2 business planning reading materials

7/28/2019 2 Business Planning Reading Materials

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Bank of Lao PDR Asian Development Bank

ADB Catalyzing Microfinance for

the Poor

Business Planning Training for MFIs

Reading Materials


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Table of Contents

SESSION 1: INTRODUCTION TO BUSINESS PLANNING ................................................................................. 2

SESSION 2: ENVIRONMENTAL ANALYSIS ............................... .......................................................................... 4

SESSION 3: CLIENTS AND MARKETS ................................................................................................ ................... 7

SESSION 4: PRODUCTS AND SERVICES .................................................................................................. ........... 10

SESSION 5: PORTFOLIO PLANNING ................................................................................................................... 14

SESSION 6: HUMAN RESOURCE MANAGEMENT ....................................................................................... .... 16

SESSION 7: MARKETING & PROMOTION ................................................................................................ ......... 19

SESSION 8: SOCIAL PERFORMANCE MANAGEMENT .................................................................................. 23

SESSION 9: FINANCIAL PLANNING ............................................................................... ..................................... 26


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Session 1: Introduct ion to Business Planning

1. What is business planning?

A business plan is a plan that enables an organisation to look ahead, allocate resources, focuson key points, and prepare for problems and opportunities.

Business planning is about results. You need to make the contents of your plan match yourpurpose.Unfortunately, many people think of business plans only for starting a new business or applyingfor business loans. But they are also vital for running a business, whether or not the businessneeds new loans or new investments. Businesses need plans to optimize growth anddevelopment according to priorities.

Business Planning incorporates both strategic and operational planning for achievingoutreach and sustainability. Strategic Planning enables us to define broad institutional goals forthe future based on an assessment of the current situation. Operational planning allows us putthose goals into action by detailing specific activities, their costs and the sources of income thatwill be received as a result.

In order to be sustainable, an MFI must be financially self sufficient . It therefore needs tooperate as a business. Sure it can have social objectives as well as financial ones, but thefinancial sustainability imperative makes it a business. And every business needs a plan.

2. The elements of a business plan

Microfinance business plans contain the same elements as for any business. Plan formats andoutlines may vary, but generally a plan should include the following components:

1) Organisational Profile: summarises the history, mission, structure etc. of theorganisation.

2) Environmental Analysis: frames the economic, regulatory and business environment in

which you operate3) Market Analysis : you need to know your market, customer needs, where they are, how

to reach them, etc.

4) Products and Services: describes your savings and loan products and any otherservices you are providing, or plan to provide.

5) Portfolio / Outreach Plan: your expected level of activity for each product / service.This generates your financial plan, and determines your resource needs, so is critical tothe planning process.

6) Human Resource Management: describes the staffing structure and the key roles andresponsibilities, as well plans for staff development.

7) Marketing & Promotion: To be successful, people need to know about your services.Who will you target and how?

8) Social Performance Management: Non-profit agencies have a social agenda, how willpoverty, gender and other social objectives be tracked and managed?

9) Financial Analysis: Identifies your funding sources, presents the balance sheet andprojected Profit and Loss and Cash Flow tables.

2. Components of the organisational profile


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The first section of the business plan is the Organisational Profile. This contains the followingelements:

1. Background brief history of organisation2. Mission brief mission statement3. Goals / Objectives lists your organisational goals4. Organisational Structure - governance and legal structure, management &

staffing5. Clients / beneficiaries identifies your main clients / beneficiaries

6. Activities & Services describes what your organisation does / offers

Mission & Objectives

A Mission Statement is a declaration of organisational purpose. A good mission statementshould state:

What issues the institution is trying to address How the institution responds to these issues Who the intended clients are

Two example mission statements1) To deliver best practice economic and soc ial development programs

2) To reduce poverty by providing training in business development that enables thepoor to improve their businessesWhich of these do you think is better? Why?

Organisational goals / objectives reflect how the institution intends to pursue its mission withspecific statements about:

The core activities The outreach goals / objectives The impact goals / objectives The institutional goals / objectives

Here are some examples of organisational goals / objectives:

1. To deliver efficient and affordable savings and credit services to poor rural households2. To reach at least 10,000 households with savings services3. For 50% of member households to move out of poverty within 3 years of joining4. To maintain at least 70% of women clients and staff5. To be financially self-sufficient

Note that these are different to operational objectives, which are more specific andwill be developed later in the business p lan. Examples of operational objectives are:

1. To extend savings and credit services to five new villages by December 20082. To commence using a computerized MIS by J uly 20093. To complete client surveys with at least 200 clients by October 2008

4. To recruit and train two new field officers by December 20085. To grow the outstanding loan portfolio to $10,000 by December 2009


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Session 2: Environmental analysis

1. Why complete an environmental analysis? What do we mean by microfinanceenvironment?

The microfinance environment includes a range of factors such as: economic, business /competition, social / cultural, legal and regulatory, and political environment.

For the purpose of the business plan we are going to focus on just a few of these: economic;regulatory; and other service providers.

The environmental analysis should help to clarify the key areas that the MFI needs toconsider in order to achieve its goals in the face of external factors.

2. Economic considerationsIn this section we consider the local economic environment. Consider how economic factorsmay affect their business as an MFI.

Some examples of important economic factors are: Inflation Main income sources for target clients Growth sectors / economic opportunities Paid employment levels Existence of cash economy at local level

Now consider how each of these factors may influence decisions you make about the wayyou run your MFI. For example:

Product design loan terms, repayment frequency, loan uses Interest rates charged on loans, and paid on savings Geographic areas to target for expansion Economic sectors to target for expansion Particular types of clients to target The pace of growth

3. Regulatory framework

The regulatory framework that an MFI operates within comprises a range of different lawsand regulations. Some examples of regulatory factors are:

business registration legal system financial accounting requirements standards for reporting capital requirements

The Bank of Lao has specific regulations for MFIs, comprising: Savings & Credit Unions,

Deposit Taking MFIs, and Non Deposit-Taking MFIs. You should be familiar with theregulations that apply to your organization.

4. Competition & Partnerships

COMPETITORS: Every business, even an NGO-MFI, is in competition with others. It is veryimportant to know who are our main competitors in order to offer competitive products andservices, as well as marketing strategies. For example, if the competition is too strong youmay choose not to enter certain markets / areas.


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You should list your competitors, and their strong points and weak points. Here is anexample:

Competitors Strenghts (+) Weaknesses (-)

1. Village fund Low interest rates, fastapproval, familiarity,convenient

Small loan sizes, limitedcapital, weak management,no savings services

2. Money lender Fast approval, no paperwork,

familiarity, convenient

Small loan sizes, not

always available, nosavings service, highinterest rate charges

3. APB Branch infrastructure, plentyof capital, low interest loans

Difficult to access loans,paperwork, too far away,inconvenient

PARTNERS. Partnering with other organisations can help your MFI to achieve its goals,improve your performance, increase outreach. These partners could be any company,organization or government agency that can assist you in your work. Ask participants to listsome of their existing or potential partners.

For each partner, identify how they will support you, and how you will support them. Here isan example:

Partners How they can support me How I can support them

Village committee Mobilise villagers, arrangemeetings, promotion

Provide useful services,help reduce poverty

Agricultural extension service Provide ag training to clients,more successful businesses

Pay travel and per diemsfor staff; take photos andreport on benefits tocommunity

Now take a look back at your Competitors. Are there any competitors that could becomePartners? Discuss ways that MFIs could potentially work with their competitors in apartnership arrangement.

For example: an MFI might use the APB branch to deposit the monthly savings, whichcould be deposited by a Village Committee member. This might save the MFI staffhaving to attend all meetings.

For any competitors that do not become partners, you need to consider how you willcompete. What will you do to ensure that your products / services are more attractive thanthose of you competition?

5. Major risks and assumptions

Whenever we develop a plan or strategy, we should be aware of the assumptions we aremaking, and the risks we are facing. We will begin by looking at the risks and assumptionsregarding the economic environment.Refer back to the list of economic considerations. And list examples of risks or assumptionsrelating to these items. For example:

i. Market for silk continues to growii. Inflation does not increase above 15% p.a.


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Now add more risks and assumptions relating to competition and partnership. For example:iii. APB is willing to open group savings accountiv. Competitor MFI does not start offering savings services


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Session 3: Clients and Markets

1. Understanding markets and clients

Understanding markets and clients helps a microfinance institution develop thecapacity to serve those clients in ways that expand outreach, achieve greater impact,and enhance institutional sustainability.

Learning more about clients needs and preferences helps an MFI to develop new

products and delivery channels, or refine existing ones.

While we often think we know what clients want / need, our assumptions are not alwayscorrect. In the past, many MFIs implemented a certain methodology without properconsideration of what their clients wanted. Nowadays, MFIs around the world havelearned that just like any business they need to put their clients first. This meansidentifying and responding to their needs and preferences.

MFI staff will often get informal feedback from clients, but it is also important to usemore structured means of gaining client feedback. Some common methods thatMFIs use to gain client feedback and suggestions are:

Structured surveys Focus group discussions Suggestion boxes (placed at the branch or at the village meeting)

2. Who are the target markets?What do we mean by markets? A market segment is a group of clients with similarneeds that are different from those of other groups. Often we choose to disaggregatemarket segments by geographic location, or by economic activity.

Why look at market segments? Since a market segment is a group of people with similarneeds, they often require a similar product or service. For example, an MFI may identifytwo main market segments: agriculturalists and traders.

Assessing the volume of demand for products will inform management of whether thespecified market is likely to be cost efficient for the MFI: this is critical to the future viabilityof the organisation.

Before entering a new market, it is important to consider key features of each segment: The estimated size of the market The overall level of demand for financial services Significant market trends is the market increasing or decreasing?

This information should feed directly into your MFIs portfolio planning. So, how can wecollect this kind of information? Secondary data in the form of government statistical data,industry reports, and donor studies may be a cost effective way of gathering suchinformation. In your analysis of the market you should identify the sources of data andany assumptions made to arrive at your conclusions.

3. What are the needs and preferences of the target clients?

Once we have identified the market segments in which we work, it is important tounderstand more fully the different types of clients we serve. We should analyse the keycharacteristics of current and/ or potential clients. Consider both their economic andpersonal traits. This information will come from data collected through client surveys.

Economic characteristics Personal & social characteristics

Business type Gender


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Understanding the needs and preferences of clients is essential to an MFIs productdevelopment process. Having products and services that respond to needs of thecommunities in which your MFI works or plans to work is both a social responsibility, anda business priority.

Surveys or focus group discussions may be used to determine client needs andpreferences. Typically these will ask questions relating to some or all of the following:

Main components of a client survey

Background on the client Income - sources and levels, business experience Household situation #income earners, #family members, assets Savings and credit history past loans and uses, savings history, perception Literacy & financial literacy ability to manage money, numbers, words

Likes or Dislikes with existing services

Other sources of savings & credit available likes and dislikes Our MFI services (for existing clients) likes and dislikes of each product / service

Savings & Credit needs

Demand for savings levels, frequency, withdrawal needs, seasonality Demand for loans size, term, repayments, seasonality

Service delivery

Feelings about group meetings usefulness, social, timing, location, activities Preferred method of conducting transactions village, branch office, other Other services required such as training Any other suggestions

The survey is primarily a qualitative tool. The survey will inform the MFI of the types ofproducts and services wanted/needed and how specific attributes of a product or servicemay be improved.

4. Seasonali ty of demand

Assessing the seasonality of demand (periods of high and low demand) for products &services will have significant influence on your product design. When designing loanproducts it is important that the seasonality of incomes and expenses of the clients beingserved are taken in to consideration. For example when designing a loan product forfarmers, it is important to consider the regularity of their incomes as this will affect theirability to make repayments; the loan term and repayment schedule should be designedso that farmers have the best possible chance of making repayments. This will haveimportant impacts in reducing levels of delinquency.

Demand for financial services andpurpose of loan

Age

Income and assets Language and LiteracyDiversity of income sources Citizenship/community reputationWork / business experience Community cohesionOther financial services that areavailable and used

Wealth level

Perceptions of credit and savings Financial literacySeasonality Location


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5. Putting it into practice

The MFI that serves two types of clients, agriculturalists and traders, may choose toconduct two different types of surveys, one for each group. The agriculturalists may beinterviewed through group surveys after harvest time, while the traders are interviewedindividually at their place of business. Following the survey, the MFI may for examplechoose to define or refine two different loan products: Agriculture loans: 6 month term (based on crop cycle), monthly interest payments,

and lump sum repayment of principal at end of term (when harvest comes in) Trading loan: variable terms (3-12 months), equal monthly installments of principalplus interest (since have regular cash flow)

Dont forget the dropouts!In addition to surveying existing and potential clients, it is also important to talk to thosewho have dropped out. From both a business and a social perspective, it is preferable foran MFI to retain its existing clients rather that to always have to find new clients toreplace the ones who are leaving. In order to improve client retention, you have to knowwhy they are leaving and what you can do to avoid this.


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Session 4: Products and Services

1. What do we mean by Products and Services in Microfi nance?

MFIs typically offer their clients a range ofproducts. A product is a specific item that youmay choose to use. Here are some examples of typical microfinance products: Savings products

Savings Product 1: Transaction account;Savings Product 2: 6-month term deposit account Loan products

Loan Product 1: Agriculture loanLoan Product 2: Regular loan

Insurance productsInsurance Product 1: Death insuranceInsurance Product 2: Crop insurance

In addition to these products, an MFI may also provide a range ofservices. Servicesinvolve the MFI performing work. For example: Remittance services

e.g. client deposits money in one village and sends to a relative in another village

Skills traininge.g. coffee growing, IPM, sewing

Business traininge.g. doing market assessments, financial planning

Financial literacy traininge.g. how to calculate interest rates

People often use the terms products and services almost interchangeably. For example,we may talk about savings services, or insurance services. One service offered by an MFImay be to provide a savings product. It really doesnt matter which terms you use, as longas you provide what your clients need!

2. Developing new or exist ing products the process

It is important that MFIs undertake a systematic process in developing or refining their loanor savings products. Products and services should be designed and delivered in such a waythat they meet the current and evolving needs and preferences of the cl ients.

Note: this section provides you with background information on how to develop newproducts or refine existing products. This is for your information only, you do not need todefine this process in the business plan.

There are 4 main steps to developing a product, which can be understood as a cycle:

2. Design

3. Testing

1. MarketResearch

4. Evaluatingnew product

ref ine des i n


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1. Market Research: In the last session we talked about the importance ofunderstanding markets and clients through market research activities like client surveysso that the products and services are designed to be popular and successful.

2. Design: We use the information gained from market research to design the product.Design will take into consideration the various product attributes described below.

Costing and pricing of products is an important factor in product design; Effective interestrates have to be high enough for the MFI to become financially self sufficient once scaleis reached.

3. Testing: Ideally you should test the new product with a sample group of clients beforelaunching into on a large scale. Make sure you specify how you will evaluate this trial, sothat later you will be able to determine whether or not the trial was successful.

4. Evaluating new product: Collect information and analyse the results to see howsuccessful the product was with the sample group. Did the product satisfy your ownobjectives? Did it meet the needs of the client? What did the client dislike about the newproduct?

Refine product : based on your evaluation of the test of the new product you can decidewhether any further modifications are needed.

3. Key product attributes

The products and services section of the business plan gives a description of the productsand services that will be provided. Any new or planned products should be clearly specified.

Each product has different attributes or features, which is what distinguishes it from otherproducts. Also, loan products will have different types of attributes to savings products. Wesummarise the main attributes of savings and loan products below.

Loan product attributes:1. Size range: what is the size of the loan? This might be a fixed amount, but more

likely, an amount within a range, i.e. $100-2002. Term: Refers to the maturity or length of time until final repayment on a loan. 3. Repayment frequency: how often does the loan principle (and interest) need to be

repaid? Weekly, monthly?4. Collateral/guarantee:

Collateral =assets pledged to secure the repayment of a loan, i.e. property.Guarantee =A pledge (could be by another person) to cover the payment of debt orto perform some obligation if the person liable fails to make repayments.

5. Interest rate (state period and flat or declin ing):Interest rate period =the period of time over which the interest rate is applicable

i.e. 24% interest over 12 months term is the same as saying 2% interest rate permonth.Which method of interest rate calculation do you use? Flat or declining interest ratemethod? (see box over page)

6. Current portfol io size: what is the total value of all your loans?


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Saving Product attributes:1. Minimum deposit: what is the minimum amount that a client must have in their

account while their account is active (usually opening deposit)? 2. Frequency of deposit: how often does the client have to make deposits into their

account?3. Withdrawal condit ions: what are the conditions (requirements set by the MFI) on

withdrawing from the account? Are there any restrictions on the customer accessingtheir money, i.e. maximum amount allowed to be withdrawn, maximum number oftimes money can be withdrawn?

4. Interest rate: how is the interest earned on savings calculated? how often does itget paid on the balance?

5. Current portfol io size: what is the total savings your MFI is currently holding?

4. MFI ServicesSeparate from its products (savings, loans, insurance), an MFI may provide services.Services can be financial or non financial.

Typical financial services offered by MFIs include: Financial Literacy Training Remittance/Money Transfer

Typical non financial services offered by MFIs include: Business/Livelihoods Training/Advice Business Development Services: Education (literacy, numeracy, other) Health (usually linked to a healthcare provider)

Below is an example of the products and services offered by TYM MFI:

Interest Rate Calculation Methods Flat vs. Declining Balance:

1. Flat Rate: Interest is charged on initial loan amount rather than outstanding loanbalance.

2. Declining Balance: Interest is charged on outstanding loan balance at a givenpoint in time, so interest amount is different for every period.

For example, a 1-year loan of 600,000 kip at 12% p.a. interest, wi th quarterlyinstallments of principal:

1. Using the Flat Rate method, total interest payable =12% * 600,000 =72,000 kip.2. Using the Declining Balance method, total interest payable =(12%/4 * 600,000)

+(12%/4 * 450,000) +(12%/4 * 300,000) +(12%/4 * 150,000) =36,000 kip

If the loan principal is all paid in one lump sum at the end of the loan term, then there isno difference in interest payable between the Flat and Declining Balance methods.

Where instalments of principal are made, the declining balance method results in aroundhalf the interest rate cost of the flat method.


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Example:TYM is a non bank financial institution in Vietnam.

The bank provides the following products: Loans Voluntary Savings Insurance

It provides the following services also:

Business Development Services Health Education/ Training Consulting

5. Act ion Plan

If your MFI is planning to develop or refine its products or services (the product attributesand/or the delivery process), you should develop an action plan that clearly defines: the organisations planned objectives for product/service modification thespecific activities your organisation must undertake to achieve its objectives, theperson responsible for taking those actions a timeframe within which the action will be completed

Below is an example of an action plan:Product/ServiceObjective

Specific Activities PersonResponsible

CompleteBy (date)

1 To introduce a new loanproduct to meet theneeds of farmers i.e.agriculture loan

1. Conduct market researchwith farmers in Rong Village

2. Design the loan productbased on market researchfinding

3. Test new product

4. Evaluate and makenecessary modifications todesign of new product

1. Lara J ones(Snr. Loanofficer)2. Bob Smith(Operationsofficer)3. Lara J ones(Snr. Loanofficer)4. Bob Smith(Operationsofficer)

1st April2009

1st J une2009

1st J uly2009

1st Dec2009

2

3

4

5

.


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Session 5: Portfolio Planning

1. What is Portfolio Planning?

A microfinance portfolio refers to the total value of the products being offered:i.e. Loan Portfolio =the total amount of loans outstanding;

Savings Portfolio =the total amount of savings deposited at the MFI.

Why it is important to plan a portfolio? How far ahead should we plan? Planning future numbers of clients helps us to plan our expansion of operations e.g.

moving into new villages, hiring new staff, increasing expenses Planning the value of a portfolio tells us how much our interest income will be on

loans, and how much our interest expenses will be on savings Planning the value of money coming in and going out helps us to plan for cash flow.

We have to make sure we always have enough cash on hand to fund our portfolioand our operational expenses

MFIs usually like to plan their portfolio for 2-3 years into the future, so that they canplan their future operations. Usually you should plan as far ahead as needed toreach full cost recover (i.e. total income exceeds total expenses)

2. Portfolio Quality

MFIs talk about portfolio quality. The quality of a loan portfolio is determined by the rate ofdelinquency among customers i.e. the percentage of loans that are not repaid.

Gross Loan Portfolio: All outstanding principal of all active loans (i.e. current, delinquent andrestructured loans, but not loans that have been written off). It does not include interestreceivable.

Arrears: the amount of repayments that are due but have not yet been paid.

Current Portfolio: theoutstanding value of all loans that do not have any instalment of principalpast due. It does not include accrued interest.

Delinquent Loan: a loanthat has repayments due but not yet paid.

Portfolio at Risk: Unpaid principal balance of all delinquent loans / Total outstanding portfolio

Loan default: refers to when a borrower cannot or will not repay his/her loan and when the MFIno longer expects to receive repayment, although it keeps trying to recover it.

3. Loan Loss Provisioning

A loan loss provision is an amount of money set aside to cover potential future loan losses.The longer a loan is overdue, the greater the provision.Loans that have been rescheduled (i.e. loan terms extended) require a higher level ofprovisioning than regular loans, since these are already considered to be risky.


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BoL requires MFIs to provision on the following basis:

Aging Status Reserve (Percent)

Regular Portfolio Rescheduled Portfolio

Current loans 1% 25%Loans past due 31-90 days 25% 25%Loans past due 91-180 days 50% 50%Loans past due >180 days 100% 100%Loans in legal recovery 100% 100%

Loan Loss Provision: an amount expensed on the Income and Expenses Statement. Itincreases the Loan Loss Reserve

Loan Loss Reserve: a balance sheet account that represents the amount of outstandingprincipal that is not expected to be recovered by an MFI. It is a credit balance on the asset sideof the balance sheet (a negative asset), and reduces the outstanding portfolio. Microfinanceorganizations typically establish a loan loss reserve equal to 2-5% of the value of their activeportfolios.

Loan write-off: when an MFI decides that it is unlikely to receive a repayment, it removes the

outstanding value of the loan from its overall loan portfolio. It uses the loan loss reserve to payfor this. Loan write-offs occur only as an accounting entry. They do not mean that recoveryshould not be pursued. They decrease the reserve and the outstanding portfolio

4. Delinquency Management

Zero delinquency is :

a reasonable and obtainable target an attitude the whole organisation must adopt if it is to become a reality. the result of a purposeful decision by the organisation

Understanding causes of delinquency:

can be internal (controllable) and external (uncontrollable but a response can be

planned) internal causes: image of MFI; bad MIS; inappropriate products and delivery

mechanisms; poor staff skills and/or morale external causes: government policies, natural disaster; economic conditions; personal

crises.

It is important for the management of an MFI to consider the internal factors of delinquencyand to put in place measures that respond to any issues that may arise. All staff should beconscious of delinquency and its causes and the MFI should manage its delinquency in astructured manner with loan officers reporting delinquency and management reviewing itscauses and providing appropriate solutions.


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Session 6: Human Resource Management

1. Why include human resources in the business plan?

An MFIs most important asset is its staff. So it is important to consider staffing andmanagement when we are preparing a business plan. In order to be effective, staff must

be competent, trained, and motivated. It is also important to make sure you have theright number and type of staff. Too many staff leads to inefficiencies while too few staffleads to inadequate attention to procedures and detail. All of this must be planned toensure that you are managing your human resources optimally.

2. Organisational Structure

When considering human resources, the first place to start is with an organisationalchart. This enables you to see at a glance your overall staffing situation, including:

o The major groupings such as branches and sectionso The total number of staff, as well as the numbers in each section / brancho The number of managers compared to the number of other staffo The relationships between personnel (lines of authority and communication), and

whether you have a very hierarchical or flat organisational structure.o Gaps in staffing that need to be filled

The organisational chart can serve as a tool for employees to understand how andwhere they fit into the mission of the institution. You can draw your organisational chartany way you like. Some organisations place the Managing Director in the middle, othersat the top, or even at the bottom. Draw your chart in the way that makes the most senseto you.

3. Staffing

An efficient organisation should have clear roles and responsibilities. Every staff member(from the Managing Director to the Driver) should have a job descr ip tion . The job

description should state:o The general and specific tasks that the staff member is required to performo Who they report too How they will be assessedo Incentives for good performance

Pay levels and working conditions should also be written down, either in the jobdescription or a separate letter of employment.

If you do not have written job descriptions for all of your staff then start now!In your business plan, summarise the key roles and responsibilities for each type ofposition (e.g. credit officer) listed in your organisational chart.

Another key aspect of human resource management is regular performance review.This should take place at least once per year (or more often). It provides an opportunityfor staff to hear from what their manager thinks of their performance what they aredoing well and what they need to improve. It also provides an opportunity for themanager to hear the thoughts, concerns and suggestions of their staff. Performanceshould always be assessed according to the job description. It is not fair to judgesomeone by standards that they are not aware of. The performance review is a goodtime to review job descriptions, as well as wage levels.


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The productivity of staff can be measured in a variety of ways. Some simple measuresof staff productivity are:

o Field officer caseload =no. of clients per field officero Field officer portfolio =loan (or savings) portfolio per field officero Clients to staff ratio = total no. of clients / total number of staff

When preparing your business plan, be sure to indicate your plans for future staffing.What staff do you plan to recruit in the future what skills and qualifications do they

need? You will also need to consider the costs involved when you are preparing yourfinancial projections.

4. Staff Incentive Schemes

Many MFIs use staff incentive schemes to encourage good performance from staffmembers. Incentives are not an entitlement they should only reward goodperformance. Typical incentives include financial reward, i.e. a bonus. A well-designedperformance-based staff incentive scheme (bonus scheme) can have positive and powerfuleffects on the productivity and efficiency of MFI operations. To be effective, such schemesmust be transparent and fair.

Staff incentive schemes take different forms and each has its own advantages anddisadvantages:

Individual: incentive payout made to each person individually Group based: incentive payout made to a team of people Profit sharing schemes: incentive payout made to individuals depending on overall

profit gains of organization Employee Stock Ownership Plan: staff members own share capital Pensions benefits and other contributions Non-financial benefits: such as promotion, training and recognition (e.g. employee of

the month)

Remember that your incentive scheme should match your organizational goals. Forexample, with regard to loan portfolio it is important to have both growth and quality.

The most common incentives schemes apply to:o The number of new clients this periodo The value of new loans disbursed this periodo Portfolio quality (PAR or other measure)o MFI or branch-level profit this period

The following are some considerations you should keep in mind when designing aperformance based Staff Incentive Scheme:

Timing: typically staff should become eligible for participation in bonus schemesapproximately six months after joining the organization

Frequency of Incentive Payout: ideally these incentive payouts should be monthly orfrequently enough to relate the reward to particular efforts.

Weight of Bonus in Total Remuneration: In practice, for effective incentive schemes

the weight of the bonuses for credit officers typically ranges from 20% up to 50% oftotal compensation.

Examples of Staff Incentive Schemes:

Acleda Bank, Cambodia

Staff incentive schemes:

1. Annual Merit Pay based on achievement of annual goals / targets


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2. Profit Centre Bonus (if RoE>20%)

3. 400 employees hold approx. 6% of share capital

Banco Ademi, Dominican Republic

Staff incentive schemes:

1. Performance-based monthly bonus for loan officers

2. Profit sharing: 10% of annual profits distributed to all employees

3. Employee Stock Ownership Plan (ESOP): Staff hold 20% of share capital and have aseat on the Board of Directors

5. Staff training & development

Every existing and new staff member should have opportunities for training and careerdevelopment. It is therefore important to have a staff training and development plan.

The training plan might include a pre-service / induction training programme:comprising training on operating rules, policies and procedures of the MFI, and anintroduction to the work ethic and philosophy of the organisation.

In-service training should be provided to upgrade the skills and knowledge ofemployees in specific areas such as products and services; internal controls; systemsand procedures; reporting; savings and loan account administration; branch accountingand Management Information System; Delinquency management etc.

The organisation should identify who is responsible for managing training activities andwho the training activities could be provided by. An outline of these plans should beprovided in the business plan.

6. Act ion Plan

It is recommended that you devise an action plan that clearly defines the specificactivities your organisaiton must undertake to achieve its human resource managementobjectives. This action plan may cover such activities as:

o Plans for recruitment of new staffo Changes to organisational structureo Employee performance review / job description reviewo Reviews of incentive schemeso A staff retreat or other activityo

When preparing an action plan be sure to identify the person responsible for each actionand a timeframe within which the action will be completed.


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Session 7: Marketing & Promotion

1. What is marketing?

A broad definition: Marketing is the way an institution engages with the variousmarkets it serves or would like to serve.

Marketing focuses on what the market values, rather than what the institution wants toprovide:Theproduction concept: Make it and it will sellTheproduct concept: Make it well and it will sell.Theselling concept: Promote it well and it will sell.Themarketing concept: Make something the market values and it will sell.

Marketing brings together information from internal and external sources to determine thebest answers to the following questions:

Which produc ts and services are needed and will be bought? What price is acceptable to clients? How can products and services be sold in the most effic ient and effective

manner? Which information channel is best able to reach clients to make the product

known, valued and demanded?

We have already discussed client needs and preferences in Session 3, and products inSession 4, so this session will focus on how an MFI effectively reaches clients withinformation about its products and services.

Remember that marketing is more than selling and promotion of products. It is the customerfocus of the whole organization.

2. Marketing for MFIs

Why do MFIs need to do marketing?

Financial viability is dependent on client satisfaction.

In places where microfinance is relatively new, MFIs typically put little effort into marketingsince they often have no competition. But in places where MFIs compete with each other forthe same clients, marketing is quickly becoming a critical concern of MFIs. Increasingcompetition requires MFIs to put more energy into retaining and finding new customers.

3. The Marketing Mix

Marketing comprises a mix of 8 different features. Read about each of these below.

For each product or service you offer, you should specify each of the following, andcompare this with your competitors.

Feature Details

Product(design)

Includes specific product features, opening/minimum savingsbalances, withdrawal terms, loan terms, loan disbursement times,collateral or guarantees, repayment structures

Price Includes the interest rate, withdrawal costs, loan fees, pre-payment


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Feature Details

penalties, prompt payment incentives, transaction costs and otherfees and discounts.

Promotion Includes advertising, public relations, direct marketing, publicity, andall aspects of sales communication.

Place Refers to distribution and making sure that the product/service isavailable where and when it is wanted. This includes such options as

field workers or agents, branches, working with informal sectorfinancial service providers, etc.

Positioning Is the effort by the MFI to occupy a distinct competitive position in themind of the target customer. This could be in terms of low price,security of savings, quick turnaround time, professional service, etc. Itis a perception.

PhysicalEvidence

This is what makes the MFI and its invisible, intangible servicesvisible. It includes the presentation of the product, how the branchphysically looks, whether it is tidy or dirty, newly painted or decaying,the appearance of the brochures, postersand passbooks, etc.

People Includes how the clients are treated by the people involved withdelivering the product in other words the staff of the MFI.

Process Includes the way or system through which products and services aredelivered: the queues/waiting involved, forms to be completed etc.

Source: MicroSave

4. Key Aspects of MarketingThe most important thing is to improve the amount and quality of attention

given to the client. FUPACODE, Paraguay

Marketing is a continuous process that includes planning, implementing and evaluatingperformance. MFI marketing involves studying clients and developing products to meet theirneeds. It takes into consideration the competitive market, determines the position of theinstitution in that market, and promotes products to potential clients. Carrying out these activities

effectively often requires a specific marketing plan.

Market & Client AnalysisMarketing begins with the clients, by identifying potential markets and then surveying clients todetermine their specific needs and desires. These steps were covered in Session 3.

Competitive AnalysisBy studying the competition, an MFI can beinformed about the types of financial servicesthat are offered by its competitors.The leveland type of competition will affect how theMFI decides to position itself strategically inthe market.

Strategic Planning and PositioningAssemble all of the market information you haveand determine how best to place to yourorganization within that market. i.e. what imagewould you like to convey?

Promotion and Outreach Communications

ACLEDA in Cambodia conducts regularquestionnaires with 100 micro and small

enterprises and 100 small and medium sizedenterprise clients at each of its

branches every year.

SEWA Bank in India and FundacinMario Santo Domingo in Colombia offercorresponding social services along with

their credit product to create acompetitive edge.


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Financial services are intangible: you cant smell them, touch them or taste them. You areselling based on perception and trust, so you must build the right perception and deliver on theclients trust.

Identify the message you want the clients to hear, then test it on a sample of clients to see whatthey think. Remember, customers buy benefits, not products, so the message needs to focuson the benefits that a product can provide.

Once you have the core message, develop abranding strategy to support it. This may be a logo,a colour scheme, a tag line or something else thatwill help to carry the message.

When your message and branding is in place, you need

effective promotional tools to reach the potential clients.Many MFIs use traditional media such as brochures,leaflets, posters, radio/TV advertising, as well as non-traditional media such as songs, theater, and film.

Marketing PlanTo make your marketing effective you must have clear objectives for how the marketingfunction will be integrated into the institutions operations, an assignment of responsibilities ,and a marketing budget to carry out the different steps.

5. Getting Started: An Action Plan

Once you have considered each of the steps above, you should come up with an action plan.An example of an action plan is provided below.

Marketing &PromotionObjective

Specific Activities Person Responsible CompleteBy (date)

1 To improveoutreach to a newmarket segment rural womenfarmers

1. Research the new marketsegment

2. Develop / modify product tomeet their needs

3. Identify message and brand

4. Develop promotionalactivities to launch newproduct

5. Assess product andmarketing strategy

1. Sandra Hio (BusinessDevelopment Manager)

2. Senior managementteam

3. Sandra Hio

4. Sandra Hio

5. Sandra Hio

25/11/08

03/03/09

01/04/09

01/09/09

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2

FINCA Uganda and K-REP havepositioned themselves as being the

oldest and largest MFI in the countrythat is, the market leader.

Karibu Bank Savings Account benefit statementThe Accumulator Savings Account is easy to open, carries no hidden costs and pays highinterest to accelerate your progress towards the lump sum of money you need to realise yourdreamsWith the Accumulator Savings Account your dreams can come true!

Mibanco MFI has a home loan

with the following brand andlogo (casa means house):


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3


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Session 8: Social Performance Management

1. What is social performance management?

Social performance management = an ongoing process which involves setting clearsocial objectives, monitoring and assessing progress towards achieving these, and using

this information to improve overall organisational performance.

Most microfinance institutions (MFIs) have explicit social goals within their missionstatements, but often these are not managed actively.

Social performance needs to be managed and reported as systematically as yourfinancial performance.

Social Performance Management can help your MFI stay focused on its mission andmaximise both aspects of its performance financial and social.

An example of Pro Mujers social objectives

Social goal Social objective

Offer services to womenwho live in conditions ofsocioeconomic exclusion

At all times, 95-98% outreach to women, percentage of menno higher than 5%

At the end of 2008, at least 50% of new clients will be belowthe poverty line

Expand coverage to 15 medium-sized towns by the end of2008

Offer integrated servicesto satisfy the needs ofthe targetclientele

By the end of 2008, to reach an average loan amount of$241.

Achieve a retention rate of 95% by the end of 2008

Establish, by the end of 2008, 3 new alliances withinstitutions to offer additional services to clients

Lead towards thesustainability of clients,their families andcommunities

Increase client income by at least 15%, by the end of 2008.

Increase of clients' participation in social organisations by15%.

Increase of 5% in school attendance of clients children.

Clients savings will average $85 by the end of 2008

2. Assessing social performance

Unlike financial performance which can be assessed with the use of statistical dataprovided from within the organisation (financial reports), social performance is muchmore qualitative in nature and therefore requires a more qualitative approach to datacollection.

Best practice market-led microfinance should assess client satisfaction on an on-goingbasis. Client satisfaction reports are also the most appropriate way for an organisation to


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assess its social performance against its pre-defined social objectives. As described inStep 3: Clients and Markets, client surveys and focus group discussions are simplemethods that any organisation can employ to obtain such information.

Remember:Client satisfaction surveys and focus group discussions should: be undertaken in a participatory manner MFI staff should consider various formats of interviewing, including the introduction

of games, use of visual tools that will encourage more of a more qualitative analysis.

An example of Pro Mujers monitor ing process:

Pro Mujer uses the following info rmation sources to evaluate itsprogress towards its social goals:

Client monitoring and evaluation: assess client satisfaction andreasons for client exit. Use suggestion boxes, exit mini-surveys, staffand client feedback.

Social development services quality monitoring system: this toollooks at the quality of health and training services, and staff attentionto clients. When complete, it will be integrated into the MIS.

Monitoring of client poverty levels External social rating reports and impact assessment, conductedevery two to three years

When planning your social performance monitoring, ask yourself:

1. What tools/methods will you use to measure social performance?2. How often will you collect data?3. Who will undertake data collection and analysis of the data?4. Are you already collecting this data?5. How will you monitor gender inequalities?

3. Assessing social & poverty impact, incl. gender considerations

In addition to looking at the organisations performance, it is important for an MFI toevaluate the impact it is having on its clients.

MFIs activities have various types of impact on its clients: social impact (relationships); human impact (health, education); natural impact (access to land, water, infrastructure); physical impact (ownership of productive and non-productive assets); financial impact (income levels, levels of savings, access to finance).

An organisations assessment should also consider the extent to which genderinequalities have been addressed andhave changed.

MFIs should use qualitative tools such as client survey, interviews, focus groupdiscussions to collect data on the impact of products and services.

4. Social Performance Measurement: Pro-poor loans

A pro-poor loan is a loan that is designed to meet the needs of the poor (definedwithin a specific context).


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How can this measure be useful?MFIs that have specific social objectives that relate to reducing levels of poverty orincreasing the percentage of poor clients they serve, can monitor these objectives bymeasuring the number of pro-poor loans disbursed to clients, the MFI can analyse theextent to which it is working with poor clients and therefore meeting poverty objectives.

In this case, Pro-poor loans are defined here as falling into two categories:a) loans with an annualised loan size of 3.2 million Kip or less (per client)

b) loans with an annualised loan size of 1.6 million Kip or less (per client)

Note on annualised loan sizes:A 6 month loan of 500,000 kip =an annualised (1 year) loan of 1,000,000 kip;A 2 year loan of 3,000,000 kip =an annualised loan of 1,500,000 kip

You should record your levels of pro-poor loans in a table as follows:Pro-poor loans Current End of Yr1 End of Yr2

Number of loans


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Session 9: Financial Planning

1. Income & Expenditure Projections

To help us plan future operations we need to know what income and expenditure we expect toincur. The easiest way to do this is by estimating our average monthly income and expenditure,

then projecting this forward. If you are planning 2 or 3 years ahead then remember to factor inprice rises each year.

Major income itemsTypical sources of MFI income are:

Interest received on loans Fees charged to clients Interest received on bank and other investments

Major expenditure itemsTypical MFI expenditure items are as follows:

Portfolio expenses such as interest paid on savings Loan loss provision expense Financing expenses such as interest paid on MFI borrowings Staffing expenses (branch and head office staff salaries) Other branch and head office operational expenses, such as rent, stationary,

postage, utilities, consumables, insurance, repairs & maintenance, fuel forvehicles, vehicle maintenance, travel and per diem, training/workshops,marketing, recruitment, audit and external accounting support, legal and licensingcosts

Depreciation of fixed assets Taxes

Depreciation expense: When you purchase fixed assets (such as a motorbike) you do notrecord the purchase value of the item as an expense. Instead you add the asset to the balance

sheet. Over time the value of the asset will reduce, so you need to reduce the value of the assetin the balance sheet. We do this by recording depreciation.

Each month or year, an MFI should depreciate a percentage of the original value of the asset.This is recorded as an expense in the income statement.

Depreciation Example:An MFI purchases a motorbike for $2,000.The useful life of the motorbike is 4 years. So the MFI will record a depreciation expense of 25%($500) each year for 4 years.

2. Sources of funds & Balance Sheet

Sources of Funds

MFIs typically access funding f rom a variety of sources and these should be clearly identifiedin the financial planning section of the business plan.

The following is a list of some common sources of funds for MFIs: Investor Capital: this refers to shares or other capital invested in the institution.


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Donations/Grants: these can be cash or in kind donations (i.e. office space, secondedstaff, legal services etc). Donations/grants are usually made by government,international aid agencies, international NGOs or individuals)

o Restricted grant funding can only be used for a specified purposeo Unrestricted grant funding can be used for any area of MFI operations

Savings: these may be deposited by members (those who have paid some membershipfee) or non members (other clients)

Borrowing: these are wholesale loans taken by the MFI. Loans may be available fromgovernment, international agencies or banks.

Retained earnings: this is the accumulated profit made by the MFI. Retained earnings orreserves =the profit in the Incomes Statement.

All of these sources of funding should be recorded in and accessible from the MFIs balancesheet.

Balance Sheet

The balance sheet shows an organisations assets, liabilitities and equity (owner capital) at aspecific point in time. The relationship between these items must always be:Assets = Liab il it ies + Owner Equity

Assets

Cash and deposits Loans Fixed Assets Other assets

Liabilities

Customer deposits Other borrowed funds Other liabilities

Owner Equity

Shares Reserves and Funds Retained Earnings

When conducting financial planning, start with your current balance sheet. Then use yourincome, expense and portfolio projections to plan what your future balance sheet will look like.This will enable you to plan the right mix between debt, capital and assets. If for example, yourprojected balance sheet tells you that you need to raise more capital next year, then you needto make plans to achieve this.

3. Projected cash-flow statement

Cash flow is critical to all businesses, especially businesses that specialise in managing cash!You should always have a cash flow projection for at least 1 year ahead.

A cash flow statement =a financial statement that shows a company's incoming and outgoingmoney (sources and uses of cash) during a time period (often monthly or quarterly).

Remember that cash in does not equal income, and cash out does not equal expenses. Thereare other sources of money coming in and out such as loans and savings.

Here as examples of typical cash flows for an MFI:


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Money in: income, deposits, repayments, other borrowingsMoney out : expenses, withdrawals, loan disbursements, repayment of borrowings

The cash flow statement is useful in determining the short and medium-term viability of a MFI,particularly its ability to pay bills.You should make sure you always have enough cash to pay foryour near-term expenses and outgoings.

4. Key Performance Indicators

Calculating performance indicators is a useful exercise for MFIs to monitor various keyperformance targets. These are presented in the business plan to give the reader a moregeneral picture of how the MFI is performing, in terms of its sustainability, client outreach, andefficiency. A few of the most useful and common indicators used by MFIs are.

Operational Self-Sufficiency (%): A measure of financial efficiency equal to total operatingrevenues divided by total administrative and financial expenses. If the resulting figure is greaterthan 100%, the organization is considered to be operationally self-sufficient. In microfinance,operationally sustainable institutions are able to cover operational costs with their businessrevenues.O.S.S = (Total Income grant income) / Total Expenses

Financial Self-Sufficiency (%):Total operating revenues divided by total administrative andfinancial expenses, adjusted for low-interest loans and inflation. In a microfinance context, aninstitution is financially self-sufficient when it has enough revenue to pay for all administrativecosts, loan losses, potential losses and funds.F.S.S. = (Total Income grant income) / (Total Expenses + imputed cost o f capital)

Return on Equity (%): Profit for the period divided by the average owner equity.RoE = (Net Operating Income, less Taxes)/ Average Equity for the period

Return on Assets (%): Profit for the period divided by the average assets.RoA = (Net Operating Income, less Taxes)/ Average Assets for the period

5. Scenario analysis

Scenario analysis =describes how changes to the key portfolio variables (e.g. client numbers,loan sizes, interest rates) affect your financial viability.

Conducting a scenario analysis :Once you have completed your portfolio plan spreadsheet, you can change one variable at atime. Look at the impact of this change on your income, expenses and balance sheet. Do thisfor various variables and consider the impacts that the change to each variable has on thefinancial viability of the business. For example:

what happens if you increase your interest rate due to competition? What happens if the average loan size is larger than expected? What happens if savings are less than expected?

You should write down the results of your scenario analysis, such as in the following table:

Variable Impact of changes in variable

1 Changeinterestrate onloanproduct

A change of interest rate from 4% to 3% per month:

Reduces interest income and overall income by $23,500 over two yearperiod

Operational Self Sustainability at end of two year period reduced to93%

2


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5. Key risks and assumptions

It is important to consider the financial risks that your organisation faces in the years to come.This may be based on your scenario analysis as well as your own consideration of risks facing

the MFI.

Major Risks & Assumptions Financial

1 Loan delinquency2 Fraud, corruption and misuse of funds (by clients or staff)3 Higher than expected operating costs4 Unreasonable rental demands from office owners5 Poor management and investment of funds678910

Finally, consider your overall business operations and list any other major risks or assumptionsthat you are facing as an institution. Below are some examples:

Major Risks & Assumptions - Other

1 Power supply problems2 Theft, robbery and attacks3 Assumes inflation rate of 3%4 Portfolio at Risk (>30 days) =1%5 Staffing structure =5 in total, 1 director, 1 finance manager, 3 loan officers678910

Congratulations! You now have the knowledge required to complete each of the key steps inpreparing a business plan. Be sure to discuss your business plan with all stakeholders andmake adjustments based on their feedback. Most importantly, take a step back and considerwhether your business plan is realistic and achievable. Once you have agreed on your businessplan, the next step is to make it reality! Be sure to refer back to your business plan regularly totrack your progress on each of the items.

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