USAID – Workshop on
agricultural sector financing
AGRICULTURAL CLIENTELE AND CREDIT
RISK ANALYSIS
Workshop on July 22 and 23, 2011
FINANCIAL ANALYSIS MEASUREMENT
Financial analysis is simple: compare, compare, compare
• Comparison of results with the projections and the objective
• Comparison of the results for the period with previous results and by
analyzing trends
• Comparison of results with those of other farms or comparable businesses
(activities)
THE PRINCIPAL AREAS TO BE
MEASURED
• Analytical tools or indicators may be divided into five categories or key
sectors as follows:
Profitability
Measures the ability to generate profits
Effectiveness
Measures the costs of operations compared with
the returns. It shows the extent that management is
competent in operating the business
Solvency
Measures the financial health and stability of the
business compared with its equity
Liquidity
Measures the ability of the business to repay its
debts on current assets
Repayment capacity
Measures the capacity to repay the loan
Risk
Measures sensitivity to prices and to production
PROFITABILITY
• Measures the ability of the producer/the business (activity) to generate a
profit
• Measures effectiveness
• Measures operational sustainability
• Makes it possible to evaluate the return on Investment
PROFITABILITY INDICATORS
• Profit margin = Net Earnings/Net Sales > 0 and to be compared to other
comparable businesses
(In the case of production activities, it concerns net income compared with
net sales resulting from production. For business and wholesaler activities,
income can also be viewed as the margin before costs.)
PROFITABILITY INDICATORS (continued)
• Profitability = Total Income/Total Costs = normal 2 x level of
compensation of savings paid by the bank for the same period and mini
= > to the loan interest charged for the same period. (Ex.: if the interest is
1%/month, then for a retail activity with a monthly capital turnover, the
mini is 1% of the net profit. For cereal production, the mini profit is 8% for
the period.)
(Indicate the ability of the business to generate a profit compared with costs.
This concerns a return on the project without taking into account the present
values of income flows and of costs, no more than the difference of risk
between the business or the rotation on investment, but very useful for the
smallest projects
LIQUIDITY
Indicate the ability of a producer or a business (activity) to cover their shortterm debts with their short-term assets (the money available in the short
term). It is essential that the projects not encounter a liquidity problem in
order to meet their obligations
• Liquidity ratio = Current assets/Short-term debts = normal 200% and
mini = 150% for any credit project
RETURN/EFFECTIVENESS
Inventory turnover speed:
• Used to analyze the production and the commercial effectiveness of an
industrial and commercial activity that manages inventories
• It must be used in comparison with that of other similar activities in order
to be significant
• Analysis is recommended before and after a loan
Ratio = Cost of sales (or inventories sold)/average inventory
SOLVENCY
• Measures the capital leverage
• Indicates the ability to cover debts with its own capital in case of
liquidation
But be careful, a solvent business can present risks of non-liquidity, hence
the interest in completing the study using liquidity ratios
SOLVENCY (continued)
• Ratio = Total debts/Capital = normal 50% and mini 75%
(Common indicator for all types of businesses. It indicates the ability of the
business to repay its debts from its equity. For activities with a higher risk, the
ratio must be lower. And it is still necessary that the debts be < equity
because in case of liquidation, the resale of shares is always weaker.
.
DEBT CAPACITY
• Debt capacity = Total Debts/Global Net Household Income: normal = 35%
for production loans, real estate loans and in general, for projects that
have periodic repayments and maxi = 50% for the small low-risk loans
• Measures the capacity to repay a loan
• The indicators give an approximation of the ability to amortize a loan and
interest costs, without major difficulties
REPAYMENT CAPACITY
Expresses an estimate of the capacity to repay the loan by including family
and other expenses and the measurement is expressed as an amount and not
as a %
•
+ Total Income (all the sources)
- Debts (including credit in the process of being put into place)
- Family Expenses
- Depreciation (amortization)
=Balance for repayment and reserves
For agricultural loans, it is advisable to use cash flow analysis
REPAYMENT CAPACITY (continued)
• Compares the capacity to repay in comparison with all income and
expenses (business and household)
• Is generally calculated for all months
• Is an indicator of the appropriate repayment capacity for agriculture and
the activities with unequal and/or multiple source income flows
REPAYMENT CAPACITY: CASH FLOW
The Cash Flow Analysis (the Flow of Income and Expenses) is a simple and
INVALUABLE analysis for the business (activity) with multiple activities
• Is invaluable since agricultural households have irregular or seasonal
flows of income and expenses
• All monetary income and business (activity) and household expenses are
included
• The current monthly balance must be positive (in order to be able to
cover costs)
• Is also a loan planning tool essential for determining the amounts and the
time limits for disbursement and repayment
REPAYMENT CAPACITY: CASH FLOW
(continued)
• To be developed together with the applicant with the three “following
advantages”:
- better understanding and apprehension by the client
- better adherence/commitment by the client for the
repayment plan
- greater reliability of data
CASH FLOW
Cash-flow Analysis:
Initial cash
+ All Income from the business
+ Other Income (including family)
- Operating expenses
- Investments
- Loan Amortization
- Interest payments
- Family Expenses
=Final cash (must be positive for each period)
CASH FLOW STATUS
Name of applicant: Nuhi Morina
Address of applicant:Ferat Dragaj 76, Prishtine
Date Statement was prepared:December 08, 2006
Actual
1-Jan-08
Actual
1-Feb-08
1. BEGINNING CASH BALANCE
Cash inflows :
2.1 Sales Revenue
2.1.1 Incomes from service
2.1.2 Incomes from trade
2.2 Loan Proceeds
2.2.1 Term Loan Proceeds
2.2.2 OVD proceeds
2. TOTAL CASH INFLOWS
Cash outflows
3.1 Cash operating expenses
3.1.1 Service - Cost of goods sold
3.1.2 Trade - cost of goods sold
3.1.3 Salaries and wages
3.1.4 Transport expenses
3.1.5 Utilities
3.1.6 Income Taxes Paid
3.2 Purchase of capital assets
3.2.1 Purchase of factory
3.3 Loan payments
3.3.1 PCB second loan installments
3.3.2 PCB third loan installments
3.3.3 RBKO loan installments
3.3.4 RBKO CLC payment
3.4 Other expenses
3.4.1 Family living expenses
3.4.3 Construction family expenses
3. TOTAL CASH OUTFLOWS
4. CASH SURPLUS (DEFICIT)
5. ENDING CASH BALANCE
6. Cash available
7. Principal and Interest Payments
8. Debt Service Ratio
Actual
1-Mar-08
Actual
1-Apr-08
Actual
1-May-08
Actual
1-Jun-08
Actual
1-Jul-08
Actual
1-Aug-08
Actual
1-Sep-08
Actual
1-Oct-08
Actual
1-Nov-08
Actual
1-Dec-08
Projected Projected Projected
1
2
3
Jan-09
Feb-09
Mar-09
Projected
2
Apr-09
0
0
0
0
0
0
0
0
0
0
0
0
0
-2.464
-4.928
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-
0
-
0
-
0
-
0
-
0
-
0
-
0
-
0
-
0
-
0
0
0
0
-
0
-
0
-
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
0
0
0
0
0
0
0
2.464
2.464
2.464
2.401
63
0
2.401
63
0
0
0
-
-
-
-
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
2.401
63
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
2.464
-2.464
2.464
-2.464
2.464
-2.464
0
0
0
0
0
0
0
0
0
0
0
0
0
-2.464
-4.928
-7.392
0
0
N/A
0
0
N/A
0
0
N/A
0
0
N/A
0
0
N/A
0
0
N/A
0
0
N/A
0
0
N/A
0
0
N/A
0
0
N/A
0
0
N/A
0
0
N/A
0
0
N/A
0
2.464
0,00
0
2.464
0,00
0
2.464
0,00
SAMPLE CALCULATION SHEET
Schéma de production pour les produits agricoles
Les revenus de la production agricole
Culture
Espace
(h)
Récolte
(kh/h)
Récolte
totale (kg)
1
2
1x2=3
Propre
Consommation
(kg)
4
Espace
2
Ventes
(kg)
Prix au
kg
Revenu
3-4=5
6
5x6=7
Prix Unitaire
Frais
Mois
3
1x2x3=4
Frais pour la production agricole
Culture
Apport
Quantité
d'hectares
1
Mois
SAMPLE CALCULATION SHEET FOR
FAMILY EXPENSES
Revenus et des dépenses de la famille - feuille de calcul
Mois 1
Revenue
Emploi à plein-temps
Travail à mi-temps
Femme
Membre de la famille
Paiement
Revenu locatif
Pension
Total des autres revenus
Frais
Logement
Nourriture
Electricité
Téléphone
L'eau
Des autres frais
Médicaux
Vêtements
Divertissements/enfants
Construction de maisons/ meubles
Total des autres frais
Mois 2
Mois 3
OTHER INDICATORS (RATIOS)
• The value of the Loan in relation to the assets of the applicant is the
measure of a borrower’s contribution. A borrower with a ratio of 80%
or less is considered to have good credit worthiness
• The debt in relation to income is the measure of the monthly debt
service compared with monthly income. A borrower with a ratio of
36% or less is considered to have good credit worthiness
• Debt in relation to savings is the measure of the annual service of a
borrower’s debt in relation to savings. A borrower with a ratio of 20%
or less is considered to have good credit worthiness
RISK INDICATORS
Are necessary in order to measure the effects that a change in the prices and
production would have on the project
THE BREAK-EVEN POINT
This is the level of periodic sales that the business must make, at minimum, in
order to cover expenses. It estimates the minimum production level needed
to cover expenses. Need to know the fixed expenses (staff, rent, etc.) and the
variable expenses (raw materials, direct production expenses, etc.)
Break-Even Point= Expenses/Sales (normal: a production of 1.5 of the breakeven point and mini a production of 1.2 times the break-even point)
Above the break-even point, the profitability of the business increases very
quickly because the fixed expenses are already covered.
THE EQUILIBRIUM PRICE/
PRICE SENSITIVITY
Indicates the minimum price needed for a business in order to cover its
operating costs, assuming constant production. Very useful, of course, for
agricultural loans
Equilibrium price=Total costs/Units produced = 75 to 85% and less if the
production risk is involved
THE PRODUCTION EQUILIBRIUM POINT/
PRODUCTION SENSITIVITY
Measures the minimum level of production needed to cover all production
costs at different product price levels. Often used for agricultural production
and transformation industries
Equilibrium point = Total costs/Price = normal 75% of quantities produced or
less if the price risk is involved and maxi 90%
PROFITABILITY AND CONTINUITY
• Profit is an average, not an end!
• Sustainability depends in the long term on the manufacture of a profit
producing enough revenue to cover costs and the creation of equity, “the
cushion” with which to cultivate and construct reserves for future needs
and economic changes.
COST CONSIDERATIONS
Small producers and entrepreneurs borrow and save very small sums of
money. For them to be able to borrow or save, the costs of doing so must be
reasonable
ANALYSIS OF AGRICULTURAL LOANS
ANALYSIS OF AGRICULTURAL LOANS
(continued)
THE BASIC RULES OF CREDIT FOR
AGRICULTURAL ACTIVITIES
• Always have a secondary repayment source
• Character is important. All the guarantees of the world would not repay
the loan “contrary to character”
• There is no substitute for:
- Equity
- Experience
- Visiting your client’s operation/farm
- Understanding the business (activity) to which you are lending
• Know the market to which you are lending
THE BASIC RULES OF CREDIT FOR
AGRICULTURAL ACTIVITIES (continued)
• Do not be too proud to ask questions
• Update financial information on long-term clients as well as for any new
client
• The quality of financial information is essential both for the business
owner and for the lender
THE BASIC RULES OF CREDIT FOR
AGRICULTURAL ACTIVITIES (continued)
•
The goal of the loan must mean something compared with the circumstances of the
applicants in terms of added value and income capacity. And also, the money must be
used for the indicated purpose
•
The term of the loan must conform to the depreciation period for the item purchased
•
The maximum sum as well as the repayment plan must conform to the borrower’s
financial situation
•
The guarantee must be requested in the form of assets or deposits (and even provided by
someone else). In this case, the existence and the value of the assets or the solvency of
the guarantor must be evaluated
SOME PERSONAL AND FAMILY
SITUATION FACTORS
• Age
• Nationality (only the inhabitants of the country should be entitled to
borrow)
• Stable work and regular income (monthly salary)
• Marital status and number of children
• Stable residence
• Bank account with bank
• No arrears in tax payment or rent
• No other loan pending with other banks or financial institutions
• No other person who depends financially on the applicant
• No criminal record
THE VISIT TO THE SITE/TO THE FARM AND
THE CREDIT APPLICATION FORM
THE GOLDEN RULE
If you were lending your own savings, would you make
the loan?