MARGIN ANALYSIS
Accounting ratios and other ratios are key in understanding financial statements.  A snapshot at the financial statements of the SACCO cannot be sufficient to guide one to know the status of the SACCO at a give time. This brings in the need for a more critical analysis of the various components making up the financial statements. This is done by doing financial Ratio Analysis.
Financial ratios are tools for interpreting financial statements to provide a basis for appraising the SACCOs general performance as well as the management performance.
Financial ratios allow a financial analyst to:
∙Have a standard format for analysing the performance of the SACCO across a given financial period.
∙Measure key relationships by relating inputs (costs) with outputs (benefits) and facilitates comparison of these relationships over time and across firms in a financial
model.
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With the understanding of margin analysis, it will help the SACCO management to make prudent decisions on the various investments the SACCO has ventured into. A SACCO normally derives its source of funds from:-
∙Member’s Savings Deposits: These may include regular savings, special or un -withdraw able deposits and term deposits.
∙External Credit: The external credit can be from Banking institutions, Microfinance institutions or other organizations.
∙Shares: A share is what buys an ordinary person membership in a SACCO. By purchasing a share at its par value, one becomes a member of a SACCO.
The SACCO has also to invest the funds so generated in various investments that will give a good return. In a model SACCO perspective, most of the assets are supposed to be in the loan portifolio. This empowers the SACCO to get a high return as well as maintaining its service to its members. However, the SACCO will also have its assets as:-
∙Financial Investments
∙Non-Financial Investments
∙Liquid Investments
By the SACCO engaging in the business of offering savings and credit, this is accompanied with costs and returns on the respective sources and uses of funds.
Margin Analysis provides Yield or Relation to Average  Assets percentage for various financial indicators. These aspects cover both costs and returns on the investments.
The SACCO needs to measure the effect of the costs that are used in driving the returns. The costs are; Administrative Expenses, Governance expenses, Marketing Expenses, Personnel Expenses, Financial Cost and Depreciation. All these expenses have corresponding standards of excellence (A limit with which they are supposed to remain in order for the SACCO to perform optimally.
On the other hand, the income from the various assets can be in the form of Interest on loans, Income on financial investments, liquid investments and Non-financial Investments should be sufficient to cover for the costs of the SACCO, contribute towards the institutional capital and also give a good return to the investors.
The key areas to be analysed are:
1.Income
2.Expenses
3.Depreciation
INCOME
1.Loans
As loans are the SACCOs paramount assets, their income can also be shown to be higher than what the other assets bring in.
A)Interest Income
Interest Income from Loans X Annualization Coefficient
Average Loan Portfolio
This analysis brings into being the income that is being generated from the loans. The annualization coefficient helps to stagger the interest to the amount of interest that may be expected at period end. It’s an accrual system where since we record the interest that has been realized to date, if we use this coefficient, we can extrapolate till the end of the period. Average Loan Portfolio = Loan Portfolio at period end + Loan Portfolio at start of period
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B) Other Loan Expense/Income
The SACCO may find that they are generating other income or incurring expenses in handling the loans. It is prudent that the SACCO analyses this scenario so as to know how much they make members pay in order to get loans and which finally impacts the actual interest rate for loans. The more the charges the SACCO imposes on members to process the loans, the further they drift from the principle of serving members.
Other Loan Income / Expense = Annualization coefficient x Other Loan Income Expense
Average Loan Portfolio
C) Return on Loans
The return from the loans form the substantial income the SACCO receives. The total return is a combination of the interest received from the loans and other income less the expenses.
Return on Loans = Interest Income from Loans + Other Loan Income – Less Expense
Average Loan Portfolio
2.Liquid Investments
The SACCO has some liquid investments in terms of short – Term bank deposits, Central Finance Facility investments, treasury bills and other investments that ca be realized within a 90 day period. There is need to analyze the returns expected from such investments and should give a guideline on the more profitable liquid investments that the SACCO can undertake. The yield so obtained need to be analyzed and compared to the yield of other investments and the SACCO reach a balance between the different portfolios that they invest in.
Liquidity Investment = Annualization Coefficient x Income from liquid investment
Average liquid investment
There is need that when analyzing such liquid investments, they be separated to specific investments where it will give more informed data on all the liquid investments the SACCO has.
The goal is to have the highest rates possible without risk.
3. Financial Investments
A SACCO also invests in different financial investments as part of the diversification of the investment portfolio. The returns from such undertakings should be analyzed to ensure they are commensurate with the returns. With the margin analysis report, the SACCO be able to make prudent investments.
Financial Investment = Annualization coefficient x Income from Financial Investment
Average Financial Investments
4. Non-Financial Investments
For Excellence, SACCOs are not supposed to engage in non-financial investments. This is because this is not part of the core business. The SACCO Societies Regulatory Authority sets the prudential st
andards on the investments, and this should be considered before planning on investing in non core business. But in the event that the SACCO has invested in non-financial investments, it is prudent they analyze the returns from such investments.
Non Financial Investment = Annualization coefficient x Income from Non Financial Investment
Average Non-Financial Investments
5 Gross Income
The total of the above incomes, has to be analyzed vis a viz the assets. This is because the SACCOs need to build their own institutional capital. This capital is only built from the profits of the SACCO which is basically the net of the incomes and expenses. Once the SACCO has made a given amount in profits, its expenses need to be controlled to reach the institutional capital.
Gross Income = Annualization Coefficient x Gross Income
Average Assets
EXPENSES
The SACCO incurs various expenses in its operations. These are
∙Financial Costs
∙Operational Expenses which comprise the following expenses; Administrative, Governance, Personnel, Marketing and Depreciation.
∙Provisions for risky assets
Margin analysis helps to know which expenses require to be controlled as they are each analyzed and an aggregate for same group expenses can be compared to standards of excellence. This will help the SACCO be able to take steps to minimize this expenses and build on the institutional capital.
A) Finance Costs
1.Share Capital
A SACCO incurs expenses on share capital in relation to both dividends and insurance
premiums on shares. These expenses each have to be analyzed in relation to average assets. In the aggregate group, the total expenses on shares has to also be analyzed.
Total Member Share Capital = Annualization Coefficient X (Dividend paid + Ins. On Shares)
Average Shares
2. Saving Deposits
Savings Deposits is one of the Sources of funds that the SACCO uses to drive its
operations. The costs associated with savings deposits include the return given to the savers and the premium paid if any insurance is undertaken on the deposits. The aim is to provide rates which are better than inflation rates so that the members can realize the benefits of saving in the institution.
Total Savings Deposits Capital = Annualization Coefficient X (Int. paid + Ins. On
Shares)
Average Savings Deposits
Int. = Interest
Ins. = Insurance
3. External Credit
The SACCO should be able to analyze the costs associated with external credit. These
are monies borrowed from banks, other SACCOs, Microfinance institutions, Non-
Governmental Organizations or other bodies in order to drive its operations. SACCOs need to mobilize savings from members as the primary source of funds. Generally,
external credit is more expensive than savings deposits that are member driven. The aim
is always to keep it lower than the returns given to savings deposits.
External Credit = Interest Expense on External Credit x Annualization Coefficient
Average External Credit
4. Other Finance Costs
Any other finance cost will also be weighed with the average assets.
margin rate5. Total Finance Costs
B) Gross Margin
Gross Margin is the difference between the income and financial costs. This implies that
only the SACCO normal operating expenses remain to be catered for as the costs for
sources of funds have already been catered for.
The purpose of calculating this ratio is measure the gross income margin generated, expressed as a yield on all assets, before subtracting operating expenses, provisions for loan losses, and other extraordinary items
The goal is to generate sufficient income to cover all operating expenses and allowances for loan losses, and provide for adequate increases in institutional capital.
It is calculated as
Gross Margin = Annualization Coefficient x Total Income – Finance Costs
Average Assets
C)Operating Expenses
Operating expenses include the costs for governance, administration, personnel,
marketing and depreciation. Each of these expenses should be analyzed individually in
relation to average assets as well as the total of the operating expenses being calculated

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