module 5, session 1 preparing the client’s non-farm cash flow

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Module 5, Session 1

Preparing the Client’s Non-Farm Cash Flow

MICRO AGRI PRODUCT

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

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?

Importance of Cash Flow AnalysisHelps 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)

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.

MABS Cash Flow TemplateItem Daily Weekly Monthly MONTHLY

TOTALS Income from Business Business 1: Business 2: Business 3:

Total Business Income Business Expenses Raw Materials/Purchase Business 1: Business 2: Business 3: Salaries and Wages Rent Utilities Transportation Expenses Fuel Business Taxes & Licenses Other Business Expenses

Total Business Expenses NET BUSINESS INCOME Other Household Income Salaries & Wages Pension Remittances from other family members Other Income Sources

Total, Other Household Income

TOTAL BUSINESS & HH INCOME Household Expenses Food House Rent Education and School Allowance Utilities Transportation Medical Expenses Insurance premium Other Loan Payments Other Expenses

Sub-Total Add: Miscellaneous Expenses

Total Household Expenses NET BUSINESS & HH INCOME DEBT CAPACITY ANALYSIS Equivalent of DAILY Net Income Equivalent of WEEKLY Net Income Equivalent of MONTHLY Net Income Amount available for debt service Adjusted Debt Capacity @ ____% ARCR Max. Loan Amount for ____ months/weeks

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 INCOMEAdd: OTHER HOUSEHOLD INCOMEEquals: TOTAL NET BUSINESS & OTHER

HOUSEHOLD INCOME

Less: Total Household ExpensesEquals: NET BUSINESS & OTHER HOUSEHOLD

INCOMETimes: Adjusted Repayment Capacity RateEquals: Adjusted Debt Capacity Times: Loan Size MultiplierEquals: MAXIMUM LOAN AMOUNT

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)

• 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 columnItem Daily Weekly Monthly MONTHLY

TOTALS Income from Business Business 1: Sari-sari store 1,500 Business 2: Rice-cake making (week-ends) 3,000 Business 3: Catering (once a month) 5,000

Total Business Income

• All entries should be converted into their monthly equivalents in the column for MONTHLY TOTALSItem Daily Weekly Monthly MONTHLY

TOTALS Income from Business Business 1: Sari-sari store 1,500 42,000 Business 2: Rice-cake making (week-ends) 3,000 12,000 Business 3: Catering (once a month) 5,000 5,000

Total Business Income 2,000 3,000 5,000 59,000

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.

Procedures for Filling-Up Procedures for Filling-Up the Cash Flow Forms the Cash Flow Forms

How to Use the Cash Flow How to Use the Cash Flow WorksheetsWorksheets

The Cash Flow Worksheets Worksheet 1.aWorksheet 1.a : Sales Worksheet 1.bWorksheet 1.b : Cost computation for Retail Business Worksheet 1.cWorksheet 1.c : Cost computation for Manufacturing/

Processing

SALES Worksheet

Days Sari-Sari Carinderia Business 3

Monday 750 4,475

Tuesday 500 4,475

Wednesday 750 4,475

Thursday 300 4,475

Friday 300 4,475

Saturday 500 4,475

Sunday 750 4,475

TOTAL 3,850 31,325

Average1/ 550 4,475

1/ : Sum of Daily Sales / No. of Operating days

Worksheet 1.a: Sales

Data on business sales (broken down by frequency of sale)

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 25 375

Take-out 30 25 750

TOTAL 4,475

Purchases for Sari-sari Store

Weekly 1,750

Semi-monthly 3,000

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

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 8 720

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

Total 2,180

Others

Labor/Wage 250/wk 2 500

NOTE : Present cost of raw materials by time frame (daily/weekly etc.)

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

Total 3,500

Others

Electricity 500

Water 100

LPG 300 2 600

Gasoline (jeepney) 500 500

NOTE : Present cost of raw materials by time frame (daily/weekly etc.)

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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

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COST COMPUTATION FOR RETAIL BUSINESS:

Type of Business: Sari-sari Store

Product

PurchaseQuantity

Unit Selling Price

Cost Cost Price 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%

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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

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)

HOUSEHOLD INCOME

Income Source Income Amount Frequency TOTAL

Salary

Remittance

Pension

NOTE : Multiply Income amount by the indicated frequency

HOUSEHOLD EXPENSE

ExpenseNo. of Units/

Persons

Unit Expense

Frequency TOTAL

School Allowance 1 20Daily (22 days) 440

Tuition Fee 1 500 Monthly 500

Telephone 200 Monthly 200

Water 50 Monthly 50

Electricity 300 Monthly 300

NOTE : Use this form for expense items involving more than one (1) unit/person and varied frequencies

Filling up the Main Cash Filling up the Main Cash Flow FormFlow Form

Item Daily Weekly Semi-Monthly

Monthly

MONTHLY TOTALS

Income from Business

Business 1 : Sari-sari Store

550

Business 2 : Carinderia 4,475


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 300 500

Total Business Expense

NET BUSINESS INCOME

STEP 1STEP 1 : From the cash flow worksheets , transfer the business and household income and expense

data in their respective cells


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

STEP 2STEP 2 : Compute for the MONTHLY TOTALS


Monthly

MONTHLY TOTALS

Computing the Monthly Totals : (Daily x no. of operating days) + (Weekly x 4 weeks) + (Semi-monthly x 2 ) + (Monthly x 1)


Business 1 : Sari-sari Store 550 15,400

Business 2 : Carinderia 4,475 125,300


Business Expenses


Business 1 : Sari-Sari Store 1,750 3,000 13,000

Business 2 : Carinderia 2,855 2,180 3,500 92,160

Labor 500 2,000

Utilities (water, electric, LPG) 550 600

Gasoline (Jeepney) & LPG 500 600 2,600

Total Business Expense

NET BUSINESS INCOME


Monthly

MONTHLY TOTALS


Salaries & Wages

Pension

Remittances



Household Expenses

Food

Education & School Allowance 20 500 940

Utilities (Telephone, Water & Electricity)

550 550

Medical Expenses


Sub-Total

Miscellaneous (10%)

Total Household Expenses


STEP 3STEP 3 : Compute the Totals and add the 10% provision

for Miscellaneous Household Expense.Item Daily Weekly Semi-Monthly Monthly MONTHLY

TOTALS


Business 1 : Sari-Sari Store 550 15,400


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


Business 1 : Sari-Sari Store

1,750 3,000 13,000


Labor 500 2,000

Utilities (Telephone, water, electricity)

600 600

Gasoline (Jeepney) & LPG 500 600 2,600

Total Business Expense 2,855 4,930 3,000 4,700 110,360

NET BUSINESS INCOME 2,170 (4,930) (3,000) (4,700) 30,340


Monthly

MONTHLY TOTALS


Salaries & Wages

Pension

Remittances



Household Expenses

Food


Utilities (Light & Water) 550 550

Medical Expenses


Sub-Total 20 1,050 1,490

Miscellaneous (10%) 2 105 149

Total Household Expenses 22 0 0 1,155 1,639


STEP 4STEP 4 : Compute the NET BUSINESS INCOME by

deducting Total Business Expense from

Total Business IncomeItem Daily Weekly Semi-

MonthlyMonthl

yMONTHLY TOTALS


Business 1 : Sari-sari Store 550 15,400


Total Business Income 5,025 140,700

Business Expenses



1,750 3,000 13,000


Labor 500 2,000

Utilities (water, electric) 600 600

Fuel (Jeepney) & LPG 300 600 1800

Total Business Expense 2,855 4,730 3,000 4,700 109,560


STEP 5STEP 5 : Compute the TOTAL BUSINESS & HOUSEHOLD

INCOME by adding Net Business Income and

Other Household IncomeItem Daily Weekly Semi-Monthly




Salaries & Wages

Pension

Remittances



2,170 (4,730) (3,000) (4,700) 31,140

STEP 6STEP 6 : Compute the NET BUSINESS & HOUSEHOLD INCOME by deducting Total Household

Expenses from Total Business & Household IncomeItem Daily Weekly Semi-

MonthlyMonthly MONTHLY

TOTALS


Salaries & Wages

Pension

Remittances



2,170 (4,730) (3,000) (4,700) 31,140

Household Expenses

Food


Utilities (Light & Water) 550 550

Medical Expenses


Sub-Total 20 1,050 1,490

Miscellaneous (10%) 2 105 149

Total Household Expenses 22 0 0 1,155 1,639


2,148 (4,730) (3,000) (5,855) 29,501

Procedure for Filling Up the Procedure for Filling Up the Debt Capacity Analysis Debt Capacity Analysis Portion of the Cash Flow Portion of the Cash Flow TemplateTemplate

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


Monthly MONTHLY

TOTALS


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

STEP 2STEP 2 : Transfer the Net Income values of the various columns into the selected Debt Capacity

Column and convert their values




2,148 (4,730) (3,000) (5,855) 29,501


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)

Item Daily Weekly(Selected

Debt Capacity Column)

Semi-Monthl

y

Monthly MONTHLY

TOTALS


2,148 (4,730) (3,000) (5,855) 29,501


Equivalent of DAILY Net Income

10,740 =2,148x5 days

Equivalent of WEEKLY Net Income

(4,730) =4,730x1


(1,500) =3,000/2 weeks


(1,463.75) =5,855/4 days

Amount Available for Debt Service

Adjusted Debt Capacity @ ______ %


Sample : If Weekly Column is Sample : If Weekly Column is selectedselected

Specific guidelines for converting Net Income Values – Positive balances to the leftleft of the selected Debt Capacity Column areare included in the analysisincluded in the analysis since these refer to cash flows that have already been received by the client

Positive balances to the rightright of the selected Debt Capacity Column are not to be included in the analysisare 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

Item Daily Weekly

(Debt Capacity Column)

Semi-Monthly


NET BUSINESS & HOUSEHOLD INCOME 2,148 (4,730) (3,000)

5,855 29,501


Equivalent of DAILY Net Income 10,740

Equivalent of WEEKLY Net Income (4,730)


(1,500)


Amount Available for Debt Service 4,510



Item Daily Weekly


Semi-Monthly


NET BUSINESS & HOUSEHOLD INCOME 2,148 (4,730) (3,000) 5,855 28,701





(1,500)

Equivalent of MONTHLY Net Income 1,463.75

Amount Available for Debt Service 5,973.75



Item Weekly







(1,500)

Equivalent of MONTHLY Net Income (1,463.75)


Adjusted Debt Capacity @ 25 % 761.56


Item Weekly







(1,500)


1,463.75


Adjusted Debt Capacity @ 25 % 1,493

Maximum Loan Amount for _____ weeks/monthsTerm : 3 months (13 weeks)

Interest : 3%/month

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.

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.

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

Item Daily

(Selected Debt Capacity

Column)

Weekly

(Selected Debt Capacity Column

Semi-Monthly







(1,500)



Adjusted Debt Capacity @ ______ %


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.

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-

MonthlyMonthly MONTHLY

TOTALS


(5,855) 30,801





(1,500)



Adjusted Debt Capacity @ 25% 761.56


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

Formulas for Loan Size Multiplier

Policy Formula

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)]

Interest amortized (standard)Interest amortized (standard)

Max. Loan Size = Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment (Adjusted Debt Capacity) * (No. of Installment Payments)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: WeeklyInterest Rate: 3% per month

Max. Loan Size = (761.56) * (13) 1 + (.03*3)

= 9,900 1.09

= 9,083

The computed maximum loan amount is shown in the cash flow template as follows:




(5,855) 30,801





(1,500)



Adjusted Debt Capacity @ 25% 761.56


9,082.85

Interest discounted (deducted up-Interest discounted (deducted up-front)front)

Max. Loan Size = (Adjusted Debt Capacity) * (No. of Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment Installment Payments)Payments)

Example:Max. Loan Size = 761.56 * 13 = 9,900

Interest discounted / contractual savings Interest discounted / contractual savings 10% of loan installment10% of loan installment

Max. Loan Size Max. Loan Size = = (Adjusted Debt Capacity) * (No. of Installment (Adjusted Debt Capacity) * (No. of Installment Payments)Payments)

1 + Contractual Deposit Rate1 + Contractual Deposit Rate

Example:Max. Loan Size = 761.56 *

13 1.10

= 9,000

Interest amortized / contractual savings Interest amortized / contractual savings 10% of 10% of loan principal payment

Max. Loan Size = Max. Loan Size = (Adjusted Debt Capacity) * (No. of Installment (Adjusted Debt Capacity) * (No. of Installment Payments)Payments)

1 + [(Interest rate * No. of Months) + Contractual Deposit 1 + [(Interest rate * No. of Months) + Contractual Deposit Rate]Rate] Example:

Max. Loan Size = 761.56 * 13 1 + [(.03*3) + .10]

= 9,900 1 + [.09 + .10]

= 9,900 1.190

= 8,319.56

Interest amortized / contractual savings Interest amortized / contractual savings 10% of 10% of loan principal & interest payment

Max. Loan Size Max. Loan Size = = (Adjusted Debt Capacity) * (No. of Installment (Adjusted Debt Capacity) * (No. of Installment Payments)Payments) ((1 + (Interest rate * # Months)) * (1 + Contractual Deposit ((1 + (Interest rate * # Months)) * (1 + Contractual Deposit Rate)]Rate)]

Example: Max. Loan Size = 761.56 * 13

((1 + (.03*3)) (1+ .10)

= 9,900 = 9,900 (1 + .09) (1+ .10) (1.09) (1.10)

= 9,900 = 8,2571.199

Policy Maximum Loan Amount

Interest amortized(Standard) 9,0839,083

Interest discounted (deducted up-front)9,9009,900

Interest discounted / contractual savings 10% of loan installment

9,0009,000

Interest amortized / contractual savings 10% of loan principal

8,319.568,319.56

Interest amortized / contractual savings 10% of loan principal & interest payment

8,2578,257

module 5, session 1 preparing the client’s non-farm cash flow

Documents

cash flowthe cash flow

cash flow forms

cash flows

clients nonfarm cash

monthly income

total business income

weekly entries

business sales