Microfinance institutions (MFIs) provide a variety of financial services to the poor. These services include microcredit products, the most common of which is the business loan designed to help a microentrepreneur increase business growth and profit. For many years, microcredit has been deemed a success. As of 2010, more than 200 million clients worldwide had received microfinance loans (Deutsche Bank, 2012). MFIs regularly publicise stories of individual microentrepreneurs who have used their business loans to dramatically expand their businesses. Various studies of microfinance have provided evidence that microcredit can improve business outcomes, increase consumption, put children in school, empower women, decrease fertility rates and increase expenditures on health care and food (Goldberg, 2005; Odell, 2010). Despite the many positive impacts of microfinance, rigorous studies of the impact of microcredit programmes have suggested only modest impacts on poverty alleviation overall (Banerjee and Duflo, 2007; Karlan and Zinman, 2010).
Conflicting results show how difficult it is to determine whether microcredit improves business performance or leads to increased income or consumption. This is partially a result of how little is known about the businesses of poor entrepreneurs. They rarely keep business records and often hide information from those trying to collect data from them (Morris and Pitt, 1995; De Mel et al., 2009). Many also operate informally and rarely pay taxes (Liedholm and Mead, 1999). This not only makes assessment of microcredit impacts difficult for academic researchers, it also means the lenders and the microentrepreneurs themselves lack information about how their businesses are performing.
To improve and better assess the impact of microcredit, some MFIs have begun to teach entrepreneurs how to keep business records as part of business skills training programmes (vladivia). If entrepreneurs keep business records, the MFI can use them to determine whether loans are being used for investing in the business as well as how profits are used for reinvestment and basic household consumption. Because misuse of loans can be harmful to the business, these training programmes teach microfinance clients how to successfully invest and track money from loans.
MFIs could also benefit from efforts aimed at improving the business records of microfinance clients. They could use this information to examine how entrepreneurs are actually using loans. MFIs could use cash flow information to tailor products and services to their clients’ business needs. And, they could use this information to offer more specific advice to individual clients.
This paper examines the investment and expenditure behaviour of microfinance clients at ASODENIC, one of Nicaragua's largest MFIs. It also describes clients’ perceptions of how cash flow training and keeping regular records affects the understanding and management of their businesses. The findings suggest that clients were careful about investing proceeds of the loan into their businesses and then managing profits and expenditures to maintain stable food consumption throughout the loan cycle. Clients reported that the process of tracking cash flows enhanced their understanding and management of their business expenditures. MFIs that are concerned about misallocation of funds or lack of social impact may find that instituting cash flow tracking provides for better management of loan proceeds and at the same time provides the MFI with valuable information about client businesses.
2 Misuse of Microcredit
Credit may not always help entrepreneurs as systematically as advocates hope because entrepreneurs do not always use their loans to invest in the assets or working capital that could help them increase their long-term business prospects (De Mel et al., 2008; Collins et al., 2009). There is a lack of credit services available for the poor to smooth their daily consumption, deal with emergencies and finance life-cycle family events because the poor are historically thought of as having no need for credit services (Hoque, 2004; Collins et al., 2009). A line of credit for business purposes may be the only credit available to poor families. Business loans can be used to finance bulk food purchases for families, pay unforeseen medical costs or make repairs to their homes. These are worthwhile needs that call for greater diversity in the financial services offered to the poor. Because there are other uses for credit, current financial services may not systematically help poor entrepreneurs achieve the intended purpose of the business loan, which is to improve long-term business performance. An increased focus on the uses of microcredit may provide insights into the effectiveness of the programmes that administer loans to poor entrepreneurs (Chen and Snodgrass, 1999; Meyer, 2002; Snodgrass and Sebstad, 2002).
3 The Importance of Cash Flow Training in Microcredit Programmes
Business training is being provided to clients to help increase the impact of credit and to improve retention rates (Karlan and Valdivia, 2011). Human capital and cognitive ability have been shown to increase returns to capital in microenterprises (Liedholm and Mead, 1999; De Mel et al., 2008). Training programmes have been developed and administered by some of the world's largest MFIs, including Opportunity International (OI) and the Foundation for International Community Assistance (FINCA). In Peru, a randomised trial showed that training programmes can increase microcredit client incomes and business knowledge (Karlan and Valdivia, 2011). These programmes are often focused on augmenting clients’ business knowledge and helping them implement changes in strategy to improve their businesses. Most teach clients basic business concepts such as inventory management and customer care to enable clients to identify opportunities to increase revenues and decrease costs.
The poor often do not maintain business records but could learn about their businesses by doing so. In one study in South Africa, as few as 7 per cent of businesses surveyed maintained business records (Morris and Pitt, 1995). Interviews with entrepreneurs across the world suggest that the poor often fail to keep records of the money they loan and borrow and instead spend a considerable amount of time worrying about how much they owe to whom (Collins et al., 2009).
Microfinance seeks to alleviate poverty by helping business owners increase their incomes. However, it is extremely difficult to obtain accurate estimates of income for microfinance clients. Microbusiness owners in developing countries keep few written records of any type and are rarely part of the formal economy. Owners typically have no training in business or accounting and are often illiterate or innumerate. Therefore, to determine whether loans and other microfinance interventions improve incomes, it is necessary to teach clients how to track and categorise their cash flows.
Through an extensive process of field-testing various cash flow tracking approaches, we settled on a very simple version that required clients only to track daily expenditures on inventory, food, other business and other household needs and to estimate the value of inventory on hand at the end of each week. Because the microfinance clients generally have no formal savings accounts and spend what they earn, revenue is roughly equal to expenditures plus or minus changes in inventory levels.
The cash flow training consisted of two parts. At the beginning of the loan cycle, clients received a 2-h lesson on how to track cash flows. This lesson did not provide any guidance on how loan proceeds should be invested, nor on how spending should be allocated to business and household needs. The training focused entirely on the mechanics of writing down every expenditure in the appropriate category on a daily basis. During the training, clients were given tracking forms and taught how to record typical expenses. Clients practiced recording typical expenditures, such as ‘purchased $1 bag of beans from the market, or paid 25 cents to ride the bus to church’. The second part of the training was provided on an ad hoc basis at weekly loan repayment meetings. Clients who were missing data from their forms worked with a researcher to fill in the missing information.
Respondents were microfinance clients of ASODENIC, one of the largest MFIs in Nicaragua, with about 38,000 clients. ASODENIC clients are microentrepreneurs who own small businesses and are seeking loans to expand their businesses. ASODENIC was among a minority of MFIs that regularly provided training for clients and was interested in experimenting with alternative forms of training. Nicaragua was selected because is one of the poorest countries in the Western Hemisphere and easily accessible to the US-based research team. Nicaragua's gross per capita national income is $1080 (World Bank, 2008). The wealth distribution in Nicaragua is unequal as the lowest quartile holds only 3.8 per cent of national wealth (World Bank, 2005).
A random sample of 227 clients who were receiving microfinance loans in a group-lending format was drawn from two urban and two rural branches. Groups were randomly selected from among the borrowing groups at ASODENIC that were beginning the loan cycle during the period of the study. Approximately 20 per cent of the groups received cash flow treatment. One group had very low attendance and was dropped from the experiment. The group was replaced with another group from the same branch that was beginning the loan cycle at the appropriate time.
The groups received the loans and cash flow training and then met each week throughout a 16-week loan cycle to repay their loans. Each client completed a pre-test and a post-test to collect demographic and business information including gender, age and business type. Then, each week throughout the loan cycle, clients recorded daily expenditures on a cash flow form and submitted the form at the end of the week to the experimenters. At the end of the loan cycle, experimenters administered exit interviews. The data collected were used to develop an understanding of basic resource allocation decisions as well as changes in client behaviour throughout the loan period. Data were reported in Cordoba for which the exchange rate was $0.04337. A summary of client characteristics can be found in Table 1.
Table 1. Descriptive statistics
Total number of clients in data set
Family members employed by business
Average number of non-family employees
Percent service businesses
Percent retail businesses
Percent mobile businesses
Percent house business
Percent market business
Business age (years)
Average loan cycles completed
Average loan size ($C)
Average business collateral ($C)
Average personal collateral ($C)
Fixed assets ($C)
Average meeting attendance
Average years of education (years)
Average account receivables
4.2 The Cash Flow Training
Clients in the data set received a 2-h cash flow training course that was provided at the beginning of the loan cycle, which lasted 16 weeks. Clients were taught to track all revenue and expenses in a cash flow statement that was to be filled out every week and turned in at the weekly loan repayment meeting. They learned to categorise expenditures into the following: inventory purchases, other business expenses, food and other home expenses. The importance of immediate documentation for accuracy was also emphasised because, otherwise, expenses could be forgotten easily and could go undocumented. In addition to learning how to keep expense records, clients were taught basic calculations to assess the performance of their businesses and record the estimated value of inventory each week. Table 2 shows the mean amount of profit and expenditures including food, inventory and household from all 227 clients for the 16-week cycle.
Table 2. Results of expenditure, investment and profit monitoring
Standard deviation (Cordoba)
% of total expenditures
Other business expense
Other household expense
Attendance in microfinance repayment meetings was irregular, and multiple clients were absent from each group meeting. Absences seemed to vary across clients, however. That enabled experimenters to collect the missing weeks’ data from clients when they returned to the group after being absent. In some cases, however, we were unable to obtain missing data, and the dataset therefore had gaps. These gaps were filled in by creating a regression analysis for each individual client and plugging in estimates for missing values.
Because of the nature of the experiment, it was not possible to identify a control group with which to compare results. To obtain the microenterprise financial transactions, it was necessary to provide the cash flow training treatment. Clients who did not receive the treatment did not have records of business revenues or expenditures. Thus, we base our discussion of the results on both the values and trends seen in quantitative data provided on the cash flow forms and on the comments made by the clients during the exit interviews when they were asked about the perceived impact of the cash flow training on their businesses
5.1 Cash Flow Statement Data
Table 2 shows the breakdown of weekly expenditures. High standard deviations occur because expenditures vary greatly among clients as well as from week to week for each client. In addition, although most clients were quite poor, and all were accessing a similar amount of microcredit debt, a subset of microentrepreneurs were on the wealthier end of the income range and made relatively large expenditures throughout the study period.
As noted earlier, in this subsistence cash economy, virtually all of the money taken in every day is spent. This fact was confirmed in pre-tests of the training and instruments and through discussions with clients. In general, clients almost universally lacked access to formal savings vehicles, and the small sums they were able to save for more than one week were typically used for household purchases. Thus, for analysis here, the sum of weekly total expenditures is considered to be equal to the revenue taken in by the business.
On average, the microentrepreneurs generated 4111.78 cordoba per week in sales (approximately $178). Throughout the loan cycle, a large proportion of the money taken in by the entrepreneurs was reinvested in the businesses—75 per cent in total. Sixty-four percent of revenue was reinvested in business inventory (which represented 85 per cent of total business expenditures), and the remaining 11 per cent was used to fund other business expenses.
After subtracting all of the business expenses, microentrepreneurs were left with 1012.29 cordoba in profits—approximately $44 or 25 per cent of total revenue. While this percentage seems high, the quantity of cash available for household spending is small. On average, the clients spent 16 per cent of revenues—some 75 per cent of available cash—on food for the family. The remaining 8 per cent, approximately $14 per week, was allocated to other household expenditures.
The manner in which the expenditures were made throughout the loan period is also interesting. The weekly breakdown of these expenditures is shown in Table 3. As can be seen, expenditures were very high immediately after the clients received the loan. Most noticeable is the huge investment in inventory. All of the clients were small retail and service businesses, so sufficient inventory on hand was essential to the successful functioning of the business. Prior to receipt of the loan, clients are often extremely low on inventory, and the stated purpose of the loan on virtually all of the loan applications was to purchase inventory. Investment in other business needs also spiked during the week following the loan. Although it is commonly supposed that a large proportion of microfinance loans are spent on household consumption needs, our data suggest that clients are, in fact, using the loan proceeds to invest heavily in their businesses when these resources become available—in the first week after the loan funds were received, 84 per cent of expenditures were allocated to the business.
Table 3. Weekly cash expenditures
r = −.4023
r = −.4320
r = −.1544
r = −.4316
r = .8279
r = −.6867
Non-food household expenditures, although very small, were also relatively high immediately after receipt of the loan. Interviews with impoverished clients suggests that household needs are chronically left unmet, so it is notable that this group spent only a small amount of the available funds on these needs. Food expenditures did not show an early spike. In discussions with clients to understand why this was the case, we were told that in anticipation of receipt of the loan, clients had sold down inventory and invested in bulk food stuffs just prior to the start of the loan cycle so that the business could start on a good footing in the new cycle. Although we have no data to support that assumption, we do see food expenditures gradually increasing throughout the period, which would be consistent with the story of gradually using up stored food and requiring more weekly expenditures.
Figure 1 shows the trend lines associated with the four expenditures. With the exception of food, all of the expenditures slope downward throughout the loan cycle. On average, clients generate less revenue each week throughout the period of the loan. After the initial infusion of cash into the business, clients have fewer funds to work with each week. This is consistent with our experience with microfinance clients across the globe—they report being comfortable at the beginning of the cycle and feeling increasingly poor as the cycle continues. Although MFIs do not publically report this information, discussions with CEOs and CFOs of these organisations support this argument; individual collections are increasingly problematic towards the end of the loan cycle. In the rare case when an entire group defaults on the loan, it is usually towards the end of the cycle, when members are simply unable to generate sufficient cash to fulfill their obligations.
Perhaps the most surprising finding in the data collected here is that, although revenues did decrease significantly throughout the period, clients were able to maintain a stable level of profits throughout the period. The slope of the profit line is essentially flat, suggesting that clients carefully managed expenses so that they could maintain an acceptable standard of living throughout the cycle. Business revenues and expenditures declined throughout the cycle, but the profit margin gradually increased, such that household expenditures were maintained. This suggests that clients were able to sell enough goods and services to meet their basic needs, even as expenditures on inventory gradually declined. Unlike most developed-country businesses, these microbusinesses have excess capacity, including a great deal of labor that can be employed as needed to increase sales. The businesses also have flexibility in terms of the hours of operation, pricing and other concessions and perks provided to clients, and resources utilised in generating the sales revenue.
Overall, the data tell a different story than much of the common conceptions of microcredit management would suggest. Clients who received the training and tracked their cash flows immediately invested loan proceeds into the business and maintained sufficient reinvestment levels throughout the loan period. Despite the numerous demands on cash in extremely poor households, these microentrepreneurs were able to prioritise their business and balance their expenditures to satisfy the needs of both the business and the household.
5.2 Client Exit Interviews
Client exit interviews provided an understanding of the impacts of the cash flow training on client knowledge and behaviour. One hundred fifteen of the subjects—roughly half of the participants—were able to meet one-on-one with an interviewer after completion of the post-test to answer the question: ‘What changes, if any, were made in your business as a result of the cash flow training?’ Contents of responses coded and summarised into 11 themes. The themes and the frequency with which they were mentioned by clients in the exit interviews are shown in Table 4.
Table 4. Coded exit interview responses
N = 115
Tracking all revenues and expenses
Becoming aware of what they spend by tracking cash flow
Identifying excessive or unnecessary expenditures
Understanding different kinds of expenses (e.g. business expenses vs. home expenses)
Understanding the relationship between/knowing how to calculate revenues, expenses and profits
Learning how to calculate profit, revenues, expenses and profit
Understanding importance of investment and re-investment in business
Reviewing cash flow analysis to decide when investment can occur
Understanding concept of inventory and how to calculate amounts/cost of inventory
Establishing priorities to increase revenues/reduce expenses
Learning from a peer's description/suggestions
Four themes were mentioned by half of the interviewees. Two of the most frequently identified impacts were that through the cash flow training, clients learned how to calculate revenue, expenses and profit (CF6) and that they had gained a better understanding of the relationship between these variables (CF5). Thirty-seven and forty-one percent, respectively, said that the training had taught them how to track revenues and expenses (CF1) and to become aware of what they were spending (CF2). Most of the microentrepreneurs were completely new to cash flow tracking at the beginning of the training, and many had difficulties and questions about the weekly records during the experimental period. So it is encouraging to see that the clients felt that the brief cash flow training and recordkeeping had provided them with this level of financial understanding and control.
Half of the clients also stated that the cash flow training helped them understand the importance of investment and reinvestment into their businesses (CF7) and enabled them to better identify unnecessary expenses (CF3). The trend data showing high initial and reinvestment levels suggests that clients acted on this knowledge. In informal discussions with clients, we were repeatedly told that records give them new insights into how they were spending their money, and their spending decisions were affected by this knowledge.
6 Discussion and Implications
Prior studies have suggested that clients misuse loans for consumption. Here, we find that a very minor intervention consisting of 2 h of training on how to track cash flows, along with encouraging clients to record expenditures throughout a loan cycle, has the potential to impact how loans are invested and proceeds managed. Client cash flow monitoring data suggest that clients made large investments in inventory shortly after receiving the loan and training and through a combination of reinvestment and expenditure management were able to maintain profitability and household food consumption throughout the loan cycle as inventory was depleted. From these data along with exit interviews, which suggested that microbusiness owners were learning how to identify unnecessary expenditures and better understanding the importance of business reinvestment, it appears that the training provided the business owners with valuable support to supplement the financial services.
Too many households used their business loans in a manner that rendered them highly inefficient. Many of these households need to better understand the importance of discipline in business investing and the eventual payoffs that could accrue to their families if they were to use their loans for business purposes. Likewise, MFIs need to monitor client usage of loans more carefully and develop incentive and education systems that encourage clients to reinvest their loans, even after the initial profit increases that can accompany new loans. Right now, the misuse of business loans for consumption may constrain businesses and dampen the effectiveness of providing them with capital. This is costly for the MFI and also prevents many of these entrepreneurs from exiting poverty.
Despite the challenges suggested by the data, cash flow training leads to important benefits for clients. As a result of the training, client interviews suggest that they better understand their household and business expenditures. In addition, they develop understanding of important business concepts, such as revenues, expenses, profits and investment. They find new ways to reduce costs. And they make strategic changes in their business operations.
Cash flow data and monitoring also provides a rich source of market data for MFIs. By learning more about the uses of loans, client behaviour and the performance of business, MFIs can better adapt loan terms, conditions and amounts to suit client needs. Cash flow, for example, suggests the possibility that clients need more options for consumption loans if they are to use credit for business purposes. In addition, tracking cash flow is changing client behaviour and may be encouraging greater savings. This may call for more savings and investment options with the MFI. While this data and training are primarily intended to help clients improve their own businesses, they can also be used by MFIs to improve the products and services they provide to their customers.
Cash flow training can have a significant impact on operations in the microfinance industry. Because many businesses are informal and records of expenses and profits are not kept, assessing and improving the impact of microcredit is difficult. Keeping records can help microfinance clients better manage investments and expenses, thereby improving business profits and contributing towards poverty alleviation. For the MFI, records about client cash flows could be used to monitor usage of loans and pinpoint their clients’ business needs to improve services.
Using data from 227 entrepreneurs in Nicaragua, this paper provides empirical evidence about business cash flows drawn from surveys and interviews with clients. The evidence shows that clients invest in their businesses when excess cash is available and shift expenditures towards household consumption as the microfinance loan cycle progresses. Client interviews suggest that behaviour is changed and management of cash flows improved as a result of the cash flow training. With well-managed cash flows, clients are more likely to have the capacity to repay their loans, providing benefit to both the client and the MFI. In the long run, if understanding cash flows enables MFIs to better meet the needs of their clients, dropout rates of MFIs could decrease because clients will find value in the services of the MFI. Further experimentation may assess the impact of more specific training on habit or skills, but for now MFIs should begin to consider the benefits of cash flow training as a means through which to provide greater benefits to clients while improving the MFI's financial sustainability and social impact.