The Diverse Sources of Income Available to CareTech PLC - Assignment Example

Managing Financial Resources in the health and Social Care Organisations – CARETECH HOLDING PLS By Institutional Affiliation June 30, 2014 Introduction As one of the home managers for CareTech Holdings PLC, the current discourse hereby aims to present a report to the Directors of the company, MONITOR-NHS and some CCG representatives as part of government review and monitoring of the care home. The following responses are hereby detailed for the users’ perusal: Learning outcome 2 2.1 What are the diverse sources of income available to CareTech PLC in the financial year in 2013? Income is defined as “increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants” (Anon., 2013, p. par. 1). Traditionally, the sources of income of an organization comes from the following: (1) sales or revenues which have been generated from selling the products or services of the organization; (2) interest received on deposit accounts with a bank; (3) dividends earned from investments; (4) rentals received on leased properties owned by the organization; and (5) gain on reevaluating the assets of the organization (Anon., 2013). In the case of CareTech PLC, an analysis of the Consolidated Statement of Comprehensive Income for the year ended 30 September 2013 revealed that the sources of income are the four care pathways which generated revenues of £114.3m (CareTech Holdings PLC, 2013, p. 9). Sources of revenues were revealed to come from the following: Adult Learning Difficulties (£73.9m); Mental Health (£6.5m); Young People Residential Services (£19.6m); and Foster Care (£14.3m) (CareTech Holdings PLC, 2013). 2.2 Analyse the factors that may influence the availability of financial resources in CareTech PLC? The factors that may influence the availability of financial resources in CareTech PLC would depend on the ability of the organization to sustain services offered to the four care pathways that were mentioned above. Any significant changes which could affect the provision of these services would drastically impact on the financial resources of the organization through affecting the revenues side of the equation. The factors which would affect the revenues side would be the number of potential clients who would avail of the services offered, as well as any decision to increase the prices of these services that would be charged to the clientele. Concurrently, any adverse changes in costs or expenses could also make a significant impact on the resources since any increases in costs or expenses would cause a minimization of net profits for CareTech PLC. Upon closer evaluation of the expenses side in the income statement, the expenses include: administrative expenses (where it was specifically noted that “there has been a considerable effort in the year to reduce administrative expenses with the two key elements being property rental costs and aggregate payroll cost” (CareTech Holdings PLC, 2013, p. 10); financial expenses; and taxes. 2.3 Review different types of budget expenditure in CareTech PLC. An expenditure-based budget is defined as “the annual expense plan of a commercial enterprise is explicitly stated in the Expenditure Budget. The primary purpose of an Expenditure Budget is to define an economic policy, with respect to the financial spendings made for infrastructural and equipment purposes, which include their making and maintenances” (Economy Watch, 2010, p. par. 1). Based on the facts presented in the financial highlights of CareTech PLC, it was revealed that capital budget expenditure of as much as £44.5m was made in 2013 where acquisition of two property portfolio businesses were disclosed. The details are provided below: “As part of these acquisitions twenty-eight free hold assets were acquired from the Quercus Healthcare Property Partnership for a cash consideration of £29.5m and in addition, Roborough House in Plymouth was acquired from Roborough Properties for a total consideration of £6.5m, to be satisfied with £5m in cash and by the issue of 794,335 new ordinary shares of 0.5p each(“Ordinary Shares”) in CareTech” (CareTech Holdings PLC, 2013, p. 12). The information revealed that the funds were earmarked for the acquisition of these property portfolios which would be expected to generate returns or sources of funds for CareTech PLC in the near future. The expected returns would be greater than the amount of funds that were initially invested. Aside from these acquisitions which formed a significant part of the budget expenditures for CareTech PLC, there were capital expenditures amounting to £5.3m which reportedly included £2.5m for the purpose of updating the organization’s portfolio of assets (CareTech Holdings PLC, 2013). 2.4 Evaluate how decisions about expenditure could be made in CareTech PLC From the overview of various expenditures at CareTech PLC, as revealed from the financial highlights, it could be deduced that capital expenditures were only made based on available funds which were earmarked to venture into acquisitions and updating of the current portfolio. Since the amounts were relatively large covering about £44.5m which was made in 2013, these acquisitions could be evaluated in terms of undertaking costs and benefits analysis which took considerable amounts of time, efforts, and funds to plan and to incorporate these funds in their budget preparations prior to the date of acquisitions. Likewise, there is a position in CareTech PLC , known as the Group Finance Director, who is actively involved in transactions affecting expenditures and sources of revenues for the organization. Thus, any expenses that is beyond the traditional operating expenses on a monthly basis would necessitate procedures in budgeting and planning to determine whether the organization has enough funds to invest in capital expenditures and investments that require large amounts of funds. Learning outcome 3 3.1 Assuming there was financial shortfall in CareTech PLC; explain how this situation could be managed? First and foremost, a shortfall is defined as “an amount that is missing that would make the total expected sum” (QFinance, n.d., p. 1). Assuming that there was a financial shortfall in CareTech PLC, the situation could be managed through determining the potential causes of the shortfall and to address this by making the necessary adjustments. For instance, if the shortfall was due to the significantly large and unexpected increases in administrative expenses, as above noted, CareTech PLC could aim to address the situation by addressing the two accounts which were considered contributory to the increased administrative expense: property rental costs and aggregate payroll costs. As these were identified, it was commendable that the following courses of action were instituted to manage the shortfall: “Property rental costs were £6.3m and following the acquisition of a business combination containing properties previously leased by the Group in late 2013, there will be a rent saving in 2014. The number of employees in management and administration has reduced by 54 which has reduced aggregate payroll costs in the year” (CareTech Holdings PLC, 2013, p. 10). Therefore, despite the noted shortfall in 2013, there are projected savings to be generated in 2014 which appropriately managed and addressed the financial shortfall caused by property rental costs. In addition, the aggregate payroll costs was also reduced through retrenchment and streamlining of human resources. If the shortfall could not be managed by adjusting expenses, other options open for CareTech PLC would be to borrow funds from financial institutions. However, the finance director should evaluate this option in terms of financial costs that would increase expenses and reduce the bottom line in the coming months or years, depending on the amount to be borrowed. Concurrently, CareTech could also try to generate more revenues from the four care pathways by promoting a campaign to invite clients to avail of the social care institution’s varied services. They could even try to increase the costs of services in a marginal manner to address the financial shortfall through generation of revenues. 3.2 What action you would take if you suspect occurrence of financial fraud in your organisation? Financial fraud is defined as “an intentional act of deception involving financial transactions for purpose of personal gain. Fraud is a crime, and is also a civil law violation” (Bank Negara Malaysia, 2010, par. 1). There are characteristics or five common elements that would confirm the intention to commit fraud: (1) a false representation of a supposedly material fact; (2) intentional and malicious; (3) believed by someone to whom the malicious intent was directed; (4) acted upon by the intended victim; and (5) a harm was inflicted to the victim (DiNapoli, n.d.). (i) The red flags of fraud A red flag was defined as “a set of circumstances that are unusual in nature or vary from the normal activity. It is a signal that something is out of the ordinary and may need to be investigated further” (DiNapoli, n.d., p. 3). The red flags were categorized according to employee red flags and management red flags. There are evident signs and symptoms exhibited by employees to be classified as red flags, as follows: (1) exhibiting lifestyle change; (2) incurrence of personal debt; (3) manifestation of behavioral changes; (4) high rates of employee turnover; (4) refusal to go on leave; and (5) reported lack of segregation in responsibilities, tasks, or duties, especially in vulnerable areas (DiNapoli, n.d., p. 5). Concurrently, management red flags are varied. These include the following: (1) weakness in internal control; (2) reluctance to disclose comprehensive information to auditors; (3) alleged excessive numbers of maintained checking accounts; and (4) missing documents or photocopied documents; among others (DiNapoli, n.d.). Other classifications of red flags include: structural (pertaining to the organization’s policies or procedures); personnel (policies involving functions in human resources management); operational (conduct of daily activities); accounting system; financial performance; and professional service (Coenen, n.d.). (ii) Actions to take in the event of fraud Depending on the classification of red flags, the actions that need to be instituted should address the root cause of the laxity in control which enabled exposure of the organization to fraudulent acts. For instance, to address structural or human resources red flags, the organization must institute clear and accurate policies and procedures that define conformity to a code of discipline and conduct, as well as adherence to ethical, moral, and legal standards. In addition, to address accounting or financial fraud, the organization must have set internal control procedures which audit transactions on a regular basis. Aside from internal control, the organization should be subjected to external audits to ensure that a comprehensive evaluation of reporting and documentation are appropriately complied according to accounting standards. When fraud is suspected or red flags were evident, the incident should immediately be reported to authorized officers who could immediately investigate and address the incident. 3.3 Evaluate budget monitoring arrangements in CareTech PLC. Budget monitoring is described as “the collection and analysis of data about budget activities... It allows budget operators to keep track of budget activities to determine whether budget objectives are being achieved and to make whatever changes that are necessary to improve budget performance” (Arikawe, 2009, p. 8). As such, since CareTech PLC’s financial condition is being closely governed by Michael Hill, the Group Finance Director, it could be presumed that budget monitoring is undertaken by the finance group. Budget preparation, including the preparation of pro-forma financial statements are presented to Michael Hill for review, evaluation and approval. The final approval is to be made the organization’s Executive Chairman, Farouq Sheikh (CareTech Holdings PLC, 2013). The types of budget monitoring arrangements which could be undertaken in CareTech PLC include: financial monitoring, physical monitoring, as well as inputs-outputs analysis monitoring (Arikawe, 2009).Under financial monitoring, the financial group would conduct a close evaluation of the manner by which funds which were released were actually earmarked to the project or program as stipulated in the budget. As such, in conjunction with physical monitoring, the actual purchases in equipment or supplies should be inspected to confirm and validate that the budget was spent, as intended. Finally, the inputs-outputs analysis monitoring allegedly determines “the efficiency and effectiveness of the system and shows whether the level of output is commensurate with inputs consumed” (Arikawe, 2009, p. 10). Learning outcome 4 4.1 Identify information required to make financial decisions relating to CareTech PLC The information required to make financial decisions relating to CareTech PLC are those that pertain to the components shown in the organization’s financial statements. As deduced, factors affecting revenues and expenses; as well as acquisition of assets, application for loans, or increases in capitalization necessitate evaluation and review of members of the executive team, especially the director of the finance group and the executive chairman. In addition, payments of dividends require analysis of funds and earnings per share and the decision to pay out dividends would be decided on by the shareholders in pre-scheduled meetings. Likewise, there were decision noted regarding disposal of properties which were non- performing or where the returns have not be substantial, to wit: “there have been a small number of property disposals during the year where the service was not meeting commissioner aspirations and a reconfiguration was not possible or economic” (CareTech Holdings PLC, 2013, p. 5). Further, assets acquisitions were as follows: a site in Dudley, and the two property portfolio above mentioned. A training provider was also mentioned to be acquired as a source of regular training and professional development of the staff and leaders at CareTech PLC. As emphasized, “this acquisition provides the opportunity to draw the professionalism of the Training Provider’s staff into a new and forward looking partnership with our own team to offer social care apprenticeships, training to social care employers and pre-employment training to our service users” (CareTech Holdings PLC, 2013, p. 7). Finally, regarding additional debts, it was mentioned that syndicated banks have reportedly offered CareTech PLC to increase financial credit (CareTech Holdings PLC, 2013). 4.2 Analyse the relationship between care service delivered and ‘costs and expenditure’. The relationship between care service delivered is quantified through the amount indicated in the revenues side, which, in 2013 amounted to £114.3m (CareTech Holdings PLC, 2013, p. 9). On the other hand, the costs and expenditure of Care Tech PLC are reflected as total expenses, shown in the income statement which amounted to £34.749. As such, the net profits for the period amounted to £14.058. On a percentage wise basis, the costs or expenses were 30.40% of revenues; while net profits represented 12.3% of revenues. Therefore, as proposed above, when CareTech PLC aims to increase their bottom line, they could focus on increasing the care service through increasing the prices of delivery of these services or increasing the volume of clients who would avail of these services. On the other hand, the organization could engage in cost-cutting activities to minimize costs and expenses below the 30% level. 4.3 Evaluate how financial considerations impact upon a service user. Financial considerations impact service users in terms of the prices pegged for the services that they could avail. Depending on the efficiency of the service provider, they could pass on a lower price or a higher price according to these financial considerations. There are three (3) financial considerations that affect and influence funding of care cost in a nursing and residential home. These considerations are as follows: (1) the ability of the organization to source supplies and materials used in the nursing and residential home in the most efficient manner (this would affect the pricing strategy of the organization since these would be passed on to the clientele); (2) the amount of funds paid to health and social care practitioners and professionals would also affect the service user in terms of perceiving affordability and access to the needed professional service; and (3) the sustained profitability of the social care provider which would determine the amount of funds and resources that could be earmarked for current and future growth, especially in terms of adherence to high quality in the delivery of social care. 4.4 Suggest ways to improve the care service provided by CareTech PLC through changes to its financial systems and processes. To improve the care service provided by CareTech PLC through changes to its financial systems and processes, the following ways are proposed: (1) ensure that the administrative expenses are minimized to avoid financial shortfall; (2) maintain an efficient staffing level to optimize the use of skills of the human resources and be able to observe the appropriate payroll level that the organization could support and sustain; (3) check on the red flags of fraud to prevent potentials for committing fraudulent activities – this would be costly for the organization and detrimental to their corporate image; (4) re-evaluated policies and procedures to prevent fraudulent activities and place internal control mechanisms to countercheck vulnerable areas; (5) evaluate future acquisitions in properties to ensure that risks and returns are checked and balanced; (6) prepare budgets in the most efficient manner depending on the availability of funds, and in conjunction with opportunities in the external environment through soliciting inputs and suggestions among social care practitioners and managers regarding their capital expenditure requirements; and (7) ensure that the organization adheres to the highest level of professionalism through conformity to ethical, moral, and legal standards in assuming transparency in all their accounting and financial transactions. Conclusion CareTech PLC should look more closely into their financial condition through a more in- depth analysis of the financial statements. According to the proposed changes to its financial systems and processes, CareTech PLC could still improve on their financial profits while aiming to adhere to the highest quality in delivery of social care to its varied clientele. References List Anon., 2013. Income: Definition. [Online] [Accessed 30 June 2014]. Arikawe, A., 2009. Budget Monitoring Performance Evaluation and Reporting. [Online] Available at: www.budgetoffice.gov.ng/.../Budget%20Monitoring%20and%20Perfor... [Accessed 30 June 2014]. Bank Negara Malaysia, 2010. What is Financial Fraud?. [Online] Available at: http://www.bnm.gov.my/microsites/fraudalert/01_what.htm [Accessed 30 June 2014]. CareTech Holdings PLC, 2013. Preliminary Results for the year ended 30 September 2013. [Online] [Accessed 30 June 2014]. Coenen, T., n.d.. Red Flags of Fraud. [Online] Available at: http://www.fraudessentials.com/red-flags-of-fraud/ [Accessed 30 June 2014]. DiNapoli, T., n.d.. Red Flags for Fraud. [Online] Available at: www.osc.state.ny.us/localgov/pubs/red_flags_fraud.pdf [Accessed 30 June 2014]. Economy Watch, 2010. Expenditure Budget. [Online] [Accessed 30 June 2014]. QFinance, n.d.. Definition of Shortfall. [Online] Available at: http://www.qfinance.com/dictionary/shortfall [Accessed 30 June 2014]. Read More