Rumki_Managing Finance in Public Sector 3500_april 13 Sent Plaz Solve

7/29/2019 Rumki_Managing Finance in Public Sector 3500_april 13 Sent Plaz Solve

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Managing Finance in the Public Sector

Table of Contents

Table of Contents....................................................................................................... 1

Conclusion................................................................................................................10


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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.


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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 highlighted-

Table 1: Differences: Private vs. Public

PRIVATE SECTOR PUBLIC SECTOR

Privately owned Government Owned

Objective: wealth maximization Objective: (usually non-profit) to serve thecommunity

Funding: IPO / Equity / Debt Funding: Grants, Taxes, Donation

Accountability: shareholders/debtors Accountability: electorate

Information Reported: Shareholder focused accounting Information Reported: public accounting

Risks are higher, therefore the returns are also higher Risks are lower, therefore returns are also lower

Finances are allocated based on Profit Opportunities 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 dynamicconcept, 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


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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


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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


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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 2009-10 Variance

Business unit m m m

UKLPI -120 20 -140

Post Office Limited 21 33 -12

General Logistics Systems 118 112 6

Other 20 15 5

Group 39 180 -141

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-


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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


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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


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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)


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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.

Conclusion

In public sector, the financial system sometime is getting very liberal in terms of accountability and

responsibility. In this essay the different issues regarding the financing process and scenarios or public

sector companies are discussed and it is found that by using effective tools and techniques, the public

sector can contribute a lot to the society and human kind for better future.

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Rumki_Managing Finance in Public Sector 3500_april 13 Sent Plaz Solve