Question

Explain some of the major differences between public and private ratio analysis. How about small, private, for-profit institutions like Salem University?

Answer 1

Differnce between public and private ration analysis

Businesses following the private ration analysis have different goals and follow different accounting practices than public-ration analysis governments and agencies. Business financial management targets the areas of concern for company owners and shareholders. Public-sector financial management aims to satisfy the politicians and bureaucrats who have oversight of the operations of public bodies and the constituents of elected officials. The differing objectives and stakeholders result in fundamental differences in how financial operations are carried out.

Planning and Budgets

While both public and private sectors ration analysts use budgets as a key planning tool, public bodies balance budgets, while private sector firms use budgets to predict operating results. The public sector budget matches expenditures on mandated assets and services with receipts of public money such as taxes and fees. If a public sector budget doesn't balance, you have to cut services, raise taxes or borrow the difference. In the private sector, you forecast revenues and expenses to estimate how much profit your company will make. If your profit is too low, you can cut costs or increase the marketing budget and predict higher sales.

Financial Objectives

The financial objectives of a public-ration analysis  are to maximize the delivery of services to the client group while keeping expenses to the authorized limit. Financial success is spending the amount authorized in the budget to provide the projected services. The objective is to meet the budgeted numbers.

The objective of a business is to reduce costs and increase revenue to maximize profit. A private-sector organization aims to spend less and sell more than predicted in the budget. Success is to exceed the profit forecast.

Accounting Differences

Public sector organizations carry out their ration analysis uses bookkeeping and accounting functions as detailed in the governing legislation. Financial controls are aimed at proving that spending is according to the amounts approved by the legislative bodies. Politicians are interested in spending rather than in tracking the effect on asset values and liabilities.

Private-sector accounting follows generally accepted accounting principles that govern how assets and liabilities are shown in the balance sheet of the company. The emphasis is on determining how much profit the company has made and how financially stable it is.

Audits and Accountability

Both public- and private-sector organizations require auditing to verify the accuracy of their financial management. Public government organizations are audited by the government office responsible for the verification of government accounts. Other public agencies and private-sector organizations may provide financial statements audited by accounting professionals or accounting companies licensed to carry out this work. Large corporations have to prepare annual audited financial statements for their shareholders. While the auditing process is similar for the public and private sectors, the material audited differs, because public-sector audits establish that expenses are accurately portrayed, while private-sector audits show that the profitability and financial stability of a company are presented correctly.

small institution

A small institution(or microenterprise) is generally defined as a small instiution employing nine people or fewer, and having a balance sheet or turnover less than a certain amount (e.g. €2 million or PhP 3 million). The terms microenterprise and microbusiness have the same meaning, though traditionally when referring to a small business financed by microcredit the term microenterprise is often used. Similarly, when referring to a small, usually legal business that is not financed by microcredit, the term microbusiness (or micro-business) is often used. Internationally, most microenterprises are family businesses employing one or two persons. Most microenterprise owners are primarily interested in earning a living to support themselves and their families. They only grow the business when something in their lives changes and they need to generate a larger income. According to information found on the Census.gov website, microenterprises make up 95% of the 28 million US companies tracked by the census.

Private institutions

The private institutions are the part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the State.

Employment

The private institutions employs most of the workforce in some countries. In private institutions,activities are guided by the motive to earn money.

A 2013 study by the International Finance Corporation (part of the World Bank Group) identified that 90 percent of jobs in developing countries are in the private sector.

Diversification

In free enterprise countries, such as the United States of America, the private sector institutions are wider, and places fewer constraints on firms. In countries with more government authority, such as China, the public sector makes up most of the economy.