The Financial Management System of Fire Rescue Authority - Assignment Example

Name: University: Course: Tutor: Date: Financial Management assignment Executive summary I am going to review the financial statements for your fire authority, the 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. Introduction A sound financial management system is important for an organization to maintain its survival in the market. The success and stability of Greater Manchester Fire Rescue Authority will be determined the ability of the management to manage all the financial resources of the company. To maximise the long term profitability of the company it is important that the management team should minimise the costs incurred in operational and capital investment activities. As such, the company will be able to invest in establishing new fire stations, adopting modern technologies and purchasing better equipment (Smith, 2008). Characteristics of the Great Manchester Fire Rescue Services The Greater Manchester Fire Rescue Services is a company that provides fire rescue services to different communities, both urban and rural. According to the website of the according, the company provides fire rescue services to different individuals. “From modern inner city developments to traditional mill towns, Greater Manchester is made up of ten very different districts - Bolton, Bury, Manchester, Oldham, Rochdale, Salford, Stockport, Tameside, Trafford and Wigan” (Manchesterfire, 2011, p. 1). The company has employed a large number of people and there is need to improve its performance so that more citizens can receive the services of the company (Manchesterfire, 2011). The operational boundary of Greater Manchester Fire Authority The operational boundary for the Greater Manchester Fire Authority in the financial year 2006/07 was a borrowing level of £6,998,000, there were no other long term liabilities were and the total external debt amounted to £8,998,000. In the financial year 2007/08 the estimated operational boundary for the company was an external borrowing amounting to £11,698,000 and since there was no other long term liabilities, the total external debt was £11,698,000. In the financial year 2008/09 the estimated operational boundary was estimated to contain £14,157,000 as total external liabilities while in the financial year 2009/10 the estimated operational boundary composed of £16,419,000 as the total external liabilities (Manchesterfire, 2011). The company has established a Treasury Management Policy Statement to show how it manages its borrowings and cash investments before making any annual computations. The indicators that are applied are the Treasury Management Code of Practice, interest rate exposures, the maturity structure of borrowing and the total principal sums invested for periods longer than 364 days. The company has adopted the CIPFA Code of Practice for Treasury Management in the Public Services. A summary of prudential indicators provide that the estimated capital expenditure for 2007/08 was £8,599,400, for yr 2008/2009 was 6,438,000 and for year 2009/10 was £8,038,000. The estimated capital financing requirements were £38,265,000 for year 2007/08, £39,589,000 for year 2009/08 and £40,766,000 for 2009/10 (Manchesterfire, 2011). Authorised limit proposal for Greater Manchester Fire Authority It is important to point out that the operational boundaries of the company were estimated to be below the Authorised Limit to allow for unusual cash movements. A 5% variation has been set as the acceptable deviation from the Authorised Limit to allow for such unusual cash movements in the company. Therefore, the authorised limit would indicate figures as follows: for the financial year 2007/08 the authorised limit should have been £12.5M as the total external debt, in 2008/2009 the total external debt should have been £15.0M and in 2009/2010 the total external debt should have been £17.5M (Manchesterfire, 2011). Categories of risks facing the Greater Manchester Fire Authority Transaction risk This is a risk experienced when transactions are being settled using foreign currencies. There is a risk that there may be changes in the exchange rate between the period of making the transaction and payment of the funds. Organizations dealing with international transactions encounter this risk and it should be factored in the decisions especially when engaging in international transactions. Therefore, the company is not affected by transaction risks because most of the activities are domestic. GMFRS operates within the country and most of the services are offered to the local communities (Smithson, 1998). Economic risk Economic risk occurs when the value of a business is likely to be affected by long run changes in exchange rates. There are changes in the economy which happen and cause shifts in the exchange rates and these may affect the performance of businesses in a given economy. When the exchange rates are altered businesses are affected either positively or negatively. To avoid this, companies diversify their area of operation to the international scenery. The GMFRS is a company that is affected by changes in exchange rates within the economy of the country (Smithson, 1998). Translation risk Translation risk occurs when a business is likely to be affected by movements in exchange rates and this may be caused by accounting problems. As such the reported performance of a company may be different from the actual performance. GMFRS is susceptible to translation risk because there may be some accounting errors which may affect the actual performance of the company (Smithson, 1998). Other risks facing the company are: first, trade risk which is the risk that is likely to occur when orders are cancelled by the customer. This risk cannot affect the GMFRS because the customers call when in need and they cannot cancel the delivery of services that they have requested. Secondly, credit risk is another risk that may affect the company. This risk occurs when bad debts are more likely to affect the company. GMFRS has a likelihood of this risk because some customers request services and promise to pay later. Thirdly, liquidity risk may affect the company such that there may be inability of the company to fund longer operating cycles. Lastly, physical risk may affect the operations of the company especially when some areas are not accessible. This risk may affect the company because the services are offered to people living in different regions which may or may not be accessible (Smithson, 1998). Budget proposals for Greater Manchester Fire and Rescue Authority for 2011 There has been pressure on the GMFRS to reduce the expenditure in the budget proposal for the financial year 2011. To reduce the expenditure of Greater Manchester Fire and Rescue Authority, it is important that the management should focus on key financial aspects such as wages, premises and equipment among other items. Reducing the expenditures has both negative and positive impacts. It is important that managers evaluate all the impacts of the decision they make (Manchesterfire, 2011). Decision making is a process whereby the management makes strategies t be applied in an organization for a given period of time. A strategy is adopted when there is a gap between the expected and actual performance of an organization. Organizations make decisions to solve problems facing them and to create more opportunities for achieving more opportunities. It is important that managers of an organization should liaise with all stakeholders so that they can make the best decision (Nutt, 2011). The Greater Manchester Fire Rescue Authority is encountering challenges in reducing its expenditures so that it can maintain government regulations. It is important for the organization to cut down its expenditure so that it can maintain government regulations as well as achieve its goals. As a proposal, the company should cut down the expenditures on wages and other employees’ expenses by 5 percent or cut down investing on premises and equipment. This strategy will have impacts on the profitability of the company. In addition, this strategy will have a great impact on the operational activities of the company because reducing the expenditure on wages, premises and equipment will hinder performance of some activities as well as reduce the progress for the company in the achievement of its goals (Manchesterfire, 2011). Therefore, reducing the expenditure on wages will improve the profits of the company. For example, in the financial year 2007/08 the company spent 70 percent of its income on salaries and wages, and 12 percent on pensions (employer contribution). Implementing the strategy of reducing expenditures on employees by 5 percent will lead to a 65% expenditure on salaries and wages and 7% expenditure on pensions (Manchesterfire, 2011). The impact on the proposals to cut the overall expenditure by 5% Wages Reducing the wages of employees by 5% will improve the profitability of the company. Wages account for a large portion of the expenses of a company and it important for an organization to reduce its wages to avoid excess costs. The expenditure on wages can be reduced by cutting down the wage rates and other employee related costs and retrenching some employees. To improve the performance of the company, the management team of Great Manchester Fire Rescue Authority should consider either reducing the number of employees or reducing the wage rates of all employees. By adopting this strategy the company will be able to improve the performance of all departments as well as reducing excess costs (Wagner & Hollenbeck, n.d.). On the other hand, cutting the overall expenditure will have an adverse impact on all the activities of the company. For example, reducing the wages of employees will de-motivate them from improving their performance. According to Henry Fayol, money is a motivator and when the remunerations are reduced employees tend to reduce their performance. High rates of employee turnover will be experienced when the company embarks on a strategy to reduce the wages. There is also a high likelihood for strikes to occur in the organization when the wages are increased or when working hours are increased (Wagner & Hollenbeck, n.d.). Equipment Reducing the expenditure on equipment will improve the profitability of the company because capital expenses will be improved and the profit will be improved. To ensure that the company reduces the costs incurred in equipment, the management can avoid investing in new equipments. A 5% reduction on the expenditure incurred on equipment is only possible when there are limits on the number of equipments purchased in a given financial year. On the other hand, reducing expenses on equipment may reduce the productivity of the company. Provision of fire services requires the use of equipments which are in good service and this will require the company to embark on purchasing new equipment to replace the old ones. Premises Another strategy of reducing the overall expenditure is to focus on cutting down the expenses incurred on premises. To avoid incurring excess costs it is important for the organization to focus on reducing the costs on fixed assets because. Premises can only be expanded when there is need to increase the output of the company. On the other hand, there is negative impact of reducing expenditure on premises. Premises are important in developing new products and reducing expenditure on these assets will have a negative impact on the competitiveness of the products manufactured by the company. For the financial year 2007/08 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% Therefore, in the financial year 2007/08 GMFRS did operate within recommended safety margins. This is because the recommended safety margin is 5% while the company operated at 6.5%. This shows that the safety margin of 6.5% is greater than the recommended 5%. It is recommended that the company should operate at a safety margin above 5% (Manchesterfire, 2011). For the financial year 2008/09 For GMFRS, the operational boundary = £14.157M The authorised limit = £15.0M The proportion of authorised limit used = operational boundary/ authorised limit = 14.157/ 15.0 = 0.9438 Therefore, the safety margin = 100% - 94.38% = 5.62% In the financial year 2008/09 GMFRS did operate within recommended safety margins. This is because the recommended safety margin is 5% while the company operated at 5.62%. This shows that the safety margin of 5.62% is greater than the recommended 5%. It is recommended that the company should operate at a safety margin above 5% (Manchesterfire, 2011). For the financial year 2009/10 For GMFRS, the operational boundary = £16.419 The authorised limit = £17.5M. The proportion of authorised limit used = operational boundary/ authorised limit = 16.419/ 17.5 = 0.9382 Therefore, the safety margin = 100% - 93.82% = 6.18% Therefore, in the financial year 2009/10 GMFRS did operate within recommended safety margins. This is because the recommended safety margin is 5% while the company operated at 6.1%. This shows that the safety margin of 6.1% is greater than the recommended 5%. It is recommended that the company should operate at a safety margin above 5% (Manchesterfire, 2011). Discussion It is evident from the above computations that the company has been operating above the safety margin for the financial years 2007/08, 2008/09 and 2009/10. This is an indication that the operational boundary of the company should be increased to enhance more accountability. Increasing the authorised limit from 5% to about 6% will make the management team more accountable as well as improving the [performance of the company. To ensure a company is growing and no stagnation is experienced within a given period of time, it is important to increase the performance targets so that the management team can continue improving their skills. Conclusion GMFRS is a company that offers fire and rescue services and there has been a great need to improve the operations of the company. The decision to cut down the costs has both positive and negative impacts on the performance of the company as well as the long-term sustainability. It is important that the management of the company should consider maintaining the performance of the employees by adopting another strategy of reducing costs on wages rather than cutting down their wage rates. Expenditure on equipments and premises can be reduced as a short term decision so that the company can have a better chance to expand its operations. Bibliography Manchesterfire (2011). The Greater Manchester Fire Rescue Services. http://www.manchesterfire.gov.uk/ Nutt, P. C. (2011). Making decision-making research matter: some issues and remedies. Management Research Review. 34 (1). Smith, J. S. (2008). Statement of Accounts 2007/08, Greater Manchester Fire and Rescue Authority. Retrieved January 15, 2011 from; www.manchesterfire.gov.uk. Smithson, C. W. (1998). Managing financial risk: a guide to derivative products, financial engineering, and value maximization. New York, NY: McGraw-Hill Professional. Wagner J. A. and Hollenbeck, J. R. (n.d.). Organizational Behavior – Securing Competitive Advantage. Retrieved January 20, 2010 from http://karlknapp.com/resources/management/organizationalbehavior.doc Read More