Good afternoon, everybody. I am John Wood, CEO at the Chartered IIA UK and Ireland.
The topic for today is ‘Cash Flow Management’.
Organisations and their internal audit functions face a dizzying pace of change and unprecedented uncertainty. Change and uncertainty are defining 2022 and will continue to define the years that follow. Financial resilience and stability have been paramount issues for organisations during the COVID period and continue to be so with the war in Ukraine and the consequential rise in inflation and cost of living.
Financial risks remain high. Audit committees and senior management may seek independent assurance that cash flow management remains a priority and is under control, and that efforts are being made to monitor the situation outside of the business itself. This may require a confirmation from internal audit that the business is using all available internal and external data to assess the situation as it evolves.
Cash flow management therefore continues to be a source of trepidation, given the volatility in revenue streams. We also know local government cannot simply close up shop when cash dries up.
Cash management includes all activities that a local government operates for maximum availability of money and the optimal rate in investment in securities, within the framework of laws and procedures. Financial planning is an important part of program management.
The objective of cash management is to ensure the availability of sufficient funds to meet the needs of local government with a minimum cost, including the potential costs of not investing free local government money. Let’s explore the topic in more detail today.
Before we commence the session, I would like to provide the normal introductory comments:
I am joined today by:
Chair's opening comments
Thank you and good afternoon everyone. In amongst the weighty responsibilities of Section 151 officers, the Local Government Finance Act 1988, places one more particular burden on their shoulders. Section 114 of the Act requires the Section 151 officer to report to members if there is or is likely to be unlawful expenditure or an unbalanced budget in year. The council then has 21 days to consider the report and once the council has issued the Section 114 notice, spending on all but essential services must stop immediately. The Notice itself is a statement that the council is in deep financial trouble.
Those of us who’ve worked in local government and more widely the public sector will know that the financial sustainability particularly in local government has faced numerous challenges. We’ve faced years of austerity where we saw a near 50% reduction in central government funding over a ten-year period, to increased demand for some of the most expensive services we provide, for example, social care. And if that wasn’t enough, we then had the pandemic, where councils took a leading role in the response to that and now, of course, we have high inflation, which is pushing up costs across the board for councils everywhere.
A few years ago, my local council, Northamptonshire County Council, issued a Section 114 Notice and was abolished in 2021, replaced by unitary councils serving the area, but more recently we’ve had them from Croydon and Slough. What they are doing is saying that they’ve run out of money.
What all of this does is demonstrate the importance of cash flow management and it’s important to remember this isn’t just a finance department issue; it’s a whole of council issue. The council needs to manage cash flows, assess the credit worthiness of business partners to make sure that investments, which many councils have made, for example in property, will actually be able to provide a return and make an effort to reduce liabilities.
Something which the private sector is very good at doing is identifying service users who may default on their payments. When many of the services we provide are of a statutory nature, saying ‘no’ to a service user is not always an option.
To talk to us today about cashflow management, I’m delighted to welcome Gareth Harris, who is a Restructuring Advisory Partner at RSM and manages the RSM regional restructuring practice. He has over 25 years of restructuring experience working with/ advising financially stressed or distressed clients across the corporate and public sectors. He heads up the Government restructuring sector approach for RSM.
Slides from the session are attached here. Notes below are supplementary.
Gareth Harris, RSM UK Restructuring Advisory LLP
Chair's closing comments
My first thought was around internal auditors not always being accountants. In councils we have to remember that our target audience is residents or members and a lot of them aren’t accountants either. So as an auditor, if you go in and ask the right questions and can you explain how does this work? How do you ensure this happens? How much cash are you expecting? Can you demonstrate that you’re getting it at the right time? Perhaps those non-technical, non-accounting type questions and if they can’t convince us, they aren’t going to be able to convince our residents and members, so I think it’s useful to keep it at that level as we are able to ask questions.
The other thing I was thinking about was Robin Hood energy, Warrington Borough Council, where something is a bit of a pet project and there are good intentions, but the council and officers commit sometimes to a black hole which can suck up money. I’m hoping that what Gareth has gone through today shows that if done properly can prevent that kind of situation escalating in the future.
Institute's closing comments
Thank you all.
As usual, notes, chat comments and the slides shared today will be placed on our web pages in the next day or two.
Our programme of forums and topics for the second half of 2022 have now been uploaded to the website. We will shortly send out a meeting invitation so you can ensure the Forums are in your diary.
Following today’s session there may be value in reading our report ‘Avoiding the blind spot: Supporting financial stability and resilience’.
Our topic for the July session on 27 July 2022 is Cyber Response Plans.
Thank you everyone, see you in July.Thank you for attending. As always, if you have any ideas or suggestions for what we might include in future agendas, please contact Liz Sandwith.
Q: How do you spot if the adverse scenarios used as sensitivities are themselves over-optimistic?
A: They’re essentially ‘what ifs’ there’s no right answer. When doing this work we often debate as a team what the right sensitivities are and what the right combinations are. The important thing is that these are something sensible, e.g., look at the high street and the level of drop from three years ago, what is the national living wage expected to increase to etc. let’s scenario plan for that. There is no point being hugely negative as those things don’t usually all combine. The best way to deal with this is to regularly update the cashflows and check back in to look at the variances – you will have lots of versions of the forecasts and make note of the assumptions used.
Q: You mentioned that good cashflow models should contain clear assumptions and be capable of being stress tested by management and by auditors. Do you anticipate internal auditors doing the stress testing, or do you anticipate them being part of the team that works on the stress testing and asking challenging questions?
A: It is more of a questioning role for the internal auditors. My view is that management should be stress testing – that is their role to manage the cash and internal audit’s role is to audit that and ask questions around it. If management aren’t doing this at all, the first question has to be ‘why not’, and the second should be – if you weren’t doing this, what would you be doing, what scenarios would you be running? It goes back to what are the key risks within the organisation – where do you see the key revenue risks and cost overruns? And then maybe looking under the rocks of the subsidiaries and joint ventures where quite often the numbers can be quite large and can make a material difference.
Q: Is there too little emphasis on cash flow management in the public sector when compared to the private sector?
A: There is clearly not enough focus on cash flow management in the public sector. It helps to think of the cash as my money – after all its taxpayer cash and if people thought about it this way they wouldn’t be so blasé about the cash in the organisation.
Q: How close have local authorities come to running out of cash?
A: Very close! In all likelihood they wouldn’t be allowed to run out by central government. Under S.114 authorities need to be mindful of not incurring more cost and only paying essential expenditure. There is a special situations team within UKGI who deal with this kind of thing and whilst they wouldn’t want to step in and make payments they have been known to make settlements – but they will only do this if the authority has been doing the right things.
Q: Would it be appropriate to suggest that the issues you identify frequently come from asking the obvious and more simple questions - nobody responsible, lack of skills, omission of key steps, obvious omissions in the work etc. rather than in the detail of your work?
A: I think the scale of the problems is different. The bigger problems come out of the more obvious questions. We as auditors and reviewers often get bogged down in the details and you must step back and consider what is material to the organisation. Those basic questions often do get to the crux of the issue. We often tend to roll things forward on audit plans without much to underpin this. Those obvious questions often get to the nub of the issue, especially when you’re told ‘we’ve always done it that way’ – the key is to ask ‘why’.
Q: You mention the need for a command and control culture/structure when cash is tight. How tight do things have to be before command and control is put in place?
A: You’re probably in the position of being borderline Section 114. The stage before that when you’re coming up with an action plan is when I would expect, in a local authority, to move towards a command and control approach. Someone needs to take control of the cash and put in place the action plan to avoid a Section 114 Notice. It goes back to the cost and cash – at that point you’re trying to save cash very quickly to drive it back into the business and those action plans need to be delivered. Similar to in year savings plans - how realistic are they? How likely are they to happen?
Q: Do you have any tips for how senior management/the exec would help drive that culture of collective ownership of effective cash management of the business? Budget holders across the organisation (outside of Finance) are often lax about confirming expenditure committed and when - any ideas as to how this could be improved?
A: The simplest way is to make sure cash is on the agenda – particularly department agendas and minutes. If it’s not on the agenda it won’t get discussed. Can also set objectives, KPIs and incentivisation etc. The CEO should have it as one of their key priorities and be continuously talking about it, it shouldn’t drop off the radar in six months’ time.
You mentioned ‘collective ownership’ – the organisation pulling together, that helps eradicate the siloed approach to things. This collective ownership is a bigger picture than simply cashflow management?
It is – it’s also about budgets as well. The number of times we hear people say – that’s budgets so that’s Finance’s responsibility – cash is the same. Collective responsibility is important but it does take time – there’s no magic wand to change the culture – it has to be a drip, drip, drip for a long time.
Of course driven from the top – it has to be the CEO’s responsibility, explaining that it’s not just the responsibility of the s.151 – you are all responsible for cash management and finance across the organisation.
I remember doing this as part of an NHS organisation, helping to set objectives for different budget holders across the organisation. This just didn’t compute to start with – it can take time.
Q: Do you agree poor cash management can lead to large (unexpected) budget variances at year end?
A: Yes definitely. We see it far too often – it goes back to the need to regularly update the cashflows. It may be prudent to do it more regularly now than ever before.