Cost Allocation for Multi-Service Micro-Finance Institutions

To implement this strategy, MFI managers must analyze their financial statements for indicators of profitability and efficiency. However, determining which costs, revenues, and balance sheet items should be included in such analysis can be complicated, especially in multi-purpose organizations. Many MFIs provide a range of non-financial services, such as business development services and training in areas like literacy, health, and family planning. The question arises as to whether financial services should be treated as a distinct cost center vis-à-vis non-financial services in an MFI's accounts. The answer depends on the MFI's institutional vision and strategy, its commitment to the self-sufficiency of its financial services, and the importance and autonomy of non-financial services within the organization. Separating financial statements into cost centers facilitates analysis of past and current financial performance of micro-finance services and provides a basis for business planning and projections. Financial analysis allows managers to identify strengths and weaknesses in their micro-finance services and take appropriate action. In some cases, cost allocation represents the first step toward hiving off micro-finance activities to form a separate legal entity. International donors and other funders increasingly rely on business plans and realistic financial projections for making funding decisions; only those institutions with separate financial statements can meet this requirement. Once an MFI decides to separate its business into cost centers, it can approach cost allocation in two ways: conducting periodic cost allocation exercises by making adjustments to financial statements from outside of the accounting system (non-integrated approach); or incorporating a cost allocation system directly into the accounting system (integrated approach). While the integrated approach may be more accurate, the non-integrated approach is equally valid for obtaining a better understanding of the issues involved in cost allocation. MFI managers should ask themselves a series of questions about allocating costs and assets among cost centers. These questions include: How important is financial viability of micro-finance services to the MFI? To what extent does the MFI consider its non-financial services as integral to the success of the micro-finance program? Are non-financial services compulsory or voluntary for clients who want financial services? Does the MFI fund its financial services from different sources than its non-financial services? The answers to these questions will determine whether cost allocation between financial and non-financial services is warranted. If non-financial services are considered integral to the micro-finance methodology, cost allocation may not be necessary. However, if non-financial services are considered complementary to the successful delivery of financial services, cost allocation is recommended.