Managing Finance in the Public Sector

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Table of Contents....................................................................................................... 1 Conclusion................................................................................................................ 10

Introduction The public sector is commonly known as state sector or the government sector and it may be a part of a state. The nature of a public sector can be a mixture of different types of business, such as production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal. In this way a public organization is sometime refereed to a business institution which is operating for social cause and the priority is social service instead of profit making. Examples of public sector activity range from delivering social security, administering urban planning and organizing national defense. In this assignment, financial issues are discussed with a reference to a postal mail company, named Royal Mail. It is a public company and based on UK, though has operational coverage across the globe. 1. Understand accountability in the context of public sector finance

A persons accountability is being responsible for an act done by the person. In context of public sector finance, accountability is very important, as these institutions are run by government and funded from donation and citizens. In this section, the discussion started with analyzing the different public sector organization and then accountability and reporting nature is briefly narrated. 1.1. Analyze the different organizations in the public sector In United Kingdom, there are different types public organizations in the public sector. These organizations are operated under semi government rule and regulations and full control of government as well. The types of organization in the public sector include the following British Council Central government departments. Executive agencies and non departmental public bodies. Local councils. New Local Government Network (Modernizing Local Government) Parliament.

Policy Hub. NHS Choices. NHS Direct. Strategy Unit Cabinet Office UK Police

It may notice that, the organizations are based on education, social security, national health service, administration management etc. The organization of the public sector (public ownership) can take several forms; there are some major differences between a public sector company and a private sector company. In the following table, the difference is highlightedTable 1: Differences: Private vs. Public PRIVATE SECTOR Privately owned Objective: wealth maximization Funding: IPO / Equity / Debt Accountability: shareholders/debtors Information Reported: Shareholder focused accounting Risks are higher, therefore the returns are also higher Finances are allocated based on Profit Opportunities PUBLIC SECTOR Government Owned Objective: (usually non-profit) to serve the community Funding: Grants, Taxes, Donation Accountability: electorate Information Reported: public accounting Risks are lower, therefore returns are also lower Finances can be restricted without considering the profitability

1.2. Assess the accountability of public sector mangers in relation to finance Accountability can not be defined in a short or few words, sentences; it is a very broad and dynamic concept, as the definition is updated very frequently. Generally, it is the acknowledgment and assumption of responsibility for different actions and its consequences. The actions may include, products of business, decisions of managers, and policies of government including the administration, governance, and implementation of the action. The fundamental accountability relationship in any democratic society

is between those who govern and those who are governed, or between the government and public sector as a whole (often called the supply side) and the rest of society (the demand side). Accountability of public sector managers The accountability of a public service organization is very important to maintain, because if it is failed, the society will suffer and the human kind will be threatened. In the management of accountability of an public sector organization, managers at different level play an important role. In different research it was found that, the accountability of public managers is same as that of their workers. But there a tendency is also found that the superiors are more accountable to external principles. And the managers more accountable to tax payers, ministry related to their work and to the government, but they are not that much accountable to the workers who works under the supervision of these managers. This situation caused the worker to be more accountable to customer than managers ( Virtanen 1997). Besides these, a public company manager has to play in different corporate social responsibly activities and maintaining corporate governance within the organization. 1.3. Analyze financial information reported for different public sector organizations The nature of financial information is different based on the types of the organization. For a health service organization, the source of income is service revenue from patients, grants from donors and government. And the expenditure account may consist of taxes, fees for doctors and consultant etc, operational expenditure. In this essay, Royal mail is used as a reference. The income source of Royal mail is revenue from service. There are different types financial performance indicators. Though most of them are meant as financial ratios. In the following section these financial indicators discussed with reference to Royal mail group

Stock turnover days. This ratios mean the ability or the reputation of Royal mail so that their stock of product, ex. The mails and other service are sold. In this ratio the lower is the better. Because lower ratio means that the inventory sold quickly

Debtors turnover days. This ratio means that how many days to be needed to turn sale to cash. Here if the debtor turnover-days of Royal mail is lower, then it favors them because, lower ratio means that the receivable accounts are paid quickly. So Royal mail should keep it at minimum

Current ratio. This ratio reflects that how much assets are available to cover the liabilities. The rule of thumb here is 2: 1. But the current asset must be higher than the current liabilities. Royal mail found safe in this ratio.

Apart from the above performance indicators, Debt/equity ratio, Interest coverage, Return on investment, Gross profit margin, Breakeven sales etc are also widely use for reflecting the performance . Apart from these indicators of financial performance, there are some non-financial performance indicators as well. These include response time to serve, speed of service delivery, quality of service, use of technology, skills of workers etc. The non-financial performance indicators include corporate governance, corporate social responsibility etc. a public organization is expected to perform more in the non-financial performance instead of financial performance. Corporate governance ensures equality, free from discrimination, justice etc. corporate social responsibility widely known as CSR activities. For a public sector organization, CSR activities is very crucial, these activities include rising fund for underprivileged people, giving stipend to meritorious student, donate money to humanitarian organization etc. The financial information of public sector organization is reported in financial statements as private company does. The common financial statements include income statements, balance sheet, cash flow statements, owners equity statement etc. There are some other external reports which are needed to be prepared for the maintenance of regulatory guidelines and accountability. These reports include Care Quality Commission, Audit Commission, reports from Houses of Parliament 2. Understand how to use financial information for decision making and control

In this part of the paper, usage of financial information to take decision and establish control mechanism in an organization will be discussed. Royal Mail Group is used to give necessary exposure of practical situation in term of financial condition and performance. 2.1. Analyze the financial information available and evaluate its use for decision making and control By analysing the financial information of Royal mail group, it is revealed that the UKLPI, a subsidiary of Royal mail group, has 120 million loss in 2010-11 financial years (annual report, 2010-11). But in the same year the group has captured a profit of 39 million. In the profit the major contribution is from general logic system which is accounted for 118 million. The implication of this financial information is

the board of directors need to priorities the business units. The subsidiaries of Royal mail group, are getting good revenues but also has incurred cost heavily as well, accept the general logistic systems. In the preparation of budgets, this subsidiary of royal mail group should get highest allocation for expanding their business. And the other should not get much and these should be critically monitored for finding out the costing problem and problem of profitability.

2.2. Assess areas to be monitored and demonstrate how this can be achieved By referring Royal mail group, the last two year, their financial condition was somewhat volatile. In the following table, the operating profit of the group, is drastically fallen in the last year. And this fall need to be monitored. Table 2: Operating profit/(loss) after modernization costs 2010-11 m -120 21 118 20 39 2009-10 m 20 33 112 15 180 Variance m -140 -12 6 5 -141

Business unit UKLPI Post Office Limited General Logistics Systems Other Group

Source: Source: Royal Mail Holdings plc Group Annual Report and financial Statements 2010-11 It can be noticed that apart from general logistic systems, other subsidiaries of the groups are not performing well in the last financial year compare to the previous year. And there is very high variance in this last financial year (2010-11) compare to 2009-1010 as shown in the the table 2. This can be monitored and take corrective actions as well. Apart from the the operating profit or loss, there are other element which should be monitored include expenditure, different revenue collection streams as well. So finally it can be said that Royal mail group need to find out the reason of fall in the operating profit and should monitor this to prevent reoccurrence. Royal mail group has performed well in the non-financial sector also. Especially, the company has contributed to different charity, social cause and humanitarian activities by giving money and other supports. Few of them are highlighted in the following-

43,000 of Royal mails employees regularly donate to good causes through payroll giving The company raised 1.8 million in charitable donations in the past year Royal Mails target of 50% of our electricity to come from renewable sources has already been achieved with 98% acquired from certified renewable sources (Royal mail CSR website 2011)

2.3. Analyze different types of financial decisions to be made and demonstrate techniques to support decision making In the public organization, like police, National Health Service, postal service, social care etc. Different financial and non-financial decisions need to be made. The financial decision include, the decision regarding sources and usage of fund, investment, appraisal of staff and organization expansion etc . For Royal mail group, the financial decision to be needed are about the expense and income, utilization and appraisal of profit, expanding coverage, increasing human resource, purchasing new equipment and increasing compensation to adjust inflation etc. The decision is made based on different types of information. The financing decision is taken based on net present value analysis, financial ratio analysis, and credit rating analysis. To take about investment, the technique used are NPV, Internal rate return method, Payback method etc. Apart from these method, cost and benefit analysis is also used widely. The method need to be suitable based on the nature of decision and investment. In the financial decision making and other non-financial decision making, the government has to play an important role in a public organization. Because they are the major fund provider in a public service organization. So this is a significant advantage for a public service company like Royal mail in decision making. 3. Understand how to manage a public sector tender process

To purchase a office stationary in large volume or to purchase office equipment, a public organization need to give tender for this purpose. In this part, details discussion regarding the tendering process is given and selection of seller of a intended elements for an organization is also discussed in this section of the essay. 3.1. Determine process by which projects are put out to tender

A government organization needs tendering process to purchase its office and operational elements frequently. In the tendering process, political issues, different parameters etc need to be considered when the process is planned. And to make the process clear and acceptable to the society and regulatory bodies, the process need to maintain the requirements and other formalities as guided by the authoritarian institutions.

3.1.1.

Tendering Process

In an tendering process, there are a number of steps to complete the process for selecting a contractor, supplier etc. in the following figure, these steps are listed.

Figure 1: ten steps in tendering process

In Step 1, the public sector defines what it needs and outlines the bidding process. Then if you are interested in making a bid, you may be asked to provide information about your finance and experience as well as supplying references. In step 3, If you do qualify, the organization will send you further instructions, information about deadlines, and a letter asking you whether you would like to bid for the tender or not, which you must return. Then the organization needs to make sure that the bid you have made represents value for money, therefore, they may ask for more information before accepting your bid. Then the public sector announces who they will award the contract to, followed by a 10 day standstill, during which suppliers can ask for feedback on why that decision was made. In step 6, the tender take place where both buyer and supplier are involved in this. Then Contracts, Terms and conditions revealed. There It is important for you to

familiarize yourself with the terms and conditions that were sent to you before you made the bid, as well as understanding the responsibilities the contract places on both buyer and supplier. Finally the contract is managed and putted to review and testing and feedback. . 3.2. Analyze how public sector tenders are evaluated and suitable suppliers selected To evaluate tenders, there should be some criteria set by the public service organization. There can be different guidelines, parameters as well to sort out the tenders. The criteria might include financial stability, fairness etc. in the following section, the principles of tenders process are highlighted which can give a direction of criteria for evaluation. Principles of Tendering Fairness: All tender or quote evaluations must be undertaken in a fair manner. This means each bid deserves equal treatment and assessment and scores should be applied consistently Confidentiality: All bids during a tender process are confidential and should not be discussed with any person not involved in the evaluation process. Security: All bid documentation must be stored securely during the evaluation period. Hard copies should not be removed from Council premises or left on desks overnight. Any electronic versions should be transferred using secure encryption methods Evaluation Criteria: Bids can only be assessed against the criteria issued in the invitation. Any criteria not included in the invitation cannot be considered or scored at evaluation stage. Scores cannot be awarded or withheld based on the structure of the bid and how easy it is to assess So the criteria for the evaluation of tenders can be the following elements Firm Experience Firm Expertise Past Performance Market Standing of the firm References provided Known milestones achieved Cost of supplies (Includes whole costs such as cost of acquiring, owning, maintaining, and disposing of goods, services or works Quality of Supplies(Factors such as technical merit, functional characteristics, environmental characteristics, running costs, cost effectiveness are considered)

If any suppliers are unsuccessful in the tendering process, they should be got feed back and the contract paper should be well written, to be free from any misunderstanding in the future.

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