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Learn to interpret financial info, determine needs, get reliable sources, and make informed decisions for business success. Understand financial documents like balance sheets, income statements, and cash flow reports. Key numbers and trends analysis to assess performance and position of a company.
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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
Organization: Departments Branches Cost Centers Outcomes Outputs = Budget Effectiveness Inputs: Salaries Supplies Capital exp, etc. Economy Efficiency Accountability Framework How much? Quality? When? Cost? Programs “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
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 position The 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 flow The statement of cash flow shows: • how cash is generated • how cash is utilized • how surplus cash is managed Key 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?