Financial Statement for Humberside Fire and Rescue Authority - Case Study Example

FINANCIAL MANAGER FOR HUMBERSIDE FIRE AND RESCUE AUTHORITY NAME: MOHAMMED HASAN ALMAAMARI Abstract Towards upholding civil safety, fire rescue services are established at the local levels to ensure the mitigation of various environmental threats towards human life. This report seeks to highlight various managerial issues from a financial perspective that involves analysing data contained in the annual financial documents provided by the Humberside Fire and Rescue Authority. Information contained herein will eventually be released to the public as required by the accounting standards. TABLE OF CONTENTS Introduction 1.0 Calculation of the Safety Margin and Operational Boundary 2.0 Operational Boundary 2.1 Setting Operational Boundaries and Authorised Limits 2.2 Main Considerations of the HFRS 3.0 Comparison of the HFRS to GMFRS 4.0 Risk Categories 4.1 Characteristics of HFRS 4.2 Financial Risks 4.3 HFRS and Financial Risks References Introduction The purpose of my report is to review the financial statements for Humberside Fire and Rescue Authority and compare with the activities of the Greater Manchester Fire Authority for the senior manager. I have considered the documents presented to me that include:- The Authority’s financial statement Summary of Accounts and prepared a report as set out below. I have critically assessed the operational boundary and the authorised limit proposals for the Fire and Rescue Service, calculated the safety margin of the Operational Boundary to the Authorised Limit, commenting on the result. I have also identified six categories of risk facing the FRS. For each category, I have commented on the financial impact on the FRS and I have considered, whether it has been recognised in the financial statements. 1.0 Calculation of the Safety Margin of the Operational Boundary The operational boundary and authorised limits make it possible for the FRS to estimate its annual revenue requirements as well as financial amounts that can accommodate the various fluctuations in the annual financial movements. Calculation of the safety margin for 31.3.2010 For HFRS Operational Boundary for 31.03.2009 - 14,157 Capital funds utilised for capital programme – 4,335 Capital Financing 2009/10 – 3,703 Use of Revenue Balances – (3,250) Statutory MRP – (1,337) Voluntary Addition – (1,189) Total – £16,419M = Operational Boundary For HFRS Authorised limit = 0.05*£16.4M =£17.5M So proportion of authorised limit used = operational boundary/authorised limit =16.419/17.5 = 0.938 Therefore the safety margin = 100% - 93.8% = 6.2% Therefore HFRS operates within recommended safety margins that are set at 5 per cent of the operational boundary. For GMFRS = £11.698M = Operational Boundary For GMFRS Authorised limit = £12.5M So proportion of authorised limit used = operational boundary/authorised limit = 11.698/12.5 = 0.935 Therefore the safety margin = 100% - 93.5% = 6.5% The recommended safety margin is 5% Therefore GMFRS operates within recommended safety margins If number at 6.5% is less than 5 – FRS is not operating in recommended limits 2.0 Operational Boundary 2.1 Setting Operational Boundaries and Authorised Limits Operational boundaries are established by summing up the cash flows of the financial period and the previous financial balances from the previous accounting year. The operational boundary provides an estimate of the funds available to facilitate the operations of the fire and rescue services (The Operational Boundary, p21). In the absence of the operational boundary, the authority may spend more than their budgetary allocations that will eventually force them into debt. On the other hand, the authorised limits are set at 5 per cent of the operational boundary to cater for the income and expenditure fluctuations within the financial year (The Operational Boundary, p21). It should however be noted that only fixed rate debt financing ensures certain future cash flows and hence stability in the FRS’s operations 2.2 Main Considerations of HFRS The HFRS has four major considerations that aim to ensure sound financial management practices. The first consideration involves capital spending that seeks to strike a balance between the funds acquired from the central government channelled towards undertaking capital projects. Capital financing requirements are re-evaluated annually to evaluate the necessity of the capital projects (Frank 2006, p47). Since the capital projects are set to be completed in the future, the determination of the NPV is important to ensure sufficient budgetary allocations. The HFRS has considered this requirement by determining the estimated capital expenditures and financing requirements. Similarly, the GMFRS considers the financial resources utilised in the implementation of capital programmes that span more than a year. Secondly, the impact of capital decisions should be analysed to ensure that other urgent activities are undertaken as well as to ensure availability of funds for daily operations (Khan & Hildreth 2004, p92). Apparently, the HFRS has not accommodated this impact analysis as the capital projects are determined by the local authority and provides funding to the FRS towards the implementation of this project. Additionally, investments made by the HFRS have a limited timeframe of 364 days that also complements the annual re-evaluation of capital projects. Comparatively, the GMFRS engages in short-term investments and makes bank deposits for a period of not more than one year. Lastly, the HFRS considers treasury management that seeks to ensure that funds are set aside to cater for emergencies. Treasury management involves the determination of the operational boundary as well as the authorised, fixed rate exposure and variable rate exposure limits (The Operational Boundary, p23). However, the HFRS does not accommodate the variable rate exposure limits as it only borrows at fixed interest rates. On the other hand, the GMFRS embarks on treasury management that seeks to basically address the credit and liquidity risks. This enables the FRS monitor the movements of funds in the reserve accounts as well as movements in capital funds and assessing the financial borrowings. 3.0 Comparison to Greater Manchester Fire and Rescue Service HFRS serves a local area that comprises of four unitary authorities with a total population of close to 890,000 people. This has necessitated the development of four community protection units (CPUs) aimed at improving community relationships within the four areas covered by the unitary authorities (HFRS 2005). Compared to the GMFRS, HFRS has a total of 31 fire stations whereas the GMFRS has a total of 41 stations. Manchester has a population estimate of 2.55 million people with ten boroughs. Secondly, HFRS largely serves a local population whereas the GMFRS serves an urban population hence the huge capital expenditures. Lastly, HFRS employs 1,214 staff personnel distributed across the four unitary regions whereas the GMFRS employs over 2,500 personnel (Oneplace 2009). The low staff number compared to the GMFRS means that the authority spends much less on operational costs than the GMFRS. However, it should be noted that the GMFRS serves a larger population that the Humberside FRS. All in all, staffing in FRS’s should be optimal to ensure efficient operations and the delivery of quality services. 3.1 Risk Areas The HFRS is subjected to the business, financial, physical, economic and political risks. For the product life cycle risk, the HFRS does not involve itself in commercial-oriented business activities hence this risk is not relevant to its operations. The business risk that is faced by the HFRS arises due to competition from private firms offering rescue services. Financial risks arise from the increase and decrease in the reduction of available funds for the FRS’s operations. Physical assets owned by the FRS reduce their market value due to their constant use in the FRS’s operations. As a result, the FRS is exposed to physical risks that could reduce the FRS’s capacity to meet its mandate. Economic and political risks are relevant to the organisation as they impact on the availability of funds for the FRS as well as its management. 3.2 Risk Categories Business risks include operational and functional risks that arise from the FRS’s basic operations directed towards performing its mandate. These risks directly impact on the FRS’s operations that are segregated into departments for proper functioning. Additionally, private firms offering commercial rescue services are on the increase and this could potentially harm the FRS’s operations. The management of this risk includes the identification of various departments within the FRS that serve distinctive functions to enhance efficiency in executing its operations. Secondly, the physical risks arise from poor storage facilities of the authority’s physical materials. Physical risks reduce the value of the stocks hence resulting into an impairment adjustment in the financial statements (Deegan 2009, p71). Transportation during an emergency response may result into accidents hence necessitating compensation for the affected. The physical risks arise from poor storage facilities of the authority’s physical materials. Physical risks reduce the value of the stocks hence resulting into an impairment adjustment in the financial statements (Deegan 2009, p71). Transportation during an emergency response may result into accidents hence necessitating compensation for the affected. Thirdly, financial risks arise from the FRS’s financial commitments that comprise of revenues and expenditures as well as assets and liabilities. The authority receives funding from donors among other revenue sources. However, in some instances, the authority falls short in its financial commitments and this requires them to source for additional funds from other financial institutions. Therefore, the movement of operational funds within the authority gives rise to financial risks and should be addressed in the financial statements. Fourthly, economic risks directly impact on the authority’s operations as they are present within the external operational environment. The FRS’s operations have been negatively impacted upon by the subsiding global economic recession hence the need to reduce their expenditures as funding decreases. Economic risks reduce the fair values of financial investments especially infrastructural investments that give rise to negative cash flows. Political risks arise from politically unstable societies where politics have a direct influence on the authority’s operations. Changes in national administrations require adjustments in the internal operations of entities and this categorically explains the impact that political risks have on the authority’s operations (Christoffersen 2003, p29). Political risks have high impacts on the internal processes of the FRS as they arise from and result into a change in policies. A change in policy requires some duration of time to facilitate a smooth transition process from the old administration system to the new one. This could negatively impact on the authority’s cash flow and hence their high risk classification. Lastly, product lifecycle risks do not normally arise within the HFRS since it is not involved in commercial marketing activities. Basically, commercial products undergo a five-stage process that comprises of the conceptual, introduction, growth, maturity and decay stages subsequently (Bergmann 2009, p116). Products in the market undergo this process that gives rise to the product lifecycle risks. As a product reaches the decay stage, the higher the probabilities of incurring the product life-cycle risk. However, the FRS is not exposed to this risk as it offers services that do not lose their importance over time. 3.3 HFRS and Financial Risks The risks highlighted in the previous section have been accommodated by the HFRS through its financial risk management standards. Horcher (2005, p25) specifies that pro-active and reactive approaches are required in the management of financial risks whereby the authority educates the public on the actions to take during an undesirable event and ensuring quick response to those in need of rescue and fire services. In managing the financial risks, HFRS has placed an upper limit on the financial amounts that an individual or organization can owe the authority. The ceiling amount is determined by evaluating the debtor’s ability to repay the loaned amount within a specified time frame. However, from the HFRS’s balance sheet as at 31st March 2009, the authority has made a provision for bad debts that are debts that have exceeded a three to five-year time period (Humberside FRS 2008). Interest payments are also charged on the debtors and the more they default their payments, the higher the amounts due from them. Credit risk ought to be evaluated on a regular basis to control the financial amounts owed to and by creditors and debtors respectively hence sustaining the authority’s operations (Correia, Flynn, Uliana & Wormald 2007, p816). The accommodation of business risks within the FRS has been undertaken through the identification of various reserve accounts. These reserve accounts ensure the availability of adequate funds to mitigate and implement organisational changes. As Horcher states, market risks are beyond the control of the authority and continuous market evaluation should be undertaken to identify the impact of the market risks on the authority’s operations (2005, p210). Market risks arise in the fluctuation of market prices and rates that impact on the authority’s operations (Horcher 2005, p129). The HFRS caters for these risks by identifying its operational boundary and establishing the safety margin. The safety margin aims at providing a buffer that handles these market fluctuations without negatively impacting on the authority’s basic operations. Physical risks are accommodated in the form of assets and stocks that enable the authority to perform its functions duly. Stocks and equipments are subjected to wear and tear due to their constant use towards the operations of the FRS. To take into consideration this constant wear and tear, the authority acknowledges the depreciation of the equipments as well as the replenishment of the available stocks. This allows the authority to ensure sustainable operations that are within the budgetary allocations. Economic risks have been accommodated in the Statement of Accounts through the operational boundary and authorised limits. In setting the operational boundary, the authority seeks to estimate its financial requirements within the financial year. Additionally, the authorised limits seek to adjust the amount identified in the operational boundary to take into consideration financial fluctuations that arise from increased or decreased economic activity. Political risks are not accounted for in the Statement of Accounts due to the uncertainty of their occurrence. Currently, the authority operates within a stable political environment that does not expose its operations to the political risk. However, internal wrangles could negatively impact on the authority’s operations in terms of the replacement of staff. This need not be accounted for in the financial statements as it is an administrative issue to be solved by the FRS’s management. Conclusion Having considered the previous areas I conclude that the FRS has adequately managed its high risk areas and placed adequate measures through regular financial risk assessments. However, the FRS’s management should monitor the credit risk especially towards its borrowings to ensure its capability in re-paying the borrowed amounts without negatively impacting on the basic operations. References Correia, C, Flynn, D, Uliana, E & Wormald, M 2007, Fin. Mgmt, 6th Ed, Michigan: Juta & Co. Ltd. Frank, HA 2006, Public Fin. Mgmt, Denver: CRC Prss. GMFRS 2007, Stmt of Accounts 2007/08 HFRS 2005, An Intro to HFRS, Accessed from < http://www.humbersidefire.gov.uk/aboutus/intro.asp > on Jan 4, 2010 Horcher, KA 2005, Essentials of Financial Risk Mgmt, California: John Wiley & Sons. Horne, JCV & Wachowicz, JM 2005, Fund. of Fin. Mgmt, 12th Ed, New York: FT Prentice Hall. Humberside Fire & Rescue Service 2008, Strategic Plan: 2009-12, Accessed on Jan 4, 2010from < http://www.humbersidefire.gov.uk/news/articles/Strategic%20Plan%202009- 2012%20.pdf >. Humberside FRS 2008, Summary of Accounts 2008/09 Institute of Risk Management 2002, A Risk Mgmt Standard, Accessed on Jan 4, 2010 from < http://www.theirm.org/publications/documents/Risk_Management_Standard_03082 0.pdf > Khan, A & Hildreth, WB 2004, Fin. Mgmt Theory in the Public Sector, Carolina: Greenwood Pub. Grp Oneplace 2009, GMFRS Organizational Assessment 2009, Accessed on Jan 4, 2010 from < http://oneplace.direct.gov.uk/infobyarea/region/area/localorganisations/organisation/ pages/default.aspx?region=53&area=423&orgId=1025 > Read More