Financial Management for Warwickshire and Great Manchester Fire Rescue Authority - Case Study Example

FINANCIAL MANAGEMENT FOR WARWICKSHIRE AND GREAT MANCHESTER FIRE RESCUE AUTHORITY NAME: SAEED ALAFARI Abstract Public financial management is established to oversee proper utilization of public funds through provision of adequate internal control systems to put checks and balances on operation to minimize costs and improve services to the services. The council ensures that public money is safeguarded, properly accounted for and used economically, efficiently and effectively. Procedures and policies are put in place to address areas of high risks like the financial risks which normally the organization is exposed to. These management controls help people in charge to implement adequate measures in making better decisions for the smooth running of the organization. Financial management ensures funds are available to finance the services as per the requirement and proper control is made to minimize excessive expenditure with sound investment decision being made. TABLE OF CONTENTS Introduction 1.0 Setting the operational boundary 1.1 Main consideration by FRS 2.0 Calculation of the operation boundary 3.0 Characteristics of FRS 3.1 Major risk areas 3.1.1 Product life cycle 3.1.2 Economic risk 3.1.3 Political risk 3.1.4 Business risk 3.1.5 Financial risk 3.1.6 Physical risk 3.2 High risk areas with FRS 3.2.1 Credit risk 3.2.2 Liquidity risk 3.2.3 Market risk 3.2.3.1 Interest rate risk 3.2.3.2 Price risk 3.2.3.3 Foreign Exchange risk Conclusion References Introduction The report addresses financial management control practices of Warwickshire fire and rescue authority by analyzing their financial statement as well as discussing major financial risks areas with their impact on the organization operation .this report shall conclude on the findings as whether the FRS finance operation shows a fair view and how they minimizes their operations risks. The finance manager is supposed to set the report to the receipt to the public domain. 1.0 Setting the operational boundary Budgetary control is part of organizational tool for planning and control of cost and it forms part of the responsibility accounting in an organization. Analysis is made for revenue and cost in areas of concern to measure performance of the budget. Budgetary control provides a formal basis of monitoring the progress of the organization as a whole towards the achievement of the objectives specified in a planning budget Terry (2003, P. 189) A budget is prepared based on anticipated revenue income and expected expenditure and capital investment decisions. Referring to the operational boundary of Warwickshire fire and rescue authority, the main sources of revenue funds to finance the operation of the council comes from government grants. These are from council tax income, government grants, government revenue support grants and business rates. 1.2 Main consideration FRS Based on the operational boundary figures, the main cash flow indicated comes from grants and out of it the expenditure is already allocated against such a grant. This is mostly the kind of budget in operation in the non-profit making organization where their work is basically to provide services to the public. However, by setting such operational boundaries, the management is concerned with making sure that heading actual spending does not exceed the budget authorized cash limit. This is effectively indicated on the operational boundary figures where they have set authorized limit head room over and above the operational boundary to allow any emergency cash movements which is not within the budgeted control figures. According to the figures given, FRS has tried to maintain their accounts within a reasonable margin of safety. In the report, on the audited financial statement this is well illustrated on the council’s revenue budget where the general fund balance had a carried forward balance of ₤ 8.9 million for the following period (page 27 of financial statement). Warwickshire being a non-profit making organization spends its revenues mainly to provide services and other social amenities like roads among others (financial statements page 7). A part from general services, the council also uses its revenues on capital spending on long term assets and building roads (page 8&9 financial statements). Generally, the balance sheet of the council shows a positive net asset as compared with the total liabilities of the company of about ₤ 355.20 million (page 29 of financial statement). The income and expenditure account shows fair activities but the cash flow shows a negative balance. The council should improve on daily cash operations to avoid a negative balance. The management of the council must revisit its budget plans to alter that and solve their problem. 2. 0. Calculation of the operation boundary Safety margin 31.3.2008 = ₤11, 698, 000/₤12, 500, 000*100 = 93.584% Safety margin is 100%-93.584% = 6.416% Operates within the recommended safety margin 31.3. 2009 Expenses = ₤14, 157,000/₤ 15,000,000*100 = 94.38% Safety margin =100%-94.38% = 5.62 %, within the safety margin 31.3.2010 Estimated boundary=₤16, 419, 000 /₤17,500,000*100=93.822% Safety margin=100% -93.822% = 6.177%, within the margin of safety. The recommended limit is 5%. This indicates funds have been well utilized without leaving funds not being used and could be possibly used in other public service areas such as the police. 3.0 Characteristics of FRS Having been created in 1948, Warwickshire Fire and Rescue Service cover an area of 1975 km2 with 512,700 people. It has 550 staff and has 19 fire stations with 34 fire engines. Warwickshire Fire & Rescue Service Press Release, (1998). It serves a manageable number of urban and rural population hence improved quality of services. GMFRS covers an area of 5000 sq miles with about 2.55 million people and 41 stations with 2500 staff. They involve local people in their activities and train them on how to minimize risks. The urban served by GMFRS has several challenges from these emergencies due to the high population that they serve and they therefore need enough fire fighting equipments. 3.1 Major Risk Six risk factors 3.1.1 Product Life Cycle: The life expectancy of a product beginning with conception, design, manufacture, service and disposal. There is a product viability curve that indicates the stages of a product in the life cycle. Changes in the environment can bring risks to the product in that a big change or innovation can bring a greater risk. Product life cycle is characterized by a variety of events which include the image by consumers over time. FRS is operating on maturity phase and the product here is most viable. FRS should consider on improving or diversifying its products to meet the growing competitors’ market and improve on the services delivery to the public. WFRS should also try to improve on investing more on the most current fire equipment and staff training to face any fire tragedy due to the growing population and congestion of the buildings. The risks of obsolescence are minimized by the replacement provision of the equipment. 3.1.2 Economic Risk: The risk here is such that the out put of projects in place may fail to generate enough revenues to balance operating costs so as to repay debts. Economy may turn against the investment and the risk may be manifested in low gains or high expenses than anticipated due to causes like increased prices of raw materials, competition, natural disasters, etc, Chorafas, (2007). The FRS financial liabilities are all valued at amortized cost where there have been no gains or losses on recognition or impairment of the financial assets held by the council. 3.1.3 Political risk: this type of risk is experienced by investors, governments and corporations due to political decisions or other changes in political environment that change expected outcome and value of a certain economic action hence affecting the business objectives. It is advisable to assess the political events that could affect operations and to have in place systems to quantify risk. Mitigation should be done before, during and after an investment. There is no incidence of political instability reported by FRS hence no relevance. 3.1.4 Business Risk: The risk here is that a company may not have sufficient cash flow to cover its operating costs as and when they fall due. It’s a combination of financial risk, liquidity risk, credit risk economic risk among others. The WFRS has minimum business risk as it has access to borrowing from money markets to cover day to day cash flow need. It acts as the last result lender to other councils therefore there is no significant risk that it will be unable raise finance to meet commitments under financial instruments. Other sources of fund includes taxes received from the public and the council has governance framework to ensure transparency and accountability is observed in the local Authority and increased efficiency and effectiveness is achieved in the WFRS to the benefits of the public. The operational is the limit set to control the risk of the financial resources being insufficient to meet the demands of the authority. 3.1.5 Financial risk: An organization can be exposed to such a risk through its financial assets, liabilities and other financial obligations. This normally implies that the company may lack sufficient cash flow to finance its activities. The situation can worsen when a company uses debts together with equity financing, Collier (2006). The FRS council approved treasury and investment strategies to address the main risk within the approved parameters. 3.1.6 Physical risks: These are associated with accidents, illnesses and environmental factors where people have been exposed to chemical or biological compounds that are harmful to health and environmental pollution. The working areas can also pose a big threat to the employees if safety and rescue measures are not in place especially during fire accidents. This being a FRS company, their core activities are centered in minimizing physical risks. WFRS train their members on safety measures and they also provide insurance and medical cover for their staff. The WFRS has a rural set up location compared with GMFRS hence the road traffic accidents and congestion is at minimum. 3.2 High risk areas with FRS The Authority is exposed to a range of financial risks: 3.2.1 Credit risk: The Company has exposure to credit risks which are the risk that a counter party may be unable to pay amounts due to the authority when they fall due. According to the financial statement report of FRS, credit risks arise from deposits with banks and financial institutions and also council’s customers. The council is faced with credit risks from deposits from the financial institutions amounting to ₤28.5million, from debt management office amounting to ₤15.0 million, deposits from customers’ ₤12.4 million and deposits from banks ₤5.6million. According to audited report of FRS, the authority does not expect any loses to arise from non performance by any of the counter parties in relation their deposits. By the time the report was prepared only customers who had outstanding debts past 42 days had to report to their members. On the side of credit risks the authority has put in place good measures to ensure it’s at the minimum level. This means the impact of this is not very much felt compared with the threat it posses to many organizations. This also indicates that the internal control systems of the authority are strong compared with the bulk of the transactions they undertake in a calendar year. The financial report has recognized these risks in their reporting as per page 92 and 93 of the audited report. However, there are various ways of minimizing credit risks taken by the companies either by charging high interest rates to cover for the default or engaging another person to collect the same repayment at a fee. Diversification can also be done where by one invests in many ways to cover other investments that may be at a high credit risk. Also, close monitoring of the performance of the debt and whether the debt is being paid regularly. An organization is faced with a risk of currency fluctuation if it has invested abroad. WFRS has no investment abroad hence faces no exposure to loss on exchange rate (financial statement page 96). 3.2.2 Liquidity Risk: Is the risk that the company is unable to meet its payment obligation as and when they fall due. According to FRS, financial report the council has ready access to borrowings from the Public Works Loan Board and indication shows no risk that they will be unable to raise finance to meet its commitments under financial instruments. The only elements of risk are that the authority is bound to replenish its borrowing at a time of unfavorable interest rates. FRS recognized this into their books as per the analysis on page 93 of the audited report. The authority uses cash reserves they set aside to support future year’s revenue budget to invest in short term. This indicates the authority has maintained proper investment procedures as most of their payables are due to be paid in less than a year. Through cash flow management and use of internal control systems the authority is able to operate within margin of safety. Also avoiding using operating capital fund may minimize the chances of the organization to face liquidity risks. 3.2.3 Market risk: it’s a component of financial risk, mainly comprising of the interest rate risk, price risk and currency risk. Market risks are risks that the value of the investments may reduce their value as a result of factors that may affect the market within the operations of the business. 3.3.3.1 Interest rate risk; it arises from investments in fixed interest securities. (Winter, P.2007). The sensitivity analysis for interest rate risk demonstrates how changes in the fair value or future cash flows of financial instruments will fluctuate because of changes in market interest rates at the reporting date. The authority is exposed to significant risk in terms of its exposure to interest rate on borrowing and investment. Big impact is on the borrowing at variable rates which increases the interest expense to the income statement, borrowing at fixed rate the fair value of liabilities decreases and the investment at fixed rates of the fair value of the assets will fall. The treasury management team has an active strategy for accessing interest rates and this helps to keep the risk at minimum. This has been accommodated in the financial statement on page 94 of the report 3.3.3.2: Price Risk: The Company is exposed to equity securities price risk as a result of its holding in quoted equity investments classified as available for sale. The authority has some shareholding in related companies all of which have been derecognized in prior years. These have impact on the authority since they are classified available for sale. This, the financial statement have accommodated as per page 95 of the financial report. 3.3.3.3: Foreign exchange risk: This comes about when one invests in foreign currencies. The company is not faced with this risk because it has no financial assets or liabilities invested in foreign currencies hence not exposed to loss arising from movement in exchange rates. Generally, there are techniques used to assess risks some of which include; decision theory, simulation analysis, and scenario analysis and sensitivity models. Warwickshire F& RS hold regular meeting to report on actual financial activity and plan future financial requirements. By comparing their previous estimates and budgets to actual performance they can take great comfort in the knowledge that they have the right skills to manage the authority’s finances. Conclusion As finance manager given all the factors under my review the financial report is reflects good performance and is prepared in accordance with the relevant legal and regulatory requirements and the code of practice on local authority accounting in the United Kingdom 2008 and is prepared in accordance with audit practice as per the auditor’s conclusion and WFRS operates strong financial controls. References Terry L. 2003. Management Accounting. CIMA Publishing. Financial Times / Prentice Hall, 2000. Taking Control of IT Costs. Nokes, Sebastian. London. Friedl, G; Hans-Ulrich K, & Burkhard P, 2005. Relevance Added: Combining ABC with German Cost Accounting. Strategic Finance (June): 56–61. Sharman, Paul A, 2003. Bring On German Cost Accounting. Strategic Finance (December): 2–9.   Chorafas, D, 2007: Risk accounting and risk management for accountants ;CIMA Publishing. Collier, 2006. Risk management and accounting, CIMA PUBLISHING, 2006. WFRS 2009, stmt of accounts 2008/09 Winter, P, 2007. : Managerial Risk Accounting and Control - A German Perspective" Rasmussen 2003. Process Improvement for Effective Budgeting and Financial Reporting.  Armstrong, J, 2001. Principles of forecasting: a handbook for researchers and practitioners. Norwell, Massachusetts: Kluwer Academic Publishers Geisser, S. (1993). Predictive Inference: An Introduction. Chapman & Hall, CRC Press.  . Roger Squires, (2008), Britain's Restored Canals, 2nd Ed., Landmark Publishing, ISBN 1-84306-331-X Read More