1. Indirect Operating Costs

2. Shared Expenses Can the MFU cover its overhead costs?

3. Examples : Direct & Indirect Costs Item Direct CostIndirect Cost Interest Expense√ Depreciation/ Amortization√ Litigation/Acquired Assets Expense√ Loan Loss Provision√ Bad Debts Written-off√ Employee’s Compensation/Fringe BenefitsMF Staff√ Other Expenses√√ Fuel & Lubricants* Traveling* Repairs & Maintenance* Stationery & Supplies* * If these can be tracked separately. Otherwise, should be classified as “Indirect.”

4. Examples : Direct & Indirect Costs Item Direct CostIndirect Cost Supervision & Examination Fee √ Fines, Penalties & Other Charges √ Taxes & Licenses √ Management & Professional Fees √ Insurance √ Rent √ Light & Water √ Security Services √ Tel., Teleg. & Postage √ Advertisement √ Representation √ Membership Fees & Dues √ Donations √ Miscellaneous √

5. Cost Allocation The method for assigning shares or indirect cost to individual operating units or products. Cost Allocation methods –Staff Time –Number of Staff –Number of Transactions –Number of Accounts –Portfolio Volume –Office Space –Equal

6. Estimating the Indirect Expenses of the Microfinance Product 1.Select and compute the ratio to be used in cost allocation Using the Number of Accounts as cost allocation basis: Number of Outstanding Microfinance Loans x 100 Total Number of Outstanding Loans 150 x 100 =7.5% 2,000

7. Estimating the Indirect Expenses of the Microfinance Product 2.Compute the share of the Microfinance Product in the indirect expense Item Amount (A) Cost Allocation Ratio (B) Cost Allocated to the Microfinance Product (A x B) Salaries & Benefits - Other Bank Employees 55,0007.50% 4,125 Management & Other Professional Fees 15,0007.50% 1,125 Banking Fees -0.00% - Taxes & Licenses 5,0007.50% 375 Fines & Penalties 2,0007.50% 150 Insurance 1,0007.50% 75 Depreciation - Other Bank Assets 6,1477.50% 461 Other Indirect Expenses 22,5007.50% 1,688 TOTAL INDIRECT EXPENSES 106,647 7,999

8. Adjustments to avoid double counting Direct expenses should be deducted from the amounts appearing in the branch income and expense statement to avoid double counting. Examples: Salaries and Benefits Depreciation Professional Fees

9. Adjustments to avoid double counting Some direct expense items should also be excluded in the computation of indirect expenses to avoid double counting. Examples: Other Operating Expenses (e.g., transportation, supplies, communications) Interest expense Loan-loss provision Bad debts written off

10. Adjusting selected Income Statement entries Item Amount, current month (A) Amount, previous month (B) Expense for current month (C = A - B) Direct Cost (D) Indirect Expense, net of Direct Cost (C - D) Employee Compensation & Benefit 765,000 680,000 85,000 11,000 74,000 * Depreciation 348,000 312,000 36,000 3,000 33,000 Professional Fee 20,000 13,000 7,000 5,000 2,000 * The compensation of other bank staff not in any way involved in the microfinance operation should also be deducted (e.g. regular loans staff)

11. Summary 1.Fill up the product performance data section of the report using data from the MIS Reports (AO Performance Report & PAR Report) 2.Fill up the section on financial income. Use the amounts shown in the MIS Report (Interest Collected from MFU) or ask the branch bookkeeper. 3.Compute the interest expense for the funds used to finance the microfinance loan portfolio. 4.Compute the loan-loss provision. 5.Fill up the section on directs costs.

12. Summary 6.From the branch financial statement, determine the indirect costs of the product. 7.Adjust/exclude the values of indirect expense items that are also classified as direct costs. 8.Select the cost allocation basis and compute the cost allocation ratio. 9.Compute the indirect costs of the microfinance product using the cost allocation ratio. 10.Using the values estimated in step 9, fill-up the indirect cost portion of the income and expense statement.