Session 2, Financial analysis exercise

(A) Meena’s shop

Meena started her small general shop, in front of her house, on 1 April 2001. It is now
31 March 2002 and Meena wants to know how well she has been doing. She has not
kept any records, since she cannot read or write, but she has a very good memory.
She says she felt that the business started well, and it has been going on at more or
less the same level for the whole year. You have interviewed her, and have obtained
the following information from her.

 She has stocks worth Rs 20,000 in the shop, which is the same amount as she
had when she started.
 She pays herself Rs 2,500 a month, every month.
 She borrowed Rs 5,000 from her brother, without interest, at the start, and
has not repaid any of this loan.
 She has Rs 2,500 in the cash box belonging to the business.
 She spends Rs 20,000 a month on goods to be sold.
 She put her own savings of Rs 10,000 into the business when she started.
 Her customers owe her Rs 10,000 for goods bought on credit.
 Her sales are Rs 25,000 every month.
 Her passbook shows that she has accumulated savings of Rs 17,500 since the
business started. She hopes to use this money to expand the business in the
future.
 She owes Rs 5,000 to suppliers for goods bought on credit.

Assignment

 Prepare a balance sheet for Meena’s business, showing the financial situation
on 31 March 2002, and an operating statement of the financial operation of
the business for a month.
 What are your comments on the way Meena manages her business?
 Session 2, Financial analysis exercise

(B) Laxmi’s group

Acting upon an idea that Laxmi got from a friend in a nearby village, she and her
neighbours started a savings and credit group in January 2000. After a year, the
members began taking loans from the savings. Laxmi does not like taking care of the
cash, and wants to open a bank account for the group. She hopes that, in the future,
members who need more money will be able to borrow from the bank. The bank
manager has asked you to advise him on whether Laxmi’s group is likely to be a
good customer. Laxmi had kept careful records in a notebook. You interviewed her at
the end of 2001, and obtained the following information.

 There have been 20 members from the beginning, two years ago.
 Each member saved five rupees a week for 50 weeks each year; they did not
make savings during two festival weeks each year.
 Their savings now total Rs 10,000.
 The members paid one rupee per Rs 100 per week on loans they took from
the group.
 The members owe Rs 10,000 to the group.
 During the two years, the members had paid Rs 250 to the group in fines for
late attendance.
 Laxmi has Rs 4,000 in cash (belonging to the group) hidden in her house.

Assignment

 Prepare a balance sheet of Laxmi’s group for the day she was interviewed,
and an operating statement for a year.
 What will you suggest to the bank manager? Should he accept the group’s
savings, and should he also consider the members as potential borrowing
customers?
 Session 2, Financial analysis exercise

(C) Gita’s and Hari’s household

Gita and Hari, and their four small children, live in a small hut in an informal
settlement in a village. One year ago, on 1 April 2001, Gita became a member of a
savings and credit group promoted by a local NGO. Her neighbours persuaded her to
join, although she was not sure what good it would do for her family. Life was always
a struggle, but they managed to survive.
You have been asked by the NGO to recommend ways in which they should develop
their new savings and credit programme. So far, they have formed a number of
groups such as that of which Gita is a member. Each member saves five rupees a
week, and the NGO field worker banks the money for them in the group’s name. Now
that a year has passed, the NGO staff and the members are considering the next
steps. Should they start to lend each other money from their accumulated savings?
Should they put their savings into fixed deposits to earn more interest? Should they
even try to borrow more money from the bank? There are many options. You
interviewed Gita and some other members at length to obtain information on which
to base your recommendations.
You soon realised that it was not sensible to try to get information for Gita alone; her
household is the economic unit. You talked to Gita and her husband for a few hours
on 31 March 2002, obtaining the following information.

 Gita has saved five rupees every week for 50 weeks, making a total of Rs 250.
 Gita and Hari pay Rs 2,500 a year as school fees for their children’s education.
 They have eight goats, worth Rs 500 each, and earn Rs 2,000 a year by selling
milk.
 They owe Rs 2,500 to Hari’s brother; no interest is payable on this loan.
 They own Rs 3,000 worth of cooking vessels and a bicycle worth Rs 1,250.
 They spend Rs 10,000 a year on food.
 Gita keeps the family’s cash in a box hidden in her hut; they have Rs 750 now.
 They owe Rs 1,500 to the local shopkeeper for goods taken on credit.
 They have five chickens worth Rs 250 in total, and sell eggs worth Rs 1,000 in
a year.
 They owe the local moneylender Rs 7,500; he charges no interest but makes
the family work for him without pay for several weeks during the planting
season.
 They spend Rs 1,500 a year on medical expenses; one child is frequently ill.
 When she is not working in the fields, Gita weaves baskets, which she sells for

Rs 2,000 a year; she spends Rs 1,000 a year on the raw material for these
baskets.
 Gita has Rs 2,500 worth of jewellery, given as dowry by her family.
 The family does not own the plot on which their hut stands, but the material of
their hut is worth Rs 2,500.
 The family earns Rs 10,000 a year from day labour for other villagers.
  The family’s clothing is worth about Rs 1,000.
 They lent Hari’s sister Rs 2,000 some time ago; she does not pay any interest
on that amount.

Assignment

 Prepare a balance sheet for Gita’s and Hari’s household, and an income and
expenditure statement for one year.
 How can Gita and Hari benefit more from their membership of the group?
 Assuming that this household is a representative sample, what will you
recommend to the NGO?
Session guide

1. Introduction and guidelines

Start the exercise with a brief introduction in the classroom, before the participants
identify and interview the business people. The participants should carefully note the
practical guidelines for field interviews, which have been developed as the result of
many similar exercises in the past.
Tell the participants that they will be required, in small groups, to select and
interview one or more micro-business owners, in order to learn from them.
The participants may feel that business owners will refuse to cooperate, or will not be
willing or able to give them the necessary information.
Reassure them that this exercise has been done many times all over the world, and
that very few business owners have refused to cooperate, so long as they are
approached in the right way.

2. Strategies
Divide the participants into groups of up to three or four members each. The
participants can work alone, and larger groups are not advisable; large groups may
intimidate the business owners, and the participants who most need to learn may
allow others do all the work.
Groups should, if possible, include some members who are familiar with simple
financial accounts and others who may have more experience in field contact; each
can learn from the others.
This exercise is designed to enable the participants to find out more about the needs
of their customers. Most MFI customers are women, so some women business owners
must be interviewed, if possible. It may not be easy to find them, since women’s
micro-businesses are often ‘hidden’ in their homes or elsewhere. If local customs
make it difficult for men to interview women, some groups should be made up of
women only. Ensure that each group has at least one member who can speak the
local language.

3. Selection and introductions to the businesses

Tell the participants that the groups must themselves select the businesses they are
to interview, and must introduce themselves and obtain their cooperation. They will
find it useful to follow certain guidelines.

 They should choose really small, informal micro-businesses, such as those

owned by clients of MFIs. These may be mobile vendors, shoe cleaners,
roadside mechanics, basket weavers, self-employed porters, women selling
fruit and vegetables, rickshaw pullers, tailors, carpenters, or those engaged in
any other ‘income generating activity’ like tea shops.
  Every group should not choose the same sort of business; one might take a
shopkeeper, one a service business, one a manufacturing business, one a
mobile business, one a youth’s business, and at least one a women’s
business.
 Groups should avoid choosing businesses which are close to one another,
since the interviews may cause disturbance, with the number of visitors
attracting too many onlookers.
 They should, if possible, not choose businesses, which are known to any of the
group members, in any capacity.
 They should look beyond the most obvious businesses, in prominent positions,
to the smallest businesses, particularly those owned by women, which are
often out of sight and have to be searched out.
 The interviewee must be the owner of the business; the groups must, at the
outset, ask if s/he is an employee and not the owner. If the owner is not
present, the group should find another business.
 If a group quite quickly obtains all the necessary information from their first
contact, or if some problems arise during the interview, it may find a second
business; in this way, it can analyse and present both sets of data, or the one
it prefers.
 The group should introduce itself and should stress at once that it has come to
learn from the business. The members have not come to give advice or to
teach anything, they have nothing to do with government or taxation
authorities, and they have NOT come to decide whether or not the business
should get a loan. This should be made very clear indeed.
 It is useful to show respect and to praise the business and its products or
service. If possible, they may buy something as they interview the owner, but
they should not suggest that they are paying for the interview.

4. The assignment
The following assignment may be written on the board or reproduced and handed
out.

a) Prepare and present a very brief description of the business, its owner, the
reason why s/he started it, its history, the numbers of jobs it is creating, and
the owner’s opinion about its main strengths and problems.
b) Prepare and present a simplified approximate balance sheet (statement of
condition) and profit/loss account (statement of operations) for the business.
The balance sheet should be for the time and date of the interview, and the
operating statement can be for a day, a week, a month, a season, a year—
whatever period is most appropriate.
c) Show briefly how the business fits into the financial economy of the owner’s
household: what other sources of income they have, how they save, and from
where they obtain money in emergencies.
d) Analyse the data, and prepare and present a brief appraisal of the business
and, in particular, of the way in which its owner is managing its finances. Is
the available money deployed optimally? What improvements would you
recommend?
e) Describe what, if anything, you believe your MFIs could do for the business.
What are the implications of this case for micro-finance in general?

The presentation should not take more than 10–15 minutes.

The participants may feel that it will be difficult, if not impossible, to obtain the
necessary information, because the owners are either unable or unwilling to provide
it. Stress that trainees in similar courses worldwide have obtained information of this
kind from micro-businesses; success depends on the way they approach and
interview the owner, and this skill is necessary not only for this exercise but for
generally understanding micro-finance clients and their needs.

5. The interview itself

Ask the participants to suggest one aspect in which the way micro-business owners
earn money differs from themselves, apart from the fact that they generally earn less
money.
They must recognise that the business owners whom they will be interviewing do not
earn money while talking or sitting about, but only when they are satisfying
customers. This is an important lesson for every aspect of micro-finance. The
interviews may occupy one hour or more; the group must show that they respect
their respondents and are sincere in their wish to learn from them.
If they show that they genuinely respect the people they are interviewing, and follow
these simple guidelines, they should be able to obtain the information they need
without difficulty.

 The group members should sit or squat at the level of the business owner,
however uncomfortable or dirty this may be.
 If customers want to do business, the group must wait until they have
finished; otherwise it will be depriving its interviewee of his/her income.
 One member of the group should ask the questions, while the others take
notes, not on threatening official-looking clipboards but small, unobtrusive
notebooks.
 Many micro-businesses are routinely threatened and harassed by the police or
other authorities; the group must recognise this fear, and show that its
members are not people of that type.
 The group is asking the business owner for personal and confidential
information; the members must recognise this, and hold the discussion out of
the public eye if possible. Interviewing women is particularly difficult in some
societies. Women participants should interview women business owners.

6. Obtaining information
Few micro-businesses have written records, and their owners themselves may not
know their monthly sales, or expenses. Also, they are unlikely to pay themselves
regular wages. They are more likely to take money from the business as and when
they need it, and to reinvest it when they do not, without recording the transaction as
such.
It is possible, however, to obtain reasonably accurate information, and groups can
use it to show their interviewees how their resources are deployed, and whether they
are making money or not.
Groups should observe visible signs as well as asking questions. The quantity and
condition of goods in stock, the appearance of the products and of the business, and
the owner’s way of dealing with customers are all indicators of management, and can
suggest avenues for questions.
Information can be obtained by ‘triangulation’; the daily sales of a tea shop, for
instance, can be obtained in many different ways:

 The daily sales figure in money

 The price per cup of tea and the numbers of cups sold per day
 The number of cups of tea per kilogram of sugar, or litre of milk, and the daily
consumption of sugar, or of milk

Most micro-business owners try to maintain some record of credit sales, if they sell
on credit, and of how much they owe to their suppliers, if they buy on credit. Any
other records they keep may be unintelligible, or wrong. It is often better to rely on
verbal information and observation, even if some written data is available.
While few micro-businesses have records of sales, many business people keep some
record of their purchases. If they buy from wholesalers, they probably have receipts,
and they may also keep some informal record of other purchases. The total figure of
purchases, plus an estimate of the average mark-up, can provide a very good
approximation of the total figure for sales.
Many business owners save money, even if they are also short of cash. They realise
that they may need money urgently in case of an accident, sickness, or some other
emergency, and they also realise that they need to discipline themselves into making
regular small savings. They may do this through a local informal cash collector,
through a rotating savings and credit system (ROSCA), or through some other means.
They often have records of such savings.
Before the interviews, members of each group should meet briefly to allocate
responsibilities and to prepare a simple checklist in order to avoid omitting any
important information.

7. The interviews
Ensure that the participants follow the guidelines on business selection, and that they
carry out the interviews properly. Some senior staff members may not wish to go into
the market if it is hot or raining; ensure that they understand that micro-finance
clients have to operate in all weathers, and micro-financiers must be willing to do the
same.
Try tactfully to see something of each group’s interviews, but do not take part in any
way. If possible, briefly observe and make some notes about each business, in order
to be able to comment more usefully on the groups’ presentations.

8. The presentations
Ensure that every group knows when and where to reassemble, and what time the
presentations are to be given. Provide any necessary paper sheets, which are better
than OHP slides or PowerPoint presentations, since they can be kept in view for
reference in later sessions.
The participants should treat this as an exercise in ‘slick’ and well-organised
presentation. They should remember the following.

 The structure and ‘flow’ should be clear.

 Their poster sheets or OHP slides should be neat, and with large clear writing,
which is clearly visible from the back of the classroom.

Figures should be rounded to enhance clarity and to avoid giving any spurious
impression of accuracy. Any calculations must be free of errors.

9. Instructions
Maintain the time limit strictly, and ensure that any errors are pointed out and
corrected. In particular, groups should avoid labelling the previous period’s surplus as
‘retained earnings’ or ‘reserves’, and then supposing that any remaining difference
between the assets and liabilities is an error.
As suggested above, most micro-business owners reinvest their profits
‘unconsciously’; their businesses survive and grow only because they do this, and
this is the main source of capital for most businesses, everywhere.
The balancing figure for retained earnings may include increases in value of assets—
such as tools or equipment, or any buildings or land, because of inflation—but for
most micro-enterprises, which have survived more than a few months, this does
reflect reinvestment, and the owners’ understanding that excessive withdrawals,
however much the money is needed for consumption, will only ‘kill’ the business.

10. Discussion
Ensure that the following issues are covered.

 Not every micro-business needs or should be encouraged to take a loan. The

constraint to growth is not always shortage of capital. It may be limited
demand, inadequacy of the owner’s time or skill, scarcity of raw material,
harassment and insecurity, or sickness. A loan in these circumstances can be
disastrous.
 Many micro-business owners need regular safe savings facilities more than
they need loans. Is there a need for a daily or weekly savings collection
service, or are there already informal and insecure services of this type with
which banks or MFIs can and should compete?
 How were the interviewees saving larger sums for emergencies? Were they
using insecure or inconvenient methods such as livestock, jewellery,
excessive stocks, or deposits with suppliers, which were less attractive than
what might be offered by the participants’ banks or MFIs?
 The participants may have felt that the businesses should have kept better
records, to make it easier to produce financial statements. Can or should
informal (and often illiterate) business owners keep records? Do they need
them at all? Can they use them effectively to manage their businesses even if
they do know or can learn how to keep them?
 Very few micro-businesses, anywhere, have received loans from banks or
MFIs. Had any of the businesses, which were studied, ever received formal
loans, and would such loans, had they been available, have been of value?
 Had any of the businesses received loans from unofficial sources such as
moneylenders or suppliers? If so, how did the cost and convenience of these
providers of finance compare with those of the participants’ banks or MFIs?
  Did the businesses need other non-financial services more than finance, such
as training, information, advocacy to reduce harassment by officials, or
technical advice? If so, how could the participants’ MFIs have helped them
obtain these services?

11. Conclusion
Conclude the session by reminding the participants that the people whom they have
been discussing and from whom they have learned so much, are their customers.
They must learn what they need, and then satisfy those needs in a way which is
affordable to them and profitable to the bank or MFI.