Cash Flow Review
Techniques
Most microenterprise operators normally do not
keep records of their business transactions so that
AOs have to rely on the verbal information supplied
to them by the applicants during the CI/BI.
Since loan applicants are biased data sources, two
errors are usually committed when preparing the
applicant’s cash flow – overstated income and
understated expenses.
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The income and expense data supplied by the client can be
checked for consistency by reviewing:
(1) Price mark-up
(2) Total Monthly Income from Business and Other
Sources
(3) Total Monthly Household Expenses
(4) Net Monthly Income
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Price Mark-up
Price mark-up is computed using the formula:
Sales
Cost of Purchases
- 1 x 100
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2
The computed price mark-up should not exceed the
maximum standard rate set by the MFU for each type
of enterprise (e.g. 15% price mark-up for sari-sari
stores, 25% for other retail shops, 50% for carenderias
and food processing activities).
If the computed mark-up exceeds the standard rate,
the reported sales or income should be adjusted by
using any acceptable rate and applying this on the
cost of purchases. Between using the reported sales
or income and the cost of merchandise purchases,
the latter would be easier to verify.
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Example:
If a sari-sari store owner claims that his weekly sales is
P20,000 and his weekly purchases is P15,000, his average
price mark-up will be:
(P20,000 / P15,000) – 1 x 100 = 33.3%
If the normal price mark-up for sari-sari stores in the area is
only within the range of 10-20%, the reported sales are too
high.
Adjust sales by assuming that the average mark-up, say, is
only 15%. A more realistic weekly sales level, therefore, can
be computed, as follows:
P15,000 x 1.15 = P17,250
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3
Estimating the Average Price Mark-Up
The average price mark-up can also be estimated by
comparing the buying and selling prices of, at least, the five
(5) fastest selling items in the shop, through the formula:
___Total Sales
Total Purchases
Where:
Total Sales
Total Purchases
- 1 x 100
= Selling price x Quantity of each item
= Buying price x Quantity of each item
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Example:
Average
stock
Item A
Item B
Item C
Item D
Item E
100 units
50 units
70 units
30 units
60 units
Current
Price
10.00
30.00
20.00
50.00
15.00
Buying Selling
Price
Sales
12.00
33.00
23.00
60.00
18.00
Total
Total
Total Price
Purchases
Mark-Up
12,000
10,000
1,650
1,500
1,610
1,400
1,800
1,500
1,080
900
18,140
15,300
?
______
18,140 -1 x 100 = 18.6%
15,300
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4
Total Monthly Income from Business and Other
Sources
This income represents the regular monthly income of the
household before household expenses. This includes all
income the family receives from the business and other
sources (salaries).
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The AO can verify whether the estimated total monthly
household income of the borrower, as shown in the cash
flow, is consistent with the living condition of the borrower
and his family when he/she visit the borrower’s house
during the CI/BI.
The AO may compare the borrower’s house and living
condition with that of his own, or those of other persons
whom he/she knows as belonging to the same income
bracket as that of the borrower.
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5
If the estimated total monthly household income is not
consistent with the living condition of the household,
the AO must revise the cash flow. Loan applicants
tend to overstate their incomes.
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Total Monthly Household Expenses
The total monthly household expense should be compared
with the size of the household and the ages of household
members.
The AO should be familiar with the major expenditure items
of households in his/her area of assignment and the most
comment level of expenditures for each item.
For greater conservatism, add at least 10% to the total
household expenses for miscellaneous expenses.
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Net Monthly Household Income
The Net Monthly Household Income also represents the
monthly savings of the household or the size of its
investment funds.
This amount should be checked against the relevant
items in the borrower’s balance sheet –
i.e. savings deposit, cash on hand, real properties, other
household assets, and other investments.
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If the amount appears large compared with the
amount the borrower intends to borrow, verify from the
client the reason why he/she still intends to borrow.
If the borrower cannot provide an adequate
explanation for the apparent discrepancy, the AO
should review the cash flow and make the necessary
adjustments in the borrower’s income and expense
data.
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