Financial Analyses for LGU Enterprises

Financial Analyses and Planning for LGU Economic Enterprises : 

Financial Analyses and Planning for LGU Economic Enterprises By: Norman R. Ramos Economic and Financial Consultant

Topics Covered : 

07 February 2007 Financial Analyses for LGU Enterprises 2 Topics Covered Essence of Public Enterprises Importance of Financial Analyses for Public Enterprises Measurement Focus and Basis of Accounting Introduction to Financial Statements Statement of Cash Flow Income Statement Revenue Recognition Aspects Working Capital Long-Lived Assets Long-Term Assets Capital Structure Creditworthiness Indicators for LGUs

Essence of Public Economic Enterprises : 

07 February 2007 Financial Analyses for LGU Enterprises 3 Essence of Public Economic Enterprises Dependence on service fees and charges to support operations. Assumes that there is effective demand for product or service being offered by the enterprise activity. There are users. Users are able and willing to pay to consume or enjoy the product or service. Extent to which fees are charged to defray the costs of providing the service depends on: Nature of the service. Size and characteristics of the user base. Policy objectives of the LGU.

Essence of Public Economic Enterprises : 

07 February 2007 Financial Analyses for LGU Enterprises 4 Essence of Public Economic Enterprises The setting of user charges should consider the following criteria: Equity. To what extent does the user charge system recognize differences in service demand by individual users? Revenue stability. Does the user charge schedule produce stable and predictable revenues over time? Flexibility. Does the user charge system have the flexibility to accommodate users with widely varying demand and usage characteristics. Ease of administration. How difficult is it for the concerned LGU staff to prepare, levy and collect bills, and can charges be easily updated. Public acceptance. Does the design of the user charge system encourage public acceptance.

Essence of Public Economic Enterprises : 

07 February 2007 Financial Analyses for LGU Enterprises 5 Essence of Public Economic Enterprises User charge systems that are very simple may be inequitable and result in poor public acceptance. To treat all users fairly may require and extremely complicated rate structure that would be extremely cumbersome to administer and to explain to the users. The optimum user charge is likely to fall between the two extremes of the simplest and the fairest.

Essence of Public Economic Enterprises : 

07 February 2007 Financial Analyses for LGU Enterprises 6 Essence of Public Economic Enterprises User charges have increased significantly in their importance to LGUs. User charges are now commonly charged for a wide variety of public activities and services including recreational an public safety services. Generate revenue. Regulate service demand by curbing abuse associated with free public services. These attributes of benefit-based charges combined with diminishing external grants from the national government portends further growth for public enterprises.

Importance of Financial Analyses for Public Enterprises : 

07 February 2007 Financial Analyses for LGU Enterprises 7 Importance of Financial Analyses for Public Enterprises It is critical to demonstrate sound financial performance, both historical and projected, to show that long-term financial obligations can be met and capital funds can be raised at the lowest possible cost. Public enterprises need to use effective financial planning to minimize long-run costs. Financial planning need to anticipate the impact of changes in demand on system unit cost and on the long-term financial health of the enterprise. Traditionally, the measurement of financial performance for public enterprises is limited to determining whether enough funds are available when bills are due.

Importance of Financial Analyses for Public Enterprises : 

07 February 2007 Financial Analyses for LGU Enterprises 8 Importance of Financial Analyses for Public Enterprises Section 313 of the 1992 LGC requires that “Local government units shall maintain special accounts in the general fund for the following:” (a) “Public utilities and other economic enterprises”; (c) “…..Receipts, transfers, and expenditures involving the foregoing special accounts shall be properly taken up thereunder…..”. Given the traditional orientation regarding the financial performance measurement for public enterprises, more often than not, subsidiary ledgers are maintained only for the revenue side.

Importance of Financial Analyses for Public Enterprises : 

07 February 2007 Financial Analyses for LGU Enterprises 9 Importance of Financial Analyses for Public Enterprises Except for the capital expenditures, especially if the construction of the enterprises are financed by borrowings, current operating expenditures for public enterprises are usually lumped with the other expenditures of the LGU department doing the work. Salaries of public market sweepers are recorded as part of the general public services budget. Repairs and maintenance works are recorded under the LGU engineering budget. Administrative including collection fees are charged against the Treasury budget if there is no separate LGU economic enterprise office.

Measurement Focus and Basis of Accounting : 

07 February 2007 Financial Analyses for LGU Enterprises 10 Measurement Focus and Basis of Accounting Public enterprises use the “flow of financial resources” as the measurement focus. Goal is to report whether a given public enterprise is better off or worse off financially. What are reported are sources, uses, and balances of financial resources. Modified accrual basis of accounting Revenues and expenditures (not expenses) are reported. Revenues are recognized when they are both measurable and available (cash). Expenditures are recognized when they are expected to be “liquidated with expendable, available financial resources.”

Introduction to Financial Statements : 

07 February 2007 Financial Analyses for LGU Enterprises 11 Introduction to Financial Statements Financial statements are a record of a company's accounts, financial condition and the results of its operations at a given point in time. Balance Sheet Income Statement (also known as Profit & Loss Statement) Statement of Cash Flows Basic Accounting Equation: Assets = Liabilities + Stockholders’ Equity The accounting process begins with basic bookkeeping. Recording financial transaction in order of occurrence in a General Journal. Then recording (posting) the same transaction in the proper account (i.e., rent payment, equipment purchase) in a General Ledger. The balance in the Ledger on a given date is what will be entered into the financial statements.

Introduction to Financial Statements : 

07 February 2007 Financial Analyses for LGU Enterprises 12 Introduction to Financial Statements Entries into the Journal and Ledger follow the Debit and Credit accounting guidelines. Debit (left) and Credit (right) refers to a column entry in the Journal or Ledger. Entries for both Assets and Liability/Equity accounts. For every entry in an Asset Journal or Ledger account there must be a matched (double) entry into either a Liability or Stockholder's Equity Journal or Ledger account. Asset accounts and Liability accounts always increase through opposite entries (Debit for Asset accounts and Credit for Liability accounts). They will also decrease through opposite accounts (Credit for Asset accounts and Debit for Liability accounts) Revenue accounts will also increase with a Credit entry with a corresponding increase (Debit) in an Accounts Receivable (Asset) account

Introduction to Financial Statements : 

07 February 2007 Financial Analyses for LGU Enterprises 13 Introduction to Financial Statements Financial statements are a system. Financial statements paint a picture of the transactions that flow through a business, including public economic enterprises. Each transaction or exchange--for example, the expenditure of funds to construct a facility or the use of that facility--is a building block that contributes to the whole picture.

Introduction to Financial Statements : 

07 February 2007 Financial Analyses for LGU Enterprises 14 Introduction to Financial Statements Shareholders and lenders supply capital (funds) to the enterprise. The Balance Sheet is an updated record of the capital invested in the business. Lenders hold liabilities. Shareholders hold equity. The capital is used to buy assets--current, e.g., inventories or long-term such as buildings and machineries. The Cash Flow captures the dynamic flows of cash Selling equity and issuing debt starts the process by raising cash. Putting the assets to use generate revenues, a large part of which is used to pay for operating costs, including salaries and wages.

Introduction to Financial Statements : 

07 February 2007 Financial Analyses for LGU Enterprises 15 Introduction to Financial Statements After paying operating costs and taxes, the balance or operating profit Pay interests on its debt--a must. Pay dividends to its shareholders-- discretionary. Retain or reinvest the remaining profits. This increases the shareholders equity account --retained earnings. Balance sheet is static while cash flow is dynamic

Statements of Cash Flows : 

07 February 2007 Financial Analyses for LGU Enterprises 16 Statements of Cash Flows The Statement of Cash flows breaks into 3 sections. Cash flow from financing (CFF) includes cash received (inflow) for the issuance of debt and equity. As expected, CFF is reduced by dividends paid (outflow). Cash flow from investing (CFI) is usually negative for single business ventures because the biggest portion is the expenditure (outflow) for the purchase of long-term assets such as plants or machinery. Cash flow from operations (CFO) naturally includes cash collected for sales and cash spent to generate sales. This includes operating expenses such as salaries, rent and taxes. But notice two additional items that reduce CFO: cash paid for inventory and interest paid on debt. CFF + CFI + CFO = Net Cash Flow

Statements of Cash Flows : 

07 February 2007 Financial Analyses for LGU Enterprises 17 Statements of Cash Flows Accounting rules require that cash flows be classified under one of the 3 groupings. Cash flow from financing (CFF) from investors or creditors Cash flow from investing (CFI) from the purchase or disposal of assets such as plant buildings, real estate, investment portfolios, equipment. Cash flow from operations (CFO) generated by normal enterprise operations. Inflows are in green and outflows in red. We might be tempted to use net cash flow as a performance measure, but the main problem is that it includes financing flows (CFI). Specifically, it could be abnormally high simply because the company issued debt to raise cash, or abnormally low because it spent cash in order to retire debt.

Statements of Cash Flows : 

07 February 2007 Financial Analyses for LGU Enterprises 18 Statements of Cash Flows Cash Flow from Operations (CFO) Net Income After Tax+ Depreciation and amortization +/- Decrease (Increase) in Accounts Receivable +/- Decrease (Increase) in Inventory +/- Decrease (Increase) in Other Current Assets +/- Increase (decrease) in Accounts Payable +/- Increase (decrease) in Accrued Expenses +/- Increase (decrease) in Other Current Liabilities Total Operating Cash Flow Cash Flow from Investing (CFI) +/- Decrease (Increase) in Fixed Assets +/- Decrease (Increase) in Notes Receivable +/- Decrease (Increase) in securities, investments +/- Decrease (Increase) intangible, non-current assets Total Investing Cash Flow. Cash Flow from Financing (CFF) +/- Increase (decrease) in Borrowings +/- Increase (decrease) Capital Stock- Dividends Paid Total Financing Cash Flow NET CASH FLOW (NCF) = CFO + CFI + CFF Cash at beginning of period + NCF = Cash at end of period

Which Cash Flow is Best for Analyzing Enterprise Performance : 

07 February 2007 Financial Analyses for LGU Enterprises 19 Which Cash Flow is Best for Analyzing Enterprise Performance FCFE improves on CFO by counting the cash flows available to shareholders net of all spending, including investments. (*) Cash flow from investment (CFI) is used as an estimate of the level of net capital expenditures required to maintain and grow the company. The goal is to deduct expenditures needed to fund "ongoing" growth, and if a better estimate than CFI is available, then it should be used. (FCFF) uses the same formula as FCFE but adds after-tax interest, which equals interest paid multiplied by [1 – tax rate] . We need to calculate an "adjusted CFO" by removing one-time cash flows or other cash flows that are not generated by regular business operations. cash outflows classified under CFI that should be reclassified to CFO one-time CFO blips

Relationship between Cash Flow and the Income Statement : 

07 February 2007 Financial Analyses for LGU Enterprises 20 Relationship between Cash Flow and the Income Statement Many cash flow items have a direct counterpart, that is, an accrual item on the income statement. During a reporting period like a fiscal year or a fiscal quarter, the cash flow typically will not match its accrual counterpart. On the income statement, revenues count when they are earned, and they are matched against expenses as the expenses are incurred.

Relationship between Cash Flow and the Income Statement : 

07 February 2007 Financial Analyses for LGU Enterprises 21 Relationship between Cash Flow and the Income Statement Expenses on the income statement are meant to represent costs incurred during the period that can be tracked either to cash already spent in a prior period or to cash that probably will be spent in a future period. Similarly, revenues are meant to recognize cash that is earned in the current period but either has already been received or probably will be received in the future. Although cash flows and accruals will disagree in the short run, they should converge in the long run. For example, the sum of the cumulative non-cash depreciation expense over the life of the asset is equal to the initial cash outlay for the asset.

Adjustments to Reconcile Net Income to CFO : 

07 February 2007 Financial Analyses for LGU Enterprises 22 Adjustments to Reconcile Net Income to CFO CFO is derived from net income with two sets of 'add backs‘ First, non-cash expenses, such as depreciation, are added back because they reduce net income but do not consume cash. Second, changes to operating (current) balance sheet accounts are added or subtracted. Trade receivables (also known as accounts receivables) reduces CFO by about Php 844 thousand: trade receivables is a 'use of cash'. This Php 844 thousand is included in revenue and therefore net income, but the company hadn't received the cash as of year-end, so the uncollected revenues needed to be excluded from a cash calculation. Conversely, accounts payable is a 'source of cash' in XOX's case. This current liability account increased by Php 2.6 million during the year; XOX owes the money (and net income reflects the expense), but the company temporarily held onto the cash, so its CFO for the period is increased by Php 2.6 million.

Adjustments to Reconcile Net Income to CFO : 

07 February 2007 Financial Analyses for LGU Enterprises 23 Adjustments to Reconcile Net Income to CFO It is not unusual for payables to increase as revenue increases, but if payables increase at a faster rate than expenses, then the company effectively creates cash flow by "stretching out" payables to vendors. If these cash inflows are abnormally high, removing them from CFO is recommended because they are probably temporary. Judgment should be applied when evaluating changes to working capital accounts, because there can be good or bad intentions behind cash flow created by lower levels of working capital. Enterprises with good intentions can work to minimize their working capital--they can try to collect receivables quickly, stretch out payables and minimize their inventory. These good intentions show up as incremental and therefore sustainable improvements to working capital. Enterprises with bad intentions attempt to temporarily dress-up cash flow right before the end of the reporting period. Such changes to working capital accounts are temporary because they will be reversed in the subsequent fiscal year. These include temporarily withholding vendor bills (which causes a temporary increase in accounts payable and CFO), cutting deals to collect receivables before year-end (causing a temporary decrease in receivables and increase in CFO), or drawing down inventory before the year-end (which causes a temporary decrease in inventory and increase in CFO). In the case of receivables, some companies sell their receivables to a third party in a factoring transaction--which has the effect of temporarily boosting CFO.

Adjustments to Reconcile Net Income to CFO : 

07 February 2007 Financial Analyses for LGU Enterprises 24 Adjustments to Reconcile Net Income to CFO XOX invested almost 111.9 million in cash. This cash outflow was classified under CFI rather than CFO because the money was spent to acquire long-term assets rather than pay for inventory or current operating expenses. However, on occasion, this is a judgment call. Some enterprises notoriously exploited this discretion by reclassifying current expenses into investments, and, in a single stroke, artificially boosting both CFO and earnings. The main idea here is that CFI need to be checked for cash outflows that ought to be reclassified to CFO.

Analyzing Income Statements : 

07 February 2007 Financial Analyses for LGU Enterprises 25 Analyzing Income Statements In theory, the income statement is superior to the cash flow in gauging enterprise performance. Key in the analysis is gauging normalized earnings - - earnings that are both recurring and operational in nature. Two major challenges in capturing normalized earnings Timing issues - - cause temporary distortions in reported profits. Classification choices – which profit number (s) are relevant to enterprise performance analyses.

Timing Issues : 

07 February 2007 Financial Analyses for LGU Enterprises 26 Timing Issues It is important to be alert to earnings that are temporarily too high or even too low due to timing issues. The effect of premature revenue recognition and delayed expenses are intuitively understood

Timing Issues : 

07 February 2007 Financial Analyses for LGU Enterprises 27 Timing Issues Overvalued assets are considered a timing issue because, in most cases, "the bill eventually comes due."

Classification Choices : 

07 February 2007 Financial Analyses for LGU Enterprises 28 Classification Choices Operating Income before Depreciation and Amortization (EBITDA) EBITDA = Operating Income + Depreciation and Amortization = Php 2,812+ Php 5,005 = Php 7,817 The virtue of EBITDA is that it tries to capture operating performance--that is, profits after operating expenses, but before non-operating items and financing items such as interest expense. Two possible flaws Not necessarily everything in EBITDA may be operating and recurring. Like OCF, it totally omits. The use of investment capital. An enterprise can boost EBITDA by merely investing in another enterprise or in financial instruments.

Classification Choices : 

07 February 2007 Financial Analyses for LGU Enterprises 29 Classification Choices Operating Income after Depreciation and Amortization (EBIT) In theory, this is a good measure of operating profit. By including depreciation and amortization, EBIT counts the cost of making long-term investments. EBIT should be trusted only if depreciation expense (also called accounting or book depreciation) approximates the company's actual cost to maintain and replace its long-term assets. Furthermore, EBIT does not include interest expense and therefore is not distorted by capital structure changes. That is, it will not be affected merely because a company substitutes debt for equity or vice versa. As with EBITDA, the key task is to check that recurring, operating items are included and items that are either non-operating or non-recurring are excluded.

Classification Choices : 

07 February 2007 Financial Analyses for LGU Enterprises 30 Classification Choices Income from Continuing Operations before Taxes (Pre-tax Earnings) Pre-tax earnings subtracts (includes) interest expense. Further, it includes other items that technically fall within "income from continuing operations," which is an important technical concept. The thing to keep in mind is that you want to double-check that Items that fall within income from continuing operations are presented on a pre-tax basis (above the income tax line), Items not deemed part of continuing operations are shown below the tax expense and on a net tax basis.

Classification Choices : 

07 February 2007 Financial Analyses for LGU Enterprises 31 Classification Choices Income from Continuing Operations (Net Income from Continuing Operations) Same as the previous measure, but taxes are subtracted. May not be that relevant to income tax free public enterprises. Net Income Compared to income from continuing operations, net income has three additional items that may contribute to it: extraordinary items, discontinued operations, and accounting changes. They are all presented net of tax.

Timing and Classification Summary of Issues : 

07 February 2007 Financial Analyses for LGU Enterprises 32 Timing and Classification Summary of Issues Reported profits is generally superior to cash flow as a gauge of enterprise operating performance. To properly draw a profit picture that is sustainable, normalized earnings generated by on-going operations need to be captured. To do that we should be alert to Timing issues that temporarily inflate (or deflate) reported profits. We should exclude items that are not recurring, resulting from either one-time events or some activity other than business operations. We should be alert to items that are technically classified under income from continuing operations but perhaps should be manually excluded such as investment gains and losses, items deemed either "unusual" or "infrequent," and other one-time transactions such as the early retirement of debt. For gauging operating performance, income from continuing operations is a better starting place than net income, because net income often includes several non-recurring items such as discontinued operations, accounting changes, and extraordinary items (which are both unusual and infrequent).

Revenue Recognition Aspects : 

07 February 2007 Financial Analyses for LGU Enterprises 33 Revenue Recognition Aspects 1. Identify Risky Revenues If only cash counted, revenue reporting would not pose any risk of misleading investors. But the accrual concept allows companies to book revenue before receiving cash. Basically, two conditions must be met: the critical earnings event must be completed (for example, service must be provided or product delivered) and the payment must be measurable in its amount, agreed upon with the buyer, and its ultimate receipt must be reasonably assured. 2. Check against Cash Collected Check reported revenues against cash actually received.

Revenue Recognition Aspects : 

07 February 2007 Financial Analyses for LGU Enterprises 34 Revenue Recognition Aspects Net Sales (2) Plus the decrease in accounts receivable (or minus the increase) (3) Plus the increase in cash advances from customers (or minus the decrease) ___________________________ = Cash received from customers We add the decrease in accounts receivable because it signifies cash received to pay down receivables. Cash advances from customers represents cash received for services not yet rendered; this is also known as unearned or deferred revenue and is classified as a current liability on the balance sheet.

Revenue Recognition Aspects : 

07 February 2007 Financial Analyses for LGU Enterprises 35 Revenue Recognition Aspects We calculate 'cash received from customers' to compare the growth in cash received to the growth in reported revenues. If the growth in reported revenues jumps far ahead of cash received, we need to ask why. For example to accelerate the take-up rates for commercial spaces, a public enterprise might offer installment terms for the lease right payment. Such promotions will create booked revenue in the current period, but cash won't be collected until future periods. And of course, some of the customers will default, and their cash won't be collected. So, the initial revenue growth may or may not be "good" growth--in which case, we should pay careful attention to the allowance for doubtful accounts. Estimate how much of the receivables will not be collected. Sufficient allowances must be made. If the enterprise is growing rapidly and funding this growth with greater accounts receivables, then the allowance for doubtful accounts should be growing too.

Working Capital : 

07 February 2007 Financial Analyses for LGU Enterprises 36 Working Capital Working capital is the difference between current assets and current liabilities. Working capital is significant where the main concern is defensiveness: can the enterprise meet its short-term obligations such as paying utility bills, bills for supplies, etc.

Long-Lived Assets : 

07 February 2007 Financial Analyses for LGU Enterprises 37 Long-Lived Assets Long-lived assets are those that provide the enterprise with a future economic benefit beyond the current year or operating period. Most long-lived assets start as some sort of purchase by the company. Asset purchases can either be expensed or capitalized. In Scenario A, the asset purchase is expensed. In Scenario B, it is capitalized. Scenario B results in a higher profit (130 for B and only 50 for A) although both have equal cash flows. Scenario A: 150-100 = 50 Scenario B: 130+20-100 = 50

Allocation of Long-Lived Assets : 

07 February 2007 Financial Analyses for LGU Enterprises 38 Allocation of Long-Lived Assets Various technical terms for the allocation of capitalized assets, but each refers to the pattern in which the assets' prices are allocated to future period expenses: Depreciation is the allocation of plant, property, and equipment; Amortization is the allocation of goodwill; and Depletion is the allocation of natural resource assets, such as oil wells, groundwater resources, mineral deposits.

Long-term Liabilities : 

07 February 2007 Financial Analyses for LGU Enterprises 39 Long-term Liabilities Long-term liabilities are enterprise obligations that extend beyond the current year. Operating liabilities are obligations created in the course of ordinary business operations, but they are not created by the enterprise raising cash from investors. Financing liabilities are debt instruments that are the result of the company raising cash. In other words, the enterprise--often in a prior period--issued debt in exchange for cash and must repay the principal plus interest. But both will require future cash outlays by the enterprise.

Capital Structure : 

07 February 2007 Financial Analyses for LGU Enterprises 40 Capital Structure Capital structure refers to the relative proportions of an enterprise's different funding sources, which include debt, equity, and hybrid instruments such as convertible bonds. The cost of equity is not explicitly displayed in the income statement -- opportunity costs are not considered in income statements -- so many thinks of equity as a cheaper source. Debt to a certain point is however cheaper First, because debtors have a prior claim if the company goes bankrupt, debt is safer than equity and therefore warrants investors a lower return; for the enterprise, this translates into an interest rate that is lower than the expected total shareholder return (TSR) on equity. Second, interest paid is tax deductible to the company; and a lower tax bill effectively creates cash. This may not be a consideration for tax free enterprises.

Capital Structure : 

07 February 2007 Financial Analyses for LGU Enterprises 41 Capital Structure Consider a company that generates $200 of earnings before interest and taxes (EBIT). If the company carries no debt, owes tax at a rate of 50%, and has issued 100 common shares, the company will produce earnings per share (EPS) of $1.00 (see left-hand column). On the right-hand side we perform a simple debt-for-equity swap. In other words, say we introduce modest leverage into the capital structure, increasing the debt-to-total capital ratio from 0 to 0.2. In order to do this, we must have the company issue (borrow) $200 of debt and use the cash to repurchase 20 shares ($200/$10 per share = 20 shares). The number of shares drops to 80 and now the company must pay interest annually ($20 per year if 10% is charged on the borrowed $200). Here is the point of the illustration: after-tax earnings decrease, but so does the number of shares. Our debt-for-equity swap actually causes EPS to increase.

Optimal Capital Structure : 

07 February 2007 Financial Analyses for LGU Enterprises 42 Optimal Capital Structure Some debt is often better than no debt--in technical terms, it lowers the weighted average cost of capital. At some point, additional debt becomes too risky. The optimal capital structure--that is, the ideal ratio of long-term debt to total capital--is hard to estimate. Optimal capital structure varies by industry. The greater the investment in fixed assets (plant, property, & equipment), the greater the average use of debt because banks prefer to lend against fixed assets rather than intangibles. Capital structure tends to track with the company's growth cycle . Rapidly growing start-ups often favor equity over debt. Debt that funds investment is preferable to debt that funds operating needs, especially if it is to fund negative operating cash flows.

Credit Worthiness Indicators for LGUs : 

07 February 2007 Financial Analyses for LGU Enterprises 43 Credit Worthiness Indicators for LGUs Revenue generation indicators Assesses the ability of the LGU to grow its revenue base, the nature, reliability, predictability and stability of its income sources and its revenue mobilization efficiency. An LGU that exhibits continuous efforts to increase its revenues and whose locally sourced income account for an increasing share of total, has more resources under its control that could help in ensuring adherence to its debt repayment commitments.

Credit Worthiness Indicators for LGUs : 

07 February 2007 Financial Analyses for LGU Enterprises 44 Credit Worthiness Indicators for LGUs Rigidity of Expenditures The higher the degree of flexibility of its expenditure profile, the more creditworthy an LGU becomes. Those relating to personal services and debt service are considered the least flexible as they are difficult to avoid. Flexibility makes it relatively easier for LGU executives to trim down expenses, in the event of a budget shortfall, to be able to service its debts.

Credit Worthiness Indicators for LGUs : 

07 February 2007 Financial Analyses for LGU Enterprises 45 Credit Worthiness Indicators for LGUs Financial management capacity indicators Measure a LGU’s fiscal effort. It will demonstrate how well a LGU manages available financial resources or exercises prudence in its expenditure flows . LGUs demonstrate financial management capacity when they do not use all resources for operational needs but instead invest a significant portion of those resources in capital projects that can, in turn, churn out more income or savings in the future. .

Credit Worthiness Indicators for LGUs : 

07 February 2007 Financial Analyses for LGU Enterprises 46 Credit Worthiness Indicators for LGUs Investment and Debt Capacity Indicators Measure a LGU’s capability to service debts or its debt service cover and the LGU’s effort in investing in capital assets that either improve the living standards of its constituents or provide infrastructures, facilities and other services that foster economic growth in the area

Slide 47: 

07 February 2007 Financial Analyses for LGU Enterprises 47