Loughborough University Understanding Financial Management
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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
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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
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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
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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
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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
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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
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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
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So this is accounts What is the answer ?
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So this is accounts What is the answer ? Zero
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So this is accounts What is the purpose of a set of
accounts?
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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!
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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
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Lets start at the very beginning Cash Accounting Double Entry
Book keeping Trial Balance
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Lets start at the very beginning Debits o Assets o Expenses o
Profits / Surpluses Credits o Liabilities o Income o Losses /
Deficits
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A Page from an Accounting Ledger Is the balance good news or
bad news?
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Why are there rules to accounting? There are many users of a
set of accounts Who would use Loughborough Universitys Financial
Statements
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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
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Accounting Principles
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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!
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Accounting Principles - Accruals Recognition of income on
research grants Recognition of income from endowments Accounting
for goods or services received Depreciation Deferred Grants
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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.
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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
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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
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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.
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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
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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
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Depreciation - Example YearCost Accumulated Depreciation Book
Value 112,0003,0009,000 212,0005,2506,750 312,000 4 5 2,847
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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.
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Depreciation Question Year Cost Accumulated Depreciation Book
Value
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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.
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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?
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Financial Objectives maximisation of profit maximisation of
return on capital employed survival securitylong-term stability
growth
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What are the Financial objectives for LU? ??
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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
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The Business Cycle How can it use those funds Fixed Assets
Working Capital Investments
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Sources of Funds Ordinary Shares Rights Issue Preference Shares
Debentures Debt
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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
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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
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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
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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
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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?
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Income and Expenditure Account Why does Loughborough University
need to make a surplus?
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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
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Income and Expenditure Account Exercise in your workbooks
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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
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Total recognised Gains and Losses Catches changes in the
valuation of assets or liabilities which have not gone through the
Income & Expenditure account
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Balance Sheet Exercise in your work books
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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!
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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!
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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
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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)
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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
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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
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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
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
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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
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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
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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
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)
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Review of the Day Any Questions? Please bring calculators
tomorrow
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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
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Ratio Analysis Ratios can be split into three areas Liquidity
Ratios Profitability Ratios Efficiency Ratios
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Liquidity Ratios Liquidity (indicates how well equipped the
business is to pay its short-term debts) Ratios: Current ratio
Liquidity ratio
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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.
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Profitability Ratios Profitability (shows the degree of success
with which the business is trading) Ratios: Gross profit/sales Net
profit/sales ROCE
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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
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Efficiency Ratios Use of Assets (shows how effectively the
assets are being utilised) Ratios: Sales/fixed assets Debtor
Payment Time Creditor Payment Time
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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
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Ratio Analysis Please do the exercise in your workbook
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Ratio Analysis We have prepared another example
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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
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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.
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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
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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.
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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)
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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:
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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?
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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
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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.
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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
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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
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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
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Flexed Budgets Discuss in Groups that advantages and
disadvantages of flexed budgets How else can you flex budgets?
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Budgetary Control This is concerned with: Monitoring budgeted
against actual figures Analysing and investigating variances both
positive and negative Re-budgeting where necessary
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Now a word from our sponsor
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Economic Challenges What do you think are the major economic
challenges facing Loughborough University ? What has changed in the
last few years?
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RASCAL Resource Allocation System and Cost Apportionment at
Loughborough It how we fund the academic Schools
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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
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RASCAL Indirect Charges Replace COMA Include the Community
Charge Now one driver People People = Staff + Students
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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
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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
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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
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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
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Budgetary control at Loughborough LU has a history of
performing better than budget Is this good or bad?
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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
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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?
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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
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