DevLearn Newsletter #2 – Follow The Money!

Insight: Help your team get better at financial analysis

My own experience in financial analysis began seven years ago, at a comedy club in North London. I love stand-up comedy and was excited to find out that this venue (the Invisible Dot) was looking to crowd-source investment. A series of comedians cracked jokes about the uncomfortable seating – “they spend more on their type-face than their chairs” – and asked us all to invest.

The problem was, the pitch documents were even less serious than the comedy. The Invisible Dot planned to open three venues that year, 10 the next year, and 30 the year after that. Revenues were projected to increase exponentially. I calculated that, at the rate they expected to grow, within a decade they would be worth £616 billion, or about a quarter of UK GDP. An unmissable investment deal – if you believed it. Fortunately, I didn’t, and was both saddened and slightly smug when the comedy club went bankrupt about six months later.

The best programmes we work with take a similarly cautious approach to investment, carefully reviewing the financial case for their partners, and avoiding unviable businesses. How do they do it? This newsletter has a number of tips.

Tip 1: Make financial analysis central to the intervention approval process

We noticed something curious about our training course while we were reviewing the content. We go into great depth about how to build a narrative case for investment, using a number of widely-used tools. We show how to develop a results chain showing how a new investment is likely to benefit their target group. We explain the use of a ‘business model’, mapping flows of money, products, and incentives.

However, our course doesn’t cover any financial modelling which might help to quantify this decision. We’re not unique – the market systems development sector as a whole has well-established templates for results chains and business models, but few ways to quantify expected returns from an investment.

So the first thing to do is to address this within your organisation. (And we’re revising our course content as well.) You can:

  • Develop a template for intervention managers to complete, showing expected returns from an investment. If you use any good templates that you are happy to share more widely, please email them to me and I will include them in the next newsletter.
  • Work with your procurement team to establish an non-disclosure agreement template, so private partners are comfortable giving you financial data. Some donors are uncomfortable with this (because they want access to all data themselves) – so this might require you to work with them to develop acceptable wording.
  • Review the financial model carefully when approving a new intervention, encouraging your team to be sceptical of the data that they are receiving!
  • Develop a regular process to revise the financial model, for example on an annual basis. This can inform a decision to continue investing or not.

Tip 2: Build team capacity

How do you make sure that your team are able to take on this role? Try:

  • Free (or cheap) online coursesCoursera has a range of free courses on financial modelling (though they try quite hard to trick you into paying for it). So does EDX. Udemy charges about £20 for a course. In a prevous project I set up a group of people who wanted to learn financial modelling, and we spent two hours a week working through a free Coursera course together, with videos playing on the projector.
  • Hiring specialist expertise. There’s no reason everyone has to be a financial expert. Hire one team member with responsibility for financial analysis of new investments.
  • Outsource the role. At DevLearn, we recently invested in a Rwandan agri-business, following an analysis supported by an accountant based in Bangladesh. There was no need for us to understand the details of what he was doing (though we learned a lot from the process) – we just paid based on his outputs.

Free resource – Practice your interview skills!

Click here to play an interactive story putting you in the role of an enumerator for the HEAP programme in Nigeria, making choices about how best to ask questions. It’s a great way to teach (or learn) the basics of survey design, and you can make your own interactive stories using Inklewriter’s easy-to-use tool. We would love to see more creative ways of teaching market systems development principles, so if you make any stories using this tool, please let us know.

That’s it from us! Please get in touch with any feedback about what you found useful (or not) about this newsletter, or to share any tips that you have on market systems development,

Adam and the DevLearn Team