Interpreting and using financial information Gert van der Linde, World Bank Uganda, Kampala May 21, 2004

Interpreting and using financial 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

Accountability Framework Organization: Departments Branches Cost Centers How much? Quality? When? Cost? Outcomes Outputs Programs = Budget Economy Efficiency Effectiveness Inputs: Salaries Supplies Capital exp, etc. “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

RSA – Old “input” focus, no trends

RSA progress: Budget Information

RSA progress: Budget Information

RSA progress: Budget Information

National Treasury Annual Report: Performance

Year-end: 31 March 2002, Audited by 31 July 2002! 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?