Professional Documents
Culture Documents
Financial Analysis
Financial Forecasting
Financial Planning
“Analysing Financial Condition”
“financial condition can be broadly defined as a LG’s ability to finance
its services on a continuing basis. More specifically, financial
condition refers to a LG’s ability to (1) maintain existing service
levels, (2) withstand local and regional economic disruptions, and (3)
meet the demands of natural growth, decline, and change.”
Maintain existing
service levels
Withstand local
and regional
economic
disruptions
Meet demands of
natural growth,
decline and
change
Evaluating Financial Condition –
some basic truths
Most financial problems do not develop suddenly
A decline in revenues
An increase in expenditure pressures,
Decreasing cash and budgetary surpluses
A growing debt burden
The accumulation of unfunded liabilities
The erosion of capital plant
A decline in tax base or an increase in the
need for public services
Budget, balance sheet and other financial
statements fails to provide multiyear
perspective of emerging good or bad
Financial Condition of LG
Framework for Evaluating
Financial Condition
Need to ask following questions -
Can the LG continue to pay for what it
is now doing?
Are there reserves or other ways for
financial crisis?
Is there enough financial flexibility to
all the LG to adjust to change?
If LG can meet these challenges, it
is having a sound condition
Environmental/ Organisational
Aspects of Financial Condition
External Economic Conditions
Inflation
Employment
Economic wealth
Interest rates
Intergovernmental Constraints
National constitutions
Laws
Natural Disasters and emergencies
Political Culture
Practices and policies that
jeopardise financial condition
Repeated use of one-time revenue
resources – reserves, sale of assets etc
Deferring a large amount of current costs to
the future deciding – maintenance, pension
Ignoring long-range or full life cost of a
liability – purchasing assets without
examining long term costs
These practices can –
Create problems or
compound existing problems or
delay recognition of existing problems
Practices and policies that
jeopardise financial condition
Practices that sustain an operating deficit
Use of internal borrowing
Selling assets
One-time accounting changes
Practices that defer current costs
Deferred pension liabilities
Deferred maintenance expenditures
Practices that ignore full-life costs
Non-salary employee benefits
Capital assets
Financial Forecast
An estimate of future financial outcomes for an
organisation.
Undertaken using historical internal accounting
and sales data, external economic and market
data and economic indicators etc.
A financial forecast is a best guess of what will
happen for a company over a given time
period.
Predicting revenue rather than cost is most
difficult aspect
Can be undertaken by an outside researcher
Purpose of Financial Forecasting
Two purposes
Quantifies the future impact of current decisions,
programs and policies (impact analysis), and
Identifies and provides information for analyzing the
revenue and expenditure adjustment options needed
to close the difference between revenues and
expenditure (gap analysis)
Forecast relies on
Policy assumption for impact analysis
Economic assumptions for gap analysis
Budget is balanced estimates while forecasting tend to
be unbalanced one
Benefits of Financial Forecasting
Link the LG’s policy with specific financial
plans to achieve a governing body’s long-
range strategic goals
Develop a picture of the LG’s financial future
and create more time to respond to adverse
events
Prepare the LG for shifts in responsibility
Improve the quality of financial decision
making
Develop alternative decision strategies
Obstacles, limitations of Financial
Forecasting
Political and staff resistance
Changing LG revenue system
Lack of development time
Lack of knowledgeable and skilled
personnel
Lack of historical data
Dilemma of circularity
Importance of assumptions
Types of Financial Forecasts
Short-term Medium-term Long-term
Short
Term Number 0-1 year 1-5 years 10+ years
of years
Medium
Use Operating Budgeting Strategic
Term budget Policy analysis planning
Long Cash Fiscal impact of Physical and
management legislation economic
Term Identify development
Monitor
financial trends planning Fiscal
budget
implementatio Capital impact
investment analysis
n
programming
Methods of Forecasting
Expert or Best Judgment
Trend
Deterministic
Econometric
Comparison of Forecasting Methods
Method Advantages Disadvantages
Expert or • Produces reasonably • Lack of an explicitly stated
Best accurate forecasts. technique makes it difficult to
Judgment • Relatively low costs. determine what was right or
wrong when analyzing the
forecast methodology.
• Dependence upon a single
individual may hamper LG’s
effectiveness if that person leaves
the organization.
• Likely to prove weak when the
forecast is extended beyond one
year, because of the greater
number of factors that must be
taken into account.
Comparison of Forecasting
Methods
Method Advantages Disadvantages
Trend • Simple technique • Does not predict a turning
to use. point in a variable (i.e., it
• Fairly accurate will continue to project
predictor of the increases [decreases] in the
next one or two variable regardless of what
future years. the economy does because it
• Reliable tool for is historically based.)
revenues and • Not useful in policy analysis
expenditures not (i.e., to anticipate economic
sensitive to or demographic changes in
economic the community.)
conditions.
• Inexpensive.
Comparison of Forecasting Methods
Method Advantages Disadvantages
Determinist •Simple to use. •Relies on fixed relationships
ic •Accurate for revenue and between inputs and activities.
expenditure short and medium •Uses averages as a major variable in
forecasts for variables not subject the forecast, making it less
to changes in economic responsive to changes in the
conditions. economy.
•Useful for economically •Depends on assumptions usually
determined variables over long based on experience.
periods of time because changes in •Less likely to accurately forecast
business cycles tend to cancel out revenues and expenditures in areas of
and averages become more decline using the deterministic
dependable. method
•Accurate and suitable for
forecasting growing areas.
•Inexpensive.
Comparison of Forecasting
Methods
Method Advantages Disadvantages
Econometr •Only methodology that lends itself to •More costly.
projecting revenues or expenditures based on •Requires a person trained in
ic changes in the economy. economics and statistics to
•More accurate than other techniques develop the forecasting
because, unlike the best judgment method, it equations.
is based on behavioural relationships that can •Requires considerably more
be measured and evaluated. time for data collection and
•It (regression technique) is not limited to input for regression analysis.
forecasting in one direction like trend line •More complex than the other
techniques. alternatives and has more
•Tests whether a relationship between potential for errors.
variables is, in fact, statistically significant.
•Considers multiple variables in making
projections rather than the single variables in
deterministic techniques.
Steps in Financial Forecasting
Step1: Define the Purpose
Step 2: Address Citizen Input/ Technical
Issues
Step 3: Decide your approach to
Forecasting
Step 4: Determine Data and Information
Requirements
Step 5: Determine Resources
Step 6: Management and Political Support
Steps in Financial Forecasting
Step 7: Determine length of Financial Forecast
Step 8: Evaluate methods of forecasting based
on length of forecast
Step 9: Decide on approach for Forecasting
Revenues
Step 10: Decide on approach for Forecasting
Expenditures
Step 11: Combine Revenue and Expenditure
Forecasts
Step 12: Understand linkages to other planning
efforts
Financial & Operating Plan
The name is self explanatory
It is an attempt to create synergy
between operational and financial
requirements
It inherently involves iteration process
Preparation of a
Financial Financial Plan for Understanding
Requirements Leading to raising resources Leading to of financial
of developing and their allocations feasibility,
and running sustainability
of operations Leading to recasting of operational Plan of operations
The Financial & Operating Plan
Features of the FOP
Determines ULB’s priority objectives in terms of
resources, service provisioning and management
aspects in the medium to long term
Objective is to reach a level wherein there is an
optimisation of what the local financial situation can
permit in terms of raising levels of services
Components of the FOP
Multi-Year Investment Plan
Income & Expenditure Plan
Capital Investment Plan
Debt-servicing Plan
Multi-year Investment Plan (MIP)
Multi-Year scheduling of public physical
improvements and investments- with associated
O&M expenditure plans
Derived from a demand-supply gap analysis hinged on
city VISION/ GOALS
A long list of projects that the ULB intends to take up for
the City
Phased based on City priorities
Would facilitate annual capital budgeting exercise, that
is responsive to city needs
Would form the base for planning for prudent fund
allocation and revenue enhancement
Income & Expenditure Plan
Features of Income & Expenditure Plan
Projection of revenue income
based on assumptions w.r.t base, basis and rules of
taxation & charges, efficiency in revenue realisation
and nominal growth rates
incorporates additional revenue from remunerative
projects of the MIP
Projection of capital income
based on scheme-based grants from State/ Central
Government
based on funding pattern (loan-grant mix) adopted
for the MIP
Income & Expenditure Plan
Projection of revenue expenditure
based on past trends/ rules for salary and other
establishment expenses, estimated charges for O&M of
infrastructure services, past trends, clearing of overdue
and regular liabilities
incorporating additional O&M expenditure due to the MIP
incorporating additional debt-servicing burden due to
borrowing plan for funding the MIP
Projection of capital expenditure
based on the scheme-based grants received from State/
Central Governments
based on the MIP
Capital Investment Plan (CIP)
Features of the CIP
Sized MIP for public capital facilities catering to city’s needs/
priorities based on investment sustaining capacity
Arrived through an iterative process of Income & Expenditure
Plan and and MIP sizing/ prioritizing
Objective is to reach a level wherein there is an optimisation of
what the ULB’s Fund can sustain in terms enabling capital
investments/ raising levels of services
CIP provides a framework for annual budgeting and hence
requires constant updating
CIP is based on
Investment sustaining capacity
Choice of specific improvements to be made
Debt Servicing Plan
Features of the Debt Servicing Plan
Annual borrowing plan- linked to ULB borrowing
powers
Annual debt-servicing commitment
Ratios/ indicators of debt-burden
Significance of the Debt Servicing Plan
Indicates the credit-worthiness of the ULB
Lenders’ requirement- to assess the risks on lending
Helps ULB & Lenders to structure the debt
Helps ULB to restrict debt exposure to safe levels
Working of the FOP
7-
7- FOP
FOP Assumptions
Assumptions
1- Service Levels Provides
Provides for
for entry
entry of
of the
the
Contains details of assumptions for:
assumptions for:
existing levels of ••projecting
projecting the
the income
income &&
service prevalent in expenditure
expenditure ofof the
the ULB-
ULB- 2- Actual Financial
the town/ city current
currentitems
items && new
new items
items Data
4- Service due to CIP
due to CIP Basic input sheet with
Norms- based on ••funding
funding pattern
pattern for
for the
the CIP
CIP provisions for entry of
sectoral and
and the debt
the debt terms.
terms. the actual financial
8- Income & Expenditure
strategies Plan (5-10 Years) data as made
Compares the Contains the item-wise available with the
indicators of the projected income and ULB in the Municipal
current service expenditure of the Municipal Accounting Code
levels in the town/ fund under different format
5-
cityDemand-
with the 3- Municipal
budgeting heads
Supply Gap
recommended Finances
Analysis 9- Capital Investment Contains the summary
levels/ norms
Estimates at the Plan (5-10 Years) of the Municipal Fund
macro level, the Contains the Capital and consists of
gaps in service Investment Plan for the ULB consolidated income &
levels, which need based on investment expenditure statement
to sustaining capacity of the under revenue &
6- be converted
Project
into projects ULB. capital accounts;
Costing (MIP) 10- Debt Servicing Plan
Determines capital (5-10 Years analysis of income &
investments Contains the debt drawl and expenditure- sectoral
(based on unit servicing plan of the ULB contributions; growth
costs) and based on the o/s debt trends; per capita
associated O&M liabilities and the funding levels
Financial Planning
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