Traditional measures of assessing financial performance and financial position in the private sector are often not relevant for assessing the performance of public sector entities. In the private sector, operating performance is concerned with profitability, and financial position is concerned with liquidity, solvency and asset management. In the public sector, some of these issues are not always relevant:

• Profit is not an objective of many budget-dependent departments, whose aim is to deliver goods or services consistent with government policy. As a result, performance needs to be measured by a wider range of criteria. Information about financial structure is less relevant, because the ongoing viability of budget-dependent bodies is determined by the government (via the will of Parliament).

• Liquidity issues become less important, because creditors know they have a claim against the government as a whole.

• Liquidity and solvency become less important from a lending perspective, because the agencies generally do not have the ability to borrow in their own right.

Given the above differences, it has become necessary for public sector entities to develop new or modified ratios compared to those used in the private sector. Develop some ratios which could be used to evaluate performance in the public sector. (You may wish to consider the relationship between costs, physical output and changes in efficiency.)