Financial condition matters.
< Let's start off by taking a look at the City of Mesa's logo.
Mayor John Giles likes to use it as "a visual tool" for his NextMesa Campaign, citing flat-tipped hills (called mesas in Spanish) as higher levels in growth in sequence one after the other - always getting raised to new heights.
What he doesn't bring up is that every flat-lined segment falls off in a declining slope over time . . .
Are we in now on Stage Red when Giles first got elected to office in 2014 - five years into his term?
Next is 2020 when the mayor has already formed and filed a PAC registration to run again for his 2nd term in office.
OK. Financial condition matters.
Blogger Note: City of Mesa Budget Pie Charts are inserted throughout the text reproduced in this post for reference to the subject matter in different sections as visual aids as you read this somewhat complicated and complex information piece about financial statements. It is intended for the public who live here in Mesa.
WHY? To help you understand some basics and at the same time get to know what financial statements are and how to analyze them.
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That’s why all aspiring public servants need to know how to evaluate financial statements, and to measure, manage, and improve their organization’s financial position.
Financial Statement Analysis: “How Are We Doing?”
Financial statement analysis informs a wide variety of strategic management questions, including:
> What is this organization’s overall financial position? Is it liquid? Profitable? Solvent?
>How does this organization’s financial position compare to its peer organizations?
> How can this organization adjust its operations and policies to strengthen its financial position?
>How much debt or other long-term liabilities can this organization afford?
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How We Pay for the Public Sector
Reference > https://press.rebus.community/financialstrategy/chapter/chapter-1/
WHERE THE MONEY COMES FROM, AND WHERE IT GOES
Managers need to know where public money comes from, and where it goes. That information can answer important questions like:
- What revenue options are available to governments? Non-profits?
- What are the advantages and disadvantages of various revenue sources with respect to efficiency, equity, fairness, and other goals?
- How will the US federal government’s financial challenges shape the financial future of state governments, local governments, non-profits, and other public organizations?
- What is the optimal “capital structure” for a non-profit?
- How, if at all, can governments address the challenges of entitlements and legacy costs?
Learning Objectives
After reading this chapter you should be able to:
- Identify the revenue sources used by the federal, state, and local governments.
- Contrast government revenue sources with non-profit revenue sources like donations and earned income.
- Identify public organizations’ main spending areas, and the division of that spending across the government, non-profit, and for-profit sector.
- Show how similar governments pay for similar services in quite different ways.
- Identify some of the “macro-challenges” that will shape public organizations’ finances well into the future.
The Basic Financial Statements
FINANCIAL STATEMENTS: THE “FINANCIAL STORY”
Financial statements help managers answer a variety of questions:
- Where does this organization’s money come from? Where does it go?
- Is this organization’s mission aligned with its money? Do its revenues and spending reflect is core mission, priorities, and strategy?
- How much of this organization’s spending does it control? How much of its spending is directed by outside stakeholders like donors, clients, or investors?
- How much, if any, does this organization report in “reserves” or “rainy day fund”? Given its operations, what would be the optimal level of reserves?
- Does this organization have enough financial resources to cover its obligations as they come due?
2. Second, and more important, financial statements are only useful if the audience knows how to read them
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Reference: https://press.rebus.community
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What is Financial Position?
Financial position is a public organization’s ability to accomplish its mission now and in the future. When stakeholders ask “how are we doing, financially?” the answer should reflect that organization’s financial position.
An organization’s financial position has three main components:
- Liquidity. Does the organization have liquid resources – especially cash – to cover its near-term liabilities? Can it convert its less liquid assets to cash to cover those liabilities?
- Profitability. Do the organization’s revenues cover its operating expenses?
- Solvency. Can the organization generate enough resources to cover its near-term and long-term liabilities?
Financial Statement Ratios for Solvency
For governments, the solvency ratios are focused entirely on debt and other long-term obligations.
Governments can borrow money that won’t be paid back for decades.
If careless, a government can take on too much leverage.
That’s why these solvency ratios focus on how much money a government has borrowed in both its governmental and enterprise funds, and its ability to pay back that debt. The later is known as coverage. Bond investors, particularly for public utilities, often stipulate how much coverage a government must maintain at all times. Coverage ratios are usually expressed as operating revenues as a percentage of interest expenses.
Financial statement analysis raises questions.
A good financial statement analysis will almost always reveal some contradictory trends.
Why does this organization’s profitability look strong but the current ratio is well below the rule of thumb? Why is this organization less liquid than its peers? Why does this organization not have debt, and is far more liquid, than similar organizations?
> A good financial statement analysis raises many of these types granular questions about the organization’s financial assumptions, program operations, and overall effectiveness.
- Sometimes these follow-up questions can be answered from other publicly-available information, such as the notes to the financial statements or the annual report.
- Sometimes they can’t. If your analysis concludes with many unanswered questions, that does not mean your analysis is bad. It simply means there are limits to what we can learn from financial statements alone.
The “TEN POINT TEST”
Throughout the past few decades, analysts have developed a popular framework to evaluate local governments’ financial condition. It’s known as the “Ten Point Test.”
It’s comprised of ten key ratios that, when taken together, summarize a government’s liquidity, profitability, and solvency. In the Ten Point Test framework a government earns “points” based on how its ratios compare to its peer governments. If its ratios are consistently better than its peers it earns a higher score. If its ratios are consistently worse than its peers, it’s scores are lower and in some instance negative.
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Financial Position and Financial Strategy
Financial statement analysis can tell us a lot about an organization’s financial position.
The question, then, is what to do about it?
As mentioned, sometimes financial statement analysis implies some clear follow-up questions about an organization’s financial operations and overall performance. Ideally, it also suggests some steps that management can take to improve that financial position and performance.
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By Updated Apr 12, 2019
( Source: https://www.investopedia.com/articles/fundamental-analysis )
Clean and Dirty Surplus
Net income, which does not contain any comprehensive income or unusual items, is called clean surplus net income. However, if there is other comprehensive income or unusual items in the company's net income, which will flow into the company's statement of retained earnings, it is called dirty surplus net income. Dirty surplus items are sectioned off into three categories:
Unrealized Gains and Losses on Securities Held for Sale: Under Financial Accounting Standards Board (FASB) Summary Statement No. 115, companies are required to report any unrealized gains and losses on any securities they are holding for sale. This process is called mark-to-market accounting and takes place every time an income statement is created. These unrealized gains and losses are then recorded in the company's income statement at year-end. Although there are no measurement issues related to recording unrealized gains and losses in comprehensive net income, some analysts and investors wonder if it should be included. These securities are marked to market every reporting period, even if they are not sold. . . "
