Financial Ratio Analysis for Government

¶ … financial ratio analysis for government financial condition analysis? Also, they will explore whether traditional solvency ratios adequately deal with financial condition analysis concerns? We will find that they do work as long as they are adapted to the Ratio analysis is a method for the expression of the relationship between 2 or more factors in a less complicated and more comprehensive fashion. This is especially true in Multiple Regression Analysis (MRA). They are commonly gotten from government financial reports and projections and represent a large amount and variety of financial ratios. As such it is important for one to put their focus upon those amounts with a functional relationship. As an example, let's think about how bad debt expense in a department or sector compares with income generation in that area. It is statistically and analytically more meaningful than the relationship between bad debt expense and total income generation across all departments or agencies. Government performance measures (including outcomes, outputs and efficiencies) are expressed in financial condition ratios. For example a factor that would need to be considered might be administrative support costs expressed in the form of the percentage of total expenditures (McNabb, 2008, 235).

As with any tool, there is a time, a place and a manner to use it in. For instance, just as in the private sector, in the public sector ratio analysis is for the public administrator to reduce financial data to fewer expressions or variables in order to make it more accessible and understandable for non-accounts and other administrators for whom a simple formula helps to boil down a lot of data. This issue most often arises at budget time when those base, underlying relationships between the different elements of the ratio are of special interest, In this, the data are not expressed as absolute dollar amounts, but as more usable and digestible percentages that can be expressed in individual as well as general instances (ibid).

Ratio analysis is not used in as widespread a manner in government as it is in the private sector. While they are very necessary, they have to be adapted specifically to the unique problems of the public sector which is not based upon profit. These primary issues include the weaknesses in the way that the key information elements needed for the assessment financial condition is reported. Though reporting methods have improved, financial analysts in the public sector must however be knowledgeable enough to draw the appropriate information government sources. Unfortunately for the accountant, it is generally not easy to asses a government agency's financial condition only from the information in financial reporting.

This however does not mean that financial conditions cannot be assessed in the public sector

. Such assessments can be done with ratio analysis methods. At the all state government and by extention federal and local levels as well financial conditions can be measured. Generalized ratios are difficult to compare from agency to agency since a unit of government is so very large and complex ("Methodology manual, data," 1995).