Enclosure 1a - Projected Working Capital (1.2M PPT)

CITY HOSPITALS SUNDERLAND NHS TRUSTBoard Memorandum on projected working capital requirements and financial reporting procedures

Final Draft – 10 June 2004

Strictly Private & Confidential

TRANSACTION SERVICES

Table of Contents

Section Page

1 Executive summary 1

2 Key income and expenditure assumptions 6

3 Key balance sheet assumptions 14

4 Cash flow projections and headroom 20

5 Sensitivities and post sensitivity headroom 24

6 Financial reporting procedures, systems and controls 27

Appendix 1 Board Statement to the Regulator 33

Section 1

Executive summary

1

Introduction and background

2

Section 1 - Executive summary

This memorandum has been prepared by the Board of City Hospitals Sunderland NHS Trust (“the Trust”) in connection with the application by the Trust for Foundation Trust status and has been prepared to support the statements to be made by the Board in respect of the Trust’s working capital requirements and its financial reporting procedures. These statements are reproduced in Appendix 1.

The forecast and projections set out in this memorandum are solely the responsibility of the Board of Directors of the Trust and were approved at a Board meeting on 10 June 2004.

Financial highlights

3


The Trust has a proven ‘breakeven’ history, and will make a surplus in 2004/05 and 2005/06.

The majority of income the Trust receives is for patient related activities and is agreed in Legally Binding Contracts for 2004/05.

The planned Capital Programme will allow for additional capacity, in particular 72 new beds in 3 wards and 4 new theatres, due for completion in the Autumn of 2004.

The Trust does not anticipate having to borrow from the external market in order to finance the planned capital programme.

Cash balances will increase as a result of I&E surpluses and the receipt of Strategic Health Authority agreed PDC will be managed to ensure maximum return from any investment.

FY02/03 FY03/04 FY04/05 FY05/06£'000 Actual Actual Forecast Projected

Income 167,686 188,078 194,905 208,840 Expenditure (161,771) (184,350) (188,650) (199,773)

Operating surplus 5,915 3,728 6,255 9,067

Retained surplus 63 51 1,704 4,578

Capital expenditure (4,036) (16,028) (10,378) (6,646)

Opening cash 387 450 450 4,042 Cash inflow/(outflow) 63 - 3,592 3,860

Closing cash 450 450 4,042 7,902

Available facilities N/a

Minimum forecast headroom 3.7mMinimum post sensitivity headroom 2.5m

RatiosDebt Service to Revenue % 2.4% 2.3%Debt Service cover ratio (X) 3 3Interest Cover (X) 2.6 3.2

Summary Financial Information

Forecast headroom

4


The Trust’s base case working capital projections indicate that the minimum headroom will be £3.7m in October 2004.

After applying the key sensitivities identified in Section 6, the minimum headroom is £2.5m in March 2005.

On the basis of the information included in this Memorandum, and taking into account the new Foundation Trust facilities to be made available to the Trust, the Board are of the opinion that the working capital available to the Trust is sufficient to meet its requirements for at least the 12 months from 1 July 2004 and that the Board is in a position to sign the working capital statement set out in Section 5.

Cash balance

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Mar

-04

Apr

-04

May

-04

Jun-

04

Jul-

04

Aug

-04

Sep-

04

Oct

-04

Nov

-04

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Jan-

05

Feb-

05

Mar

-05

Apr

-05

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-05

Jun-

05

Jul-

05

Aug

-05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb-

06

Mar

-06

Month£'

000

Financial reporting procedures, systems and controls

5


On the basis of the information included in this Memorandum, the Boardconfirm that they have established procedures which provide a reasonablebasis for them to reach proper judgement as to the financial position and prospects of the Trust. These have been reviewed by Independent Assessors on behalf of the Independent Regulator. Details of the Trust’s financial reporting procedures, systems and controls

are set out in Section 6. These provide details of the following:

– Corporate Governance• Governance Structure• Management Structure• Assurance Framework• Audit Committee Arrangements

– Financial Controls and Reporting• Finance Department• Finance Systems• Maintenance of the Financial Ledger• Financial Reporting – In Year• Treasury Management• Budget Setting• Budget Monitoring• IT Controls• Data Quality

3 Audit Arrangements• External Audit• Internal Audit• Internal Audit Working Practices• Counter Fraud Work

Section 2

Key income and expenditure assumptions

6

Basis of preparation (1 of 2)

7

Section 2 - Key income and expenditure assumptions

The projections included in this Memorandum are based on the projections preparedby the Trust in the format provided by the Office of the Independent Regulator.

The projections are based on a model of projected activity and costs for the periodfrom March 2004 to 31 March 2006. The key sources of information for the modelare set out below:

Protected income

– The strategic direction set out in the Trust’s Service Development Strategy dated February 2004;

– Activity and resource forecasts to deliver the strategic plan submitted by the Trust’s Clinical Directors/Business Managers;

– The Host Commissioners’ draft Local Delivery Plans for 2004-05;

– Signed Legally Binding Contracts with all Commissioners of Patient Care Services 2004/05;

– Pricing assumptions based on material received from the Department of Health on the National Tariff rates;

Non protected income

– Comprises both Private Patient Income and income from OATs. It is assumed that these increase each year in line with inflation.

Other income

– Based on estimate by the Director of Finance and inflated each year by 3.3%.

Staff costs

– Staff costs are based on the 2004/05 budget and uplifted each year by the national pay award of 3.225%.

Non staff costs

– Based on the 2004/05 budget and uplifted by a composite 2.5%. Within this, high inflation areas such as drugs and blood products are uplifted by a higher amount.

Depreciation

- Has been calculated based on the current value of fixed assets and expected capital expenditure through each year.

Basis of preparation (2 of 2)

8


Public Divided Capital dividends

- Are based on a 3.5% return on assets employed.

Capital expenditure

- It is anticipated that the Trust will generate sufficient cash through depreciation and ‘surplus’ on national tariff to fund the capital expenditure programme. In addition, PDC funding will be received in 2004/05 as agreed with the Strategic Health Authority.

The accounting policies adopted in the financial projections are, so far as the Directors are aware, consistent with the NHS accounting manual and the accounting policies adopted by the Trust in its published financial statements..

In preparing the projections a number of sensitivities have been considered. These are summarised in Section 5.

Key assumptions

9


The 2004/05 position represents the recurring budgeted position and takes no account of any non-recurring income which may be received during the year. Historically, the Trust has received non-recurring income of a minimum of £10m on an annual basis.

The Trust has opted to take the minimum income guarantee transition path to National Tariff for baseline activity.

Protected Income is for Patient Related Activities and represents that agreed in Legally Binding Contracts for 2004/05. Activity above that included in contracts will be charged at National Tariff Rates and is excluded from assumptions.

The Pay Award is included as that nationally agreed pay rate under Agenda for Change of 3.225% and covers all staff groups in the NHS.

Individual Non-Pay categories have been examined and uplifted, resulting in a composite non-pay inflation uplift of 2.5%.

The Trust will generate income from interest on cash balances of 4%.

The Trust will continue to pay PDC dividends which represent a 3.5% return on assets employed.

The assumption is that the National Tariff will increase annually by 1% less than the assessed impact of inflation and general cost pressures. The Trust has a strong history of identifying and achieving Cash Releasing Efficiency Savings and it is assumed that the Trust will continue to take savings to offset the impact of this 1%.

FY02/03 FY03/04 FY04/05 FY05/06

£'000 Actual Actual Forecast Projected

Income from activities:Protected 148,179 162,203 175,932 189,127 Non-protected 1,316 1,141 1,084 1,118 Other operating income 18,191 24,739 17,889 18,595 Over/(under) deliverance - - - -

167,686 188,083 194,905 208,840 Operating expensesPay (106,177) (122,865) (129,834) (137,826) Non-pay (55,594) (61,517) (58,816) (61,947)

(161,771) (184,382) (188,650) (199,773)

OPERATING SURPLUS 5,915 3,701 6,255 9,067

Exceptional items - - - - Provision for bad debts - - - - Profit/(loss) on disposal of assets - - - -

SURPLUS BEFORE INTEREST 5,915 3,701 6,255 9,067

Net interest receivable 196 203 205 393

SURPLUS FOR THE YEAR 6,111 3,904 6,460 9,460

PDC* dividends payable (6,046) (3,853) (4,756) (4,882)

RETAINED SURPLUS 65 51 1,704 4,578

Summary Income and Expenditure Statement

Income assumptions

10


Transition to Payment by Results – minimum income guarantee with full transition in 2007/08.

No assumptions on activity volume variance from plan are built into our income as surplus as the Legally Binding Contracts, include clear agreed arrangements in case of over/under performance.

Patients’ Choice initiative – no assumptions are included on activity likely to be requested from commissioners outside the Trust’s usual catchment areas. If this happens it will be outside the volumes agreed of the Legally Binding Contracts.

All Legally Binding Contracts were signed by 31 March 2004.

No assumption on ability of commissioners to pay for additional activity in-year is made and the plan is based on signed Legally Binding Contracts volumes only.

Capacity on stream over the five years to deliver the plan.

Advised levels of research and teaching subsidies.


INCOME FROM ACTIVITIESProtectedSHA/PCG income 148,125 162,203 175,932 189,127 NHS Trusts 54 - - - Total protected 148,179 162,203 175,932 189,127 Non-protectedPrivate patients 501 328 283 294 RTA income 699 568 555 576 Out of area treatment income 116 245 246 247 Total non-protected 1,316 1,141 1,084 1,117

TOTAL INCOME FROM ACTIVITIES 149,495 163,344 177,016 190,244

OTHER OPERATING INCOMEEducation, training and research 5,959 7,143 6,565 6,818 Non-patient care services to other bodies 3,820 3,935 3,742 3,887 Other income (parking, catering, etc) 8,244 11,914 7,390 7,675 Other 168 1,747 192 215

18,191 24,739 17,889 18,595

TOTAL OPERATING INCOME 167,686 188,083 194,905 208,839

Income Summary

Income phasing

11


The majority of income to the Trust is for patient related activities and as agreed in signed 2004/05 Legally Binding Contracts, this will be received in equal 1/12ths in each year.

The unusual movements in October 2003 and November 2003 are due to the implementation of a new Financial Ledger System which went ‘live’ in October 2003.

Monthly Income

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5,000

10,000

15,000

20,000

25,000

30,000

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Month

£'00

0

FY02/03

FY03/04

FY04/05

FY05/06

Expenditure assumptions

12


Staff costs

Staff costs are calculated at specialty level and it is assumed form 66% of overall marginal rates.

Costs associated with the Consultant Contract are included as per national estimates and are fully funded.

The Trust is an ‘Early Implementer’ for Agenda for Change and therefore experienced increased staffing costs in 2003/04. All costs associated with Agenda for Change are included as per national estimates.

Wage inflation is as nationally agreed @ 3.225%

Non staff costs

Drug inflation is minimal with drug costs increases mainly due to increases in volume of service activity.

Bottom line inflation will average 2.5%.

Depreciation is calculated using current asset values plus anticipated capital expenditure. PDC dividends represent a 3.5% return on Assets Employed.


Senior Managers and Managers 2,774 4,550 4,818 5,103 Medical 26,415 32,391 34,178 36,329 Nursing, Midwifery and Health Visiting 41,070 46,692 49,323 52,391 Scientific, Therapeutic and Technical 14,701 17,554 18,603 19,710 Administrative and Clerical 11,268 11,853 12,553 13,300 Healthcare Assistants and Other Support 5,162 5,572 5,894 6,245 Other 3,036 2,302 2,422 2,566 Total NHS staff salaries and wages 104,426 120,914 127,791 135,644

Medical 895 1,126 1,182 1,263 Scientific, Therapeutic and Technical 337 289 308 329 Nursing, Midwifery and Health Visiting 79 201 206 220 Other 394 335 346 370 Total non NHS staff salaries and wages 1,705 1,951 2,042 2,182 Chairman & Non-Executive Directors 46 - - - Total salaries and wages 106,177 122,865 129,833 137,826

Clinical Supplies and Services 23,526 27,348 26,418 27,627 General Supplies and Services 4,565 4,882 4,728 5,019 Establishment 3,848 3,827 3,696 3,924 Premises and fixed plant 8,062 9,520 9,192 9,758 Depreciation 5,304 6,446 5,794 6,091 Purchase of healthcare from non-NHS 846 585 564 597 Miscellaneous 9,443 8,909 8,424 8,931 Total non pay revenue expenditure 55,594 61,517 58,816 61,947

Total expenditure 161,771 184,382 188,649 199,773

Expenditure Summary

Expenditure phasing

13


The bulk of expenditure is on staff salaries the majority of which are paid monthly.

Non-pay expenditure is also anticipated to be phased equally over 12 months, consistent with board activity trends.

The unusual trend experienced in October 2003 and November 2003 is due to the introduction of a new Financial Ledger System.

Monthly expenditure

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18,000

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FY03/04

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FY05/06

Section 3

Key balance sheet assumptions

14

Balance sheets

15

Section 3 - Key balance sheet assumptions

The 31 March 2004 Balance Sheet in the model is an estimated position determined prior to the completion of the draft annual accounts.

Fixed Assets Move year on year dependent on capital expenditure and are

expected to increase in each year as a result of the Capital Programme, and are reduced by depreciation.

Current Assets Will be managed to existing levels. The only significant

increase is in cash as balances are allowed to rise as a result of:

– EFL no longer a financial target.– I&E Surpluses generated through profit from national

tariff and increases in inflation being slightly less than funding received.

Creditors No significant increase anticipated as activity signed into

Legally Binding Contracts.

Tax Payers Equity The Trust will only receive additional PDC as agreed with the

SHA, in 2004/05.

March 03 March 04 June 04£'000 Actual Actual Forecast

Intangible assets 345 345 345 Tangible assets 109,598 129,345 131,710 Total fixed assets 109,943 129,690 132,055

Stocks and work in progress 2,616 2,970 2,883 Debtors 5,388 4,143 4,344 Cash at bank and in hand 450 450 894 Total current assets 8,454 7,563 8,121

Creditors : due within one year (10,344) (5,332) (10,622)

Net current assets/(liabilities) (1,890) 2,231 (2,501)

Total assets less current liabilities 108,053 131,921 129,554

Debtors: due after more than one year 1,153 911 911

Provisions for liabilities and charges (1,692) (5,019) (1,659)

Total assets employed 107,514 127,813 128,806

Taxpayers' equityPublic dividend capital 75,709 85,717 85,717 Revaluation reserve 28,961 38,595 38,670 Donated asset reserve 1,099 1,705 1,657 Other reserves 192 192 192 Income and expenditure reserve 1,553 1,604 2,570

Total taxpayers' equity 107,514 127,813 128,806

Historical Balance Sheets

Fixed assets

16


The Capital Programme will deliver additional capacity as a result of the conversion of the Multi Storey Car Park into 72 beds in 3 wards and 4 theatres. Completion is anticipated by the end of 2004.

The current Capital Programme allows all financial ratios to be met and leaves a level of flexibility.

The Trust has a history of delivering completed capital projects to both time and budget.

The Trust does not anticipate ‘borrowing’ to enable funding of the Capital Programme being able to generate sufficient resources internally, and through the receipt of additional PDC in 2004/05.

FY04/05 FY05/06£'000 Budget Projected

Multi Storey Car Park Conversion 6,207 - Cardiac Lab/Chest Pain Assessment 1,041 1,198 Eye Infirmary Theatre 1,100 - C' Block Extension - 2,300 Other 2,387 3,147

Total Stock 10,735 6,645

Capital Programme

Stock

17


Historically stock levels are kept at a low level as the Trust takes advantage of Just-in-Time procurement and consignment stock.

The bulk of stock items are drugs and orthopaedic prosthesis.

Stock levels will be managed to 2002/03 values throughout 2004/05.

Monthly stocks

2,400

2,500

2,600

2,700

2,800

2,900

3,000


Month

£'000

FY03/04 FY04/05 FY05/06

Mar-04 Mar-05 Mar-06

£'000 Actual Actual Forecast

Total Stock 2,970 2,618 2,702

Total Stock 2,970 2,618 2,702

Stock Analysis

Debtors

18


Main income providers will settle activity related invoices on the 15th of each month as agreed in Legally Binding Contracts.

No anticipated increase in bad debt provisions is expected as activity forecasts are prudent and agreed in Legally Binding Contracts.

Monthly debtors

0

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No

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Deb

tors

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25

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tors d

ay

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NHS debtors

Non NHS debtors

Total debtors

NHS debtors days

Non NHS debtor days

Mar-04 Mar-05 Mar-06£'000 Actual Actual Forecast

NHS Debtors 1,665 2,444 2,627 Non NHS Debtors 2,477 1,622 1,794

Total Stock 4,142 4,066 4,421

Debtors Analysis

Creditors

19


Creditors are expected to be managed back to historical levels during 2004/05 and the Trust has assumed that creditor days will remain as previously experienced, around 10 days.

Monthly creditors

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Cre

dito

rs (£

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)

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2

4

6

8

10

12

Creditor days

Employee creditors

Other creditors

Total creditors

Emplyee creditor days

Other creditor days

Mar-04 Mar-05 Mar-06£'000 Actual Actual Forecast

NHS Creditors 3,360 3,627 3,829 Non NHS Creditors 1,972 4,263 4,054

Total Stock 5,332 7,890 7,883

Creditors Analysis

Section 4

Cash flow projections and headroom

20

Cash flows

21

Section 4 - Cash flow projections and headroom

The Trust expects to generate a cash surplus in both 2004/05 and 2005/06, largely as a result of the Income and Expenditure surplus.

It is assumed that PDC dividends continue to be calculated and paid as currently.

The Public Dividend Capital received figure of £7.036m in 2004/05 has been agreed with the Strategic Health Authority but remains subject to approval by the Department of Health.

FY02/03 FY03/04 FY04/05 FY05/06


Net cash inflow/(outflow) from operating activities 9,978 8,922 11,485 14,495

Net cash inflow/(outflow) from returns on investments and servicing of finance 216 203 205 393

Payments to acquire tangible fixed assets (3,886) (16,028) (10,335) (6,646) Receipts from sale of tangible fixed assets - - - -

(Payments to acquire)/receipts from sale of intangible assets (150) - (43) - Net cash inflow/(outflow) from capital expenditure (4,036) (16,028) (10,378) (6,646)

Dividends paid (6,046) (3,853) (4,756) (4,882)

Net cash inflow/(outflow) before financing 112 (10,756) (3,444) 3,360

FINANCINGPublic dividend capital received - 10,563 7,036 500 Public dividend capital repaid (not previously accrued) (368) (555) - - Other capital receipts and payments 319 748 - - Net cash inflow/(outflow) from financing (49) 10,756 7,036 500

Increase/(decrease) in cash 63 - 3,592 3,860

Summary Cash Flow Statement

Operating cash flows

22


Significant operating cash surpluses are anticipated in both 2004/05 and 2005/06. This is mainly due to the large operating surplus before depreciation.

Movements in Debtors and Creditors between 2003/04 and 2004/05 are due to the accounting treatment of provisions for Agenda for Change and the Consultant Contract.

FY02/03 FY03/04 FY04/05 FY05/06


Operating surplus/(deficit) before interest 5,913 3,728 6,255 9,066 Depreciation and amortisation 5,305 6,485 5,603 5,879 (Profit)/loss on disposal of fixed assets - - - (2) Transfer from donated asset reserve (168) (187) - - (Increase)/decrease in stocks (497) (354) 352 (84) (Increase)/decrease in debtors (1,265) (3,624) 78 (357) Increase/(decrease) in creditors and provisions 690 3,657 (803) (7)

Net cash inflow/(outflow) from operating activities 9,978 9,705 11,485 14,495

Operating Cash Flow

Headroom

23


The Trust has agreed with its host commissioner, Sunderland Teaching Primary Care Trust, payment of the July block contract element on the 1 July 2004, rather than 15 July 2004 to ensure sufficient cash is available immediately.

Discussions have taken place with a number of Banking facilities and the Trust is confident overdraft facilities will be in place by 1 July 2004, should they be required.

The Department of Health have indicated that they will consider applications for in-year Short Term Loans at a rate of 4.35% from Foundation Trusts.

Section 5

Sensitivities and post sensitivity headroom

24

Income and expenditure sensitivities

25

Section 5 - Sensitivities and post sensitivity headroom

Two sensitivities were run through the model with the results summarised on the attached table.

The sensitivities were:

- Increase expenditure on drugs by £1m in both 2004/05 and 2005/06

- Increase expenditure by £642k in 2004/05 to reflect non achievement of efficiency savings to cover the ‘risk share’ agreement with Sunderland TPCT.

• These sensitivities reduce the surplus in 2004/05 by £1.6m and in 2005/06 by £2m.

FY04/05 FY05/06£'000 Forecast Projected

Retained surplus 1,704 4,578

Sensitivities Non-pay inflation (1,000) (2,000) Cost savings not supported with action plans (642) - Modelling differences 68 (41)

(1,574) (2,041)

Adjusted surplus/(deficit) 130 2,537

Income and Expenditure Sensitivities

Cash flow sensitivities/Post sensitivity headroom

26

Section 5 - Sensitivities and post sensitivity headroom

• Applying the income and expenditure sensitivities has a ‘like for like’ impact on cash balances,changing the minimum headroom required to £2.5m in March 2005.

• This does not take into consideration cash balances during the month

• In this instance, the Trust can look at ;

- Delaying creditor payments

- Rephasing capital cashflow in order to mitigate the impact.Revised headroom

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Month

£'00

0

Cash at bank Revised cash at bank

Section 6

Financial reporting procedures, systems and controls

27

Financial reporting procedures, systems and controls –

28

Section 6 - Financial reporting procedures, systems and controls

This section sets out the details of the Trust’s financial reporting procedures, systems and controls and covers:

– Corporate Governance– Financial Controls and Reporting– Audit Arrangements

Corporate Governance1.1 Governance Structure

The Trust is managed by a Board consisting of:

– a Chairman and five Non-Executive Directors, all of which are ‘termed’ appointments made by the independent NHS Appointments Commission; and

– five Executive Directors, although the Director of Finance post has been vacant since February 2003. A new Director of Finance has recently been appointed and is due to come into post later this year.

The Board is supported by five sub-committees:

– the Audit Committee;– the Remuneration Committee;– the Corporate Governance Committee;– the Clinical Governance Committee;– the Investment Committee; and– the Tendering Committee

The Trust plans to merge the Corporate and Clinical Governance Committees into one Governance Committee (covering clinical and non-clinical risk) after incorporation as a NHS Foundation Trust.

1.2 Management StructureThe operations of the Trust are managed within a divisional structure, with six main Divisions (plus Trust Headquarters Department) as follows:

– surgery;– medicine;– family care;– clinical support one;– clinical support two; and– estates and facilities.

Each of the Executive Directors of the Trust (excluding the Chief Executive and Medical Director) is responsible for a range of Clinical Directorates, grouped into Divisions. Each Clinical Directorate is supported by a dedicated Business Manager.

The Trust Board meets every other month in public, meeting in the intervening months in private (as the General Purpose Committee).

1.3 Assurance FrameworkThe Trust’s formal Assurance Framework document was approved by the Board in March 2004. The Framework is split into ten categories and identifies the gaps in controls and assurance across each area. A lead officer is responsible for each category. The Corporate Governance Committee will be responsible for reviewing the Assurance Framework and progress against any action plans on a regular basis. The Trust Board will receive updates on the Framework twice a year.


29


1.4 Audit Committee ArrangementsThe Trust’s Audit Committee consists of three Non Executive Directors as follows:

– Margaret Forbes JP (Chair): Margaret Forbes trained as an executive secretary working locally for Tyne Tees Television and abroad. She has been a local councilor since 1983 and is a local School Governor. She was a member of the Family Practitioner Committee from 1989 and an FHSA member to Sunderland Health Commission from 1994;

– Ailsa Martin: Ailsa Martin was appointed co-coordinator for the Princess Royal Trust Sunderland Carer's Centre in 1994. She is a Committee Member of Sunderland Art Studio. She is also a Director of ETEC (Sunderland) Ltd; and

– David Clifford OBE DL: David Clifford has 40 years experience in the region's transport industries. He retired as Managing Director at the Port of Tyne Authority in 2002. He has previously been Chairman of South Tyneside Enterprise Partnership and East Durham Groundwork Trust and a member of regional committees. He is a Deputy Lieutenant of County Durham.

The Audit Committee meets at least three times a year. Also in attendance at the Committee are the Trust Chairman and Director of Finance, along with the Head of Internal Audit and external auditors (although the external auditors are not invited to every meeting).

.

2 Financial Controls and Reporting2.1 Finance Department

Overall, the Trust’s Finance function is considered to be adequately resourced and fit for purpose. This will need to be kept under review as the impact of NHS Foundation Trust status on future resourcing requirements becomes clearer.

The Finance Department is led by the Director of Finance, who is supported by the Head of Finance. The Director of Finance post has been vacant since November 2003, as the former Director of Finance was appointed Chief Executive of the Trust. An appointment to this post has recently been made, with the new Director of Finance due to start later this year.

There are three Assistant Directors of Finance (covering financial services, financial management and internal audit). Each Division has a Finance Manager.

2.2 Finance SystemsOn 1 October 2003, the Trust moved onto a new financial ledger, Oracle 11i. This was procured under a shared services arrangement, led by a neighbouring acute trust. The ledger is maintained by a central team who maintain all ledger systems under the shared ledger arrangement.

The other three key finance-related operating systems used by the Trust are:

– Payroll – McKesson system;– Stock – Resus system; and– Fixed Asset Register – FMIS system.


30


2.3 Maintenance of the Financial LedgerThe financial ledger is updated and maintained by the financial services team, led by the Assistant Director of Finance/Procurement. This team is also responsible for the key control account reconciliations.

Responsibilities held by the central team (provided under the shared services arrangement) include updating user access levels (if amendments are requested by the Trust) and the provision of technical support for the ledger system.

2.4 Financial Reporting – In YearThe Trust produces a formal financial position for the Trust Board/General Purpose Committee on a monthly basis.

Detailed monthly finance reports are prepared for each Directorate. A detailed commentary as to the performance of the Directorate, including reasons for overspends, is produced by Finance Managers. This information is used by the Head of Finance to prepare the summary financial report that goes to the Trust Board/General Purpose Committee.

2.5 Treasury management The Trust’s treasury management function seeks to ensure adherence to NHS directions that:

– funds held in commercial bank accounts of NHS bodies do not exceed £50,000 at any time; and

– NHS bodies do not overdraw on these accounts.

The Trust holds one commercial bank account with HSBC, with the remaining cash balance being held in the Trust’s PGO account. These accounts are managed via the online Masterline (for the PGO account) and Hexagon (for the HSBC account). The following key controls are in place over treasury management:

.

– documented procedure notes exist covering key treasury management

processes, such as making transfers/payments; and

– arrangements are in place for the management and oversight of bank accounts, including bank account reconciliations and cash requirement forecasting.

Key controls per the Trust’s Treasury Management financial procedure notes include:

– a daily cash flow statement is completed showing balances held in accounts and funds available for spending;

– the Treasury Manager prepares and updates cash flow forecasts on a monthly basis looking forward twelve months;

– the Treasury Manager prepares and updates cash flow forecasts on a daily basis looking forward 30 – 60 days; and

– the Assistant Director of Finance for Financial Services reviews cash flow forecasts monthly to ensure that cash management projections are geared towards an outturn position within the Trust’s External Finance Limit and initiates amendments as required.

2.6 Budget settingFor 2004/05, the budget baseline has been derived from the recurrent (budget) position as at Month 9 (December 2003).

The Finance Managers were required to submit details of financial pressures experienced in each Directorate to identify potential pressure areas in the budget. The Head of Finance and Director of Finance decided on the necessary budget uplifts to be applied in the next financial year.

A final adjustment was then made for any recurring budget uplifts occurring in the final three months of the 2003/04 financial year.

The 2004/05 budget was approved by the Trust Board in April 2004.


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2.7 Budget MonitoringBudgets are managed at both Directorate and Divisional level. Budget holders receive a copy of a standard Oracle financial report following the period end close. Business Managers, Clinical Directors and Divisional Directors also receive a report prepared by the Divisional Finance Manager highlighting the major features within the period.

2.8 IT controlsThe IT control environment within the Trust is reviewed by the Trust’s internal audit provider.

2.9 Data qualityThree Audit Commission reviews on NHS Data Quality have been undertaken at the Trust as required as part of the mandatory external audit programme, and these specifically assessed:

– the adequacy of overall data quality management arrangements;

– the adequacy of data quality in relation to data which supports the NHS Performance Assessment Framework; and

– the robustness of the Trust’s HRGs and reference costs data.

3 Audit Arrangements3.1 External Audit

The Audit Commission (Operations) is the appointed external auditor to the Trust. A full programme of work is undertaken at the Trust annually in line with the Audit Commission’s Code of Audit Practice. This includes:

– a requirement to comply with Statements of Auditing Standards in undertaking the audit of the financial statements;

– the application of specific targeted work on the financial aspects of corporate governance; and

– undertaking all relevant mandated performance audit reviews, such as on the progress with the NHS Plan and Data Quality arrangements.

3.2 Internal Audit

The Trust’s internal audit function is provided by Sunderland Internal Audit Services (“SIAS”) which is hosted by City Hospitals Sunderland NHS Trust. SIAS provide internal audit services to eight NHS clients and operates with 20 staff.

3.3 Internal Audit Working PracticesInternal audit activity has been designed to comply with the requirements of the mandatory NHS Internal Audit Standards.

3.4 Counter Fraud WorkThere is a Proactive Fraud Programme covering the period 2002/03 to 2004/05. In 2003/04, a number of local proactive reviews have been completed including:

– Patients’ Travel Expenses (Sunderland Eye Infirmary and Sunderland Royal Hospital);

– Library Income and Petty Cash; and

– Petty Cash Expenditure (Sunderland Royal Hospital).

Budgeting and forecasting

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Prior forecasting history

The budget is set in April of each year, based on the recurring budget position. This changes significantly over the course of the year due to non-recurring income being received, for example, activity.

Historically, the Trust has always achieved the statutory requirement to ‘breakeven’.

The movement in 2003/04 is due to the reduction/reclassification of PDC capital from 6% to 3.5%.

FY01/02 FY02/03 FY03/04

£'000 Actual Budget Variance Actual Budget Variance Actual Budget Variance

Income 152,044 144,292 7,752 167,686 158,215 9,471 188,078 175,339 12,739

Expenditure (146,481) (139,542) (6,939) (161,771) (153,139) (8,632) (184,350) (169,501) (14,849)

Operating surplus/(deficit) 5,563 4,750 813 5,915 5,076 839 3,728 5,838 (2,110)

Retained surplus/(deficit) 58 - 58 63 - 63 51 - 51

Summary of historical budgeting accuracy

Appendix 1

Board Statement to the Regulator

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Board Statement to be made to Regulator

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Appendix 1 - Board Statement to the Regulator

Private & Confidential

Independent Regulator of NHS Foundation Trusts

10 June 2004

Dear Sir

City Hospitals Sunderland NHS Trust

Working Capital

In connection with the application of City Hospitals Sunderland NHS Trust (“the Trust”) for NHS Foundation Trust status, the Board of Directors of the Trust has reviewed the Trust’s future working capital requirements from 1 July 2004 to 31 March 2005. The results of this review are set out in the attached Board Memorandum dated 10 June 2004 which has been prepared after due and careful enquiry.

In the opinion of the Board of Directors, the working capital available to the Trust is sufficient for its present requirements, that is at least the 12 months from 1 July 2004.

Financial Reporting Procedures

The Board of Directors confirm that they have established procedures which provide a reasonable basis for them to reach proper judgement as to the financial position and prospects of the Trust.

The basis of the Board of Directors’ confirmation is set out in the attached Board Memorandum dated 10 June 2004. The Board of Directors confirm that it will continue to maintain procedures at or exceeding this level of quality subsequent to 1 July 2004.

Yours faithfully

For and on behalf of the Board of Directors

Enclosure 1a - Projected Working Capital (1.2M PPT)

Documents

Transcript of Enclosure 1a - Projected Working Capital (1.2M PPT)