ACCOUNT OFFICER’S
BASIC TRAINING
Cash Flow Review Techniques
Objectives
At the end of this session, Account
Officers will be able to –
1. Review the Cash Flow and test the accuracy and
consistency of data using the five Cash Flow
Review Technique tools.
2. Make the adjustments to Cash Flow computations,
if needed, to ensure that information contained in
the report is accurate and consistent with industry
and business standards.
2
 Most information on the business is
based on “ memory ” rather than actual
financial records
 High possibility of biased information
from the loan applicant - overstated income
and understated expenses.
3
The income and expense data supplied by the
client can be checked for consistency by
reviewing:
(1) Price mark-up or Profit margin
(2) Average Inventory
(3) Total Monthly Income from Business and
Sources
Other
(4) Total Monthly Household Expenses
(5) Net Monthly Income
4
Price Mark-up/Gross Profit
Margin Analysis
Price Mark-up/Gross Profit Margin
Price mark-up or gross profit margin
is computed using the formula:
Sales
- 1 x 100
Cost of Purchases
6
Price Mark-up/Gross Profit Margin
The computed price mark-up or profit margin should not exceed
the maximum standard rate set by the MFU for each type of
enterprise
For example:
-15-20 % price mark-up for sari-sari stores,
-25% for other retail shops,
-50% for carenderias and food processing activities
7
Price Mark-up/Gross Profit Margin
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.
8
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 is 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
9
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
10
Example:
Current
stock
Item
Item
Item
Item
Item
A
B
C
D
E
Buying
Price
100 units
50 units
70 units
30 units
60 units
Average
Selling Total
Price
Sales
10.00
30.00
20.00
50.00
15.00
18,140
15,300
12.00
33.00
23.00
60.00
18.00
Total
TotalPrice
Purchases
12,000
1,650
1,610
1,800
1,080
18,140
10,000
1,500
1,400
1,500
900
15,300
Mark-Up
______
?
-1 x 100 = 18.6%
11
Exercise:
Question: Is there anything wrong with these data?
Type of Business:
Daily sales:
Weekly Purchases:
Sari-sari store
1,500
9,000
Analysis:
Weekly equivalent of daily sales = 1,500 x 7 days
= 10,500
Weekly Purchases
= 9,000
Price mark-up
= (10,500/9,000) - 1 x 100
= (1.167 - 1) x 100
= 16.7%
Conclusion: This price mark-up is acceptable
12
Exercise:
Question: Is there anything wrong with these data?
Type of Business:
Sari-sari store
Daily sales:
1,500
Weekly Purchases:
9,000
Merchandise Inventory (AO’s estimate):
1,000
Analysis:
Merchandise Inventory:
1,000
Daily Sales:
1,500
Derived Cost of Purchase:
(1,500/1.15) = 1,304
which means that the
ending inventory cannot
support even one day of
sales
Conclusion: Data on sales & purchases are doubtful
13
What to do -• Check sales receipts or records, if any; or
• Check receipts or records of purchases, if
any; or
• Verify level of regular purchases with client’s
suppliers; or
• Estimate a more realistic level of sales and
purchases based on the client’s average
inventory level
14
Average Inventory Analysis
Average Inventory
Average inventory, is the total value of
stocks usually maintained by the business.
Small retail shops usually maintain an
inventory equal to 2-4 weeks of regular
daily or weekly sales.
16
Average Inventory
The AO should compare the reported average inventory
with the total value of the stocks of the shop when he/she
visits the business during the CI/BI.
If the discrepancy between the total value of the
observed inventory and that of the reported inventory is
large, the AO should verify reason for discrepancy from the
client.
If the client cannot provide adequate explanation for the
discrepancy, the AO should use whichever amount is lower
to represent the applicant’ average business inventory.
17
Average Inventory
• For trading-related activities, such as retail shops, the
ending inventory should be compared with the average
inventory. The ending inventory should always be
equal to, or greater than, the average inventory.
• If the ending inventory is lower than the
average inventory, the COST OF SALES should
be adjusted downwards using the difference
between the average inventory and the ending
inventory.
18
Adjusting SALES
Steps
Formula
Reported Sales
(1 + Normal Price Mark-up)
1
Cost of Sales
2
Adjusted Cost of
Sales
Cost of Sales
Plus : Ending Inventory minus
Minus : Average Inventory
3
Adjusted SALES
Adjusted Cost of Sales
Multiply by : (1 + Normal Price Mark-up)
19
Example
Type of Business:
Sari-sari store
Daily Sales:
P 1,500
Total Weekly Purchases:
P 9,000
Merchandise Inventory (AO’s estimate):
P 1,000
Average Inventory (Client’s estimate):
P 5,000
Analysis
Step 1:
COST OF SALES
=
Step 2:
ADJUSTED COST =
OF SALES
P1,500 x 7days
(1 + 0.167)
=
8,997
8,997 + (1,000 - 5,000)
4,997
This means that the cost of sales of P9,000 should be reduced to
P4,997.
20
Step 3:
Adjusted Sales = Adjusted Cost of Sales
x (1 + Normal price mark-up)
Adjusted Sales
= 4,997 x (1 + 0.167)
= 4,997 x 1.167
= 5,831
This means that the reported sales of P1,500 per day or P10,500 per
week should be reduced to only P5,831 per week, or P833 per day.
21
These adjustments are necessary in order to make the average inventory
consistent with the average sales and purchases of the business, as shown
in the table below. These adjustments are necessary in order to make the
average inventory consistent with the average sales and purchases of the
business, as shown in the table below.
Average Inventory, Beginning
Add: Purchases
Less: Cost of Sales
Equals: Average Inventory, Ending
Before
After
Adjustments Adjustments
5,000*
5,000
9,000
4,997
9,000
4,997
1,000** (?)
5,000
*As claimed by the client
** As estimated by the AO
22
NOTE : Do the average inventory analysis
only if the total value of the inventory is
substantially lower than the total cost of
purchases reported by the client.
However, if the difference between the
observed inventory and the cost of
purchases is not large, the price mark-up or
gross profit margin analysis would suffice.
23
Analysis of Total Monthly
Business and Household
Income
Total Monthly Income from Business
and Other Sources
Item
Daily
Weekly
SemiMonthly
Monthly
MONTHLY
TOTALS
Net Income from Business:
Total Business Income
Business Expenses:
Total Business Expense
NET BUSINESS INCOME
Total Other Household Income
TOTAL BUSINESS & HOUSEHOLD
INCOME
Analyze data
here
25
Total Monthly Income from Business
and Other Sources
This income represents the regular monthly
income of the household before household
expenses.
It is, thus, comparable to the monthly
salaries received by the AOs (or other
employees), in the sense that both are incomes
before household expenses.
26
Total Monthly Income from Business
and Other Sources
The AO can verify whether the estimated total
monthly household income of the applicant,
as shown in the cash flow, is consistent with
the living condition of the applicant and his
family when he/she visit the borrower’s house
during the CI/BI.
The AO may compare the applicant’s house and
living condition with that of his own, or those of
other persons whom he/she knows belong to the
same income bracket as that of the applicant.
27
Total Monthly Income from Business
and Other Sources
NOTE : If the estimated total monthly
business & 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.
28
Example
Total Monthly Income from Business
& Other Household Sources:
P25,000
Analysis
Compare the P25,000 total monthly income (before HH expenses)
with the following items:
•No. of HH members
4
•Household appliances
None
•House construction materials
Temporary
Conclusion: The income data is doubtful. A household with
only 4 HH members and receiving a monthly “salary” of
P25,000 normally would be owning at least some small HH
assets, or is residing in a house made of more durable
materials. AO should further verify the discrepancy between
the reported HH income & the observed living condition of the
HH.
29
Analysis of the Total Monthly
Household Expenses
Total Monthly Household
Expenses
Item
Daily
Weekly
SemiMonthly
Monthly
MONTHLY
TOTALS
Other Household Income
Remittances
Total Other Household Income
Total Business & Household Income
Household Expenses
Food
Education & School Allowance
Utilities (Light & Water)
Sub-Total
Miscellaneous (10%)
Total Household Expenses
Analyze data
here
31
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 common level of expenditures for each
item.
For greater conservatism, add at least 10% to the
total household expenses as miscellaneous expenses.
32
Example
Total Monthly Household Expenses:
P2,000
Analysis
Compare the P2,000 total monthly expenses with the following
items:
•Type of client’s business
Sari-sari store
•No. of HH members
5
•Ages of HH members (children)
1 HS, 1 college, 1
grade school
•Community where client is residing
Urban
Conclusion: The expense data appear too small for the
household described above. AO should gather more
information on the applicant’s HH expenditures and adjust
these, if necessary.
33
Analysis of Net Monthly
Household Income
Net Monthly Household Income
• Compute for this data using the Monthly Totals column in the
Cash Flow
• Formula:
Total Other Household Income
less : Total Household Expense
equals :NET HOUSEHOLD INCOME
35
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 applicant’s balance sheet -i.e.
savings deposit, cash on hand, real
properties, other household assets, and other
investments.
36
If the amount appears large compared
with the amount the applicant intends to
borrow, verify from the client the reason
why he/she still intends to borrow.
If the applicant cannot provide an
adequate explanation for the apparent
discrepancy, the AO should review the cash
flow and make the necessary adjustments
in the applicant’s income and expense data.
37
Example
Total Net Monthly HH Income:
P10,000
Analysis
Compare the P10,000 net monthly income with the following items:
•Savings/cash in bank
None
•Cash on hand
P500
•Real properties
None
•Household appliances
P10,000
•Business assets
P10,000
•Total Assets
P40,000
Conclusion: The income data is doubtful. It is not clear
where the P10,000 net monthly income or “savings” is kept
or invested by the applicant. AO should further verify the
applicant’s income and expense data.
38
Example
Total Net Monthly HH Income:
P3,000
Analysis
Compare the P3,000 net monthly income with the following items:
•Savings/cash in bank
None
•Cash on hand
P500
•Real properties
P300,000
•Household appliances
P100,000
•Business assets
P10,000
•Total Assets
P500,000
•Total liabilities
None
Conclusion: The income data is doubtful. Monthly net
income is too small compared with the HH’s assets. This HH
most likely had acquired all these assets from borrowings.
AOs should further verify the liabilities of the HH.
39
Analysis of Monthly Household
Income Structure
Monthly Household Income Structure
• This refers to the ratio of the NET BUSINESS
INCOME to the TOTAL BUSINESS & HH
INCOME The ratio is computed as follows:
Net Business Income
Total Business & HH Income
x 100
41
• Net Income from Business should be at least
80% of the total household income.
• If Other Household Income is more than 20%
of the Total Business & HH Income, the AO
should gather proof of this income (e.g. pay
slip of spouse’s salary).
• If Other HH Income is more than 50% of the
Total Business & HH Income – that is, most of
the HH income come from outside the client’s
business, offer the client other loan products of
the banks (e.g. salary loan)
42
Example
Net Business Income
10,000
Other HH Income (Spouse’s salary) 4,000
Total Business & HH Income
14,000
Analysis
Net Business Income
71.4%
Other HH Income (Spouse’s salary) 29.6%
Total Business & HH Income
100.0%
Recommendation: AO should present proof of the spouse’s salary (pay
slip)
43
Example
Net Business Income
4,000
Other HH Income (Spouse’s salary) 10,000
Total Business & HH Income
14,000
Analysis
Net Business Income
29.6%
Other HH Income (Spouse’s salary) 71.4%
Total Business & HH Income
100.0%
Recommendation: Client’s spouse should be offered a salary loan instead.
44
Cash Flow Paradox
The Puzzle -• Even without any improvement in the client’s
cash flow, and using the same loan term and
Adjusted Repayment Capacity Rate (ARCR), a
client can still be given a bigger loan amount
by moving the repayment schedule from daily
to weekly.
46
Example
DAILY
NET BUSINESS & HH INCOME
Debt Capacity Analysis
Equivalent of DAILY Net Income
Equivalent of WEEKLY Net Income
Equivalent of MONTHLY Net Income
Amount Available for Debt Service
Adjusted Debt Capacity Rate (35%)
Maximum Loan Amount (13 weeks % 2.5%)
MONTHLY
MONTHLY TOTAL
WEEKLY
300
0
300
2,100
0
0
2,100
735
8,888
300
105
6,349
0
By just moving the amortization schedule from daily to weekly,
the loan amount can be increased from P6,349 to P8,888 - or an
increase of about 40%. How is this possible?
47
Solving the Puzzle -• In the daily loan amortization schedule, the loan
amount is computed using 65 collection days. In the
weekly loan amortization schedule, however, the loan
amount is computed using 13 weeks, or 91 days.
• To avoid committing this error, the number of days to
be used in computing the loan amount for loans paid
either daily or weekly should be the same.
• If loans with daily payments are computed using 65
days, loans with weekly payments should also be
computed using 5 collection days a week.
48
Example
DAILY
NET BUSINESS & HH INCOME
Debt Capacity Analysis
Equivalent of DAILY Net Income
Equivalent of WEEKLY Net Income
Equivalent of MONTHLY Net Income
Amount Available for Debt Service
Adjusted Debt Capacity Rate (35%)
Maximum Loan Amount (13 weeks % 2.5%)
MONTHLY
MONTHLY TOTAL
WEEKLY
300
0
0
1.500*
0
0
1,500
525
6,349
1500 = 300 x 5 days
49
SUMMARY -• The secret in analyzing the cash flow is in the
MONTHLY TOTALS. Without the Monthly Totals, it is
difficult to compare and analyze the various items in
the cash flow.
• There are a lot of information in the CIBI report that
can be used in validating the data reported in the
cash flow. Do not limit cash flow analysis by looking
only at the figures in the cash flow. Also, compare
the cash flow figures with other sections of the CIBI
report.
50
Individual Case Analysis
• You may have the participants prepare the Cash flow for
Jenni’s Bakery and apply Cash Flow Review techniques to
checking for validity/accuracy of the data.
51
Lending to Microenterprises without
analyzing the cash flow …
… is like playing darts
blind-folded.
Determining how
much loan the bank
should give to a
client is left to
CHANCE.
52
Thank you!