Financial Management for Greater Manchester Fire and Rescue Service - Case Study Example

GMFRS FINANCIAL MANAGEMENT NAME COURSE Introduction This report reviews the 2009/10 financial statements for Greater Manchester Fire and Rescue Service to facilitate an assessment on the authority’s financial management. Towards conducting this assessment, the report narrows down to the authority’s financial structures, controls and systems that have a significant impact on strategic decision making. This is in the wake of a government proposal to cut overall spending by public entities by 5 per cent. Additionally, the report evaluates the operational boundary and the authorised limit set proposals for the Fire and Rescue Services as well as calculating the safety margin of the Operational Boundary to the Authorised Limit. On the other hand, this report assesses whether the identified financial risks have been recognised in the financial statements as a way of risk identification that results to risk mitigation and/or avoidance. Having assessed and critically evaluated the financial structure, control and systems, rational recommendations have been made as a guide towards improving financial management policies to complement the proposed budget cuts. Overview As a public entity, sound financial management ensures service delivery as well as improve the authority’s financial performance and capability to meet its goals and objectives (Wang 2010, p6). The authority’s senior management oversees the establishment of financial goals that complement its basic operations as well as other requirements from the stakeholders. Brigham and Houston (2009, p44) state that, prudent financial management assists in:- Enabling long-term planning in terms of making investments that do not interfere with the authority’s basic operation The acquisition and disposal of assets such as new fire stations, equipment and fire-fighting technologies by deploying the modernisation strategy to optimally utilise the available resources Ensuring the authority’s staff are adequately protected given the risky nature of their work As nations seek to emerge from the global economic crisis, the UK Government requested public institutions to cut their spending by 5 per cent as it sought to reduce their public spending. This directive affected the fire authorities that draw their basic funding from the central government. As a result, Great Manchester Fire and Rescue Authority (GMFRS) has identified various operational areas that will be affected by budget cuts as it streamlines it operations to adapt to the directive. Therefore, the authority has narrowed down to three major areas namely human resources, premises and equipments. 3.0 PROPOSED BUDGET CUT AREAS 3.1 Staffing Cuts With a population of over 2.5 million inhabitants, GMFRS employs over 1,960 staff members distributed across the 39 stations to ensure prompt response to emergencies. According to the FRS’s 2009/2010 performance plan, the FRS has 1911 whole-time fire fighters and another 39 on retained duty terms (2010, p9). Additionally, the FRS has 419 non-uniformed staff working on control, training and other relevant services. Included in the proposed budget cuts is the reduction in the number of fire stations and appliances hence a change in the crewing system from whole-time to retained crewing staff (Performance Plan 2010, p17). With 68 per cent of the FRSs budget is spent on staffing costs, a review of crewing systems and appliances is most likely as the FRS seeks to reduce expenses associated with the support function by £1.6m (GMFRS 2010, p8). GMFRS annual staff costs are pegged at £83.5m and the FRS seeks to reduce this amount in response to increased budget cuts as well as savings objectives. With the proposed cuts in the authority’s staffing requirements, the authority can increase its savings by:- How Impact Reduce Impact 1. Re-evaluate the authorities staffing requirements and reduce the number of whole-time fire fighters to retained duty system Possibility of facing resistance resulting into go slows and strikes Develop flexible work policies where employees are able to earn more for working more Prepare the employees in advance to the looming lay-offs to enable them plan ahead 2. Reduce Employees Benefits such as trainings and unnecessary free medical camps Reduced morale among the employees with the possibility of experiencing massive move-outs to other Authorities Reassurance from the senior management that the authority seeks to derive value for the tax payers money Hire qualified professionals and hence little need to embark on training programs 3. Outsource or increase temporary employments Lack adequate and skilled personnel to execute the authority’s responses to emergencies Collaborate with local education institutions to offer tailored courses as the authority grants the students exposure as fire men 4. New effective approaches to human resource management within the authority has paid off through the implementation of new policies such as Installation of monitoring systems to ensure smooth internal processes Development of attendance standards towards improving emergency response times This is in line with the authority’s objective of acquiring more resources through partnerships and utilising them on the authority’s core operations. The authority has witnessed a reduction in the number of working days/shifts lost due to staff illnesses. Management systems within organisations enhance control and utilisation of available resources as well as safeguard the core business operations (Brigham & Houston 2009, p79) 3.2 Equipment As the authority seeks to meet the needs of the community and improve the internal business processes, the authority has increased its acquisition of fire fighting equipments to complement the looming staff cuts. From the authority’s financial statement, £4.533 million has been incurred under capital expenditures that are mostly in the acquisition of equipments, vehicles and pumping appliances (2010, p10). A breakdown of the premises and equipment section of the budget identifies 4 major categories namely:- Equipment and Supplies Communications Information Systems Transport The first 3 categories have witnessed significant increment from the 2007/08 actual expenditures, an indication of the restructuring within the authority. To improve service delivery and resource utilisation, the authority has embarked on computerising its operations hence the increase in budgetary allocations for information systems to a tune of £1.349m. Notably, vehicles and operational equipment account for a major chunk of the budgetary allocation as their costs have been forecasted for the next 3 years. How Impact Reduce Impact 1. Gradually modernise the existent equipment vis-a-vis technological advancements Increased capital expenditures as well as staffing costs due to the requirement of skilled labour Due to increased efficiency in service delivery, increased revenue are expected to rise above the incurred costs 2. Undertake new acquisitions via capital leasing where capital expenditures are spread over a 3-year duration Risk losses especially where the capital assets are destroyed prior to the completion of the acquisition Place adequate insurance cover to ensure the safety of the equipment over its life-time. Additionally, the insurance cover should serve as an investment 3. Embark on equity financing through private partnerships Divert the authority’s attention towards the achievement of its objectives due to the large number of stakeholders Conflicts of interests Ensure that the stakeholder’s interests are complementary as improving partnerships is among the authority major objectives Towards ensuring prudent financial management practices, the GMFRS has adopted a stock management system that ensures stock costs related to the authority’s supplies are maintained at a minimum. In response to the looming budget cuts from the central government, the authority can exploit other financing options such as lease agreements that enable the authority generate revenue from the equipments while still paying for acquisitions (Wang 2010, p91). 3.3 Premises The authority’s capital programme seeks to ensure that premises are acquired in a financial responsible manner to serve as dispatch centres for the FRA’s operations. Besides the acquisition of property, other costs include property maintenance activities, utilities and land rent and rates. Compared to 2006/07, the FRS has reduced its capital spending on premises by almost 50 per cent. The acquisition of premises enables the FRS to benefit over a long period of time without incurring major expenditures. To reduce operational and acquisition costs on premises, the authority has embarked on the following:- How Impact Reduce Impact 1. Shut Down less active operation centres or shift to less expansive offices Increase emergency response times to incidents Inhibit on service delivery Continuously gather intelligence reports on such areas to ensure adequate preparation to incidents Deploy mobile patrol units to assess ground situations within the areas 2. Regulate the utilisation of water and electricity within the premises Due to frequent interruptions, this could result into false alarm within the stations or even failure in the functioning of the fire alarms Regular checks should be conducted on the condition of the alarm and warning systems within the station Premises are fixed assets and provide service to the authority for a number of years and hence their net book value is expected to reduce with time. Therefore, the depreciation charged to the balance sheet will reduce concurrently and this will increase the authority’s surplus as well as the amounts appropriated to the reserve account (Brigham & Houston 2009, p167). Additionally, outsourcing its first responder’s service to local rescue companies can serve to reduce operational budgets especially where the safer communities programme is a success. Towards the acquisition of premises, the authority has the option of using debt as a financing instrument. This is because the premises are to be utilised over a period of time and the authority has the capability to spread forward the associated costs. However due to the volatility of the economy, the authority is likely to face flexible interest rates that are determined by the inflation rates among other economic factors. To manage the interest rates, the authority can utilise futures and/or option that have a more stable interest rates and highly liquid (Wang 2010, p66). 4.0 RISK AREAS AND SUBSEQUENT CONTROLS TO MITIGATE THE RISKS With the proposed budget cuts mainly affecting the authority’s operational areas, the authority is further subjected to operational risk. These operational risks arise from the authority’s probable inefficiency in service delivery. Effective internal control systems are appropriate in the management of operating risks and the authority should conduct regular reviews on performance (Brigham & Houston 2009, p84). Additionally, to mitigate operational risks, sufficient skilled staff should be recruited and match the authority’s skill requirement profile. Arising from the operational risks are the funding risks that occur due to the inability of the authority to achieve its objectives. As a result, the authority will have to depend on the government’s funding as investors and other partners will be hesitant to cooperate with the authority due to its inability to achieve its objectives. Wang (2010) suggests that in setting financial targets, the authority should review their previous financial performance and identify how much the management can achieve with the available funds (p59). To safeguard their public-private partnerships, the authority should ensure effective communication with the stakeholders to avoid the lack of funds. Additionally, the authority’s IRMP should take into consideration future capital expenditures to ensure the availability of sufficient funds. The authority also faces liquidity risks due to the interruption in forecasted cash flows arising from the interrupted service delivery. Towards mitigating the liquidity risks, the authority should ensure that its reserves are adequate and maintain rapport with financial institutions to enable them to meet contingencies (Brigham & Houston 2009, p101). To avoid liquidity risks, the authority ought to establish specific kitties where amounts associated with various projects are placed. These enables the authority to distinguish the funds required for day-to-day operations and funds for capital and other expenditures. However, the authority faces credit risks especially where the authority is unable to adequately finance its operations. These risks can be mitigated by conducting credit profiles of the authority’s debtors thereby controlling overdue accounts. Additionally, the authority’s borrowings should comprise of a balanced mixture of debt and equity financing. Where debt financing is utilised, a mixture of floating and fixed interest rates should be sought by utilising financial tools such as swaps, options and futures (Wang 2010, p91). Recommendations The reduction in the 3 identified areas has an overall impact on the authority’s financial structure. This arises from the risks that the authority faces from the looming budget cuts in the 3 areas. To mitigate the risks, the authority ought to embark on risk avoidance, reduction and transfer (Brigham & Houston 2009, p19). The risk strategies are particularly useful with the supplies and equipments such as placing insurance covers and installing sprinklers at the shared warehouse. Despite an increase in insurance costs, it is an important risk strategy as it protects the authority from incurring heavy losses. To benefit from the bulk supplies, the authority’s management should seek to collaborate with other fire authorities in securing stock supplies. Notably, the authority was able to reduce its actual expenditure by 3.5 per cent compared to the budget estimates (Smith 2009, p24). This arises from improved internal processes especially training costs, communication, transport and professional support costs. Due to the increasing trend into the use of long-term borrowing especially from the Public Works Loan Board, the authority should embark on private investments via venture capital or private placement in order to secure its capital spending. Additionally, the authority should consider finance leases for the acquisition of premises and instead embark on capital leases as they are expected to provide service to the authority over a long period of time (Wang 2010, p65). References Brigham, F Eugene & Houston, F Joel (2009). Fundamentals of Financial Mgmt. Cengage Learning, Denver. Smith J David (2009). Greater Manchester Fire & Rescue Auth: Revenue & Capital Budgets 2009/10. Retrieved from < http://www.manchesterfire.gov.uk/media/40245/capital- revenue-budgets2009-10.pdf > on 3rd February 2011. Greater Manchester Fire and Rescue Authority: Statement of Accounts 2009/10. Accessed from < http://www.manchesterfire.gov.uk/media/68567/statement_of_accounts_2009- 10.pdf > on 23rd January 2011 Smith J David (2007). Greater Manchester Fire & Rescue Auth: Medium Term Financial Strategy 2007-2010. Accessed on 3rd February 2011 from < http://www.manchesterfire.gov.uk/media/40245/capital-revenue-budgets2009-10.pdf > Wang, Xiaohu (2010). Financial Management in the Public Sector: Tools, Applications & Cases. M.E Sharpe, Cambridge. Read More