Analyzing Financial Statements

Published: 2021-09-27 16:25:03
essay essay

Category: Money, Budget, Financial Statements

Type of paper: Essay

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Hey! We can write a custom essay for you.

All possible types of assignments. Written by academics

GET MY ESSAY
Synopsis and Ratio Explanations
It is very important for organizations to know how well they are doing financially when most efforts are being made to serve clients. It is easy to forget that pouring money into a problem will not fix it unless revenue flows continue or are increased and expenses are controlled. Some of the easiest computations can be made with information retrieved from balance sheets and income statements provided by accountants. Ratios such as the current ratio, long-term solvency ratio, contribution ratio, programs and the expense ratio, general and the management expense ratio, fund-raising and expense ratio, and revenue and expense ratio can provide a picture of where a company stands now compared to where it was in past years and what may need to be done in the future.
The current ratio gives a picture of the liquidity of an agency; the amount of cash and other assets that can be easily accessed for use to pay expenses. The current ratio is expected to be over 1. 0; if it is less, the agency may have problems meeting its obligations. In this scenario, each year the ratio has shown that XYZ is getting closer to 1. 0; 2002 reflected. 75, while by 2004 it has increased to  90. This means that while it still may make it difficult to pay obligations, the situation has gotten much better. The purpose of the long-term solvency ratio is to provide insight into how well an agency will be able to pay their annual expenses as they come due. The result of the ratio should be at least 1. 0, but the higher the number the better; if it is less than 1. 0, the viability or likelihood of existence is questionable. In 2002, a figure of 1. 26 was acceptable, but in 2004 it has risen to 2. 06; this is a good figure and shows that the organization is improving in its financial planning and will more than likely remain viable. The contribution ratio is used to show to what extent an agency is dependent upon its main funding source. It is best for an organization to have its revenues spread through many sources rather than becoming dependent on only one or two which may or may not fund them in the future. If the figure calculated as above. XYZ Corporation needs to look for more sources of funding. Their contribution ratio is. 53 for 2002 and has remained stable in 2003 and 2004 at . 51. While their dependence has dropped a little bit, they are still working in the danger zone.



The programs and expense ratio is based upon a standard set by the National Charities Information Bureau (NCIB). This agency provides the standards which show whether or not a program is making or not making the grade as far as how much of program expenses are in comparison to overall expenses. It is expected that this ratio is a minimum of  60. In 2002, XYZ Corporation produced a ratio of 60; in 2003 and 2004, this number raised to  66. The beginning figure is acceptable, but the rise in ratios for 2003 and 2004 is even better. The general and management expense ratio identified how much money is spent on the administration of the agency in comparison to the total expenses. If the calculated figure is greater than  35, the organization should begin to cut the costs related to administration. XYZ Corporation has consistently brought their administrative costs down. Beginning in 2002 this organization had a 40 ratio, which is unacceptable; then in 2004 a figure of. 29 which is well within the acceptable range. The fund-raising expense ratio basically tells how much money is being spent related to the total expenses in order to raise revenues to be used by the agency. A ratio of over is a sign that more money is being spent than necessary to raise the funds needed by the agency; this means that less can be spent on essential services. In 2002, XYZ Corporation’s ratio was 1, which is within acceptable limits; in 2003 and 2004, they reduce their amount still farther to  60. While this rate is very good, it is important to be aware that cutting this ratio too close may actually limit the revenues of the agency; some money needs to be spent to identify and court some funding sources or those potential revenues may be lost.
The revenue expense ratio is a very important figure in understanding where an organization stands. This ratio informs the reader whether the agency is making money, losing money, or breaking even. It gives a starting point for making decisions about whether a program should continue, if it should be re-evaluated, or if it should be discontinued. The financial management team should be held accountable for the figures they produce and be able to explain shortfalls or positive changes. The acceptable figure for this ratio is 1. 0 or greater. In 2002, this agency had a ratio of . 8, which is just below acceptable. Through hard work, it appears that they have raised this number to 1. 11. This is a big change and shows that XYZ is working to make their organization more stable. Overall, based on these figures, this corporation is taking positive steps towards making their agency viable, effective, and efficient. All of their ratios reflect the movement towards acceptable levels and if history predicts future behavior, they will continue to grow and be able to provide services for their clients without fear of insolvency.
They do need to work on getting more grantors instead of having one major source of revenue, but even now they have increased to two major donors. This in itself is a major accomplishment. XYZ Corporation Fixed Costs, Variable Costs, and Break-even Point Comparison of Years 2002, 2003, and 2004 (respectively) 2002 Fixed Costs for 2002 in Expenses: Rent and Utilities






Rent and Utilities
$150,000. 00


Telephone
$24,000. 00


Management and other
$351,000. 00


Total Fixed Costs
$525,000. 00



Variable Costs for 2002 in Expenses: Other Expenses $117,903. 00






Payroll and benefits
$417,004. 00


Supplies
$125,101. 20


Total Variable Costs
$660,008.



Rounded to $660,008. 00 Per Appendix D What is the BEP for the program since we see that they were in the red for the year?

Total Fixed Costs = $525,000
Total Variable Costs = $660,008

Revenue per Customer = Total Revenue/Total Customers $1,165,065. 00/5962 = $ 195. 42
Variable Cost per Customer = $660,008/5962 = $110. 70
BEP = Total Fixed Costs/ (Revenue per Customer – Variable Costs per Customer)
BEP = $525,000/($195. 42 – $110. 70) = $525,000/ $84. 72 = 6196. 88
Rounded to 6197 2003
Fixed Costs:

Rent and Utilities $150,000
Telephone 24,000 Management and Other 371,101 $545,101
Variable Costs Payroll and Benefits $520,069
Supplies 171,623 (rounded up the $. 77)
Other Expenses 79,888 $771,580
Break-Even Point Total Fixed Costs = $545,101
Total Variable Costs = $771,580

Revenue per Customer = Total Revenue/Total Customers $1,244,261. 00/6821 = $182. 42
Variable Cost per Customer = $771,580/6821 = $113. 12
BEP = Total Fixed Costs/ (Revenue per Customer – Variable Costs per Customer)
BEP = $545,101/($182. 2-113. 12) = $545,101/ $69. 30 = 7866
Rounded to 7,866 because there is no way to have a partial person and at 7865, we will not make break-even. 2004
Fixed Costs:

Rent and Utilities $150,000 Telephone 24,000
Management and other 445,819 619,819
Variable Costs: Payroll and Benefits $915,787 (rounded down)
Supplies 320,526 (rounded up)
Other Expenses 115,999 $1,352,312
Total Fixed Costs = $619,819
Total Variable Costs = $1,352,312

Revenue per Customer = Total Revenue/Total Customers 2,191,243/11,822 = $185. 35
Variable Cost per Customer = $1,352,312/11822 = $114. 39
BEP = Total Fixed Costs/ (Revenue per Customer – Variable Costs per Customer)
BEP = $619,819/($185. 35 – $114. 39) = $619,819/70. 96 = 8,735.
Rounded to 8,735
Budgeting
There are three basic types of budgeting that apply to human service organizations; line item, performance, and program budgets. Deciding which method will be best for a given agency depends on what information they wish to retrieve and from a perspective they wish to look at revenues and expenditures. By listing the advantages and disadvantages of each method, a financial management professional or Executive Director may make the appropriate decision on which format to use. Line budgeting is the most utilized budgeting method because it simplifies how money is allocated and how well each program is controlling expenditures. Because of its simplicity, employees, financial managers, and laymen can readily identify key pieces of information. Financial control is the basic purpose of this type of budgeting. Line item budgets are easy to prepare, easy to justify, and easy to understand. They provide specific information as to where the money is allocated and for what purposes.
There are two major disadvantages to line-item budgeting; lack of relationship between the budget, objectives, and the outcome of the program. The second disadvantage is that there is no real way to estimate what the future holds; line item budgets are always based on historical data which may not properly reflect the current situation. The purpose of “performance budgeting is to relate agency expenses to programs by determining (a) a program output (or unit of service) performance measure, (b) the total program cost, and (c) the cost per output of service.  The advantages of this type of budget program are similar to program budgets; with the difference being the concentration of quantity over quality. Being able to know how much a particular output cost gives managers a real picture of how much is being spent to provide client services. If adjustments need to be made, they can do so as the program advances or declines in services rendered. This method addresses not only how a budget will be broken down for departments, but also the efficiency of what departments are meeting their budgetary goals while serving the most clients (based on how outcomes are represented).
Fixed costs are added to the budget line items. A disadvantage of performance budgets is that while they do show how many clients are services and at what cost, they do not concern themselves with quality. If the quality of service is not a concern then it shows people as numbers, rather than as important beings we are supposed to serve. The other major disadvantage is that calculations can be difficult and require more computer input than the basic line-item type budget. While many calculations can be done by hand, many also need more complex programs to provide appropriate data. Program budgets are concerned with an agency’s activities rather than its expenditures. The cost per outcome is the main concentration of the financial manager and gives information about the success or failure of the program. This is perhaps the best type of budgeting for agencies that need to know whether they should continue, reorganize, or discontinue their program. The major advantages to this type of budgeting are that it is easier to evaluate programs since costs are tied to results, priorities may be changed quickly and with a minimal amount of work, and programs are broken down into smaller, more manageable budget units.
This type of budget concentrates on effectiveness, not just efficiency. The disadvantage is that it is difficult to get all to agree on what an acceptable outcome will be for budgetary purposes. The fact exists that if an outcome is only defined as a specific ending, major positive changes in a client’s case may be overlooked as not an outcome. Another disadvantage is that the analysis can be time-consuming and difficult. To understand the data which is produced, most people would have to have an accounting background or someone who can explain the reports to them. Fund-Raising—Traditional versus Non-Traditional Organizations from everywhere are begging for funding to keep their programs going and expand services they can offer to their clients. Traditional sources such as government grants, private donor grants (individual or corporate), annual support mailings, and the United Way may offer some assistance, but the reality is that money is a limited commodity and all agencies need more of it.
While each type of traditional funding may allow only certain types of programs or projects which target specific groups based on acceptance criteria, there are others that give general funding. The process to receive these funds may involve grant writing, volunteers to send out mailers, and liaisons with other agencies; paperwork and attention to detail are very important in attaining these types of funding. Non-traditional methods arise from many different styles and perspectives. While the “chunks” of money may be smaller, they do have benefits that more traditional methods offer. We all hate telemarketers, but how would we feel about children from our church calling about a pizza sale to benefit their summer program? The pizzas could be bought in bulk under a discount program that companies offer and then picked up at the church on a given day. Most would probably spend money to help people they know earn money for a good cause. A second non-traditional method of fund-raising is to the community rummage sale. Most people have lots of good “stuff” that they think has value but have little time or inclination to have a yard sale. By donating these goods to an organization to sell at a community rummage sale, individuals may be given a donation credit on their taxes, clean out their garages, and help the agency make much-needed money. Funds that are raised in this manner are not paperwork intensive (in fact, other than writing up posters, there is none) and funds are not required to be spent on an identified program or project.
Conclusion
After reviewing the financial documents and ratios of XYZ Corporation, it is clear that they are making a solid business decision on how their money is spent and how revenue is raised. Most calculations show that their situation has improved since the initial reports of 2002. If history is any indicator of what will follow in the future, they should be able to sustain their growth and perhaps even expand. They have increased the number of clients served while at the same time keeping their budget under control. The only area that really needs improvement is the revenue dependency aspect of their budget. Being too dependent on one funder can spell disaster for any organization. XYZ has made headway in this department by getting the majority of their funds from two agencies instead of just one, but it would serve them to continue to diversify their revenue sources. Hopefully, this corporation will continue to provide quality services to their clientele far into the future and continue to remain solvent.
Reference

Martin, L. (2001). Financial management for human service administrators. Needham Heights, MA: Allyn & Bacon.

Warning! This essay is not original. Get 100% unique essay within 45 seconds!

GET UNIQUE ESSAY

We can write your paper just for 11.99$

i want to copy...

This essay has been submitted by a student and contain not unique content

People also read