Introduction
Financial management strategies are regarded as the basis of effective business, marketing an financial performance of any organization. In accordance with the principles of effective financial management, business strategies are elaborated for optimizing the working principles applied by the company, and improving the HR strategies that are regarded as the basis of effective performance of the employees.
The paper is aimed at analyzing the financial management principles applied by Greater Manchester Fire and Rescue Authority for 2011, and review the general aspects of its financial activity, paying particular attention to financial activities, strategies, and suggestions in the financial sphere.
The paper will be based on the key factors of financial management that form the frameworks of the financial management principles applied by the Greater Manchester Fire and Rescue Authority. The key aspects of the analysis will involve the opportunity of decreasing the expenses by the organization by 5%, and analysis of the consequences of this cut. Additionally, there is a need to identify the possible spheres of the cut, with further discussion of the financial control tools. Finally, risk areas should be defined and analyzed for proper assessment of the financial management effectiveness, if the expenses are cut.
Budget Analysis
Previously to analyzing the opportunities of the budget cut, the financial management principles should be analyzed. Additionally, there is a need to assess the budget patterns, applied by the company. In accordance with the financial statement, the revenues and expenses of the company for the years 2009-2010 were as given below:
Additionally, as it is stated in the report, the authority receives revenue support grant, and the related rates from Central Government, therefore, the budget balance of the company is formed in accordance with the actual needs and requirements of the business activity. The most credible sphere for cutting expenses is running expenses. These are the technical service for the machinery, fuel costs, training costs, as well as managerial needs and requirements of the Managerial Department. (Sutton, 2001)
In order to define the most appropriate sphere for budget reduction, there is a need to identify the most relevant constrains, requirements, and objectives of the financial structure, aims, and purposes of the organization; identify the possible expense reduction strategy; measure financial management performance. Aims, purposes and requirements of the organization are closely linked with the character of the company’s activity – fire fight and rescue, the decrease of budgeting operative needs will inevitably cause decrease in the effectiveness of the company. It is impossible to reduce the machinery service costs, training costs, communication costs that help the rescue team react operatively.
The expense reduction strategy will have to be radical, as the expense reduction will inevitably cause decrease in the effectiveness of the business performance. Considering the fact that the general principles of the budget changes are closely linked with the principles of proper management of further expenses and incomes, financial management department will have to analyze the consequences of this reduction. Hence, as it is stated by Brigham and Ehrhardt (2004), the goals, stated as the key direction of company’s development should be regarded as the basis of corporate finance governing. As a rule, the cash flows of the organization are affected by the financial mix, and the aim of the reduction is closely associated with finding the optimal mix – the capital structure that will be featured with the maximal effectiveness for the organizational performance. (Westerman, 2006)
Financial management performance, after reduction of the expenses, will be measured in accordance with the values of the operative and financial strategies that will be used. Financing sources will stay the same, while the general performance of the financial system will be equity based. Hence, the liquidity of the financial assets of the Greater Manchester Fire and Rescue Authority will be higher, and cash flow implications will define the success of the entire project.
Budget Reduction
Financial management strategies of the Greater Manchester Fire and Rescue Authority may be divided into four key elements:
- Cash Management. This involves identification of cash balance that is intended for meeting the regular expenses, and decreases cash holding costs. This element may be regarded as the key management strategy of the Greater Manchester Fire and Rescue Authority.
- Inventory Management. As it has been already emphasized this sphere of financial management is of particular importance for the company. This also involves supply chain management.
- Debtors management involves identifying the most appropriate credit management of the financial liabilities. This is mainly aimed for attracting customers, however, in Greater Manchester Fire and Rescue Authority this is resorted to for paying salaries, pensions, or technical services of the machinery and equipment.
- Short-term financing is effective for utilizing a bank loan in the case of overdraft. However, Manchester Fire and Rescue Authority frequently resorts to this type of financial management principles.
Therefore, considering the budget analysis given in the previous chapter, and components of financial management above, it should be stated that the most obvious reduction spheres are: running expenses in the sphere of debtors management, capital charges that may be attributed to inventory management, and decrease of the total expenses by proportional decrease of all the expenses. Hence, the risks will depend on the financial management principles applied by the company. (Barr, 2002)
Risk Assessment
Proper analysis of the risks is closely linked with the values of the financial structure, control systems, and strategic decisions associated with the financial management principles. These are intended for creating the effective frameworks of the financial control, and controlling the cash flows. Considering the previously defined spheres of budget reduction, the risks will be closely linked with the values of the financial and activity priorities. Therefore, if the expenses are cut by reducing the running expenses, the effectiveness of the rescue performance may decrease. This is explained by the fact that the authority will have to decrease service costs, training expenses, as well as the expenses for managerial needs. Nevertheless, if the main aim of the cut is associated with managerial expenses, the company will have to think over the cost optimization strategy for these needs. Hence, the number one priority expenses will be saved, while bureaucratic expenses will be reduced and optimized. (McMenamin, 2002)
If reduction touches upon the capital charges associated with inventory management, the risks will be closely linked with the effectiveness of the fire and rescue activity. The company can not afford cutting costs for technical maintenance of the machinery, supply chain management, and training.
If the total expenses are cut proportionally, the consequences will be minimal. This is explained by the fact that every department involved into the system of expenses will have to tolerate 1% of the cut, while the responsibility for restructuring will be imposed for the department leaders and department financial managers. However, reduction of the wages will make the personnel unhappy, and that will inevitably decrease the effectiveness of the fire and safety activity. However, if the company grants other benefits in exchange, the team will understand this measure, and the performance effectiveness level will stay the same.
As it is stated in the report (Greater Manchester Fire and Rescue Authority. 2010, p 14):
The Financial Statements also include a separate section for the Pension Fund Account in line with the Code of Practice on Local Authority Accounting 2009. Each Fire Authority in England is required by legislation to operate a Pension Fund and the amounts that must be paid into and out of the Fund are specified by regulation. The current arrangements ensure that any shortfall on the pension fund is met by grant funding issued by the Department for Communities and Local Government.
In the light of this statement, it should be emphasized that the actual necessity of the budget cut is explained by the opportunity of Manchester Fire and Rescue Authority to reduce the expenses, and improve the income – expense balance. Considering the fact that the expenses overwhelm the incomes, this decrease is of high importance for the Authority, as financial management principles, applied by the organization do not fit the debt financial structure.
Control systems that are implemented for controlling the financial flows within the company involve proper assessment of the expense effectiveness control. Therefore, all the liabilities stated in the budget are regarded as the results of the financial activity and tendencies. The objectives of financial control are based on the premise that the Authority should not be dependent on the financial management, as the key aim of its activity is to prevent material damages caused by fire and other emergencies.
Strategic decision making will not be influenced by the expense reduction, as the main aim of this sphere is to make effective decisions associated with the authority activity, improvement of its performance, controlling financial flows etc. Agency costs, linked with it, are based on the interest conflicts, actions performed by department directors, etc. Therefore, the decrease of the expenses will inevitably mean the conflict of interests within the managerial departments.
Current Practices
The current financial management practices of the Greater Manchester Fire and Rescue Authority involve regulation of the cash flows by minimizing costs in accordance with the general critical route principle. This involves defining the shortest, and the most effective way of the cash flow, with further assessment of the possible values of the invested spheres. Therefore, current liabilities stated in the report are closely linked with the values of the net cash flows that are reconciled to the income and expenditure account. In accordance with the financial statement of the Authority, the following should be emphasized (Greater Manchester Fire and Rescue Authority. 2010, p. 38):
The liabilities show the underlying commitments that the Authority has in the long run to pay retirement benefits. The total liability of J1,274.5m has a substantial impact on the net worth of the Authority. However, statutory arrangements for funding the deficit mean that the financial position of the Authority remains healthy. The deficit on the Local Government Scheme will be made good by increased contributions over the remaining life of the employees, as assessed by the actuary. The total contributions expected to be made to the Local Government Pension Scheme by the Authority in the year to 31 March 2011 is J2.202m
In the context of Public Service management, this statement undermines the likelihood of riskless decrease of the expenses, as in total, the general principles of cost reduction are closely linked with the necessity to control the values of the operational boundary. This is regarded as the integral part of successful financial management in the case of budget reduction, or cut of the expenses. Additionally, the calculation of the authorized limit should offer reliable headroom over and above the operational boundary. This is required for allowing additional cash movements, and control of the existing flows. Moreover, the allowed limit should presuppose 5% variation for stating the regarded headroom. Therefore, the regarded budget cut will be the necessary tool for decreasing the headroom and for eliminating the additional cash movements that may decrease the effectiveness of financial management within the organization that is controlled by strict control strategies. (Sutton, 2001)
Critical Analysis
In distinction with the generally accepted financial management patterns that are applied in other financial systems, the principles by Greater Manchester Fire and Rescue Authority are closely associated with the values of the governmental financial regulation. This is explained by the fact that other financial systems, like commercial banking, private equity, pension funds, insurance, and various wealth funds are mainly effective if the financial structure is equity based. However, governmental financial system may be debt based, and in some cases this appears to be even more effective, as regulation tools allow large-scale reformation of the system with further optimization of the expenses. Therefore, the optimization tool that will be needed for Greater Manchester Fire and Rescue Authority may be required as the distinctive point of the financial system applied for managing the budget cut. However, in accordance with the principles of government financial management, the administrative costs are essentially larger, as they involve more points, such as employers’ contributions, light and heat, advertising, bank charges, depreciation costs, and donations. This means that critical analysis of the financial management principles applied by the Greater Manchester Fire and Rescue Authority should also involve logical recommendations, and strategic recommendations intended for the improved decision making process.
The supplied financial data available in the report may be regarded as a part of the cash movement process that is controlled by the financial management strategies useful for controlling the implementation and following of the governmental regulations. Therefore, there is a need to regulate the Local Government Pension Scheme applied, and in accordance with the financial report of the organization (Greater Manchester Fire and Rescue Authority. 2010, p. 42):
The Authority makes provision within its insurance fund to meet liabilities as and when they arise. The Authority is in receipt of a third party personal injury claim. Negotiations are underway, the outcome of which are unknown at this time. It is estimated that the liabilities relating to the Pension Scheme will drop by around 5.9% and the Balance sheet deficit by around 15.3%. In monetary terms the liabilities and deficit have fallen by around £5.5m. In relation to the Fire Fighter’s pension scheme the assumption is likely to lead to a reduction in the liabilities of approximately 10%.
In the light of this fact, the decision-making strategy of the company should be changed in accordance with the actual operative needs. This will help to control the implementation of the Pension Scheme, as well as regulate the training process effectiveness regardless of the training costs. As for the salaries, bank costs, insurance and similar expenses will be controlled by the running cost reduction, as well as by the regulation of the general expenses experienced by the Manchester Fire and Rescue Authority.
Conclusion
Considering the nature of the organizational activity, the actual importance of the proper balance control and reduction of the expenses is associated with the opportunity of optimizing these expenses for further effective implementation of the improved pension scheme. In general, these actions are risky, however, proper risk assessment and management will help to mitigate the risks, and minimize the drastic consequences of budget cut. Therefore, the optimal sphere for expense reduction is the running cost decrease. This will help to optimize the cash flows within the organization, and link financial management principles with the operative strategy of the expense reduction strategy.
On the other hand, the possible risks will inevitably touch upon the effectiveness of the financial system that is applied for proper financial management. Considering the fact that the actual importance of the cost reduction is performed within the frames of governmental financial regulation system, the change of financial structure will have to be modified. Hence, equity based financial principles will be applied in the case of effective cut of the expenses, and the risks, associated with this cut will touch upon the entire performance of the financial system.
Reference List
Barr, M. J. 2002. The Jossey-Bass Academic Administrator’s Guide to Budgets and Financial Management. London: Routledge.
Brigham, E.F., Ehrhardt, M.C. 2004. Financial Management: Theory and Practice. South-Western College Pub
Greater Manchester Fire and Rescue Authority. 2010. Statement of Accounts 2009/10.
McMenamin, J. 2002. Financial Management: An Introduction. London: Routledge.
Sutton, G. W. 2001. Revision to the Financial Management Regulation on the Horizon. DISAM Journal of International Security Assistance Management, 23, 103.
Westerman, W. (2006). The Financial Management of Foreign Direct Investment. International Journal of Management, 23(4), 851.