Financial Management for Mid and West Wales Fire Authority - Example

FINANCIAL MANAGEMENT FOR MID & WEST WALES FIRE AUTHORITY INSERT NAME Abstract Financial and risk management seeks to oversee the efficient operations of an entity without major holdups. Both public and private organizational entities undertake sound financial and risk management measures to ensure the sustainable operations as they seek to achieve their pre-determined objectives. While financial management seeks to ensure adequate funds towards the sustenance of the entity’s operations, risk management seeks to identify and mitigate threats that can adversely affect the business operations. As a result, these two practices play a major role in enhancing the daily operations of the entity. TABLE OF CONTENTS Introduction 1.0 Calculating the Operational Boundary 2.0 Operational Boundary and MWW Fire 2.1 Setting the Operational Boundary 2.2 Main Considerations of Mid & West Wales Fire and Rescue Authority 3.0 Financial Risks 3.1 Characteristics of Mid & West Wales Fire and Rescue Authority 3.2 Financial Risks 3.3 Accommodation of the Risk Areas into the Mid & West Wales Fire and Rescue Authority’s Accounts 3.3.1 Credit Risk 3.3.2 Liquidity Risk 3.3.3 Interest Rate Risk 3.3.4 Foreign Exchange Risk 3.3.5 Transaction Risks 3.3.6 Refinancing and Maturity Risk References Introduction This report seeks to discuss the financial management perspectives of the Mid and West Wales Fire and Rescue Service. Towards this end, the author will evaluate the authority’s financial statements that have been provided as well as additional organizational reports accessed via the internet. The assessment of the authority’s financial management practices will eventually enable the author to make a conclusion on the success of the financial strategies and make respective recommendations. 1.0 Calculating the Operational Boundary For the Mid & West Wales Fire and Rescue Authority, the operational boundary for the year 2008/09 is calculated as follows: 2008/09 Use of Capital Fund for Capital Programme 9 Capital Financing Requirement 2008/09 15,236 Use of Revenue Balances (2,419) Revenue Set Aside (Statutory MRP) (377) Revenue Set Aside (Voluntary Addition) (1,326) Estimated operational Boundary at 31.03.2009 11,123 The authorised limit is calculated as: 0.05*11,123 = 11,679.15 Proportion of Authorised Limit used = Operational Boundary/Authorised Limit =11.123/11.7 =0.95 As a result, safety margin = 100% - 95% =5% The recommended margin is 5 per cent of the operational boundary to allow adjustments in the authority’s expenditures due to the dynamic operating environment. Therefore, Mid & West Wales Fire Authority operates within the recommended safety margins. 2.0 Operational Boundary and MWW Fire 2.1 Setting the Operational Boundary The operational boundary provides an estimate of the financial requirements to necessitate the authority’s operations over a specified period of time. In most instances, funding for public institutions go hand in hand with the nation’s budgetary periods. In calculating the operational boundary, the management seeks to establish the high and low financial requirements that can be able to absorb the financial fluctuations that are incurred in the authority’s daily operations (The Operational Boundary, p2). In setting the operational boundary, the authority’s outstanding balances and financial obligations are considered in order to identify its financial position. 2.2 Main Considerations of Mid & West Wales Fire and Rescue Authority One of the main considerations of the FRS is its incomes and expenditures that enable the authority to manage its daily operations. Majority of the FRS revenues are acquired from contributions made by unitary authorities that are complemented by fees, charges and revenue grants. On the other hand, the FRS spends majority of its revenues on salaries and wages, operations and capital financing. The second consideration is the funds available to fund the FRS’s operations. Budgets seek to strike a balance between the authority’s revenues and expenditures that have a surplus or deficit impact on the available funding. Thirdly, capital borrowing and expenditures are aimed at establishing capital projects for social welfare. For the FRS, funding for capital projects can only be sourced from the Public Works Loan Board. Lastly, reserves and balances are vital in ensuring the operations of the FRS as well as compliance with the local and regional authorities (Mid & West Wales Accounts 2008/09, p7). During the operational year, the authority’s utilisation of the available funds may either exceed or fall below the budget estimates. As a result of this, the authority maintains a general reserve account that smoothes these budgetary discrepancies. The Mid & West Wales Fire and Rescue Authority has recognised and accommodated the above considerations in its financial statements in an effort to establish its fair financial position. Basically, the four considerations seek to identify the sources of revenue available to the FRS and its expenditures. Revenues are recorded when services are offered and expenditures charged when the works are complete. Therefore, the management exercises complete control over the authority’s cash flows to ensure payments and receipts are received duly. 3.0 Financial Risks 3.1 Characteristics of Mid & West Wales Fire and Rescue Authority M&WW Wales Fire Service is the largest operational rescue services in the UK serving an area with an estimated 4,500 square miles. The authority serves a mixture of urban and local populations with a workforce totalling to 1,400 staff personnel. Additionally, the authority has a total of 57 stations across the 6 command centres that are pegged on the unitary authorities (FireFightingNews 2010, Para 1). Compared to the GMFRS, the authority covers a much larger area and thus requires additional staff to efficiently execute its duties. However, the population served by the Mid & West Wales Fire and Rescue Authority is lesser than that served by the GMFRS and hence the evident provision of efficient services. Secondly, the GMFRS has three command centres that are established on regional basis. Lastly, the GMFRS has a high number of staff estimated at over 2,500 spread across the 41 fire stations (Oneplace 2009). 3.2 Financial Risks Financial risks are part of the normal business operations of an organization irrespective of its structure or ownership. The identification of various financial risks relevant to the organization is the first step towards formulating risk management practices geared towards mitigating the impact of the financial risks on the core operations. Firstly, the market risks are presented with the fluctuations in the market prices of commodities attributed to demand and supply. On the other hand, the M&WW Fire Service are involved in investment activities whereby stock prices fluctuate (Mid & West Wales Accounts 2008/09, p32). As a result, capital gains or losses can be accrued from these investments and hence the need to evaluate the impact of price risks on the authority’s operations. Due to these fluctuations, price risk arises that poses a financial risk to the basic operations of the authority. Secondly, organisations ought to ensure that they have the capacity to raise sufficient funds to meet their current and long-term financial obligations. An entity’s liquidity position can be established by netting off the current assets and liabilities. Horne and Wachowicz (2005, p39) states that the management ought to evaluate the authority’s liquidity risk as it indicates the ability of the organization to meet its financial obligations as well as ensure sustainable operations. Thirdly, interest rate risks are relevant to the Mid & West Wales Fire and Rescue Authority as it engages in financial borrowing especially towards the implementation of capital projects. Similar to prices, interest rates adjust according to economic performances and therefore have a real impact on the operations of the authority. However, the Mid & West Wales Fire and Rescue Authority engage in borrowing at fixed rates and periods in an effort to stabilise its operations and ensure sustainable practices (Mid & West Wales Accounts 2008/09, p33). Fourthly, debtors and creditors account for quite a portion of the authority’s assets and liabilities and hence it faces a credit risk (Mid & West Wales Accounts 2008/09, p32). The authority may be unable to repay its debts or its debtors may default on their borrowings hence negatively impacting on the authority’s cash flows. Another risk is the foreign exchange risk that affects trade practices as currencies gain or loses their monetary values. To the Mid & West Wales Fire and Rescue Authority, majority of its operational revenues and expenditures are quoted in the pound and therefore the foreign exchange risk is not relevant to the authority. Lastly, transaction risk arises when the revenue streams are negatively impacted by problems within the service delivery chain. The Mid & West Wales Fire and Rescue Authority delivers services to the public and therefore problems impact on the efficient delivery of these services can result into losses that in turn impact on the authority’s operational capability. Unlike other risks that are purely financial, the transaction risk arises from a poor management structure and eventually impacts on the authority’s cash flows (Horcher 2005, p161). Poor service delivery will result into a reduction of the charges placed upon the clients as well as reduced funding until the authority streamlines its internal process to boost their service delivery. 3.3 Accommodation of the Risk Areas into the Mid & West Wales Fire and Rescue Authority’s Accounts 3.3.1 Credit Risk The Mid & West Wales Fire and Rescue Authority identify its credit risk to arise from financial deposits made to various financial institutions and also from its debtors. However, to ensure that the authority manages its exposure to credit risk, the management has developed a financial policy that does not allow its customers to be offered services on credit. Additionally, bank deposits are only made for periods less than one year whereby both parties related to the bank deposits sign a mutual agreement (Mid & West Wales Accounts 2008/09, p32). Shirreff notes that, with this financial arrangement, the authority seeks to mitigate the impacts of the credit risk (2004, p117). According to the financial policies, only the authority’s financial services provider can make deposits in order to exercise control over the deposits. 3.3.2 Liquidity Risk Financial investment activities within the Mid & West Wales Fire and Rescue Authority are limited to ensure the availability of adequate funds to meet its daily financial obligations. Daily cash flows ought to be stabilised to facilitate normal operations without negatively impacting on their quality. The Mid & West Wales Fire and Rescue Authority can borrow from its financial services provider or the Public Works Loans Board (Mid & West Wales Accounts 2008/09, p32). These institutions are only allowed to provide the authority with short-term borrowings. Additionally, the authority is required to prepare a balanced budget that identifies the authority’s annual expenditure. With the availability of these measures, the authority’s exposure to liquidity risk is minimal and its impact on the authority’s operations can be handled effectively. 3.3.3 Interest Rate Risk The Mid & West Wales Fire and Rescue Authority operations are exposed to interest rate fluctuations that arise from its investment in financial instruments as well as borrowings. Interest rate fluctuations have a multiplier impact on the operations of the authority based on the movement in fixed or variable interest rates on the financial instruments (Mid & West Wales Accounts 2008/09, p34). On the balance sheet, the financial borrowings are not valued at fair value and hence the nominal gains or losses are not reflected on the income and expenditure statement. This is unlike the movements on the fixed rate investments that are reflected on the income and expenditure statement. Towards avoiding the interest rate risk, the authority only borrows from one lender and does not engage in long-term investments. 3.3.4 Foreign Exchange Risk As stated earlier, the authority does not engage in foreign transactions with foreign entities hence the foreign exchange risk does not arise. Exchange rate fluctuations do not therefore impact on the authority’s cash flows as its revenues and financial obligations are quoted in the UK pound. 3.3.5 Transaction Risks The flow of internal processes highly affects the supply value chain in the delivery of services to the public. Poorly managed internal processes resulted into increased costs that increase the budgetary allocations to the specific projects (McKinney 2004, p118). Taking into consideration this risk, the authority’s management has sought to streamline its internal operations in order to reduce unnecessary expenditures. This has in turn seen a reduction in the number of staff across the multiple salary scales. However, the authority does not solely focus on the salaries and wages but also on other items such as operational costs. Towards the management of the transaction risk, the authority’s management has developed a new operational structure aimed at identifying the various duties and determine on how to efficiently undertake them. 3.3.6 Refinancing and Maturity Risk The M&WW Fire Service undertakes several financial borrowings and therefore its management maintains a substantial debt portfolio (Mid & West Wales Accounts 2008/09, p34). As stated earlier, the authority only engages in short term borrowings but it also has to ensure that as the borrowed financial instruments mature they have to be replaced. As a result, the refinancing and maturity risk arises and has to be properly managed to ensure that it does not negatively impact on the authority’s internal processes. Internally, financial caps are placed on financial debts and investments that limit them to a period of or less than a year. Debt monitoring is also undertaken to ensure adequate funds for financing activities. Conclusion In my opinion, the Mid and West Wales Fire Authority has maintained strong financial controls by constantly reviewing the funds available to finance the authority’s operations within the financial year as well as the provision of several reserve accounts to handle funding for capital and other short-term projects. References Bergmann, A 2009, Public Sector Fin. Mgmt, New York: FT Prentice Hall. Christoffersen, PF 2003, Elmnts of Fin. Risk Mgmt, Chicago: Academic Prss. Coombs, HM & Jenkins, DE 2002, Public Sector Fin. Mgmt 3rd Ed, Brooklyn: Cengage Learning EMEA. Deegan, CM 2009, Financial Accounting Theory 3RD Ed, New York: McGraw-Hill. Elliott, B & Elliott, J 2007, Financial Accounting & Reporting, New York: FT Prentice Hall. 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