Indicators for Financial

Analysis

For CEPT University – Ahmedabad Students

Based on Financial Management Training Series- UNHSP

Dr Ravikant Joshi
 Local Government Financial
Management
Accounting Managing Performance Asset Management

Creating Financial Managing Financial Framework

Performance Measurement
Framework
Evaluating Financial Financing of Managing
Procurement

Condition Operative Operative

Budget Budget

Financial Policy
Making
Financing of Managing
Capital Capital
Investment Investment
Financial Planning
Plan Plan

Citizens’ Participation
 Conceptual Framework of
Performance Measurement
 Need to be based on a consistent and universally
accepted set of definitions of
 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
 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
 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
 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

 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 < > Measures

Input
Amount of resources within the Efficiency
program
Input ratio by output
Output produced
Amount of goods and services
rendered Efficacy
Out put ratio by results
Results/Outcome unit
Direct results amount
Relevance
Results ratio by impact
Impact unit

Degree of accomplishment of the

objectives
Substanciability
Measure of program benefits in
Significance time

Tendency in the accomplishment of

objectives
 GASB (USA) Classification of
Performance Indicators
 Input Indicators
 Output Indicators
 Outcome Indicators
 Efficiency (and cost effectiveness) Indicators
 Explanatory Indicators
 Developing The Indicators

Organize Evaluate Collect Data

Project Indicators for
Worksheets

Develop Evaluate Develop

Policy Results Indicators/Plot
Statements
 Indicators Financial Analysis
 Key Indicators include:
 Revenues
 Expenditures
 Operating Position
 Unfunded Liabilities
 Capital Assets
 Show by Trend Worksheet
 Graph illustrating
warning trend Line Description Source 2001 2002 2003 2004 2005
 Formula
1 Net Operating Work
 Description Revenue sheet 2
 Suggestions for
Analysis
 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 / Decrease indicates poor allocation to
Population population
Restricted Revenues Restricted Operating Revenue/ Increase indicates revenue allocation for
Net Op Revenue specific needs
Intergovernmental Intgov Op Revenue/ Gross Op Increase indicates dependence on other
Revenues Revenue governments
Elastic Tax Revenue Elastic Op Rev/ Net Op Rev Decrease indicates poor economy and
high inflation
One Time Revenues One time Op Rev/ Net Op Rev Increase/ Continuous use indicates
overdependence on onetime sources
Property Tax Revenue Property Tax Decrease indicates shortfall in LG
Revenue/Operating Revenue revenues
Uncollected Property Uncollected PT/ Total PT Levy Increase indicates decline in LG’s
Taxes economic health
User Charge Coverage User Charge Rev/ Related Decrease indicates loss in service
Services Expenditure 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 No of LG Increase indicates LG is becoming
Capita Employees more labour intensive
/Population
Fixed Costs Fixed Costs/ Net Op Increase indicates less flexibility to
Costs respond to economic changes
Fringe Benefits Fringe Ben Exp/ Increase indicates unhealthy LG
Salaries and Wages 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 Increase indicates unbalanced budget,
Surplus Deficit deteriorating finances
Fiscal Total expenditure/total revenue
Surplus/Deficit
Fund Balances Unreserved Fund Balance/ Net Unplanned decline indicates lack of
Op Revenue funds for future needs of LG
Liquidity Cash- short-term invest/ current Decrease indicates poor state of LG
liabilities
Current Current Liabilities/ Net Op Rev Increase indicates lack of flexibility in
Liabilities 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 Net direct bonded long term Increase indicates diminished
Debt debt / Assessed valuation 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 Unfunded Pension Liability/ Increase indicates increased
Liabilities 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 Total unused- sick leave/ Increase indicates large
Employee Leave Total employees 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 Cap Outlay from Op funds/ Decline over 2-3 years indicates
Outlay 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 Increase indicates greater public assistance receipts
thousands
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
 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
 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