Key Financial Indicators: Operating Ratio

In previous posts, we have discussed where to find data to help make smart financial and managerial decisions. Another vital data source for any enterprise is its own financial statements, from which enterprises can calculate key financial indicators. Let’s look at key financial indicators from the perspective of a business-like unit within government–a water or wastewater system. Key financial indicators are a way for that enterprise to get a snapshot of its financial health and to determine whether it needs to make adjustments to its rates, and they should be calculated annually when financial statements are released. One important financial indicator is operating ratio, which measures the ratio of annual operating revenues to annual operating expenses. To be a true enterprise fund that is self-supporting, a system should strive to have at least as much operating revenue as it has operating expenses, if not more. Otherwise, the system would be operating at a loss. Operating revenue includes any money the system receives for its services, including income from rates, tap/connection fees, penalties, and other sources. Operating expenses include items such as salary, benefits and employee taxes for staff, supplies, treatment chemicals, filters, utilities, insurance, lab and testing fees, minor repairs and regular maintenance, and, if applicable, the cost of purchasing water from another system. These are the costs of running the system day in and day out. If the system is owned by a government that follows GASB 34 procedures for audited financial statements, these numbers can be found on the Statement of Revenues, Expenses, and Changes in [...]