Interpreting and usingfinancial information

Gert van der Linde, World Bank

Uganda, Kampala

May 21, 2004

Interpreting and usingfinancial information

• Determining information needs

• Sources of information

• Importance of standards

• Getting the information

• Using the information

• Closure

Determining information needs

• What information do we want and why?

• Trends in financial performance• Trends in financial position• Trends in cash flow sources and utilization• Audit opinion• Non-financial information – e.g. service delivery

trends• Strategic direction

Accountability Framework

Outcomes Outputs Programs

Inputs:

Salaries

Supplies

Capital exp, etc.

Organization:

Departments

Branches

Cost Centers

How much?Quality?When?Cost?

Economy

Efficiency

Effectiveness

= Budget

“REAL” Performance Agreements

Accountable for what is controlled

Sources of information• Budgets• Annual reports• Annual financial statements

– Statement of financial position (balance sheet)– Statement of financial performance (income

statement)– Cash flow statement– Notes to the annual financial statements

• Strategic plans

Vote 26 - Transport

Appropriation account for the year ended 31 March 1993

Original Adjustments Saving

Estimate Vote 25 Estimate Voted Expenditure (Excess)

1992-93 1992-93 1992-93 1992-93 1992-93 1992-93

Main Divisions R'000 R'000 R'000 R'000 R'000 R'000 %

1 Administration 23 430 154 ( 210) 23 374 20 821 2 553 11

2 Civil Aviation 122 148 1 264 11 978 135 390 142 189 (6 799) ( 5)

RSA – Old “input” focus, no trends

RSA progress: Budget Information

RSA progress: Budget Information

RSA progress: Budget Information

National Treasury

Annual Report: Performance

Annual Report

Year-end: 31 March 2002,

Audited by 31 July 2002!

National Treasury:

Income Statement

National Treasury:Balance

Sheet

Accounting Standards• Accounting Standards Board• Participate and use IFAC “IPSAS” to issue accounting

standards• Unresolved issues, e.g.:

– Budget still on cash basis– Capitalization of physical assets– Accrual standard issues

• Non-exchange Revenue• Social Policy Obligations• Budget Reporting • Heritage assets

– GFS/ESA 95 and IPSAS Harmonization

Getting the Information• Delineated the reporting entity – introduced concept of

“ownership control” into legal framework and requirement to produce annual consolidated financial statements

• Legal recognition for accounting standards – established Accounting Standards Board

• Changed the audit cycle to be completed 5 months after y/e

• Introduced requirement for annual reports and established Minister’s responsibility for tabling of audited financial information in Parliament

• Established control over the bank account configuration• Established monthly reconciliation and reporting

procedures, supported by good audit trails

Using the information

• Trends in financial performance

• Trends in financial position

• Trends in cash flow sources and utilization

• Audit opinion

• Non-financial information – e.g. service delivery trends

• Strategic direction

Statement of Financial Performance

The statement of financial performance shows:• how much revenue has been earned during the year;• the costs and expenses associated with earning that

revenue; and• the net earnings (or loss) - how much the company

earned (or lost).Key numbers:• revenue from products and services sold• expenses, or costs, of doing business• net earnings / (loss)To interpret this information, analyze trends in:• revenue• gross profit• operating income (operating profit)• net earnings (net income, net profit)• earnings per share

Statement of financial positionThe statement of financial position shows a snapshot of:• what the company owns• what the company owes• what belongs to the owners (net worth)Assets should be equal to liabilities and owners’ equity.Key numbers:• assets (what the company owns)• liabilities (what the company owes)• owners equity (what belongs to the owners) To interpret this information, analyze trends in:• liquidity and levels of debt and inventory, e.g. the current ratio, a

comparison of current assets with current liabilities• relationship of this statement with the statement of financial

performance, e.g. relationship of accounts receivable with sales; inventory with the costs of sales

• time to collect money owed by customers• time to pay debt to suppliers

Statement of cash flowThe statement of cash flow shows:• how cash is generated• how cash is utilized• how surplus cash is managedKey numbers:• Net cash provided (or used) by operating activities• Net cash provided (or used) by investing activities• Net cash provided (or used) by financing activities To interpret this information, analyze trends in:• cash from operating activities to determine how efficiently the company

can produce and sell its primary product or service• cash flows in relation to earnings figures (from the statement of

financial performance). For example, if positive earnings does not turn into positive cash flows, the reasons and impact need to be understood.

Other information

• Audit opinion

• Non-financial information – e.g. service delivery trends

• Strategic direction

Closure

• Communicate need• Ensure legal framework supports information need• See that the Executive gets the basics right• Enforce sanctions• It costs money to produce – use it.

Questions?