Financial Management - Assignment Example

?Financial Management Introduction: Manchester fire and rescue service is the largest fire and rescue service station that is situated outside London. It comprises of nearly 2500 members of staff as well as 41 fire stations. The service covers around 500 square miles thereby providing benefit to nearly 2.5 million people. Greater Manchester consists of ten different districts they are Bolton, Bury, Manchester, Oldham, Rochdale, Salford, Stockport, Tameside, Trafford, and Wigan (About Us. 2011). Every organization whether it is a profit or non profit one will be having a financial structure. Financial structure refers to the right side of the firms or organizations balance sheet detailing how the assets are financed including debt as well as shares. In other words, financial structure refers to the way in which the organizations assets are financed. Like all other organizations, Manchester fire and rescue service too have a financial structure. The finance of the organization are managed by departmental managers and consists of a team which manages the payroll of the service employees, control the annual budgets as well as provide general financial advice to the managers (Organizational Structure. 2011). The Manchester fire and rescue service in its budget in 2009-10 has set aside 0.9 million pounds for effective governance, 22.2 million for community fire safety, 0.4 million for emergency planning and civil defense, and 95.8 million for fire fighting and rescue operations. Majority of the funds necessary for the purpose would be available from percepts which is money that is paid by the metropolitan district authority collected as part of council tax. Moreover it also receives funds through national non domestic rates which are businesses rates that are set up by and paid to the government and redistributed based on population. It also receives revenue support grant which is paid by the authorities from national taxation to provide funding to operate local services. Majority revenue share for the fire service organization is expected from national domestic rates. Revenues from percepts and revenue support grants follow. The financial allocations of Manchester fire and rescue services are done through financial annual budgets. Allocations and spending are strictly according to the preplanned budgets. The annual budgets expresses in financial terms the priorities determined by the members of the authority moreover it sets out the plans for service provision in the coming year. The budgets that are prepared reconsider objectives, reassess priorities as well as reexamine the way in which the service delivery is achieved currently. This is because the budgets that are prepared should be in line with the needs of the authority against the cost to local tax payers’ while operating along with governmental guidelines. To get allocation of funds from the government and its agencies all financial plans, allocations and spending should be done according to governmental guidelines. Therefore the authority has developed a three year financial planning process. The government also has a hand to determine the resources that pass through this three year process. The government has announced formula grant for the next three years starting from 2009 to 2011. The average increase in grants will be 1.4%. The collection fund surplus remains at 0.113 million pounds. Given all these increases, the Manchester fire and rescue authority has to frame its own strategies and plans to achieve the planning objectives on the basis of governmental policies. Governmental policies should be followed strictly because all major funding for operations are coming from the government. With regard to capital expenditure programme, replacements and upgrades requires resources in excess of supported borrowing approval from the government. There should be separate revenue budgets and capital expenditure programmes. The balance between the revenue and capital budgets is to be determined by the authority to achieve a balanced budget plan. The authority is required to make its own borrowing plans according to internal calculations. All the calculations regarding borrowings should be in compliance with the treasury management policies as well as according to the Local government act of 2002 (GMFRA Capital and revenue budget 2009/11. 2010). The implementation of financial systems in fire rescue agencies is often slow because of the delay in getting government aided funds. Finance is considered secondary in such type of organizations. Moreover government wide financial systems often preempt those in individual departments. The most critical need of financial information in fire departments occurs during preparation of budgets. The most important part of preparation of budgets comprises of arduous and politically risky process of allocation of resources. Budget control is also high priority for fire agencies it is necessary to forecast expenditures for management needs. The other needs represent general ledger, billing, accounts payable, and payroll (Cote 2003. p155-158). The Manchester fire and rescue authority adopted its own framework of corporate governance in the year 2003. This framework provides guidelines that are used strictly to enforce financial controls and disciple in the area of monetary matters. To ensure correct financial policy implementation, there is the service of an effective audit committee with a term of reference in full compliance with the current CIPFA guidance. Draft committee reports are reviewed by the director of finance to decide their financial implications. All activities having a financial implication in the organization have to be submitted to the finance department before finance and general purpose committee for approval. The authority has entered into a service level agreement with Wigan MBC and its executive director , as per the agreement the business support services ahs been designated to the treasurer by the authority as the responsible officer under section 73 of the local government act of 1985 and part VII of the local government finance act of 1988. This is done for the proper administration of its financial affairs. Moreover the director of finance and technical services has been delegated the responsibilities in relation to the financial administration and stewardship of the authority. These distinctive roles reflect the position of the treasurer as accountable to the authority as well as to its members and the director’s role in reporting directly to the CEO. In this approach the chief financial officer has a key role in the authority to develop financial strategies under the delegated authority to the director of finance. The CFO has direct as well as independent access to the CEO of the authority on all financial related matters. It is ensured that there is professional advice on all matters that have financial implications is available and recorded in advance for the purpose of using in decision making. The budget calculations are robust and reserves are kept adequately in line with CIPFA guidelines. There is balance sheet monitoring arrangements where monitoring is done on a monthly basis on all key balance sheet items. The outcome of this is reported to members on a regular basis through quarterly budget monitoring reports. The Manchester fire and rescue authority is a non profit organization that works under civil utility services. It is responsible to prevent and curtail disasters happening in its jurisdiction. Its prime motive is not profit but service. Since it is a non profit organization majority of its funding and revenues comes from public sources. Therefore the authority is responsible to the government as well as to the citizens to set high standards as regards to financial control. It is the prime responsibility of the CEO, CFO and other responsible persons that all financial related activities are done according to internationally recognized standards and methods. Manchester fire and rescue authority has so far followed on such practices (ANNUAL ASSESSMENT . 2010). All types of financial reports prepared by the authority are required to adopt proper accounting practices which are based on statutory requirements published by the CIPFA (Greater Manchester's award-winning fire and rescue service.2011).The current costs of pensions in the financial report presented 2009-10 have many key areas. One among them is the pension fund which is presented under the FRS 17. This discloses the cost of pension liabilities of employees irrespective of the fact that they may not be due and payable for many years. There is a large liability consisting of 1238 million pounds in the current year when compared to 867 million in the previous year. This increase is due to the compliance of the accounting standard 16. This liability reflects the aggregate of all pensions that is payable to existing and future pensioners. This liability is not due and payable and will be discharged over many years in the future. This is secured against future funding from the government and the percept. Moreover the local fund balances shows a deficit of 35.9 million which was previously 12.6 million. The significant increase in the liabilities related to pension schemes is because of the result of market conditions in the last few years which have resulted in unfavorable financial assumptions. With regard to the authorities balances provisions and reserves, the balances as on 31 March 2010 was 14.586 million pounds. This is a lower than anticipated figure when compared with previous years figures. A provision for insurance is maintained to meet the potential risks and liabilities. It is thought that the insurance fund is in surplus by 0.760 million. Therefore this sum has been transferred to the insurance reserve according to the accounting standard. Moreover this reserve is also used to fund the cost of risk management initiatives. A capital reserve is created to support capital expenditure. Out of 2.5 million revenue, 1.182million is transferred to capital reserve. Another reserve is created for supporting future initiatives in partnership and innovation and children and young people. Under spent amount in this area amounted to 0.834 million has been transferred to reserve. Further scrutiny of accounts reveals that there are two significant changes during 2009-10 regarding realignment of existing policies with the requirements of the SORP 200. These are namely PFI and the council tax. The income and expenditure account shows a deficit of 40.930 million for the year. This is mainly because of the inclusion of only one side of the notional pension’s costs. The other side is included ion the statement of movement on general fund balance. This change is presentational; and will not have any impact on the balances of the authority. The statement of movement on general fund balance shows a surplus of 37.752 million. This surplus is significant and represents the net additional required by the statute and non statutory proper practices to be credited to the balances every year. The balance sheet contains detailed notes on various items as required by the SORP. These help changes and provide explanations on significant items in the balance sheet. With respect to presentation of accounts which is very vital in financial control and its interpretation, it is advisable to follow all the statutory provisions regarding CIPFA SORP. This would reduce conflicts in determining statutory provisions as well as helps in achieving consistency and opens scope for professional interpretations. It is also recommendable to follow a fully audited set of consolidated accounts for the whole activities of the authority under the Whole government accounts criteria. It is also important that the costs of individual services are defined in accordance with the CIPFA best value accounting code of practice. This will enable to ensure consistency of treatment like unit costs when compared. The PFI schemes should be treated according to newly introduced IFRS and service concession arrangements according to IFRIC12 standards. When this type of treatment is followed, the PFI assets will be brought on the balance sheet and treated like other assets of the authority. Prior period adjustments should also be published along with the current statements. Moreover full disclosure of PFI should be made in the statements. Accrued incomes should be recorded during the year. However such change should not impact the balances held by the authority. It is appropriate to include full notes in the statement that explains this change. Necessary steps have to be undertaken regarding effective maintenance of asset register. This would help the authority to manage the asset base well as well as provide transparency for the auditors (Statement of accounts. 2010). The budget proposals for the year 2010-11 for Manchester fire and rescue service has been forwarded to the Audit committee and finance committee for further recommendations (Budget manual 2010-11. 2010). In this budget a reduction of 5% on overall spending is anticipated. Reduction in this area is expected to be achieved through potential changes made in the area of income and expenditure, pay awards, pensions, percept levels and levels of government grant. A major financial policy change from the government side is that the government is planning to reduce the council tax increases for 2011-12. They propose to achieve this through recycling of some efficiency to be achieved elsewhere. Reduction in the increase of council tax would effect the revenue generation of the government. This will in turn prompt the government to reduce grants given to the authority. Another significant development is the reduction of pay hikes that is proposed in the coming years for employees earning more than 21000 pounds in a year this move would result in savings of nearly 750000 pounds in a full year. This policy has positive as well as negative effects. The positive effect is that there will be considerable amount in savings and the negative effect is that the morale of the employees will be seriously affected (EMERGENCY BUDGET UPDATE. 2010). There is an overall change in pension schemes of employees also. The employers’ contribution towards pension is to be increased by 1% per annum. However there is a funding gap of 3%. To reduce the gap new proposals has to be developed for a wider review of pensions. As a result of spending review of the government, it is expected that there will be a grant cut of about 25% and sometimes 40% in other areas. The proposed reduction amounts to 20-30 million pounds over the period of four years. This cost reduction technique will face serous administrative and financial problems if other sources of incomes are identified and generated. The most important issue in this area is the review of the fire fund that is under consideration. Revision of fire fund determines all future grant allocations made by the government to the fire authority (Revenue estimates 2010-2011. 2010). Conclusion: Public sector undertakings all over the world are facing serious financial challenges over the years. It is expected that such situations would not be corrected in the near future. Fire and rescue services in UK do not appear to be ring fenced from the pressure of budget reductions. In recent years, the fire and rescue authority has been successful to adapt to the changes in the financial sector and was able to deliver significant financial strategies in recent years that helped them to reduce costs and improve its outcomes to the society. Moreover the risks that were attached with the authority have been identified and corrective actions undertaken. However more strenuous exercises have to undertaken for those risks that have a chance for occurring in the long term. A number of financial strategies framed by the authority have been useful for answering some of the questions related to financial difficulties and changes. But new thinking in this area is required for answering questions about achievement of core objectives of the authority in the future (EMERGENCY BUDGET UPDATE. 2010). Reference: About Us. 2011. Retrieved January 21, 2010 from http://www.manchesterfire.gov.uk/about_us.aspx Budget manual 2010-11. 2010. Retrieved January 21, 2010 from http://www.manchesterfire.gov.uk/media/10017/gmfire%20budget%20manual%2009-10.pdf CORPORATE GOVERNANCE ARRANGEMENTS - ANNUAL ASSESSMENT. 2010. Cote.A.E. Organizing for Fire And Rescue Services. 2003.Sudbury: Jones & Bartlett Learning. P155-158. EMERGENCY BUDGET UPDATE. 2010. Retrieved January 21, 2010 from http://authority.manchesterfire.gov.uk/mgConvert2PDF.aspx?ID=358 GMFRA Capital and revenue budget 2009/11. 2010. Retrieved January 21, 2010 from http://www.manchesterfire.gov.uk/media/40245/capital-revenue-budgets2009-10.pdf Greater Manchester's award-winning fire and rescue service will cost tax payers ?1 per week. 2011. Retrieved January 21, 2010 from http://www.thebigredguide.com/news/greater-manchester-s-award-winning-fire-and-rescue-service-will-cost-tax-payers-1-per-week.html Organizational Structure. 2011. Retrieved January 21, 2010 from http://www.manchesterfire.gov.uk/about_us/who_we_are/organisational_structure.aspx Revenue estimates 2010-2011. 2010. Retrieved January 21, 2010 from http://authority.manchesterfire.gov.uk/Data/Joint%20Policy%20and%20Finance%20and%20General%20Purposes%20Committee/20100128/Agenda/item%209%20revenue%20estimates.pdf Statement of accounts. 2010. Retrieved January 21, 2010 from http://authority.manchesterfire.gov.uk/Data/Audit%20Committee/20100623/Agenda/statement_of_accounts.pdf Read More