Financial Management - West Midlands Fire and Rescue Authority - Example

West Midlands fire and Rescue Authority Module: BA (Hons) FMS 302 Financial Management University: University Centre at Blackburn College Tutor: Anthea Grange Assignment number: 1 Student: Mohammed Al Darei Table of contents Task based introduction I am going to review the financial statements for West Midlands fire and Rescue Authority and Greater Manchester Fire authority and prepare a report for you, my senior manager. I have done this by critically assessing the operational boundary and the authorised limit proposals for the Fire and Rescue Services, calculating the safety margin of the Operational Boundary to the Authorised Limit and identifying six categories of risk facing the FRS. For each category I have commented on whether the risk has a financial impact on the FRS and if so, whether it has been recognised in the financial statements. At the conclusion I give my opinion as to whether it has been recognised, explaining why I believe that is the correct view. The West Midlands Fire and Rescue Authority has been rated one of the most effective fire rescue service. To achieve this authority has collaborated with the management and other parties in order to ensure operational boundary is lower than the authorised limit. The authorised limit is the limit imposed by the authority for external debt that is total borrowing and other authorised long-term liabilities. It is set to establish the outer boundary of the authority’s borrowing based on the assessment of the risks. The operational boundary limit which is based on expectations of probable events is set up to guide the day to day activities of the treasury management within the authority. It is always lower than the authorised limit. Operational limit should trigger corrective measures before the authorised limit is reached. The limits are calculated to be consistent with the agreed capital programme for that year with its treasury, management policies and practices. The limits are based on the evaluation of risk that the authority is facing. One of the requirements of the code is that there should be agreement as one of the parts of the annual budget setting process, although revision can be done with time if necessary (Bateman, 2006). The fire rescue station is operating well since the operating limit is less than the authorised limit. How West Midlands Fire Rescue Authority accommodated the considerations A number of considerations were taken into account, some of which include; The minutes of the resources committee held on January 2009 were received and noted. Close attention was drawn to £350,000 of capital funds made available by the Welsh Assembly Government for capital works which was meant to be spent before ;March 2009. They agreed to increase the amount of funding available and approve the list of proposed work to be done (Fireman, 1979). The grant settlement was received, approved and considered in depth. Since it was not different from the provisional statement the budget recommendations remained the same (chief fire officer association, 2008). The revenue monitory report was received and compared with the approved budget which had been profiled for 8 months. There was an under spent of the budget and additional expenditure on pensions. The combination led to under spend. The last deficit on fire fighters pension scheme would be funded through transfer of funds from the elective Pensioners Provision at the end of the year. The expenditure and financing of capital projects is summarised in the capital monetary report according to the approved capital programme. Thus capital financing was within the prudential indicators set limits (fire and rescue services Act, 2004). It was evident that the net budget requirement had been notified to all authorities as part of the consultation process as indicated by the joint report of the chief fire security officer and the treasury. The report had consolidated the earlier reports and formed the base for the final process of budget setting. Therefore, as a consultation process, all authorities had been informed about the net budget requirement as indicated in the report. The report received on the corresponded scheme was agreed as follows; 1. All authorities were motivated by employers to give support to the case involving the 2 FRS in court. 2. Uniformed employees resolved to share the legal costs involved in. 3. Resolving any opposition in the high court. With the awareness that corresponder schemes were undertaken by fire fighters who were prepared to do so the authority encouraged support of the schemes at the court (Independent review of the fire service, 2007). According to a report on LGA annual fire conference consideration was given to the forth coming LGA annual fire conference. Commitments to attend the annual conference should be honored except in cases of sickness. Chief fire officers and the group leaders arranged for a meeting to determine future member attendance to the meeting (Shropshire and Wreckin, 2007). Safety margin of the operational boundary to the Authorised limit YEAR 31/01/ 2008 WEST MIDLANDS FIRE AND RESCUE AUTHORITY Operational Boundary = £21.000 M Authorised limit = £19.400 M Therefore proportion of authorised limit used =operational boundary/authorised limit Thus: £19.400 M/£21.000M = 0.923 0.923 * 100% = 92.3% 100% -92.3% = 7.7% The recommended safety margin is 5%. This therefore means that for any number greater than 5% the FRS is operating within the safety limits recommended. Thus the west midlands fire and rescue authority is operating within the recommended safety margin because its safety margin exceeds the recommended safety margin which is set at 5 % (statements of account, 08). As compared to Greater Manchester Fire rescue statement as the year ended 2008. GREATER MANCHESTER FIRE RESCUE SERVICE AS YEAR ENDED 31/10/2008 Operational boundary = £97.930 M Authorised limit = £85.000 M Authorised limit= £85.000 M/£97.930 M = 0.8679 0.8679*100%= 86.79% 100% - 86.79%= 13.20% Conclusion Greater Manchester FRS has a safety margin which is higher than 5% this shows that it is operating on the set safety margin. Report to the senior manager Basing on the above information it is evident that greater Manchester FRS is performing better than west midlands FRS. Its authorised limit is higher than that of west midlands therefore showing that it has a higher capacity of borrowing than west midlands. Its creditworthiness is also considered to be higher than that of west midlands FRS. Greater Manchester’s safety margin is rated at 13.20% which is way too high meaning it’s operating on the set safety margin. Characteristics of west midland FRS in rural urban and middle West midland FRS in urban areas rates its risk exposure as high and more risky compared to the rural areas. In an urban setting the FRS are fast. Incase of a fire three fire engines are sent in eight minutes time with the first 2 arriving in 5 minutes, it has special vehicles allocated to them, they receive over 2000 emergency calls, and they have 2 fire appliances also known as shouts (London fire brigade, 2007). In suburban areas the FRS is less faster and deploys 2 engines 1 within 5 minutes the second within 8 minutes and they have 1 fire appliance. West midland FRS rates its risk as low in the rural areas and it deploys 1 fire engine after every 10 or 20 minutes, it receives less than 2000 calls per year and has less firefighting equipment (Shropshire fire and rescue service, 2007). Areas of risk, their relevance and their considerations in the accounts of west midland FRS 1. Business risk. Is the chance of a loss arising in a firm’s operations and the environment which can affect the organisations ability to get returns on investment (Bateman, 2006). Relevance Decreased business risk can lead to increased returns of the FRS and saving of large sums of money associated in covering the costs which are affiliated to the loss. Considerations The west midlands FRS has Carried out frequent audit of the firms accounts thus enabling it to reduce the risk. 2. Financial risk It is also termed as liquidity risk. It occurs when a risk cannot easily be traded to avoid making a loss.This risk occurs when a party wants to trade an asset but it becomes impossible because they cannot trade for the asset in the market. It affects a business ability to trade on an asset it is holding Relevance Financial risk assists the FRS to know its liquidity. It might increase finance if there is an increase in the credit ratings. Thus there happens to be an increase in inflow of cash. Due to this many people will want to trade with the business. Consideration This has been accommodated in the financial statements by looking at the future net cash flows on a daily routine. High concern is raised on days that have a negative cash flow. Thus the negative cash flow was well taken care of to avoid the risk (Lerner, 2001). 3. Physical risk The chance that the firm will be affected by the environment where it is situated. This risk originated from the environment under the assumption that the environment is so uncertain and unpredictable Relevance This will help the west midlands FRS to know whether the environment its operating in is safe or risky. Knowing the environment is important because it saves the firm from losing large sums of money caused by the risk. Consideration West midlands fire rescue station has undertaken environmental audit and evaluated the gravity of the risk (Drury, 2007) 4. Economic risk Also known as interest rate risk. It starts with an asset that is charged on interest like a bond or loan. This is so because of variability in interest rates. As interest rates increase the bonds price decreases the risk is determined by the period of loan or bond repayment Relevance When interest rates are low the west midlands FRS will gain more income. This is so because interest rates lead to variations in the incomes and expenses. Consideration The west midlands FRS has reduced the rate of economic risk by investing in bonds with a short period of repayment and using fixed income instruments such as loans and also invest in assets with higher rates so that they can counter the disparities in income and expenses (Cornish, 2004). 5. Political risk This is a risk which is normally caused by political changes that lead to disparity in the expected outcome. It can also be attributed by occurrences which lead to political instability such as wars terrorism and coups relevance The political risk can adjust the suitability of an investment destination in this case the west midlands FRS. It can either increase the suitability of the FRs thus causing it to have high profit. If the political effects are positive it can also increase the desirability of the opportunity venture. Considerations The west midlands FRS has selected leaders who have an influence in the government and it has also chosen the chief fire officer who is charged with managing this risk. The FRS has also insured against the political risk (Cagan, 2006) 6. Product Life Cycle risk This is a risk which occurs during manufacture of a product its transportation usage and in the last stage of disposal (Bragg, 2007) Conclusion According to the analysis West Midlands Fire and Rescue Authority is operating within the recommended safety margin greater than 5%. Risks such as; business risk, financial risk, Physical risk, economic risk and political risk have been identified in the books of account of west midlands fire rescue station This shows that they are relevant in the accounting. Product life cycle risk has not been identified in the books of account of west midlands fire rescue station. This is because estimates have to be made on other information such as models when the market price information is not available. Thus the west midlands fire rescue station has resolved to identify the above risk in the upcoming accounts. In my opinion west midlands fire rescue station is financially stable. References Bateman L. (26th June 2006) West Midlands Fire and Rescue Authority Statement of Accounts Available from: http://www.wmfs.net/digitalAssets/105/105754_Statement_of_Accounts_2005_and_06.pdf [Accessed 30th December 2009]. Bragg, S. (2007) Accounting Best Practices. 5th edition, UK: John Wiley and Sons. Bragg, S. (2009) Just-in-Time Accounting: How to Decrease Costs and Increase Efficiency.3rd edition. UK: John Wiley and Sons. Cagan, M. (2006) The Everything Accounting Book: Balance Your Budget, Manage Your Cash Flow, and Keep Your Books in the Black London: Everything Books. Cornish B and Shearman C (2004) Firefighting in Worcestershire, London: Jeremy Mills Publishing. Drury, C. (2007) Management and Cost Accounting 7th edition, UK, Cengage Learning, Lai Lan Mo, P. (2003) Tax avoidance and anti-avoidance measures in major developing economies. Sussex: Cengage Publishing Company. Lerner, J. and Cashin, J. (2001) Principles of accounting: based on Schaum's Principles of accounting I. UK: McGraw-Hill Professional. Matrix display (2005) Case Study; Public Sector Solution. Birmingham, Available from: http://www.avmachines.com/PDF/case-studies/public-sector/West-Mids-Fire Projectors.pdf [Accessed 30th December 2009]. NHS (2008) Finance Report for the Eight Months Ending 30th November 2008 Month 8 Trust Board, Available from: http://www.uhns.nhs.uk/Documents/FoundationTrust/Trust%20Board%20Minutes/0901 6/090106%20Agenda%20item%2010a.pdf [Accessed 30th December 2009]. Pinson, L. (2007) Keeping the Books: Basic Recordkeeping and Accounting for the Successful Small Business, 7th edition. California: Kaplan Publishing Steve Allen (2009) West Midlands Strategic Health Authority March 2009 Performance and Finance Report, Available from: http://www.westmidlands.nhs.uk/cms/portals/0/repository/21/Enclosure%209%20%20P rformance%20and%20Finance%20Report%20March%202009.c475ccbd-61e0-4e4e a328-7bf9c47fc0f3.pdf [Accessed 30th December 2009]. Stone, P. (2003) Understanding financial accounts: understanding the principles of accounting from book-keeping to VAT. 2nd edition, Oxford: How to Books Ltd Read More