MFMA Circular 71: Ratio Analysis Facilitation

MFMA Circular 71 issued in January 2014 provides a set of uniform key financial ratios and norms suitable and applicable to municipalities and municipal entities.

These ratios, if calculated and interpreted accurately, should allow decision-makers and those charged with governance to assess the municipality’s financial position, performance, budget implementation and cash flows and to provide a vertical (internal) and horizontal (external) benchmark, which can serve as both confirmation of planned progress or as a pre-warning system for deficiencies in strategic financial management.

The accurate calculation and interpretation of these ratios should allow for uniform and consistent assessment of the financial health and performance of a municipality, setting of benchmarks for progressive improvement; a comparison of the municipality with other municipalities, and even as a pre-warning system to ensure the continual strengthening of financial management and accountability within a municipality.

Holistic insight on comparative information

A holistic analysis of these ratio indicators, based on empirical and factual information, allows for:

• the executive and decision-makers (e.g. Councillors, Municipal Managers, Chief Financial Officers, Accounting officers of Municipal Entities,  and other financial officials) to timeously predict, identify, proactively manage, resolve, prevent and avoid financial problems; and
• the enhancement of the oversight roles(e.g. municipal executive, Audit Committee, Municipal Public Account Committee).

Financial ratios are considered as part of in-year analyses (e.g. S52, S71 and S72 reporting), end-year analyses (AFS and annual reports, Integrated development plans, oversight reports), budgeting and long-term financial & strategic planning.

Interpret financial management

These financial management ratio assessments considerations include:

• Financial position analysis: Asset-; Debtors-; Liquidity- and Liability management.

• Financial performance analysis: Efficiency: Sustainability; Service delivery and distribution losses; Revenue & Expenditure management

• Budget implementation analysis: Capital-; Operating expenditure-; and Operating Revenue management.

Analyse & insight

We can assist municipalities with the compilation of an MFMA Circular 71 Compliant Ratio Analysis Report based on the latest 3 sets of GRAP compliant Annual Financial statements. (Comparative Ratio Analysis Report / CRA report).

This will include the accurate and complete calculation of, as a minimum, the various ratios required by MFMA Circular 71, together with the main benefit being the detailed comparative interpretation of these results, which will include:

• VERTICAL: internal comparatives which provide insight to the internal progression/digression of the municipality over the period; and
• HORIZONTAL: external comparatives based on benchmark municipalities which will provide the context of the municipality’s financial position and performance in comparison to a financially sound municipality.

The DTI will then facilitate workshops based on the CRA report results with (i) Councillors and other oversight parties, and (ii) the municipal executive and Section 57 managers.  This is to assist these role-players in understanding and obtaining insight into the comparative ratio analysis results (internal and external), which impact the day-to-day management, strategic planning, decision making, and oversight functions of the municipality as well as operational considerations.

For more information

The compilation and interpretation of the Comparative Ratio Analysis Report takes approximately 3 days, with the report discussion and workshops at the Municipality another 2 days.  For more details contact us: Daniel Erasmus at 0722 58 12 45 or derasmus@ducharme.co.za