6. Indicators For Financial Analysis)- For Cept Students

Indicators for Financial Analysis For CEPT University – Ahmedabad Students

Based on Financial Management Training Series- UNHSP

Dr Ravikant Joshi

Local Government Financial Management Creating Financial

Managing Performance

Asset Management

Managing Financial Framework

Procurement

Framework Evaluating Financial Condition

Financial Policy Making

Financial Planning

Financing of Operative Budget

Managing Operative Budget

Financing of Capital Investment Plan

Managing Capital Investment Plan

Citizens’ Participation

Performance Measurement

Accounting

Conceptual Framework of Performance Measurement 

Need to be based on a consistent and universally accepted set of definitions of 

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various resources that go into the process of service delivery entities that are involved in the delivery process, (input) the work that is to be done (workload) results that are generated (outputs) Impacts, consequences or effects that are generated by the output of the program at the individual and societal level, in the short run and in the long run, obviously including side effects (outcomes)

Conceptual Framework of Performance Measurement 

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Broad Classification (input, workload, output, outcome) differs from entity to entity, program to program Output of one becomes input of others Ratio of input to output = efficiency Ratio of output to input = productivity But these ratios to be used with caution as they can enhanced or reduced

Performance Indicators Definition 

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The word indicator means ‘pointer’ to a desirable outcome. “Systems of quantifiable elements or numerical ratios to measure certain aspects of the input of public entities, their operation and their results”. Indicator is a way to measure, indicate, point out or point with more or less exactness. Indicator is something used to visualize the condition of the system.

Uses of Performance Indicator Systems    

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Respond to officials’ and public’s demand for accountability. Help to articulate and demand for budgetary allocations Allocate resources efficiently and raise funds Examine reasons for failures and successes and suggest remedies Motivate personnel to continue improvement Monitor the role of contractors and other grantees Support strategic and other long term planning (by providing initial information and later tracking the process) Evaluate programs Most importantly help to provide better services. Build public trust and communication

Types of Indicators 

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Input-output level indicators – resources used to achieve output Output-impact level indicators-effectiveness of the efforts put in Condition-Stress-Response (CSR) indicators – ground realities, challenges and systemic approach applied Integral Indicators – results of linkages between sectors Trend Indicators - processes Distributive Indicators – equity aspects Predictive Indicators – futuristic projections Conditional Indicators – assumed conditions or change

Indicators

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Measures

Input Amount of resources within the program

Efficiency Input ratio by output produced

Output Amount of goods and services rendered

Results/Outcome Direct results amount

Efficacy Out put ratio by results unit

Relevance Results ratio by impact unit

Impact Degree of accomplishment of the objectives

Significance Tendency in the accomplishment of objectives

Substanciability Measure of program benefits in time

GASB (USA) Classification of Performance Indicators     

Input Indicators Output Indicators Outcome Indicators Efficiency (and cost effectiveness) Indicators Explanatory Indicators

Developing The Indicators Organize Project

Develop Policy Statements

Evaluate Indicators

Collect Data for Worksheets

Evaluate Results

Develop Indicators/Plot

Indicators Financial Analysis 

Key Indicators include:     

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Revenues Expenditures Operating Position Unfunded Liabilities Capital Assets

Show by 

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Graph illustrating warning trend Formula Description Suggestions for Analysis

Trend Worksheet Line

Description Source

1

Net Operating Work Revenue sheet 2

2001

2002

2003

2004

2005

Examples-Revenues “Revenues determine the capacity of a LG to provide services. Important

issues to consider in revenue analysis are growth, flexibility, elasticity, dependability, diversity, and administration.”

Key Indicators Include: Revenues per Capita

Net Operating Revenue / Population

Decrease indicates poor allocation to population

Restricted Revenues

Restricted Operating Revenue/ Increase indicates revenue allocation for Net Op Revenue specific needs

Intergovernmental Revenues

Intgov Op Revenue/ Gross Op Increase indicates dependence on other Revenue governments

Elastic Tax Revenue

Elastic Op Rev/ Net Op Rev

One Time Revenues

One time Op Rev/ Net Op Rev Increase/ Continuous use indicates overdependence on onetime sources

Property Tax Revenue

Property Tax Revenue/Operating Revenue

Uncollected Property Taxes

Uncollected PT/ Total PT Levy Increase indicates decline in LG’s economic health

User Charge Coverage

User Charge Rev/ Related Services Expenditure

Decrease indicates poor economy and high inflation

Decrease indicates shortfall in LG revenues

Decrease indicates loss in service charges

Examples-Expenditures “Expenditures are a rough measure of a LG’s service output. Generally, the more a LG spends in constant dollars, the more services it is providing.”

Key Indicators Include: Expenditures per Net Operating Exp / Increase indicates higher service costs Capita Population to service charge on population Employees per Capita

No of LG Employees /Population

Fixed Costs

Fixed Costs/ Net Op Increase indicates less flexibility to Costs respond to economic changes

Fringe Benefits Fringe Ben Exp/ Salaries and Wages

Increase indicates LG is becoming more labour intensive

Increase indicates unhealthy LG finances

Examples-Operating Position “During a typical year, a LG generates either an operating surplus or an

operating deficit. An operating surplus develops when current revenues exceed current expenditures, an operating deficit when the reverse occurs.”

Key Indicators Include: Operating Ratio Op Expenditure /Op Revenue Surplus Deficit

Increase indicates unbalanced budget, deteriorating finances

Fiscal Surplus/Deficit

Total expenditure/total revenue

Fund Balances

Unreserved Fund Balance/ Net Op Revenue

Liquidity

Cash- short-term invest/ current Decrease indicates poor state of LG liabilities

Current Liabilities

Current Liabilities/ Net Op Rev

Unplanned decline indicates lack of funds for future needs of LG

Increase indicates lack of flexibility in allocation of funds

Examples- Debt “Debt is an effective way to finance capital investments to even out short-term

revenue flows, but its misuse can cause serious financial problems. Even a temporary inability to repay debt can damage a LG’s credit rating, which can in turn increase the cost of future borrowing”

Key Indicators Include: Long term Debt

Net direct bonded long term debt / Assessed valuation

Increase indicates diminished ability to repay debt

Debt Service Net direct debt service / Net OpIncrease indicates excessive Rev fiscal strain on LG Overlapping Long-term overlapping bonded Increase indicates dependence Debt debt / Assessed valuation on other repayment sources

Examples- Unfunded Liabilities “An unfunded liability is one that has been incurred during the current or a

prior year, that does not have to be paid until a future year, and for which reserves, or funds, have not been set aside.”

Key Indicators Include: Unfunded Pension Liabilities

Unfunded Pension Liability/ Increase indicates increased Assessed Valuation burden on tax base

Pension Assets

Pension plan assets/ annual Decline indicates problems pension benefits paid in the management of the plan

Accumulated Employee Leave

Total unused- sick leave/ Total employees

Increase indicates large termination costs

Examples-Capital Assets “Most of a LG’s wealth is invested in its physical assets or capital plant

streets, buildings, utility networks, and equipment. If these assets are not properly maintained or are allowed to become obsolete, the results are often (1) decreasing usefulness of the assets, (2) increasing cost of maintaining and replacing them, and (3) decreasing attractiveness of the LG as a place to live or do business.”

Key Indicators Include: Maintenance Exp of repair & maintenance Decrease indicates low Effort of cap assets/ Quantity of maintenance assets Capital Outlay

Cap Outlay from Op funds/ Decline over 2-3 years indicates Net Op Exp capital outlay needs being deferred

Depreciation Depreciation Expense/ Cost Decrease indicates assets being Expense of depreciable assets used beyond estimated life

Examples-Community Needs & Resources “The community needs and resources indicators encompass economic and

demographic characteristics including population, personal income, property value, employment, and business activity.”

Key Indicators Include: Population

Population

Rapid change in population size

Median Age

Median Age

Increasing median age of population indicates greater expenditure

Personal Income per Capita

Personal Income/ Population

Decline indicates drop in purchasing power

Poverty Households

Poverty Households/ Households in thousands

Increase indicates greater public assistance receipts

Property Value

Change in property value/ property value in Decline indicates drop in market value prior year

Residential Development

Market Val of new residential dev/ Mkt val Increase indicates greater expenditure demands of total new dvpt

Vacancy Rates

Vacancy Rates

Increase indicates sluggish economy

Employment Base

Local unemployment rate

Increase indicates overall economic decline

Business Activity

Decrease indicates sluggish economy

Benefits of EFC Indicators 

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Can not explain specifically why a problem is occurring? Or a single number or index to measure financial health It provides flags for identifying problems, clues about their causes, time to take anticipatory actions Provides for better planning and policy making Puts already existing information in context of other economic, demographic data and creates new meaning

Obstacles In Indicators based Financial Analysis  

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Resistance to change Lack of necessary financial and performance data Nature of LG Limitation of LG accounting practices LG financial analysis – lack of world wide normative standards for LG

Indicators for Financial Analysis Thank You