Transcript Returns to Capital in Sri Lanka
Measuring Microenterprise Profits
Christopher Woodruff, UC San Diego (Based on joint work with Suresh de Mel and David McKenzie)
Presentation for conference on Innovations in Development Theory and Survey Data: Implications for Policy UTCC, Bangkok, August 4-6, 2008
Self employment rates
Source: Gollin 2002
Measuring microenterprises
Important… – Around a quarter of the urban labor force in a typical low-income country – Owners represent an important part of the urban poor But challenging – Lack of administrative data – Only about 20% of microenterprises keep any records
Data
Data from two surveys in Sri Lanka – 618 non-ag enterprises in southern Sri Lanka surveyed multiple times, retail, manufacturing, services – Data from 174 retail shops in Kandy 1/3 surveyed monthly 1/3 surveyed weekly 1/3 rd surveyed every other day
Outline
Cash flow vs. profits Recall issues Deliberate mis-reporting – General – Specific to interventions Prospects for obtaining harder data?
What is the best measure of performance?
Profits vs. cash flow – Possible that perhaps owners don’t understand well the concept of profits – Very low correlations between profits and R-C: around 0.2, in our data and in other data – Levels differ markedly as well, with R-C much lower
Profits and R-C
Profits: “What was the total income the business earning during the month of March after paying all expenses including the wages of employees, but not including any income you paid yourself. That is, what were the profits of your business during March?” Revenue / Cost – Costs in eleven categories
Profits v. (R-C)
Table 2: Reported Profits Vs Reported Revenue Minus Expenses
Reported Profits Reported Revenue Minus Expenses Correlations: Mean S.D.
Median % negative Mean S.D.
Median % negative Pearson round 1 3357 2534 3000 0 1174 7368 1000 29 0.286
SLMS retail 5257 4095 4000 0 3017 7631 2623 27 0.468
manufacturing 3598 3212 2650 0 1271 5548 1425 26 0.202
Why is the cash flow/profit correlation so low?
Percentage of firms reporting that:
Goods used for home consumption Firm inputs given as gifts but reported as a business expense Firm owners pay themselves a salary but fail to include this as profits: Business revenue is used to pay household expenses, but is not counted as profit
Adjusting Expenses and Profits
Mean Adjusted Profits S.D.
Median % negative Mean Adjusted Revenue Minus Expenses Correlations: S.D.
Median % negative Pearson retail SLMS manufacturing 63.5
14.7
2.3
0.7
2.3
1.7
13.3
5752 4471 4810 0 4976 9290 3825 21 0.457
14.1
4199 3929 3000 0 1883 7470 1615 25 0.174
Why is the cash flow/profit correlation so low?
Percentage of firms reporting that:
Goods used for home consumption Firm inputs given as gifts but reported as a business expense Firm owners pay themselves a salary but fail to include this as profits: Business revenue is used to pay household expenses, but is not counted as profit
Adjusting Expenses and Profits
Mean Adjusted Profits S.D.
Median % negative Mean Adjusted Revenue Minus Expenses Correlations: S.D.
Median % negative Pearson retail SLMS manufacturing 63.5
14.7
2.3
0.7
2.3
1.7
13.3
5752 4471 4810 0 4976 9290 3825 21 0.457
14.1
4199 3929 3000 0 1883 7470 1615 25 0.174
Timing mismatches
Inputs purchased one month may be sold in a later month – Seasonality We asked firms for markup between input and sales prices (up to three products) “ Consider the most important item which you manufacture. If you buy Rs. 1000 worth of raw materials how much of revenue will you receive from the final products that you manufacture with these raw materials on average?”
Why is the cash flow/profit correlation so low?
Table 4A: Adjustments Using Markups
Adjusted Profits Adjusted Revenue Minus Expenses Markup-Adjusted Revenue Minus Expenses Mean S.D.
Median % negative Mean S.D.
Median % negative Mean S.D.
Median % negative Correlations: Adjusted Profits Pearson retail 8508 6044 7000 0 7431 20967 5775 21 7227 6859 5540 8 0.609
SLMS manufacturing 6238 5663 5000 0 3401 9110 2100 20 3938 5039 2188 9 0.733
Why is the cash flow/profit correlation so low?
Table 4A: Adjustments Using Markups
Adjusted Profits Adjusted Revenue Minus Expenses Markup-Adjusted Revenue Minus Expenses Mean S.D.
Median % negative Mean S.D.
Median % negative Mean S.D.
Median % negative Correlations: Adjusted Profits Pearson retail 8508 6044 7000 0 7431 20967 5775 21 7227 6859 5540 8 0.609
SLMS manufacturing 6238 5663 5000 0 3401 9110 2100 20 3938 5039 2188 9 0.733
Why is the cash flow/profit correlation so low?
Table 4B: Markups and Inventory Turns
Correlations: Adjusted Profits vs. Adjusted Rev-Exp Correlations: Adjusted Profits vs. Markup Adjusted Pearson Spearman p-value Pearson Spearman p-value ≥ 75% of inventories sold in same month 0.698
0.767
0.000
0.701
0.742
0.000
< 60% of inventories sold in same month 0.138
0.297
0.000
0.659
0.698
0.000
Why is the cash flow/profit correlation so low?
This is the same timing mismatch that Samphantharak and Townsend (2008) resolve using monthly data on inventories – Clearly, better to have monthly data – We had no success getting monthly data in quarterly surveys (beginning of last month, end of last month, expected end of this month) – Markup allows this correction to be made even in cross-sectional data – We interpret the high correlations as suggesting that owners do understand what ‘profits’ are
Profits v R-C Improvements in the correlations of the measures are reassuring We interpret the data as suggesting that profits are likely a better reflection of reality than R-C, based on a comparison of levels – In baseline month, unskilled workers earn 6-7000 LKR/month – Owners say they would need 8000 LKR in wages to shut down
Recall issues
Compare March 2005 sales reported in April with March 2005 sales reported in July. Later report is 10% lower on average, 16% at median But, compare annual sales reported in April 2006 with sum of monthly sales reported quarterly. Annual recall only 3% lower
Recall issues: 1 month vs. 4
Recall issues: Annual
Recall issues: the effect of books
Provided simple ledgers for half of the enterprises (daily/weekly recording) – Expenses on inputs – Other expenses – Goods taken from business – Total business revenue – Business income used by household
Recall issues: the effect of books
Find: – Increased reported revenue and expenses – Much higher level of goods taken for home use – Little effect on reported profits
Compliance with books
Compliance fairly high for first few months – 68% in first month, 53% in third, 60% in fourth, 43% in ninth month – In April 2008, only 17% still keeping books, only 8% as detailed as the ledgers In Kandy, with weekly interviews, higher compliance – One month later, 52% still keeping books; a year later, only 20% keeping books in anything like this format
Deliberate misreporting
We might suspect firms would underreport profits – 2/3rds say ‘firms like theirs’ under report profits Fear of taxes Trying to show difficulty of running business Don’t want to reveal true state of business
Deliberate misreporting
Table 9: If the truth is 10,000, how much would owners report?
Mean 25th percentile 50th percentile 75th percentile Revenue KMS-all 6744 SLMS 8204 5000 7000 8000 7000 8000 10000 Expenses KMS 12254 SLMS 11417 10000 12000 15000 10000 10000 13000 Profit SLMS 7801 6000 8000 10000 Only weak evidence of reversion to the mean, typically found in wage data
Do the ‘firms like yours’ reflect own firms?
For 1/3 rd of the sample in Kandy, RAs visited every 2 days, recorded all transactions for an ~hour each visit.
Compare reported revenue with revenue estimated from these visits, and with the average % under reporting
Do the ‘firms like yours’ reflect own firms?
Table 10: Comparison of Reported Sales to Directly Monitored Sales
For 58 KMS firms receiving visits every 2 days Hours of transactions observed in month Mean 8.2
S.D.
1.8
Reported Sales for September Estimated Sales based on observed transactions and weekly hours reported Implied % underreporting 37090 53630 30.8
26205 39224 Compare with “firms like yours” response: average under reporting of 32.5%
Impact of interventions
Deliberate mis-reporting is particularly problematic for analyzing impact of interventions Two models of behavior: – Warm glow (wears off over time) – Switch to “honest reporting” state (might not wear off) Ideally, would have ‘harder’ data
Prospects for harder data?
In some contexts administrative data is an option – Wage workers – MFI interventions (repayment) But generally any administrative data on incomes and revenues of microenterprises will be less rather than more reliable
Harder measures
One possibility is independent valuations of inventories A.
1.
Rangana Stores- Doluwa Road, Hindagala. (July 14, 2008) Enterpriser Owner’s answer about current inventory= around Rs. 150,000 2.
RA (Susil) manual measurement = Rs. 214,000 (around 2 hours) Research Assistant’s Visual Estimate: Time spent RA1. M. Chanaka RA3. K.G.M. Kodagoda Rs. 170,000 Rs. 260,000 20 minutes 20 minutes RA4. D.M.R.K. Disanayaka Rs. 204,000 RA6. M.M.E.M Gnanarathna Rs. 185,000 B.
1.
Kapila Stores, Hindagala Junction, Hindagala (July 14, 2008) Enterpriser Owner’s answer about current inventory= No answer given 2.
RA (Susil) manual measurement = Rs. 115,000 (around 2 hours) Research Assistant’s Visual Estimate: Time spent RA5. Rasika Rajapaksha Rs. 106,600 20 minutes 20 minutes 20 minutes 20 minutes
Measuring microenterprises
A poor man’s version of Samphantharak and Townsend Low correlations between profit reflect timing mismatches more than a misunderstanding of profits We find little evidence of long-term recall bias, no effect of books on reported profits Monitoring of sales levels suggests firms under report sales by 30%, about what they say “firms like their” do.
Measuring microenterprises
Measurement issues more problematic when combined with interventions Did not address a couple of relevant issues: – Allocation of assets used jointly by business and household – Depreciation of fixed assets