Paper

Cost Allocation For Multi-Service Microfinance Institutions

Creating cost centers for better business planning

This paper examines the importance of allocating costs for MFIs. Cost allocation contributes to the understanding of the basic financial health of MFIs.

Many multi-service MFIs have realized the importance of creating distinct cost centers for their financial and non-financial programs. Separating financial statements into cost centers facilitates analysis of past and current financial performance of microfinance services. It also provides a basis for business planning and projections. Cost allocation involves defining separate cost centers, identifying costs to be allocated, establishing decision rules for allocating costs, and defining separate cost allocation.

The document presents an illustrative case study of the Bangladesh Rural Advancement Committee (BRAC), one of the largest multi-purpose organizations involved in microfinance in the world. The paper explains how to apply decision rules to financial statements and undertake ratio analysis after allocation. Common decision rules include:

  • Direct Expense Ratio;
  • Direct Administrative Expense Ratio;
  • Simple Personnel Ratio;
  • Personnel Time Ratio;
  • Personnel Cost Ratio;
  • Executive Director's Time Ratio.

This article is also available in French, Spanish and Arabic here.

About this Publication

By Helms, B.
Published