Loughborough University Understanding Financial Management.

Loughborough University Understanding Financial Management

Understanding Financial Management ILM level 5 Learning objectives to understand: The purpose of a set of accounts The jargon used by accounts The principles on which accounts are based

Understanding Financial Management ILM level 5 Learning objectives to understand: The purpose of the main financial documents The main sources of finance into Loughborough University The types of expenditure Why cash flow is so important Sources of financial information Capital funding Performance indicators

Timetable Day One A general introduction to Finance Understand the purpose of accounting standards and the regulatory framework Understand 4 key accounting policies Understand two methods for calculating depreciation Identify a range of financial objectives Understand how a business is financed Identify key sources of finance for an organisation

Timetable Day One Understand the relationship between the 3 main financial statements and apply them: cash flow forecast, profit and loss statement, balance sheet Understand the relationship between the 3 main financial statements and apply them: cash flow forecast, profit and loss statement, balance sheet continued Cash flow forecasting Look at the Financial Statements of Loughborough University

Timetable Day Two Apply ratio analysis Financial and Management Accounting Understand the budgetary process and budgetary control Consider the challenges facing Loughborough University Consider the Economic climate in which we operate RASCAL Develop measures to populate a balanced scorecard Financial Governance at Loughborough University Review and discuss the module assignment

Work Based assignment Title: Understanding financial management Purpose: to develop a greater understanding of financial management within the organisation together with the tools and techniques used in your role as a middle manager at Loughborough 3 parts: Explain finance within the context of Loughborough

Work Cased Assignment contd Explain the role and value of management accounting Explain the purpose of budgets and budgetary control Suggested word count: 1,500 to 2,000 Submission date: 19 th December Deadline for feedback from your tutor: 12 th December

So this is accounts What is the answer ?

So this is accounts What is the answer ? Zero

So this is accounts What is the purpose of a set of accounts?

So this is accounts What is the purpose of a set of accounts? give a true and fair view of the state of the groups and Universitys affairs as at 31 July 2013 and of its surplus for the year then ended It is a BSc here!

Why do we do accounts To support business decisions To identify trends To explore opportunities To use financial information to understand what is happening in a business

Lets start at the very beginning Cash Accounting Double Entry Book keeping Trial Balance

Lets start at the very beginning Debits o Assets o Expenses o Profits / Surpluses Credits o Liabilities o Income o Losses / Deficits

A Page from an Accounting Ledger Is the balance good news or bad news?

Why are there rules to accounting? There are many users of a set of accounts Who would use Loughborough Universitys Financial Statements

Accounting and Financial Reporting Standards About consistency across organisations UK GAAP Companies Act 2006 Statement of Recommended Practise Financial Reporting Standards All change - New rules from 15/16

Accounting Principles

Accounting Principles - Consistency Depreciation use of the straight line method each year, rather than reducing balance one year and straight line the next. When deciding on the treatment of any item, looking at what has been done before is justifiable as it provides consistency Potential Flaw Could be consistently bad!

Accounting Principles - Accruals Recognition of income on research grants Recognition of income from endowments Accounting for goods or services received Depreciation Deferred Grants

Accounting Principles - Prudence Accounting of Retirements Recognition of losses on a contract Where a range of potential costs are possible, selecting the worst case scenario if no reliable estimation exists.

Accounting Principles Going Concern The assumption that a business will continue in existence for an indefinite period. Impairment of assets - Giving up economic benefit UPP Halls

Depreciation Most fixed assets reduce in value over their lifespan think of your own assets Deducted from the fixed assets annually in the Balance Sheet Charged as an expense in the Profit and Loss Account 2 methods: 1.Straight line method 2.Reducing balance method

Depreciation Straight Line The Straight Line Method: takes the original cost of the asset and deducts the same fixed amount each year, eg. A machine costs 10,000 There is no expected residual value at the end of its forecast 5 year lifespan. (Residual Value means how much the asset will be worth and for how much it is expected to be sold at the end of its useful life within the business.) Depreciation will be 2,000 per year leaving a residual value of 0.

Depreciation - Example Year Cost Accumulated Depreciation Book Value 11 10,000 2,000 8,000 22 10,000 4,000 6,000 33 10,000 6,000 4,000 44 10,000 8,000 2,000 55 10,000 00

Depreciation The Reducing Balance The Reducing Balance Method: takes the original cost of the asset and reduces it by a fixed % each year This method is used where the asset is expected to depreciate more heavily in the earlier years of its use. Activity: (complete the table below) A new vehicle costs 12,000 It is decided that it will depreciate at a rate of 25% per year

Depreciation - Example YearCost Accumulated Depreciation Book Value 112,0003,0009,000 212,0005,2506,750 312,000 4 5 2,847

Depreciation Question The Finance Office purchase a super duper photocopier costing 24,000 on the 1 st August. The University accounts for depreciation on a straight line basis with an expected life of 4 years. After three years, on the 1 st August, the Finance Office sells the photocopier to the College for 5,000. Required - Calculate the accounting entries resulting from this transaction.

Depreciation Question Year Cost Accumulated Depreciation Book Value

Depreciation Answer YearCost Accumulated Depreciation Book Value 124,0006,00018,000 224,0006,00012,000 324,0006,000 In Year 4, the book value of 6,000 would be written back to the I&E Account and show as expenditure. However, this would be matched by the receipt of 5,000 from the college. These two amounts would be netted against each other to produce a loss on disposal of 1k. If the proceeds had been more than the 6k net book value then a profit on disposal would have been generated.

Repair or Fixed Asset Broken Window? Broken Window on the top floor of the Towers? Additional Teaching Room on the side of Edward Herbert? Roof Repair to Schofield?

Financial Objectives maximisation of profit maximisation of return on capital employed survival securitylong-term stability growth

What are the Financial objectives for LU? ??

The Business Cycle Where can a business get funds Your Own Share Capital Someone Elses Debt or Loans From the profits of the business Retained Profits / Reserves

The Business Cycle How can it use those funds Fixed Assets Working Capital Investments

Sources of Funds Ordinary Shares Rights Issue Preference Shares Debentures Debt

Sources of Money for LU We have no share capital We borrow from banks We have retained reserves We use third party funders e.g. UPP

What makes up a set of financial statements? Statement of principle accounting policies 3 main statements - Income and Expenditure account Balance sheet Cash flow incl STRGL Notes to the accounts

What makes up a set of financial statements? List of officers and staff Providers of financial services Operating and financial review Statement of corporate governance Responsibilities of Council Auditors report to Council

Income and Expenditure account what does it tell us? Designed to answer the sustainability question Brings together all the income and expenditure related to routine operations including subsidiary companies It excludes capital items like new buildings, equipment and grants It reports the total of income and expenditure for a financial year

Income and Expenditure account what does it tell us? It is based on costs committed not cash paid and income earned not just cash received It includes depreciation spreads the cost of a capital investment over its useful life Exceptional items If income exceeds expenditure a surplus results What surplus is enough?

Income and Expenditure Account Why does Loughborough University need to make a surplus?

Income and Expenditure account To invest in new capital assets Because our income is volatile Because our income is more volatile than our expenditure To be able to capitalise on opportunities

Income and Expenditure Account Exercise in your workbooks

Balance sheet what does it tell us? Picture at a point in time of what the institution is worth Report of what we own What we owe What we are owed Indicator of ability to withstand a difficult period or capacity for development

Total recognised Gains and Losses Catches changes in the valuation of assets or liabilities which have not gone through the Income & Expenditure account

Balance Sheet Exercise in your work books

Cash Flow Why is this so important The lifeblood of the organisation The cashflow forecast shows the cashflow of the business on a month-by-month basis Shows the real money situation: actual timing of cash outflows (cash and creditors) actual timing of cash inflows (cash and debtors) Variance Analysis Key Points: Cash is not Profit Profit is not Cash Depreciation is not cash For the period ended .. No cash no business!

Cash Flow Why is this so important No business goes bust through a lack of profits All businesses go bust through a LACK OF CASH!

Cash flow statement what does it show? Cash flow statement explains how your cash has been managed during the financial year Takes out the non cash items - Net cash inflow from operating activities Shows affect of interest both payable and receivable - Returns on investments and the servicing of finance Separates out new investments - Capital expenditure and financial investment Discloses movement on loans - Financing Net increase/decrease in cash

Cash/Net liquidity 2012/13 2011/12 000 000 Short term deposits 24,505 22,505 Cash at bank 51,801 24,012 Loans 1year (70,953) (53,072) Total 3,337 (8,096)

Analysis of Income 2012/13 2011/12 000 000 Funding Council Grants 56,967 66,624 Academic Fees 88,633 70,726 Research Grants 39,147 38,670 Other income 58,880 60,330 Investment Income 1,313 1,407 Total Income 244,940237,757

Academic fees and support grants 2012/13 2011/12 000 000 Home and EU Students 57,944 (65%) 41,067 (60%) International Students 30,689 (35%) 29,659 (40%) Total 88,633 70,726

Analysis of Expenditure 2012/13 2011/12 000 000 Staff Costs124,303 122,777 Depreciation 17,700 15,221 Other Operating Expenses 91,412 91,719 Interest Payable 3,416 2,235 Total Expenditure236,831 231,952

Staff costs 2012/13 2011/12 000 000 Wages & Salaries 101,345 100,713 Social Security 7,898 7,831 Pension costs 14,958 14,093 Restructuring costs 102 140 Total 124,303 122,777

Surplus retained within reserves 2012/13 2011/12 000 000 Surplus on continuing operations 8,109 5,805 Tax 12 12 Specific Endowments 183 40 Retained within reserves 8,309 5,857

Financial Statements 2012/13 Successful year 8.3m surplus after exceptional items 8.1m operating surplus Liquidity good though moved to net debt Cash used to finance assets

Balance sheet: Assets 2012/132011/12 000 000 Tangible assets 302,723 300,380 Benefit re College of Art & Design (2,364) (2,497) Investments 214 242 Long Term Loans 145 173 Endowments 2,803 2,687 Stocks & Debtors18,37618,241 Cash76,306 46,517 Total 398,203 365,743

Balance sheet: Liabilities 2012/132011/12 000 000 Creditors < 1 Year *(73,902)(69,761) Creditors > 1 Year(70,953)(53,072) Provisions (1,922) (1,964) Pension Liability(47,187)(47,618) Total(193,964)(172,415) * Includes unapplied deferred capital grants and research payments received on account

Balance sheet: Assets and liabilities represented by: 2012/13 2011/12 000 000 Deferred Capital Grants 101,932 102,134 Endowments 2,803 2,687 Reserves 101,50488,507 Total206,239193,328

Movement in Pension Reserve 2012/13 2011/12 000 Opening Reserve (47,618) (28,902) Movement for year 2,431 (18,716) Closing Reserve (45,187)(47,618)

Review of the Day Any Questions? Please bring calculators tomorrow

Ratio Analysis Financial ratios enable you to compare: the current performance of the organisation or operation with past performance the performance of one organisation with that of another organisation (preferably in the same industry) the size of the organisation doesnt matter too much because ratios cancel out size differences

Ratio Analysis Ratios can be split into three areas Liquidity Ratios Profitability Ratios Efficiency Ratios

Liquidity Ratios Liquidity (indicates how well equipped the business is to pay its short-term debts) Ratios: Current ratio Liquidity ratio

Liquidity Ratios Calculation Current Ratio Current Assets eg. 2 :1 Current Liabilities =50,000 / 25,000 =2:1 The recommended current ratio is 2.1 Liquid Ratio Current Assets (excluding stock) eg. 1:1 Current Liabilities Current assets (excluding Stock) / Current liabilities eg.30,000 / 25,000 = 1.2:1 The recommended liquid ratio is 1:1.

Profitability Ratios Profitability (shows the degree of success with which the business is trading) Ratios: Gross profit/sales Net profit/sales ROCE

Profitability Ratios Calculation Gross Profit Ratio: Gross Profit x 100 eg. 10% Sales Revenue Means that gross profit is 10% of the total value of sales Net Profit Ratio: Net Profit x 100 eg. 6% Sales Revenue Means that net profit is 6% of the total value of sales. Return on Capital Employed (ROCE): Net Profit x 100 eg. 20% Total Assets less Current Liabilities Compares inputs (capital invested) with outputs (profits) Shows the return on funds employed within the business and the effectiveness with which they have been employed

Efficiency Ratios Use of Assets (shows how effectively the assets are being utilised) Ratios: Sales/fixed assets Debtor Payment Time Creditor Payment Time

Efficiency Ratios Calculation Sales to Fixed Assets: Sales eg. 3 times Fixed Assets Debtor Payment Time: Debtors / credit sales for the year (multiplied by) the time period (eg. 365 days) = debtor collection time in days Creditor Payment Time: Creditors / Credit Purchases (multipled by) the time period (eg. 365 days) = creditor payment time in days

Ratio Analysis Please do the exercise in your workbook

Ratio Analysis We have prepared another example

Financial Accounting Vs Management Accounting IssueFinancialManagement Governed byCompany law, SSAPs Managers needs UsersExternalInternal TimePast and presentPresent and future EmphasisAccuracyDecision- making DataMoneyMoney or units of performance

Budgeting Budgeting is used in organisations of all types to assist in the development and co-ordination of plans, to communicate these plans to those who are responsible for carrying them out, to secure co-operation of managers at all levels, and as a standard against which results can be compared.

The Budget Setting Process Budgeting is part of the short-term planning process. A painstaking process, involving the co-operation and flexibility of all the budget holders who may well have to modify their budgets in the light of both external and internal factors. Many drafts may have to be prepared before the final set of budgets is established. The outcome of the budgeting process is a master budget comprising: Projected balance sheet Projected profit and loss account Projected cashflow

The Budget Setting ProcessThe Budget Setting Process These will be supported by a series of operating budgets for each cost area, eg. labour budget, materials budget, sales expense budget. It is vital to apportion responsibility for each budget, in the form of a cost centre, which is responsible for the monitoring and control of costs.

What Stops us achieving our budgets Important to analyse the limiting factors, ie. those factors which may put barriers in the way of the organisation achieving its objectives. These are the: External limiting factors (over which the organisation has no direct control) Internal limiting factors (over which the business has considerable control)

Group Exercise Working in groups, consider possible examples of limiting factors within the higher education sector and make a list under the following headings. Please split these between annual and longer term External Limiting Factors: Internal Limiting Factors:

Flexed Budgets These are used where forecast demand and actual demand are different. By flexing the budget, it is possible to get a much more realistic analysis of budgetary performance. The purpose of a flexed budget, therefore, is to account for changes in the budget variables and, consequently, to assess real budgetary performance. For example, the training budget in your workbook, for January, was forecast for 5,000 delegates. If you look at the following slide how would you evaluate budgetary performance?

Non flexed budget Forecast 5,000 delegates Actual: 4,000 delegates Variance Support Staff10,0008,3001,700 FAV T. Workbooks1,000840160 FAV Training Staff15,00013,2001,800 FAV D. Workbooks2,0001,900100 FAV Venues4,4003,500900 FAV Catering1,600 0 Hotel Expenses2,400 0 Other Materials1,8001,400400 FAV Services70072020 ADV Total38,90033,8605,040 FAV

Flexed Budgets As you can see the actual expenditure in all but 3 items, was less than forecast expenditure. The net variance is actually just over 5,000 less than forecast. We need to investigate why it is so much less. On investigation, we find that the forecast was based upon 5,000 staff going through training. In reality, however, there were only 4,000 delegates. In order to get a real picture of budgetary performance we can use a technique called flexing, so that we can create a flexed budget.

Flexed Budgets Activity: Complete the flexed budget on page 38 of your workbook by using the formula below. The flexed budget for support staff has been done for you. Step 1: Find the flexed % = 4,000/5,000 x 100 = 80% Step 2: Calculate the flexed figures: (example Support Staff): 10,000/100 x 80 = 8,000 Step 3: Compare the actual figures with the flexed figures to find the variation from the flexed budget: (example Support Staff) 8,300 8,000 = +300 = 300 adverse oversp

Flexed Budgets (these are the 3 cols you should select) Actual: 4,000 delegates Flexed Budget: 4,000 delegates Variation from Flexed Budget Support Staff8,3008,000300 T. Workbooks840 Training Staff13,200 D. Workbooks1,900 Venues3,500 Catering1,600 Hotel Expenses2,400 Other Materials1,400 Services720 Total33,860

Variance Analysis Training Budget ForecastActual:Variance Support Staff10,0008,3001,700 fav Workbooks1,000840160 fav Training Staff15,00013,2001,800 fav Workbooks2,0001,900100 fav Venues4,4003,500900 fav Catering1,600 0 Hotel Expenses2,400 0 Other Materials1,8001,400400 fav Services70072020 adv Total38,90033,8605,040 fav

Flexed Budgets Discuss in Groups that advantages and disadvantages of flexed budgets How else can you flex budgets?

Budgetary Control This is concerned with: Monitoring budgeted against actual figures Analysing and investigating variances both positive and negative Re-budgeting where necessary

Now a word from our sponsor

Economic Challenges What do you think are the major economic challenges facing Loughborough University ? What has changed in the last few years?

RASCAL Resource Allocation System and Cost Apportionment at Loughborough It how we fund the academic Schools

RASCAL Principles It is an income streamed model All income is distributed All costs are distributed The budgeted Surplus is distributed as a cost Therefore it adds up to zero

RASCAL Indirect Charges Replace COMA Include the Community Charge Now one driver People People = Staff + Students

RASCAL Cross Subsidy It is an income streamed model All home undergraduates are charged 9,000 We wish to remain a mixed University We cross subsidise home undergraduate teaching based on national TRAC T data

The Budget Process at Loughborough The process begins with the five year plan Discussions on the overall budget take place at Operations and ALT before business plans are produced These are informed by the Development Plans Areas for investment are highlighted

The Budget Process at Loughborough Detailed plans are assessed with Schools to ensure that they are deliverable Result is assessed by operations Committee and new investments are approved Budget for the year is agreed by Council and Finance Committee

Budgetary control at Loughborough Performance against budget is assessed quarterly Meetings take place between the Dean and the DVC All areas of expenditure and grant or consultancy income are assessed New forecasts for the year end are agreed The overall University budget is updated to reflect changes

Budgetary control at Loughborough LU has a history of performing better than budget Is this good or bad?

The Balanced Scorecard A methodology for producing a comprehensive set of measures to assess the success of an organisation Makes use of non financial measures Also known as KPIs

Performance indicators Need to ensure financial security but how? Look at KPIs for your institution Banking covenants Total funds to exceed 50m Total borrowing costs not to exceed 5% of total consolidate income HEFCE Financial Memorandum Maximum 4% annualised servicing costs No deficits Are you inline with other institutions?

Sustainability Reporting We have been asked by HEFCE to produce a report on Financial Sustainability for 2012/13 We were one of the pilot institutions producing this report Here is the example we gave to Council

Financial Governance at Loughborough HEFCE Financial Memorandum Audit Committee Finance Committee Operations Committee External Audit Internal Audit

Sources of financial information HEI websites Funding Council websites summary of financial forecasts from all HEIs, summary of grant allocations to each HEI, various areas of guidance for each institution Pension fund websites Within institutions themselves HEIDI

Thank you and goodnight!

Loughborough University Understanding Financial Management.

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