The Optimal Financial Structure of the Great Manchester Fire and Rescue Services - Literature review Example

THE GREAT MANCHESTER FIRE AND RESCUE SERVICES By (Student Name) In essence, the public service exists primarily to offer services for the community whether that community is individuals, families or a wider community in general. In addition to this community service role however, most public service organisations can trade for profit but this is not usually a primary objective. Critical to this assertion is the fact that most, if not all public services are funded from taxation or from rates or community charges that are independent of the amount of service consumed by individual payers (Chan and Xiao, 2009). This then calls for the greatest responsibility and efficiency in terms of financial management which must be enhanced by detailed and rigorous planning to avoid instances of surplus and misappropriation that have been synonymous with the public service since time immemorial. It is against such background that issues of financial structure, systems and controls are significant in handling public finances efficiently and effectively. Many are the business commentators that have lent credence to an organisation’s financial structure as the pillar of any firm’s integrity. The reasoning behind this rationale is the fact that a firm’s financial structure forms the backbone that provides the capacity to withstand not only the forces of economic nature but also the self-imposed forces. This is even more important in the current economy that is caught in deep financial and political uncertainties. Consequently, any keen creditor will first look at a firm’s financial structure when evaluating an enterprise. In the wake of such an assertion, financial commentators have argued that the more leverage an entity has, the greater is the risk (Hackel, 2010). This then calls for the setting of financial structure on a firm foundation. Hackel (2010) has argued that if the financial structure of a firm has not been built on a solid ground, there arises a marginal turn of events that can put the health of an enterprise at a risk. Under such a risk, the ability of such an entity to satisfy claims, including fixed obligations, becomes questionable. This was the case for many organisations during the 2008 global financial crisis that saw many of them recess into liquidity and insolvency. The main cause of this was in part due to the inability of their respective financial structure to withstand the forces of the economic turmoil. A classical example to this is the Lehman Brothers Company that collapsed during the financial recession of 2008. For almost 151 years, the Lehman Brothers Company had survived through the hardest of times that the business environment was predisposed to then ranging from political animosity to deep recessions. However, by deciding to include the riskiest of all financial instruments on its balance sheet i.e. buying and financing real estate, the company was driven out of business when the real market estate collapsed in the wake of the global economic recession. According to Hackel (2010), this failure can be attributed to the fact that the financial structure of the company that had been profitable for such a long time could no longer accommodate the immense strain of the risky assets to which its management had exposed it to. Common for many entities has been the over capitalisation of their financial structure. These entities that overly capitalise their financial structure often brace themselves for a sudden and swift negative turn of events. This puts them in a position to buy time and take advantage of its competitors’ weakened market conditions. Such entities can also gain market share or severely weaken their competitors for instance through the setting of pricing conditions that its weakened competitors cannot afford to match profitably. However, overcapitalisation has its costs in the form of foregone free cash flow. This free cash flow is based on the returns of lower-yielding cash assets versus anticipated achievements had the cash been invested in value-enhancing investment (Hackel, 2010). It is on such a backdrop that Hackel (2010) has observed that most financial executives shy away from significant overcapitalisation on the basis that a larger than necessary equity cushion has the potential of harming a firm’s financial ratios. In addition to this risk of overcapitalisation, the yield on cash is unpredictable besides to not being the purpose for which the organisation was founded. The establishment of financial structure therefore becomes phenomenal in the finance of assets which the inclusion of debt and equity issues. To this end, it is quite clear that the optimal financial structure is established on the basis of a firm’s ability to predict its cash flows accurately. For cases where an organisation lacks this foresight, the financial structure must be set by its ability to withstand a probable worse-case scenario. In the current business environment, such a probable scenario is no longer occurring at a hundred-year frequency but rather comes around all too frequently (Hackel, 2010). Financial structure thus plays an integral role when making capital decisions and financial executives and investors frequently weigh different business facets in making these decisions. Hackel (2010) has pointed out that business risk, leverage and cost of capital has been frequently considered by financial executives in making capital decisions. It therefore becomes incumbent on the investors to also weigh the rewards and risks with the purpose of setting a required return for the cash they are considering to invest. There may arise a scenario whereby the returns on invested capital (ROIC) is greater than the cost of capital for a project. In line to this, Hackel (2010) has asserted that the firm’s cost of capital could very well decline by increasing its leverage. It is also important to note at this moment in time that financial structure’s stability on the balance sheet is not long-run. The firm’s financial structure that is portrayed by its balance sheet becomes outdated a moment after it is prepared. The reason for this the value of a firm’s assets and liabilities shifts with the respective markets, the company’s clients’ business and financial conditions. Consequently, errors on forecasts or shifting industry conditions are detrimental to the optimal financial structure. Considering the case of the Lehman Brothers Company which had a conservative financial structure including interest-charge coverage, its reasonable financial structure became onerous as the company’s business failed to meet expectations. The only way out of such a situation is for financial analysts to be able to go over the board in an event that additional capital is needed and where, how and at what cost that capital could be raised (Hackel, 2010). Financial structure deals with asset financing including debt and equity issues. It therefore follows that a financial system has to exist to facilitate the transfer of financial resources as well the allocation of the same into the economy. The financial system plays a key role in the smooth and efficient functioning of the economy. Fundamental to this role is the channelling of resources from individuals and companies with surplus resources to those with deficits and therefore acting as an intermediary between the same. This translates to the system not only satisfying the savings needs of the economy but also facilitates the accumulation of investment capital that is critical to growth and development (Charmichael and Pomeileano, 2002). It is therefore clear that the financial system is fundamental in the allocation of funds to their most efficient use amongst competing demands. Nevertheless, the primary function of the financial system is to match the needs of primary issuers of financial promises with the ultimate holders of the provisions. Toward this end, the system provides the framework within which these promises are created and exchanged. As these systems continue to develop in sophistication, specialist financial institutions have evolved that intermediate the promises between issuers and holders. Most of these institutions essentially change the nature and risks of the primary promises (Charmichael and Pomeileano, 2002). Having transferred and allocated financial resources into the economy, financial control becomes critical for the purposes of managing a firm’s costs and expenses in relation to budgetary allocation. Financial management and control issues in the realm of the public sector have gained prominence in recent years with cuts in public expenditure appearing to be the driving force behind these emerging issues. In addition, fraud and waste in the public sector have also intensified public sector accounting, reporting and auditing. Under such circumstances, public authorities are now under intense pressure to maintain services with real money. In order to accomplish this taunting task, these authorities have had to improve their financial analysis so that the actions can be taken to improve efficiency and value of money (Henley et al., 1989). This situation has been aggravated by the source of funding for these public authorities. Ideally, the funding of most public service is controlled by central governments by way of annual cash-spend allocations that have been commonly referred to as ‘cash limits.’ The most important task for financial management in cash-limited service is to assist the other managers to meet their operational objectives and scope with funding new developments and expected contingencies while at the same time completing each year within the totals of the cash limits. This therefore translates into having some form of foresight of the likely cash limits in time well advanced in the internal budgeting before a new fiscal year begins. This thus makes close monitoring and control of cash critical at all times even though it can become doubly critical for fine-tuning to balance to the cash limit targets close to the year end (Chan and Xiao, 2009). A budget has been long established as a key performance indicator as it targets can be reviewed to identify any deviation from revenue or expenditure forecasts. In addition to budgets, cash flow can also be used as a performance indicator and for financial control of an event. A budget system is therefore very important to organizations making a budget a key element of the management process in the organisation. This is so because it aims to improve the overall organisation performance in terms of the quantity, quality and cost of services provided and show how plans for change are to be implemented (Prowle, 2000). As budgeting system continues to be major financial control instrument, current happenings in the global economy have shifted budgetary allocations. Key to these has been the proposals to cut government spending in an effort to check budget deficits and revive the economy. These spending cuts by governments have been directed at public services that pool their financial resources from the treasury. Inasmuch as spending cuts are increasingly a financial control choice, it is important to outweigh the impact of the same on the public services. Following the general election, the central government has proposed spending cuts by 5% in its efforts to revive the economy and reduce annual budget deficits. Given the fact that the Fire and Rescue Services is a beneficiary of public funding, the service will ultimately be affected by this budget cut proposals on its operations. The most obvious impact will be limited cash flow which means that the service will be strained in providing its services to the community. This will force the service to operate under constrained financial conditions that are contrary to the previous allocations hence impacting on its major operations. In practice, the major areas that will be affected by the cuts will be human resource, technological advancements, prevention and response services as well as community outreach programmes. All these areas require adequate funds to be sustained and limited funds may result in layoffs and suspension of new advancements and developments that would otherwise be critical in increasing the service’s efficiency. However, the limited cash flow to the service will have, to some extent, a positive impact on the sense that the service management will be forced to adequately and efficiently plan on how to utilise limited funds while at the same time meeting the community demands. This will be essential especially in reducing surpluses within the service. Over the years, public services have been wrought with cash surpluses at the end every fiscal year that accounts for unutilised funds. Unfortunately, these surplus are not carried forward to the next financial year but are rather returned to the treasury. This phenomenon has been brought about majorly by the service managers’ failure to set priorities on how to utilise the public funds they procure from the central government. With cash limits, the Fire and Rescue Service management will be obligated to adopt management accounting practices that will involve the formation of internal reports at prescribed times so that performance can be reviewed thus aiding decision making. As a consequence, the service will experience an efficient way of resource allocation and utilisation which will in turn shift its focus on more important activities that have value for money. At this juncture, it is necessary to consider the areas that will need cuts in expenditure to accommodate the limited cash flows. The first probable area for potential cuts will be the service workforce by freezing temporarily all non-urgent staff vacancies. It is such a brilliant idea for the fire and rescue service to have a diverse and all inclusive workforce but it is not wise to make such a move under limited cash flow and if recruitment of new staff is not a priority. By freezing unnecessary employment, the service can divert the funds aimed at paying new staff to the development of a key priority area such as technology or risk management. The outcome of this freeze will impose a burden on the service’s staff and in effect affect the delivery of fire and rescue services to the community. However, the service’s proposal to effectively and efficiently roster managers and employees as well as the proposal to employ different groups of staff on different terms and conditions will be essential checking workforce deficits and work loads. In addition, the use of volunteers will assist in filling deficits at no huge costs while partnering with other organisations will be critical in the sharing of resources. The second area for cutting expenditure will be community outreach programmes on fire safety education and advice. This action will result in cost savings for the service but will also lead to potential increase in fire incidences given that community members will lack the necessary skills to prevent and control fires. Even though such programmes are effective fire prevention strategies in creating awareness among the community, the service can collaborate with companies and learning institutions to provide the same to their staff and students respectively. In doing so, the service will be able to cost share and transfer the monies intended for these programmes to other priority areas. The third area for cutting expenditure will be in the development of community safety services that are bespoken for vulnerable groups. This will be accomplished by delaying start-up staffing of the new service development. The obvious impact of this expenditure cut will be saving costs which can be converted into operational capital for other critical developments. The outcome of this action will be increased danger and risk for the vulnerable groups. However, by implementing the new plan for the vulnerable groups in phases instead of wholesome implementation, the service can be able to accomplish its intended plans in the long run. Following the spending cuts, it is expected that some areas of operation for the service will be at a greater risk. Firstly, there will be increased risk to risk management risk methodology in terms of response to terror threat and consequences and threats of climate change. These two are unexpected disasters that require adequate planning and resources. Search and rescue services in terror attacks, in flooding and other adverse weather conditions require sophisticated risk models, computer programmes and professional expertise to make early warning and disaster management effective. However, these activities require enormous amounts of money and expertise to guarantee success especially in the area of communication technology. With spending cuts eminent, it is clear that these services can not be maintained under limited cash flows. The good news is that there are other firms that have been in the market for a long time offering search and rescue services. Probably, these firms have a well developed infrastructure for offering these services including the military. Therefore, since this will be a new venture for the fire service, it will be wise for the service to collaborate with other firms providing the same services. This will help in the pooling of financial, human and material resources together hence minimising expenditure on the provision of search and rescue service. However, to curb instances of conflict of interests between the collaborating services the service must outline the areas of collaboration and spell clearly the role to be played by each party. Secondly, environmental sustainability will be at a greater risk given the fact that environmental management initiatives requires highly experienced staff, equipment and financial resources. In its endeavour to minimise emission of carbon dioxide, the service will require investing heavily in efficient engines as well as investing in green energy and minimise over extraction of water resources used for fire fighting. With limited funds, the service may not be able to meet its carbon emission targets including the construction of green fire stations all of which will be detrimental to global climate such as flash floods and storms that the service intends to fight in the first place. The service can only achieve this by pooling resources from non-key areas as well as mobilizing more resources from partners and devoting them to environmental management. Moreover, the service can collaborate with sewer plants to supply it with recycled wastewater for fighting fire to avoid depletion of clean water. Lastly, cutting expenditure on community outreach programmes will water down the service’s fire prevention programmes that are viable and cost effective. Having a population that has no idea on the basics of fire management is a disastrous affair hence making community awareness and mobilisation key in preventing fire accidents and other arson activities that are a consequence of antisocial behaviours among the disengaged youth. This can however be countered by the use of well trained fire service volunteers in increasing awareness amongst vulnerable groups with the aim of changing their risky behaviour. Additionally, these volunteers can provide individuals in communities, schools and workplaces with life skills on how to manage minor fires without necessarily having to place a call for emergency services. REFERENCES Carmichael, J. and Pomelleano, M., 2002. The development and regulation of non-bank financial institutions. Washington, D.C: The World Bank Chan, L. J. and Xiao, X., 2009. Financial management in public sector organization. In: A. G. Bovaird and L. Elke, eds. Public management and governance. 2nd ed. New York: Routledge. Pp109-118 Hackel, K. S., 2010. Security valuation and risk analysis: assessing value in investment decision. New York: McGraw Henley, D., Holthan, C., Liklerman, A. and Perrin, J., 1989. Public sector accounting and financial controls. London: Van Nostrand Reinhold Prowle, M., 2000. The changing public sector: a practical management guide. Hampshire, England: Gower Publishers Read More