Lincolnshire Fire & Rescue Service Performance - Case Study Example

FINANCIAL MANAGEMENT FOR LINCOLNSHIRE AND MANCHESTER RESUE AUTHORITY. NAME: Alfandi Almazrourei Abstract I have received and assessed the Lincolnshire fire & Rescue Service (LFRS) performance for three years from 2008, 2009 and 2010 budget. All the three years LFRS county council has been performing within the budget limit with no deficit. I have also gone through the audited financial statements, the balance sheets, the income and expenditure statement and cash flow. All of them reflect a fair view of performance of the council although the cash flow reflected a deficit which needs some improvements. This has reflected sound financial management have been undertaken to ensure proper flow of internal process in providing services to the public as is required of them. TABLE OF CONTENTS Introduction 1.0 Setting the operational boundary 1.1 Main consideration of L FRS 2.0 Calculation of the operational boundary 3.0 Characteristics of LFRS vs. GMFF 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 Lincolnshire Fire and Rescue Authority by analyzing their financial statement as well as discussing major financial risks areas with their impact on the organization operation .The report shall conclude on the findings as whether Lincolnshire fire and rescue Authority finance operation shows a fair view and whether the code of practice on the Local Authority Accounting in the United Kingdom as been followed and financial reporting standards to the local authority account has been applied. Financial management policies and procedures of Lincolnshire must ensure that funds are well managed to meet the required needs at minimum costs and risks are reduced ensuring proper investment decisions are made. The finance manager is supposed to release the report for the public domain. 1.0 Setting the operational boundary For any activity which requires cash expenditure, a budget needs to be drawn for effective management. A budget is normally prepared in advance from the total money expected as income and out of it the total expenses are analyzed and allocated against that income. The budget has to be authorized by the management for it to be used in the organization. This means that income has to be known in advance and expenditure including capital for investment decisions. An effective budget should have a control system on spending. A budget includes investment decisions which have to be factored in as either capital expenditure or short term investments. One of the control system applied by the Lincolnshire Fire and Rescue service (LFRS) in their financing operation is the application of a strict budget. By setting an upper limit of the budget LFRS is able to be in control over their spending during the year and remain within the sustainable level of operation .They are able to make sound investment decisions as well as distributing their resources equitably well. (Terry Lacey2003,p.152) 1.1 Main consideration of Lincolnshire Fire and Rescue Authority The main consideration or sources of income of the council comes from the following; General grants which accounted for 19%. The effect of this increases the council’s income. Council taxes which account for 21%, specific grants which account for 49%, charges and other income which account for 11% so income generated is 100%. The report indicates that the council attracted about ₤ 26.7 million of external funding in competition with other bidders across the country and a further ₤ 17.6 million in grant funding from the European Union. The FRS has actually accommodated all the figures and this can be traced on page 5 of the statement of accounts. The distribution of these expenses has been clearly shown in the financial statement of FRS page 4 and 5. According to the revenue budget of 2008/09, of the LFRS and comparing the actual and the budgeted figure, on page 6 the report shows there was under spending as compared with the approved budget of the council. The report indicates also the council had sufficient cash savings and also maintains a general reserve account as a contingency against unexpected events or emergencies. The council has a sound budget based on known levels of income (statement of accounts page8) and together with a prudent level of reserves to manage any financial challenge. 2. 0. Calculation of the operational boundary The proportion is given by = operational boundary / Authorized limit as follows: 31.3.2008 Estimated boundary, = ₤11, 698, 000/₤12, 500, 000*100 = 93.584% Safety margin is 100%-93.584% = 6.416% Recommended Authorized limit is 5% Therefore LFR operates within the recommended safety margin. 31.3. 2009 Estimated boundary = ₤14, 157,000/₤ 15,000,000*100 = 94.38% Safety margin =100%-94.38% = 5.62 %, Recommended Authorized limit is 5% Therefore LFR operates within the recommended safety margin. 31.3.2010 Estimated boundary=₤16, 419, 000 /₤17,500,000*100= 93.822% Safety margin=100% -93.822% = 6.177%, Recommended Authorized limit is 5% According its future forecast, the authority will operate within its limit and this indicates better utilization of the funds. 3.0 Characteristics of Lincolnshire Fire & Rescue Service VS Greater Manchester Fire Fighter (GMFF) The fire and rescue services authority is responsible for ensuring that its business is conducted in accordance with the law and proper standards, public money is safeguarded and properly accounted for. The governance framework is operating as intended and they are doing the right things for the people in an honest way. GMFF, has failed to address the risk associated with water rescues. Fire fighters had no training on water rescues, no operating procedures had been developed for water rescues and no proper equipment by 1998 where the assessment carried out ranked water rescue as a moderate risk hence so many fatal cases. 3.1 Major Risks 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. LFRS is operating on maturity phase and the product here is most viable. LFRS should consider on improving or diversifying its products to meet the growing competitors’ market. 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. The LFRS 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. The example of political risk can be legal frame work like compliance to state law office and annual returns. The Government taxation policies can be a risk to Local Authorities that is by increasing local licenses this can discourage investment or lead to tax evasion. The LFRS council has got a well established governance framework to ensure that local people and other stakeholders are involved in decision making process; this will ensure transparency, accountability, sustainability and competitiveness in Local Authorities ensure increased efficiency and effectiveness in the LFRS Authority. 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 LFRS has minimum business risk as it has readily access to borrowing from money markets to cover day to day cash flow need. It acts as a lender to the last result to other council therefore there is no significant risk that it will be unable raise finance to meet commitments under financial instruments. 3.1.5 Financial risk: A company 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. The LFRS 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 LFRS company, their core activities are centered in minimizing physical risks. Through safety standards, Insurance and medical cover for employees, awareness through training and conducting seminars to staff. 3.2 High risk areas with FRS The Authority is exposed to a range of financial risks: 3.2.1 Credit risk: The Company is exposed to credit risk which is the risk that a counter party may be unable to pay amounts due to the council of LFRS. According to the financial statement report of LFRS, credit risks arising from deposits with banks and financial institutions and also councils customers. The council is faced with credit risks from AAA rated counter party up to 23.92% as at 31.3.2009. AA rated counter parties up to 55.39%, A rated counter parties up to 12.28%, others 8.40%. However, due to the exception set of circumstances in the global financial markets that have occurred during the reporting period the financial institutions fairly met the councils minimum investment criteria hence the council was able to evade from credit risks. The council also does not generally give credit to the customers hence are risk free from this group. Comparing the debt age analyses, the oldest debt is 19.62% of which more than a year as per page 49 of the financial statement. Generally, the credit risk given the results of the audit does not have a financial impact. However failed Icelandic bank which the council had invested in 2008 fell below the councils minimum investment criteria during the year 2008 at which time the investment made to these banks ceased and according to the audit report the council had no investment exposure to any Icelandic Bank at the time of their collapse late 2008. (Page 49 of financial statement), hence this only affected prior period not the current. 3.2.2 Liquidity Risk: Is the risk that the company may be unable to meet its payment obligation as and when they fall due Hachmeister, (2007). According to FRS, financial report the council has ready access to borrowings from the money markets to cover day to day cash flow needs. The council is also required to provide a balanced budget through the local government finance Act of 1992 which ensures sufficient monies are raised to cover annual expenditure. According to the report of LFRS, there are no significant risks that it will be unable to raise finance to meet its commitment when they fall due. This is due to the fact that the council manages its liquidity position through the risk management procedures as well as through cash flow management procedures required by the code of practice. This has clearly been accommodated in the financial report page 50 hence indicates strong internal control procedures are strictly followed to manage liquidity risk. 3.2.3 Market risk: being one of the components of financial risk, mainly comprising of the interest rate risk, price risk and currency risk. Market risks are risks that the value of those investments may reduce their value as a result of factors that may be affecting the market. Charles, (2004). 3.3.3.1 Interest rate risk; it arises from investment in fixed interest securities, fluctuation up to the reporting date of financial statement. The council is exposed to interest rate on borrowings and investments which have a big impact on the council especially, a rise in interest rate would increase interest expense charged to income and expenditure account at variable borrowings. However, the council has a number of strategies for managing interest risk where the annual treasury management strategy draws the council’s prudential indications and its expected treasury operations including an expectation of interest rate movement. This has been recognized in the notes on page 51. 3.3.3.2: Price Risk: The company is exposed to equity securities price risk that the price may decline as a result of owning quoted equity investment normally referred to as available for sale and traded on a stock market. The council of LFRS does not generally invest in equity shares and is therefore not exposed to losses arising from movements in the price of shares. However, according to the reported financial statements of the LFRS, the council has a small equity. Holding in another company and the shares are classified as unquoted equity investments value at cost and does not represent a price risk for the council. 3.3.3.3 Foreign exchange risk: Such a risk 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. CONCLUSION: Financial structure of a company shows how the current assets of the company are financed. This includes short term credit and borrowing. According to Lincolnshire county council balance sheet, it indicates the total current liabilities are ₤ 166784 against current assets of ₤234820. This indicates the council is able to maintain their working capital at a sustainable level. Finance manager determine how much a company must keep on hand and how much should be used be used from short term financing. Ideally it is prudent for the organization to keep credit at a minimum for its efficient operation. Framework and policy procedure are developed in the contest of public financial controls which recognizes day to day challenges and ensures implementation is adhered with through processes. Lincolnshire county council has effectively operated at a sustainable level within their manageable limit and maintains strong financial controls for their effective operation of funds. REFENCES "Presentation of Financial Statements" Standard IAS 1, International Accounting Standards Board. Accessed 24 June 2007. International Accounting Standards Board. Accessed 24 June 2007. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate Accounting (12th ed.). Hoboken, NJ: John Wiley & Sons, p. 1320 Charles, Tapiero (2004). 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