Analyzing Financial Statements

Financial analysis is necessary in any human service agency as it allows it to get a clear picture of the financial standings for the fiscal year. According to Martin (2001), “financial analysis is defined as the process of using information from financial statements to calculate financial ratios that assess the financial standings of human service agencies.” There are six formulas used when conducting the financial analysis: long-term solvency ratio, contribution ratio, programs/expense ratio, current ratio, general and management ratio, and the revenue/expense ratio.
Importance of Financial Ratios
Current Ratio
The current ratio is used to give an idea of the company’s ability to readily pay back its short-term liabilities with its short-term assets. These calculations are found on the balance sheet or the statement of financial position. 2002
Current Ratio = $104,296/$139,017 = 0 .75
2003
Current Ratio = $82,058/$93,975 = 0.87
2004
Current Ratio = $302,902/$337033 = 0.90 (rounded up)
Long-term Solvency Ratio
The long-term solvency ratio is also developed from the statement of financial position (or the balance sheet). The long-term solvency ratio determines whether an agency’s cash flow is sufficient to meet short and long-term liabilities. 2002
Long-Term Solvency Ratio = $391,270/$310,246 = 1.26
2003
Long-Term Solvency Ratio = $359,863/$259,979 = 1.38
2004
Long-Term Solvency Ratio = $699,004/$338.937 = 2.06
Contribution Ratio
The contribution ratio is developed from the statement of activities (or the profit and loss summary). The contribution ratio assesses the dependency of the agency on the major revenue source. 2002
Contribution Ratio = $617,169/$1,165,065 = 0.53 (rounded up)
2003
Contribution Ratio = $632,889/$1,244,261 = 0.51 (rounded up)
2004
Contribution Ratio =