# Assessing Financial Condition

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The regular evaluation of an organization’s finances goes a long way toward establishing trust with stakeholders, such as tax payers, board members, clients, patrons, and funding agencies. Just as financial planning and budgeting are integral parts of an organization’s success, financial audits and evaluations are vital parts of the functioning of an organization. Evaluating the financial condition of an organization involves determining whether it has the revenue from taxes, fees, and other sources to meet its needs as well as if its assets exceed its liabilities.
In this Assignment, you evaluate the financial condition of a hypothetical town by considering trends and what they could mean. Review this week’s Learning Resources. Think about how public organizations can use data from audits and assessments to increase their effectiveness.
Consider the following:
Centerville is a hypothetical town that provides the context for this Assignment. What follows is a table that presents five years of data.
Use the five-year-trend data in the table to evaluate whether Centerville’s (C) revenue and expenditures are balanced. In summarizing Centerville’s financial situation over a five-year period, the table includes five factors: amount of revenue that the city is gaining per household, the percentage of total revenue contributed by sales tax, how much the city is spending per household, and the percentage of the city’s households that are exempt from paying sales tax.
Note that the city is gaining less per year from each household; however, with the exception of Year 5, it is spending more per year for services per household. Look at sales tax in the city, which is a main source of revenue. (Note: Convert the decimals in the “Sales tax as a percentage of total revenue” row. Remember that you multiply the decimal figure by 100 to derive the percentage. Multiplying .928 by 100 equals 92.8%, .926 by 100 equals 92.6%, .925 by 100 equals 92.5%, .923 by 100 equals 92.5%.)
What is happening to sales tax as a percentage of revenue? Look at the percentage of the city’s households that are exempt from paying sales tax row. What is happening to the percentage of sales-tax-exempt households over the five-year period?
FACTOR YEAR
1 2 3 4 5
Revenue per household \$321 \$318 \$329 \$329 \$328
Sales tax as a percent of total revenue .938 .936 .935 .935 .933
Expenditures per household \$321 \$321 \$333 \$334 \$334
Low-income, sales-tax-exempt households as a percent of population .139 .139 .142 .155 .156
The city is spending more per household and deriving less revenue per household. The Centerville tax base is shrinking because more of its citizens are exempt from paying sales tax. What are possible reasons for an increase in the number of citizens who are exempt from paying sales tax? Is the city losing jobs? Is the city’s population increasingly older and retired?
Analyzing a revenue structure will help identify the following types of problems.
The Assignment:
Create an expenditure profile that can reveal the following:
• Deterioration of revenue base
• Internal procedures or legislative/board policies that may adversely affect revenue yields
• Over-dependence on obsolete or external revenue sources
• User fees that do not cover the cost of services
• Changes in tax burden
• Lack of cost controls and poor revenue estimating practices
• Inefficiency in the collection and administration of revenues
Analyzing an expenditure profile can reveal the following:
• Excessive growth of overall expenditures as compared to revenue growth or growth in wealth (personal and business income)
• Undesirable increases in fixed costs
• Ineffective budgetary controls
• A decline in personnel productivity
• Excessive growth in programs, which creates future expenditures
Community needs and resources encompass economic and demographic characteristics, including population, employment, personal income property value, and business activity. An examination of demographic and economic characteristics can identify the following:
• A decline in the tax or revenue base
• A need to shift public or customer service priorities
• A need to shift policies because of a loss of competitive position

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