Financial Solvency

Introduction

There are a number of different solvency methods and techniques that governments can use in order to stay afloat financially. One of the most popular and commonly used solvency methods is tax revenue. This is when the government collects taxes from citizens in order to generate income. Another solvency method is borrowing money. This can be done through issuing bonds or taking out loans. Governments may also use reserve funds in order to cover expenses. This is money that the government has set aside specifically for emergencies. Finally, governments may also rely on grants or other forms of financial assistance from external sources. Solvency methods and techniques are important for governments because they allow them to generate income and keep their head above water financially. Without these methods, governments would quickly become insolvent and would not be able to function properly. This paper looks at the degree of solvency of Bay City, Texas, to provide an example of these topics. It then discusses several ratios and their implications. Next, it examines cutoff points and solvency methods. Following this is an explanation of solvency and how it solves financial issues. Finally, solvency vs. liquidity is discussed. All of these are important matters for government, for as the Bible states, But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever (1 Timothy 5:8).

The Degree of Solvency of Bay City, Texas

Bay City, Texas FY 2016

Dollar Amount

Ratio

Cash Solvency:

1

Current Ratio:

Current Assets

$13,606,925

Current Liabilites

$4,974,732

Ratio

2.7

Budget Solvency

2

Operating Ratio

Total Revenue

$26,768,960

Total Expenses

$23,337,612

Ratio

1.1

Long-Run Solvency

3

Net Asset Rato

Total Assets

$59,289,046

Restricted + Unrestricted Assets

$4,704,065

Ratio

12.6

Current Liabilities Ratio = Current Assets/Current Liabilities:

Bay City, Texas, has a current ratio of 2.7, which is good. The current liabilities ratio is a financial metric that measures the proportion of an organizations current liabilities to its overall assets. This ratio is used to assess the financial stability of an organization and its ability to meet its short-term obligations (Okunev, 2022). A high ratio indicates that the organization has a high proportion of current liabilities, which may put it at risk of defaulting on its obligations. A low ratio, on the other hand, indicates that the organization has a low proportion of current liabilities and is therefore more financially stable. The ideal current liabilities ratio is 1.50, which means that the organization has enough assets to cover its liabilities. A ratio greater than 1.50 indicates that the organization is in a good financial position and is less likely to default on its obligations. Bay City is therefore unlikely to face any defaults in the foreseeable future based on its current liabilities ratio of 2.7.

Operating Ratio = Total Revenues/Total Expenses

Bay City, Texas, has an operating ratio of 1.1, which means the city has just enough revenue to cover its expenses. A governments operating ratio is calculated by dividing its operating expenses by its revenue. If the government has an operating ratio of greater than 1.00, it means that its operating expenses are not greater than its revenue, which is a good sign for the governments financial stability, as it indicates that the government should be able to cover its expenses in the future (Cherry & Garston, 1982). However, if the government has an operating ratio of less than 1.00, it means that its revenue is less than its expenses, which is not a good sign for its continuing financial stability. A governments operating ratio can also be used to compare its financial stability to that of other governments. If a city has a higher operating ratio than its peers, it means that it is more financially stable than them.

Net Asset Ratio = Total Assets/(Restricted + Unrestricted Assets)

Bay City, Texas, has a net asset ratio of 12.6, which is very good and means that the city has likelihood of long-term solvency. The net asset ratio is a key financial metric that measures the stability of an organization. A ratio of greater than 1.50 indicates that the organization has a strong financial position and is likely to be financially stable over the next fiscal year (Okunev, 2022). In contrast, a ratio of less than 1.00 indicates that the organization is at risk of financial instability. The net asset ratio is calculated by dividing the total assets of an organization by its total liabilities. This ratio is important for investors and creditors to consider when assessing the financial health of an organization or government. A high net asset ratio is indicative of a strong balance sheet and can provide confidence to those considering investing in or lending to the government of the city.

Cut-off Points

A cutoff point is a pre-determined value that is used to classify data points. In the context of ratios, cutoff...

Conclusion

Bay City, Texas, is in a good place with regards to solvency and liquidity. It has enough revenue to cover its expenses, and well more in terms of assets should it be required to liquidate to pay down debts. Its current ratio is above the cutoff; in short, Bay City does not have anything to worry about with regard to solvency. So long as it does not lose a significant portion of its population, which would deplete tax revenue, the city should be fine for the foreseeable future. It should, however, be careful not to raise its expenses, because doing so would tip the city into debt. It is better t have more than enough to pay expenditures than to be in want. As the Bible explains in Romans 13:6-7, all are expected to do their share in the brotherhood of one: For because of this you also pay taxes, for the authorities are ministers of God, attending to this very thing. Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed. And since this is the case, it is the responsibility of government to maintain sound financial practices and accounting responsibility. Just as citizens have a responsibility to support their government, the government has a responsibility to its citizens to be financially accountable and solvent. This means that the government must keep track of its spending, income, and debts in order to ensure that it is not spending more than it is taking in. In addition, the government must also work to ensure that its debts are manageable and that it is not taking on more debt than it can realistically handle. This can be a difficult task, but it is one that the government must take seriously in order to maintain the trust of its citizens. Additionally, by being financially responsible, the government can set a good example for its citizens and help them to become more financially responsible themselves. Finally, by staying solvent, the government can ensure that it is able to provide essential services to its citizens and meet its obligations.

References

CFI. (2020). Solvency. Retrieved from

https://corporatefinanceinstitute.com/resources/knowledge/finance/solvency/

Cherry, R., & Garston, N. (1982). Operating ratio regulation: control theory approach.

Transportation Science,16(1), 67-82.

Enright, M. (2021). Solvency Ratios Measure…