The purpose of this lesson is to introduce the concepts of accounting, what it is used for and who uses it. You will develop a basic understanding of the role accounting plays and why it is important to create accounting records and how they aid in the financial management of a credit operation. Basic accounting principles and the most widely used financial statements – the Balance Sheet, the Income Statement and the Statement of Changes in Financial Position are introduced. Topics include:
- Definition of accounting
- Role of accounting
- Basic accounting concepts
- Financial statements
Designing loan products to meet client needs is fundamental to the success of a micro-finance organization. Understanding cash patterns of borrowers and the profitability of their businesses helps to match the loan product to their business cycles. The loan term and repayment frequency are possibly the most significant variables in micro-finance and should be suited to the borrowers’ needs. The effect of an increased interest rate on the borrower is relatively less significant than increases in other costs. The method of calculating the interest rate and fees significantly influences the price of the loan.
The objective of this lesson is to highlight the effect of credit on borrower activities. Topics covered include:
- Cash Patterns
- Loan Term
- Loan Utilization
- Loan Purpose
- Interest Rate
- Fees/Service Charges
When clients borrow money, they incur both financial and transaction costs. Financial costs include interest, fees, forced savings, group fund and insurance fund contributions. Transaction costs include direct costs such as child care and transportation costs to attend meetings, and other indirect costs such as time away from the business, plus the opportunity cost of savings.
The objective of this lesson is to explain the effective cost to clients of borrowing and the related yield to the lender. Topics covered include:
- Cost components
- Effective cost calculation
- Effective yield to an organization
- Role of savings
This subject is covered in more detail in the separate study guide on Interest rates and self sufficiency, which also includes a financial calculator.
The purpose of this lesson is to introduce the Balance Sheet and explain its components: Assets, Liabilities and Equity (Fund Balance; Reserve Balance). The relationship between these components will be explained.
You will develop a basic understanding of how the Balance Sheet is created and how the operations of the organization are recorded on the Balance Sheet. You will also see how the Balance Sheet is “static” in nature. Topics include:
- The Balance Sheet
- The Accounting Equation
- Comparative Balance Sheet
This lesson will provide the tools necessary to determine the break-even point for a borrower activity, for an income-generating project or for a micro-finance organization branch. Profitability can be forecast and managed when one knows: i) at what level of production a business will be able to cover all of its expenses; ii) what minimum product price is needed for the product to be viable at different levels of production; and iii) what happens if the financial estimate of costs and prices are changed.
You will learn how to calculate a break-even point for an income-generating activity and for a branch. Topics covered include:
- Fixed costs
- Variable costs
- Contribution margin
- Required break-even volume / revenue
- Break-even portfolio size
The purpose of this lesson is to introduce the Income Statement and to define revenue and expenses. The relationship between revenue and expenses and their affect on the Income Statement will be explained.
You will become familiar with definitions of items commonly seen on the Income Statement and how the Income Statement is created. You will develop an understanding of how the Income Statement reflects transactions for a specified period of time rather than at a specific “point-in-time”. Topics include:
- The Income Statement
- Comparative Income Statement
The purpose of this lesson is to examine how the various activities of the organization’s credit operations are recorded. Double-entry accounting is discussed and the methods of recording various transactions are presented. Voucher preparation and journal entries are explained for both Balance Sheet accounts (Assets, Liabilities and Equity) and Income Statement accounts (Revenue and Expenses). In addition, the importance of the Cash account and corresponding periodic bank reconciliations are discussed.
You will develop a good understanding of how to record transactions and what the terms “debit” and “credit” refer to in accounting terms. An understanding of generally accepted accounting principles and accounting methods will be achieved. Topics include:
- Double-Entry Accounting
- Voucher Preparation
- Journal Entries
- Recording Assets, Liabilities and Equity Transactions
- Recording Revenues and Expenses
- Cash Account and Bank Reconciliation
Micro-finance organizations are becoming more and more concerned with financial viability. This lesson discusses the costs and revenues associated with credit activities and the importance of achieving self-sufficiency and high productivity.
Micro-finance organizations are generally involved in two primary activities: credit and savings. For the purpose of this lesson, it is assumed that no voluntary savings are provided by the organization and all savings collected are simply a requirement of receiving credit. Any other activities which occur at the branch are excluded from the analysis which is explained here.
Topics covered include:
- Financial viability
- Operational self-sufficiency
- Cost of capital
- Financial self-sufficiency
- Trend analysis
- Productivity analysis
Generally, the loan portfolio of a micro-finance organization is its largest asset. The loan portfolio enables the organization to continue to provide credit to borrowers and to earn revenue. It is necessary, therefore, to manage the portfolio in such a way as to limit delinquency and loan default.
This lesson demonstrates the importance of accurately measuring the portfolio risk, provides an understanding of how the quality of the portfolio affects the viability of a micro-finance organization, and offers ways to manage the credit operations to minimize the risk to the portfolio.
Topics covered include:
- Portfolio outstanding
- Repayment rates
- Measuring portfolio risk
- Aging analysis
- Loan loss reserves
- Rescheduling/refinancing loans
- The cost of delinquency
- Controlling delinquency