Download Product Cost Analysis / Financial Viability

Handout 16
Product Cost Analysis / Financial Viability
Analyzing the financial viability of the proposed product involves calculating the
expected revenue the product will generate (through interest and fee income,
commissions, etc) to the costs incurred from delivering the product – both direct
and indirect. Below is a rough break-even analysis what kind of sales volume the
product would need to generate to cover a certain percentage of the institution’s
fixed cost. The purpose of this financial analysis is to allow the institution to
refine the product terms and features before it has been launched to make sure
it can be sustained.
Using the worksheet provided below, develop rough cost
projections for your product. By repeating the sensitivity analysis,
you can use this information to refine the price and terms of the
proposed product.
Worksheet 11: Estimating Break-Even
A. Fixed Costs to be covered by the Product1
1. Direct staff expenses (e.g.: program managers, loan officers)
2. Indirect staff expense (e.g. President, accounting, legal)
3. MIS or other capacity upgrades
4. Marketing materials
TOTAL COSTS TO COVER = 1 + 2 + 3 + 4
B. Marginal Contribution per Product
1. Average loan size or savings balance
2. Average term
3. Average repayment periods per loan
4. Average “spread” (price – cost of capital)
1 Deciding what portion of the fixed costs of operations your product will cover is a strategic one. There are
no rules set in stone, but most common methods include estimating what proportion of staff efforts will be
dedicated to this product or service, since salaries are one of the most significant expenses for microfinance
institutions and prorating indirect costs by that percentage.
© ACCION International
This material is not to be used or reproduced without the express written consent of ACCION
International.
Handout 16
Break-Even Sales Volume = Total Fixed Costs of Design & Pilot
Marginal Contribution per loan*
* Marginal contribution equals financial margin times recovery rate (which 1 – delinquency
rate). The financial margin per loan is a function of:
 average loan size
 average loan term
 average number of repayment periods per loan
 average net interest rate (price – weighted average cost of capital)
The exact formula will depend on the method of interest rate calculations the MFI uses.
MARGINAL CONTRIBUTION PER LOAN =
method of interest rate calculations used by your institution, for example:
FLAT: loan term (months) X monthly interest rate X principal amount
DECLINING BALANCE: Payment = ______interest rate X Payment____
(1 – 1/(1+int rate)/# of periods)
In order to understand the implications of the product on the organizational
financial goals seriously consider the following points:
1. Compare break even sales volume with total potential market size. Is it
realistic that your organization can capture enough of the potential
market demand to reach the break-even sales volume?
2. If yes, how long do you think it would take your organization to
reach break-even?
3. Do you have other sources of revenue to cover the costs of
development in the interim?
4. How sustainable are these sources in case the product does not do
as well as expected?
If the financial projections indicate that the current product
design might not be viable, you can conduct a “sensitivity
analysis” to see if changing the terms (i.e, increasing interest
rate
or average loan term) impacts the break even time.
© ACCION
International
This material is not to be used or reproduced without the express written consent of ACCION
International.
Handout 16
Finalizing the prototype design will involve balancing cost and
profitability considerations with customer service, competitive
strategy, and risk. This exercise will help you establish return
goals for the pilot test or at least what information you need to
gather to calculate more accurate financial projections.
© ACCION International
This material is not to be used or reproduced without the express written consent of ACCION
International.