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Finance for Providers

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Title: Finance for Providers


1
Finance for Providers
Designed by
2
You will learn about
  • An introduction to ODPM's financial requirements
    for ACCREDITATION
  • SUPPORTING PEOPLE and financial systems
  • Good practice in BUDGET setting
  • How to produce and interpret MANAGEMENT ACCOUNTS

3
ACCREDITATION
4
Accreditation
  • looks at the organisation not the service
  • will run parallel to service review
  • All new providers from April 03
  • existing providers in order to receive steady
    state contracts
  • lasts for three years, or to next service review
  • statutory providers exempt

5
Accreditation - Criteria
  • ODPM outline 5 criteria for Administering
    Authorities to use
  • 1 financial viability
  • 2 competent administrative procedures
  • 3 effective employment policies
  • 4 robust management procedures
  • 5 proven track record

6
Accreditation - Key financial requirements
  • Business Plan
  • Annual budgets and Management accounts
  • Assessing financial projections
  • Assessing risk
  • Bankers reference
  • Annual Accounts
  • Auditors management letter

7
What is a Business Plan? Pt 1
An opportunity for the managers of a business to
stand back from day-to-day management and to
appraise their business in its wider context, to
take stock of performance to date and to plan for
the future. A major element of business planning
is to look forward so that any potential problems
are foreseen, planned for and, hopefully,
minimised or avoided. Other things being equal,
providers that do not undertake periodic business
planning are inherently riskier propositions than
those that do. For these reasons, the business
plan is a key tool in the assessment of financial
viability. ODPM Dec 2002
8
What is a Business Plan? Pt 2
  • Business Plans are not only concerned with
    financial matters
  • a list of the principal weaknesses of the
    organisation
  • a list of principal threats faced by the
    organisation
  • a plan for dealing with the major threats and
    weaknesses
  • detailed financial projections of income and
    expenditure looking forward at least one year
    (and usually a minimum of three years)
  • a cashflow forecast looking forward at least one
    year.
  • ODPM Dec 2002

9
ACCOUNTING under Supporting People
10
Accounting under Supporting People Pt 1
  • Three types of interim Contract
  • Block Gross
  • Block Gross (Chargeable)
  • Block Subsidy

11
Accounting under Supporting People Pt 2
12
Association/Agency Relationships
  • 4 different types of relationship under FLAP
  • Main arrangement is-
  • Agency managed management agreement
  • Responsibility for accounting determined by
    type and content of agreement

13
  • SETTING UP AND MAINTAINING AN ACCOUNTING SYSTEM

14
The Accounting System Pt 1
  • 1 Legal Obligations
  • Keeping records
  • Theres a legal obligation to keep accurate
    records of receipts and payments which are
    accessible and understandable at any given time
  • To produce a set of accounts based on the
    accounting system at the end of a given financial
    year and that they are audited or checked by a
    suitably qualified person for the type of legal
    entity your organisation is, usually by a
    qualified accountant.
  • 2 Management Obligations
  • As well as ones legal obligations to keep
    accurate, accessible records there are managerial
    obligations on you to manage your finances
    successfully.

An accounting system is designed to enable you to
carry out 1 and 2.
15
The Accounting System Pt 2
  • An accounting system is made up of a number of
    ledgers grouped together under three main
    headings
  • Sales ledger to record ones Revenue Income
  • Purchase ledger to record ones purchases on
    credit
  • The General or Nominal ledger which records all
    ones expenses
  • As well as these ledgers the accounting system
    will include details of movements on the bank
    account (sometimes known as the cash book) and
    ledgers that relate to the balance sheet e.g.
    debtors, creditors, fixed assets.

16
The Accounting System Pt 3
  • The Chart of Accounts
  • In setting up a set of accounts for the first
    time one of the first things your accountants are
    going to have to do is set up a Chart of
    Accounts. This is a list of all the accounts that
    go to make up your Income and Expenditure items
    as well as your balance sheet items. They are
    also the accounts that are updated whenever there
    are transactions on your three types of ledgers.
  • The chart of accounts should roughly look like
    your budget headings.

17
The Accounting System Pt 4
  • As well as the ledgers above any housing
    organisation needs a rent ledger.
  • What to look out for in a rent ledger
  • That the system produces a clear rent statement
    for each tenant detailing rent due to-date rent
    paid and arrears
  • The system can produce details of rent arrears
    summaries (effectively your debtors) both for
    housing management purposes and for financial
    management purposes
  • A detailed voids list for a given period.
  • Separate tracking of supporting people charges
    from rental charges

18
The Accounting System Pt 5
  • Further considerations in setting up your
    accounting system
  • Payroll
  • Petty cash
  • Bank reconciliation
  • Supporting documentation
  • Are the rental and payroll systems integrated
    with the main accounting system

19
  • BUDGET
  • SETTING

20
What is a Budget?
A Budget is a formal plan expressed in monetary
terms, prepared and approved in advance of the
budget period. It shows the financial resources
available to carry out the various activities
within a given period of time
  • A FINANCIAL PICTURE of your OBJECTIVES
  • A PLANNING tool
  • A MOTIVATIONAL tool
  • A FINANCIAL CONTROL tool

21
Why Budget at all? Pt 1
  • To help you achieve your Objectives
  • Without a budget
  • How will you know if youve achieved your
    objectives?
  • You may end up somewhere completely different
  • To help delegate authority and responsibility
    to budget holders
  • Budgets can act as motivation to help budget
    holders reach their targets, and beyond!

22
Why Budget at all? Pt 2
  • FUND RAISING AID
  • FINANCIAL STATEMENT
  • To IDENTIFY areas of STRENGTH AND WEAKNESS
  • To EXAMINE different OPTIONS and AREAS OF
    ACTIVITY
  • To help CONTROL INCOME and EXPENDITURE.
  • And finally,
  • To LEARN more about your organisation

23
A ten point plan to producing a Budget
  • Have a clear understanding of your organisations
    objectives.
  • Review your current situation
  • Categorise costs
  • Identify Income
  • Construct your budget, using 1-4 above.
  • Review, and revise if necessary
  • Get the Boards/MCs approval
  • Review, and revise if necessary
  • Report against actual performance.
  • Review, and revise throughout the year- giving
    a latest forecast.

10
24
Preparing a Budget - Step 1
START WITH CLEAR OBJECTIVES Objectives should
be S Specific M Measurable A Achievable R
Resourced T Timely You must have a clear idea
of timing and activities
25
Preparing a Budget - Step 2
  • REVIEW YOUR CURRENT SITUATION
  • Look at issues such as
  • Service demand and delivery
  • Current expenditure
  • Potential income
  • Current inflation levels
  • Break down your current activities in terms of
    costs and
  • income.
  • Look at your restricting resources
  • Think about your current concerns.

26
Preparing a Budget - Step 3
CATEGORISE COSTS FIXED AND
VARIABLE FIXED - Set, in the short term - Not
affected by the level of activity - May change
in the long term VARIABLE - Dependent on
activity and level of work -
Vary proportionately in line with work
levels SEMI -VARIABLE - Will include an element
of fixed, but
may be affected by level of activity
27
Preparing a Budget - Step 3
  • CATEGORISE COSTS continued
  • A second way to categorise costs is between
  • DIRECT AND INDIRECT (OR OVERHEAD) COSTS
  • DIRECT COSTS
  • those costs that directly relate to providing the
    service
  • e.g. salary of project worker, communal heat and
    light in a house
  • INDIRECT COSTS
  • those costs which are not directly attributed to
    one specific project or service but are general
    expenses chargeable to a number of different
    projects or cost centres
  • e.g. central admin charges, central office costs.

28
Preparing a Budget - Step 4
  • IDENTIFY INCOME
  • Break down your income into
  • CERTAIN
  • PROBABLE
  • POSSIBLE
  • What would make the probable a certainty, and how
    can you make a possible into a probable?

29
Preparing a Budget - Step 5
  • CONSTRUCTING THE BUDGET
  • List your income and expenditure and apply what
    you
  • have decided concerning issues such as
  • Inflation levels and interest rates
  • Staffing levels and pay
  • Changes in service provisions
  • Proposed repairs or refurbishments
  • Make a note of any assumptions.
  • Adapt basic budget for different scenarios if
  • appropriate.

30
Preparing a Budget - Step 6
  • REVIEW AND REVISE
  • Ask yourself the following questions about your
    budget
  • Does it make sense, with your knowledge of the
    business?
  • Is it viable?
  • Is it realistic?
  • Is the surplus or deficit at the desired level?
  • Are you happy with it?
  • Can you explain where all the figures come from?

31
Preparing a Budget - Steps 7 8
SUBMIT YOUR BUDGET TO THE BOARD OR MANAGEMENT
COMMITTEE You may have more than one option at
this stage, but you may want to indicate your
suggested option to the Management Committee at
the same time as outlining your
alternatives. REVIEW AND REVISE You may need
to make alterations according to the
Board/Committees recommendations.
32
Preparing a Budget - Steps 9 10
REPORT AGAINST ACTUAL PERFORMANCE The actual
performance of the organisation should be
reported against the budget on a regular basis,
at least quarterly. REVIEW AND REVISE The
budget may need to be revised during the year if
circumstances change significantly, or if some of
the assumptions in the original budget prove to
be incorrect.
33
  • CASH FLOW

34
What is Cash Flow Forecasting?
  • One step on from the budget
  • Shows Cash Movement
  • Make sure that you have money in the bank
  • When will cash be coming in and out of account
  • Surplus in I E does not mean surplus of cash!

35
Why is Cash Flow Forecasting important?
  • Better understanding of organisation
  • Manage peaks and trough's
  • Forecast on the basis of your needs
  • Avoid pitfalls and capitalise on surpluses

36
The differences between a Budget and a Cash Flow
Forecast
  • Budget includes Accruals and Prepayments
  • Budget will include depreciation
  • Items such as rates not paid evenly throughout
    year
  • Suppliers and creditors terms will determine when
    money comes in or out
  • Tax and NI are paid in the month after they are
    deducted from pay
  • Grant income is usually quarterly
  • Housing Benefit is usually paid in arrears
  • Surplus or deficit on budget will not equate to
    inflow and outflow

37
Constructing a Cashflow Forecast 1
  • Based on Receipts and Payments
  • Draw up month by month table for receipts and
    payments
  • Estimate date of receipt and put in appropriate
    period
  • Estimate date of cash payments and put in
    appropriate period
  • Remember changes in salaries or staff changes

38
Constructing a Cashflow Forecast 2
  • Dont include non-cash items
  • Account for proposed maintenance schedules and
    irregular payments
  • Calculate net outflow or inflow of cash
  • Calculate closing balance
  • Replace forecast figures with actuals to give
    updated picture

39
  • MANAGEMENT ACCOUNTS

40
What are Management Accounts?
  • Literally Accounts for Management-
  • A comparison between Actual Performance and the
  • Budget
  • Management accounts combine
  • the past - the budget
  • the present - actual performance year to date
  • and the future - impact of year to date on the
    year end.
  • Management accounts show you where you are
  • against where you thought youd be.

41
What is the Purpose of Management Accounts?
  • Management accounts show actual performance
    against budget and as such
  • Provide up to date information
  • Alert the board/management committee to areas
    that require
  • attention or a decision
  • Prompt decision-making and action
  • Update the board/management committee on what is
    actually
  • happening in the project.
  • Help to review plans against actions.
  • Management accounts are only as useful as the
    information they provide, which should be user
    friendly, relevant and up to date.

42
What makes them useful?
  • Up to date information
  • Regularity
  • Detail
  • Accuracy
  • Presentation
  • Audience
  • A.O.B. e.g. any issues that are not immediately
    apparent from the figures

43
What should Management Accounts show?
  • Essentially
  • Actual figures to date
  • Budget figures to date
  • Variances
  • Notes explaining differences
  • Optionally
  • Full year budget
  • Remaining amounts

44
What can they tell you?
  • What should you be looking for when reviewing the
    management accounts?
  • Are any of the differences between actual
    performance and
  • budget (VARIANCE) significant?
  • Are the variances long OR short term?
  • Do the variances require action to be taken?
  • Are income differences due to timing?
  • Are there any changes in circumstances?
  • Are there any items that are not included in
  • the original budget?

45
Reporting on Surplus and Deficit
  • A large deficit can give the appearance that the
    organisation is out of control.
  • A small deficit can show a need, but can also
    convey a sense of good management.
  • A large surplus can indicate that the
    organisation is not meeting its objectives or
    that there is not a need for the services
    provided or the areas of operation undertaken.
  • A small surplus can show good housekeeping and a
    well-managed organisation.

46
Audited vs. Management Accounts
  • What is the difference?
  • Audited Accounts Management Accounts
  • Statutory requirement Management report
  • Annual accounts Monthly/Quarterly
  • Externally focused Internally focused
  • Detail fixed According to need

47
  • INTERNAL CONTROLS

48
Internal Controls
  • ACCOUNT CONTROLS
  • Reconciliations
  • Cash
  • Bank
  • Wages etc.
  • Control accounts
  • Debtors
  • Creditors
  • INTERNAL CONTROLS
  • Structure responsibilities
  • Segregation of duties
  • Physical assets
  • Authorisation and approval
  • Payroll/ Personnel Management

49
Internal Controls would cover 1
  • Organisational
  • You will need a plan of the organisation which-
  • defines and allocates responsibilities
  • sets out lines of reporting, including controls.
  • clear delegation of authority and responsibility
  • Segregation of duties
  • receiving and opening post,
  • authorisation of expenditure
  • recording income, banking,
  • Physical
  • custody of assets authorisation of access and use
  • Authorisation and Approval
  • responsibility for authorisation of transactions
    clearly defined.
  • The limits for authorisations should be specified.

50
Internal Controls would cover 2
  • Payroll/Personnel
  • payments to employees are correctly authorised
  • additions to staff or increases to pay are
    documented and minuted.
  • Management
  • Checks areas falling outside the day-to-day
    running of the
  • system e.g.
  • overall supervisory controls, budgets and
    variances review of management accounts, any
    other special review procedures.

51
Internal Controls would cover 3
  • Financial Controls
  • To ensure that transactions have been
  • entered correctly
  • totals checked
  • processed properly
  • control accounts
  • arithmetical accuracy
  • reconciliations

52
Internal Controls Why?
  • Why are financial controls necessary?
  • Accuracy
  • it is important to be able to rely on accurate
    records.
  • Legality
  • The Management Committee are legally responsible
    for ensuring financial records are completed and
    accurate.
  • Risk reduction
  • Financial controls reduce risk of fraud and
    protect staff by ensuring they have clear
    guidelines
  • Also
  • Procedures should be in place, and WRITTEN DOWN,
    which outline the controls decided on by the
    organisation.
  • Everyone should be made aware of the existence of
    the procedures

53
Internal Controls - Exercise
  • Your task is to come up with a set of Internal
    Controls for your organisation bearing in mind
    financial physical and management areas of
    responsibility.
  • Wherever possible, begin to personalise it to
    your organisation including roles and
    locations.

54
  • ANNUAL AUDITED ACCOUNTS

55
Who will be interested in your audited accounts?
  • A Supported Housing Organisations annual audited
    Accounts
  • are not only designed to satisfy constitutional
    and legal
  • requirements but also to provide useful financial
    information
  • relevant to
  • The Board or Management Committee
  • Members/service users
  • Funders/donors
  • Regulatory and other government and quasi
    government bodies including the Housing
    Corporation and local Supporting People Teams
  • Management
  • Other staff
  • Creditors and guarantors
  • Banks and Building Societies

56
The information which your accounts contain
should be
  • In a format appropriate to the constitution of
    the organisation and its legal status e.g.
    Charity, Limited Company, Industrial and
    Provident Society, Registered Social Landlord
  • Relevant to the user
  • Comprehensible
  • Reliable
  • Complete - gives an accurate and full picture of
    the financial health of the organisation
  • Up-to-date
  • Consistent with information provided in previous
    years
  • In a form acceptable compatible with external
    legal requirements and generally accepted
    accounting standards.

57
  • AUDITED ACCOUNTS FOR RSLs

58
Accounting Regulations for Registered Social
Landlords (RSLs)
  • Organisations providing supported housing can be
    legally constituted in a variety of ways.
  • Industrial and Provident Society Acts 1965 and
    1968
  • Registered Charity (Charities Act 1993)
  • Company limited by guarantee (Companies Act 1985)

59
What must RSLs include in their accounts?
  • To comply with statutes the Housing Corporation
  • issued a General Determination in 2000 which lays
  • down the accounting requirements that must be
  • observed by RSLs in the preparation of annual
  • accounts. Including the following
  • A Board Report
  • An Income and Expenditure Account
  • A Statement of Total Recognised Surpluses or
    Deficits (if any)
  • A Balance Sheet
  • A Cash Flow Statement (for larger RSLs)
  • Notes to the Accounts

60
The Statement of Recommended Practice (SORP) for
RSLs
  • The regulations were supplemented by a SORP for
    RSLs first published by the three Housing
    federations in 1994, and revised in 1999.
  • The SORP requires a board report to be prepared
    for each financial year in line with Section 234
    of the Companies Act and to include
  • The principal activities of the RSL and give a
    fair review of its operations
  • The names of all Board members
  • A statement of its objectives, policies and
    strategies
  • Information about future developments in its
    business operations
  • The amounts transferred to designated reserves
  • A statement of internal controls and financial
    procedures (for RSLs managing 50 or more
    properties)
  • Arrangements to ensure the health, safety and
    welfare of employees
  • A statement of its policies relating to disabled
    employees

61
The Income and Expenditure Account
  • Income
  • Turnover
  • Rents receivable
  • Service charges receivable
  • SHG (Revenue element)
  • SHMG and other grants
  • Management fees
  • Other income will typically include
  • Profit on sale of fixed assets
  • Interest receivable and other income

62
The Income and Expenditure Account
  • Expenditure
  • Operating costs
  • Housing management and services
  • Repairs and maintenance
  • Bad debts
  • Depreciation
  • Auditors fees
  • Other expenses
  • Loss on sale of fixed assets
  • Mortgage and bank interest and other charges

63
Income Expenditure Accountfor the year ended
31 March 2003
64
  • ANNUAL ACCOUNTS FOR CHARITIES

65
Accounting regulations for charities SORP And
SOFA
  • The Charities Act 1992, superseded by the
    Charities Act 1993
  • The 1993 Act strengthens the powers of the
    Charity Commission relating to the enforcement of
    accounting and audit requirements.
  • The Accounting Regulations set out the form and
    content of the accounts and annual report.
  • They also set out the duties of, and range of
    tasks to be carried out by, auditors and
    independent examiners.

66
The accounting regulations spell out that
  • Charities must keep accounting records which
    clearly show the charitys financial transactions
  • These records should contain detailed entries for
    all money received and paid out which shows the
    source and destination of funds
  • Charities must keep records of assets and
    liabilities
  • Accounting records must be kept for at least 6
    years

67
The Statement of Recommended Practice (SORP) for
Charities
  • First issued 1995
  • Revised 2000
  • The SORP embodies current best practice and
    should be adopted by all charities unless a more
    specialised SORP applies (as is the case for
    housing associations).
  • The SORP for charities spells out the style of
    accounts a charity must produce depending on the
    size of turnover and its legal status.

68
The SORP 2000 states that
  • The threshold requiring the charity to have a
    full audit carried out by a qualified auditor is
    gross income above 250,000
  • The threshold for preparation of accounts by the
    accruals method is 100,000
  • The threshold for using functional headings
    rather than natural headings in the SOFA is
    250,000.

69
Charitable Companies must
  • Present their statutory accounts on the accrual
    basis with an audited report stating that the
    accounts give a true and fair view
  • Comply with the companies act 1985 and include an
    income and expenditure account in their financial
    statements. For most charitable companies the
    SOFA will suffice as long as the charities income
    and expenditure is clear from the SOFA.
  • Include a directors report. However if the
    trustees report covers the information required
    by the companies act then this will suffice as a
    directors report as well.

70
The Statement of Financial Activities (SOFA)
  • This replaces the Income and Expenditure Account
    for Charities
  • Income is called Incoming Resources
  • And Expenditure is called Resources Expended

71
Incoming resources - 1
  • Donations, legacies and similar incoming
    resources
  • Incoming resources from operating activities of
    the charity distinguished between
  • Activities in furtherance of the charitys
    objectives and
  • Activities for generating funds
  • Investment income and
  • other incoming resources

72
Incoming resources - 2
  • Typical Income categories for Supported
  • Housing Agency providers
  • Rental Income
  • Service charge income
  • Topping-up grants
  • Supported Housing Management Grant - No longer
    available from April 2003
  • Supporting People Grant From April 2003

73
Resources expended
  • Costs of Generating Funds (SORP 2000)
  • E.g. fundraising expenses
  • Charitable Expenditure (SORP 2000)
  • costs of activities in furtherance of the
    charitys objectives
  • support costs
  • costs of management and administration of the
    charity

74
Charitable Expenditure
  • Costs of activities in furtherance of the
    charitys objectives
  • Usually the core direct support costs
  • Support costs
  • Usually the indirect or overhead costs
  • Costs of management and administration of the
    charity
  • The costs of managing and administrating the
    charity as a legal body, and should be fairly
    negligible
  • (not to be confused with support costs as above).

75
  • THE BALANCE SHEET

76
The Balance Sheet
  • A balance sheet is always drawn up to a given
    date (e.g. 31st March 2001) and is a snap-shot
    of the worth or value of the organisation in
    terms of what the organisation owns owes and is
    owed, represented by its own retained surpluses
    and its long term financing.

77
The Balance Sheet Top Half
  • What you own owe are owed as working assets and
    liabilities
  • Fixed Assets
  • Property equipment and investments. Fixed assets
    often need to be depreciated and or revalued
  • Current Assets
  • Current Assets are defined as assets, which could
    be converted into cash within one year
  • Current Liabilities
  • Current Liabilities are defined as liabilities
    which will be paid by the organisation within one
    year.
  • Creditors and accrued expenses
  • FA CA CL The Value or Worth of the
    organisation

78
The Balance Sheet Bottom Half
  • What you owe and own in terms of financing the
    organisation
  • Creditors falling due after one year
  • Usually long term loans such as mortgages or
    other sorts of financing
  • Provision for Liabilities and charges
  • Capital and Reserves
  • Share capital if the organisation is a company
    limited by shares
  • Restricted reserves
  • Always by an external body
  • Designated reserves
  • these are monies set aside by an organisation
    from previous surpluses
  • Revenue or general reserves
  • the undesignated unrestricted reserves of an
    organisation

79
  • The Role and Responsibilities of the
    Committee/Board

80
The Role and Responsibilities of the
Committee/Board Pt 1
  • a) Giving strategic direction to the organisation
  • Defining the mission
  • Safeguarding the values
  • Developing the strategy
  • Monitoring, reviewing and evaluating
    performance
  • b) Managing people
  • Recruit, support, supervise and appraise the
    Chief Executive
  • Act as an appeal body
  • Ensure health and safety of staff and users
  • Ensure equal opportunities are promoted
  • c) Legal Role and Accountability
  • Be accountable to service users, regulators,
    funders and the public
  • Provide information on the organisations
  • plans and activities

81
Roles and Responsibilities Pt 2
  • d) Abide by the constitution and objects of the
  • organisation
  • Ensure the organisation acts within the law at
    all times
  • e) Resource Management
  • Ensure that money, property, staffing and other
    resources
  • are used wholly for the furthering the
    organisations objects.
  • Ensure that assets and resources are managed to
    best
  • effect
  • Ensure there are adequate internal controls
  • f) Self Management
  • Ensure the Board/Committee makes good decisions
  • Delegate responsibility properly
  • Functions effectively, and involves everyone.

82
The Role of the Board/Committee (Financial)
  • To take ultimate responsibility for ensuring that
    the organisation is properly financially
    resourced.
  • To set the annual budget.
  • Approval of any new undertakings or commitments
    or loans involving substantial expenditure not in
    an already approved budget.
  • To receive regular management accounts and the
    audited year-end accounts.
  • To set terms and conditions of employment,
    including salaries
  • To be accountable to the organisations
    regulators and funders
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