Condition versus statement analysis

Condition vs. Statement Analysis

In this short essay, the author will examine how financial condition analysis differs from financial statement analysis (ratio analysis) in public administration. Although they are similar, there are important variances between the two. Though financial analysis was previously primarily the province of business and accounting, these fields are now becoming more and more a part of public administration theory and practice as well. Accountability in public administration is the cornerstone of good government in the United States and in other countries. Responsibility is demanded by the public and must be provided to them by public servants using financial condition analysis and financial statement analysis.

Financial condition analysis in essence is defining net worth for an organization, defining an optimal financial state based upon financial theory. This theory allows us to create a picture of what the optimal financial condition should be to maximize financial efficiency. Essentially, the financial analyst is making a checklist of vital statistics that define this optimal state. This may involve a goodly amount of out of the box thinking, avoiding a cookie cutter type of analysis. In such cases, demand for rapid growth may involve a certain amount of risk with more dynamic investment is something such as retirement funds. The trade-off is to determine the proper mix of slow growth safe investments vs. dynamic fast growth investments so that the organization can benefit from the best of both worlds (Fridson, & Alvarez, 2009, 3-4) .

The financial condition performance measurement and key performance indicators provide government oversight. Such oversight requires performance measurement and performance indicators in order that public administrators can perform their oversight functions competently and quickly. This is especially true in the case with local governments. This then has attracted the attention of government accountants about financial sustainability. In public administration, good government is based upon this financial analysis (Dollery, & Crase, 2005, 3-4). Simply, if its net financial debts are a moderate levels at which associated interest payments can be met comfortably from its annual income, this it is being run well.

Ratio analysis is a useful way of gaining a snapshot of an organization. It is a transparent system of analysis reporting. These ratios can then be analyzed to identify an organization's strengths and weaknesses as well as useful insights. One thing that is important to realize is that the ratios lack the backing of financial theory. Theory says what should be the case or value. In the case of financial ratios, there is no way to identify a "theoretically best" value for any of these ratios. Essentially, financial ratios are simply nothing more measures that have been developed and evolved over time. They are therefore imperfect measures and need to be treated that way. It is usual that financial ratios are grouped together by their purpose in the ledger. There are a host of different classifications. However, the most commonly used classifications are liquidity, debt, activity. Typically one would not calculate ratios in all of or for just a single government agency. Rather, one would approach the ratio analysis from the perspective of an individual interested in one particular area ("Financial ratios," 2010).