In this assignment we will further examine the financial health of Easton Town, Massachusetts by computing a number of accounting rations on the financial figures portrayed in the annual report of 2006. A horizontal analysis will also be conducted on certain key financial variables of the town, by considering the increase or decrease occurring from 2005 to 2006. This financial analysis will be classified on three main factors, being profitability, liquidity and stability.
1.1 Financial Performance of Easton Town, Massachusetts
A weak financial performance of Easton Town Massachusetts is noted from the profitability ratios performed in latter section of this assignment. The interperiod equity figure of 0.98 times reveals that the total revenue of the town is not capable to cover by one time the operating expenses incurred. In this respect, a deficiency of revenue over expenditure is taking place. This point is further substantiated by the net income margin of 2.16%. This implies that a loss of $2.16 is made up from every $100 of sales. This is a substantially high loss for Easton Town.
A loss is normally either the result of lack of revenue or excessive costs incurred in the day-to-day operations of the town. The revenue dispersion ratio performed in section 1.4 shows that the two main revenue-generating activities of the town are Property Taxes and Intergovernmental State Revenue. Both of them account for 84.99% of the total revenue of Easton Town. If one considers the property taxes per capita, as we did in the latter section of this assignment, a ratio of 136.64% is attained. This high ratio implies that substantial revenue is generated from property taxes in line with the population of Easton Town. In this respect, the preposition of lack of revenue leading to losses diminishes on such facet.
Expenditure is considerably high for Easton Town. Cutting down costs is not an easy task especially for a non-profit making entity like Easton Town. Personnel reductions could be performed in order to limit costs. However, severe disadvantages would be derived from such policy, such as increased crime, deteriorating infrastructure of roads and decline in the standard of living. Such factors would infringe the main objective of the Town, which entails providing a good overall service to the town and enhance their standard of living. In this respect concessions should be placed on such profitability aspect.
A solution that could be adopted for this expenditure issue is to try to improve the efficiency of the utilization of the towns resources. Presently such efficiency stands at 29.76%. Through the adoption of scientific management, such efficiency can be improved by optimally changing the present operational procedures.
1.2 Financial Position of Easton Town, Massachusetts
A sound liquidity position is noted for Easton Town from the ratios determined. The ability of the current assets of the town to cover its outstanding short-term debts is by one and a half. This is a good working capital feature. Further more, the capability of cash and cash equivalents to handle the current liabilities is significantly material standing at 70.87%. This further sheds light on a good management of working.
In spite of such positive factors, through the horizontal analysis conducted, a decrease in cash and cash equivalents of $124,336 was noted. This particularly stems from a reduction in trust funds and scholarship funds. For instance, the high conservative funds payments, which are drastically exceeding the annual receipts is contributing to such decrease in trust funds. Attention should be thus placed on such facet to ensure that cash flow problems are prevented.
1.3 Financial Stability of Easton Town, Massachusetts
The gearing ratio computed in the proceeding section reveals that Easton Town is a high-geared company. High gearing means that debt is in a higher proportion than equity capital. The greater the debt, the more the financial commitments necessary to meet such debt obligations, like interest payments. The horizontal analysis conducted revealed that the long-term debt diminished from 2005 to 2006 by $2,128,480 and thus further reduced such financial commitments. The payments of long-term debts are another factor that contributed to the decline in cash and cash equivalents. However, the short-term debt increased by $2,411,000, which is higher than the decrease in long-term debt. Such movement also corresponds with the significant debt to total assets determined. This increasing figure is yet mitigated by the good current ratio noted in the previous section.
1.4 Concluding Remark Financial Health of Easton Town, Massachusetts
Even though there is a deteriorating profitability, the sound liquidity is mitigating such factor. The increasing total debt portion is also being stabilized by decreasing long-term debts and increasing short-term debts. As already noted, the good financial position can sustain an increase in current liabilities. We can therefore conclude that a good financial health is portrayed for Easton Town, Massachusetts for the financial year ended 2006.