

Adjust your planned disbursements up or down depending on your cash forecasts. As you gain experience it will become easier to anticipate your cash requirements. You can damage your credibility if you suddenly discover yourself unable to pay your bills or honour your loan commitments.

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