Finance for Providers

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Finance for Providers
Designed by
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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

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ACCREDITATION
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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

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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

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Accreditation - Key financial requirements

• Business Plan
• Annual budgets and Management accounts
• Assessing financial projections
• Assessing risk
• Bankers reference
• Annual Accounts
• Auditors management letter

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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
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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

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ACCOUNTING under Supporting People
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Accounting under Supporting People Pt 1

• Three types of interim Contract
• Block Gross
• Block Gross (Chargeable)
• Block Subsidy

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Accounting under Supporting People Pt 2
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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

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• SETTING UP AND MAINTAINING AN ACCOUNTING SYSTEM

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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.
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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.

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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.

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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

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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

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• BUDGET
• SETTING

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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

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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!

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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

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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.

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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
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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.

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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
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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.

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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?

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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.

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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?

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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.
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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.
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• CASH FLOW

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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!

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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

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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

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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

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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

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• MANAGEMENT ACCOUNTS

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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.

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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.

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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

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What should Management Accounts show?

• Essentially
• Actual figures to date
• Budget figures to date
• Variances
• Notes explaining differences
• Optionally
• Full year budget
• Remaining amounts

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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?

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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.

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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

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• INTERNAL CONTROLS

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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

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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.

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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.

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Internal Controls would cover 3

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

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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

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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.

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• ANNUAL AUDITED ACCOUNTS

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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

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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.

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• AUDITED ACCOUNTS FOR RSLs

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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)

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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

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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

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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

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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

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

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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.

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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

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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.

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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.

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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.

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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

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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

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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

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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

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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).

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• THE BALANCE SHEET

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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.

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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

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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

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• The Role and Responsibilities of the
  Committee/Board

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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

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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.

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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