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

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Tracking Financial Performance Standards of Microfinance Institutions• MFIs that expect their financial services to cross-subsidise their non-financial services may see the value incost allocation so they can understand exactly what portion of their income from financial services goestoward covering the costs of non-financial services. Similarly, MFIs that charge a dedicated fee on theirloans to cover a specific non-financial service may wish to verify that the fee actually covers the relevantcosts.• Non-financial services may represent a marginal activity to MFIs. If non-financial services make up a verysmall proportion of total costs and institutional effort, a complicated cost allocation exercise is probablynot necessary. No fixed standard of materiality can be applied to all cases. However, MFIs with less than 10percent of their costs attributable to non-financial services should consider whether they need anythingbeyond the simplest cost allocation exercise.When costs related to non-financial services have to be allocated, the SIMPLE procedure given below is suggestedto be followed. Complicated cost allocation exercises are avoided because, as experience indicates, the additionalityof such an exercise is really minimal.1. First, identify what the non-financial services are and ask the question as to whether they are compulsoryand an inevitable part of Microfinance.2. If they are integral (compulsory) part of Microfinance services, then NO cost allocation is necessary.3. If they are not an integral part of Microfinance services (i.e., not compulsory) then determine what costscan be attributed to them?4. If they exceed 10 percent then a Simple cost allocation may be warranted5. Assuming that cost allocation is to be done, first determine, what are the resources used to the variousactivities that constitute Microfinance?The major resources are:(a) Fixed Assets – Immovables (land and building)(b) Fixed Assets – Movables (vehicles)(c) Fixed Assets – Equipment (computers etc)(d) Human Resources – Staff(e) Financial Resources(f) Other Resources6. This requires that the MFI identify all activities related to Microfinance – which of course would vary withthe methodology. An example is given in the Box below7. For each activity, determine, if any resource, not part of the Microfinance programme, is used. If yes,identify the resource and attribute a cost value to it.8. For fixed assets (immovables), like shared office space, some MFIs use the square feet approach to allocaterental costs (based on the going market rate in the area). This is fairly simple and accurate.9. Steps for this would include:(a) Identifying the actual measurement of office space in Square Feet(b) Multiplying it by the rental per square feet per month for all months in a year based on the localmarket conditions(c) Adding the cost of borrowing money to make the deposit that would have been paid, if it were actuallya rental44
Financial Statements of a Microfinance Institution(d) Adding utilities as per usage based on the square feet, of course taking into account the actual usage.Some MFI have even added a sub-metres to track utilities like electricity and make accurate paymentswith regard to these.10. For fixed asset movables, like motorcycles, the actual usage could be discussed from a log book of travelrecords kept with regard to the vehicles.11. A fair rental value, (based on local market) and actual fuel costs based on the log of usage could beallocated. The normal going mileage per litre of fuel can be assumed here.12. For equipment like computers, again fair rental value (based on local market) could be allocated.13. The key issue is that when ownership of fixed assets lies with other (non-financial service providers) legalentities/projects, then, allocating costs based on fair market rental value is what is appropriate.14. Likewise, human resources (staff) costs could be allocated on the time that these non-microfinance staffspend for Microfinance activity15. This entails that these staff track their time spent on Microfinance in terms of hours/day and the monthwisetotal time spent by them can then be obtained by summing up each day’s total. Then, one as outlinedbelow can allocate accurate staff indirect costs. This is done in the following manner.16. For each staff determine their gross remuneration per hour or day (8 hours in a day) and multiply this bythe number of hours allocated to Microfinance. While calculating the cost/hour, please use a consistentstandard appropriate to the staff position and also to the organisations’ human resources policies.17. For instance if the human resources policy states that working 8 hours/day for 25 days a month entitlesthem to a gross monthly compensation of Y Rupees, then per hour costs would be:25 days X 8 hours Y Rupees1 hour Y Rupees20018. If this standard varies by position, then the appropriate figures must be used.19. Once the per hour cost is determined for all staff positions, then allocating indirect staff costs is fairly easyas shown below.Sl. No. Staff position Actual time spentduring monthCost per hourTotal monthly cost(in Rs)1 A 1B 1Hours C 1Rs B 1C 12 A 2B 2Hours C 2Rs B 2C 23 A 3B 3Hours C 3Rs B 3C 3...n A nB nHours C nRs B nC nTotal All Positions NA NA B 1C 1+B 2C 2+ B 3C 3+…. B nC n45
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TermStatement of Profit and LossStr
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REFERENCESBarrel, Margaret, Michael
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