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"MicroStart: A Guide for Planning, Starting and Managing a Microfinance Programme" :
Table of Contents
Purchase a hard copy of this guide (at Pact Publications).
Chapter Three
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G. Ratios 1.
Performance Ratios
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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:
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:
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.
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.
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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