Tracking Financial Performance Standards of ... - Sa-Dhan

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Tracking Financial Performance Standards of Microfinance Institutions3.3.2.2 Long-Term AssetsLong-term assets represent those assets not readily redeemable as cash. Basically, there are two kinds of longtermassets – (a) investments or receivables held for longer than one year, and (b) fixed assets, such as land,buildings, machinery, equipment, furniture, automobiles, etc.a) Long-term InvestmentsInvestments not intended as a ready source of cash such as long term fixed deposits, stocks, bonds andpromissory notes that are held for more than one year are classified as long-term investments.b) Fixed AssetsFixed assets usually refer to property and equipment, such as land, buildings, machinery, furniture,automobiles, etc. They are recorded at their acquisition cost – i.e., the historical cost at which they werebought.c) Accumulated DepreciationThis represents the sum of depreciation expenses recorded in the current and previous fiscal periods.Depreciation represents gradual decrease in value of fixed assets. The common methods for calculatingdepreciation are the straight-line method and the declining balance method. For financial analysis anyfrequent change in depreciation method is an area of concern.Long-Term Assets 2001 2002 2003BS 12 Long Term Investments 16,000 22,000 25,000BS 13 Fixed Assets (Movable & Immovable) At Cost 6,000 8,000 8,000BS 14 (Accumulated Depreciation) -400 -600 -1,400BS 15 Net Fixed Assets 5,600 7,400 6,600BS 16 Total Long Term Assets 21,600 29,400 31,600Analysing changes in the Balance Sheet StructureOne of the key tasks for the analyst is to isolate changes in the structure of the various asset and liability itemsacross two years. This trend analysis is a very useful technique for understanding where the MFI is today andwhere it is headed tomorrow. In turn, such analysis will facilitate what on-course corrections are required andalso enable MFI management to take suitable decisions that will enable the MFI to enhance its sustainabilityand expand out reach.Basically, such analysis involves calculating the proportion of asset and liability items as a measure of the totalassets and liabilities respectively.42
Financial Statements of a Microfinance Institution3.4 COST ALLOCATION – KEY ISSUES FOR PREPARING FINANCIAL STATEMENTSA number of institutions that provide Microfinance services also offer a range of non-financial services, such asbusiness development services (training & technical assistance to micro entrepreneurs) and training in areaslike literacy, health, natural resource management etc. Usually the consolidated financial statements of suchmulti-service organisations contain financial data pertaining to all activities undertaken by the organisation.Assessing financial performance and sustainability of Microfinance operation of a multi-service organisationfrom its consolidated financial statements would become rather difficult. Though Microfinance is being carriedout with developmental agenda, the activity per se is commercial. Unlike other traditional developmentalprogramme, in this activity, there is two-way flow of money – money is given or taken as credit or deposit to orfrom the poor and also it is repaid in the form of money. Therefore, the financial services should be treated asdistinct cost centres vis-à-vis non-financial services in an MFI’s accounts.The following points provides a summary of the key issues in preparing financial statements for multi-serviceorganisations who also undertake Microfinance programme:• Before embarking on a cost allocation exercise, MFI managers must first decide which services offered, ifany, can be considered functionally separate from the provision of financial services. In other words, theymust answer the question of “to what extent are the non-financial services integral to the success of the Microfinanceprogramme?”• In some Microfinance programmes, the provision of skills and literacy training, for instance, is consideredvital to core elements of the Microfinance methodology, such as group development and cohesion. In thesecases, non-financial services may be seen as directly contributing to good credit/savings behaviour, particularlyin programmes serving extremely poor clients. This sense of “non-separability” may pertain particularly incases where credit officers are charged with providing training and where on-site technical assistance isinseparable from credit supervision.• Cost allocation is appropriate for MFIs that offer non-financial services on a voluntary basis Therefore, ifnon-financial services are considered an integral part of the Microfinance or lending methodology, then costallocation between financial & non-financial services may not be warranted since the MFI implicitly orexplicitly considers these services as part of the Microfinance methodology and cost. On the other hand, ifnon-financial services are thought to be complementary (but not necessary) to the successful delivery offinancial services, cost allocation is recommended. However, MFIs interested in exploring the possibility ofchanging their approach and offering these services on a voluntary basis may wish to conduct a costallocation exercise to guide their planning process.• Some MFIs recognise that the provision of non-financial services may require ongoing subsidies, particularlythose services with a “social” character like health and literacy training. They often approach internationaldonors or national funding agencies for separate financing of these services. This financing may or may notbe combined with a fee charged to clients to help cover the costs of delivering the service. Other MFIsexpect that these social activities will be financed with income and fees earned from the provision offinancial services. Such MFIs may charge a separate commission on loans or otherwise integrate the cost ofproviding non-financial services into the effective interest rate on financial services.• MFIs that fund their non-financial services separately, either through donations or fees or some combinationof the two, are likely to view these services as separate “cost centers”. These MFIs are good candidates forcost allocation.43
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REFERENCESBarrel, Margaret, Michael
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