Financial governance - are we getting the best bang for our buck?

02 August 2016

The state and profile of the NHS finances is at its highest level for a generation with an overall deficit of £2.45BN being reported for 2015-16. It is critical that all organisations ensure that they maintain tight financial control and avoid a deficit blind organisational cultural malaise developing.

Whilst undoubtedly there are significant system wide and national level issues to tackle, in this article we discuss a number of simple quick wins and improvements that can be made at an organisation level to recover local control of your organisation’s finances. Whilst these alone will not eradicate the NHS’ financial problem, they will contribute to stemming the flow and help instill effective financial control into NHS providers. Otherwise we run the very real risk of losing financial discipline and creating a financial culture which will be even harder to turnaround.

Financial planning

The majority of organisations commence their financial planning process in autumn and put a plan in place with milestones, accountabilities, dependencies and sign off arrangements. Their plans demonstrate a high level of clinical and operational engagement, appropriate senior challenge and Board level approval. The key elements of an effective planning process are:

  • clear and comprehensive schedule which encompasses milestones, accountabilities, dependencies, outputs and sign off arrangements;
  • clear framework that sets out the corporate expectations in relation to key planning assumptions;
  • provision of financial and business planning templates ensuring consistency of approach;
  • clear expectation of the breadth of operational and clinical engagement and sign off of plans;
  • continued dialogue and iteration throughout contract negotiations with commissioners as required activity volumes are firmed up;
  • use of benchmarking data and prior year run rates to sense check and challenge assumptions where necessary; and
  • a clear audit trail which allows the Board to understand how the new budget relates to previous year.

Financial reporting

Once the annual budget has been set and approved in advance of the financial year our attention turns to how this is monitored and managed in-year. The quality of the discussions and challenge will only ever be as good as the quality of the financial reporting. This is true irrespective of the level within the organisation at which you wish to hold such discussions.

The basic fundamentals of good quality reporting are the same whether or not it is financial or non-financial information being reported. These include:

  • accurate, timely and meaningful data that the recipient can understand and believe in;
  • reports should be action oriented and not too discursive;
  • appropriately balanced between rearward and forward looking;
  • use of trend data, run rates, forward projections and improvement trajectories;
  • the use of RAG reporting or other visual aids to focus the reader on those areas of greatest concern;
  • the reporting of actions incorporating timescales, accountabilities, expected impact and monitoring arrangements;
  • when variances arise it is important that the report focusses on those areas and includes deep dive analytical analysis to provide a greater level of understanding of the key drivers; and
  • the finance report should incorporate Balance Sheet and other non I&E reporting to provide rounded assurances over the overall financial health of the organisation.

Cost improvement plans

During these times of increasing financial challenge it is important that Trusts retain effective oversight of the planning and execution of cost improvement plans (CIP). Key elements of effective CIP planning and execution include:

  • risk assess top down savings so that they reflect where you are in respect of your start point, culture and resources available to implement;
  • insufficient clinical engagement adversely impacts on local ownership and clinical buy in;
  • QIAs need to be undertaken prior to commencement of the CIP scheme. QIAs should be in place prior to Board approval of the financial plan;
  • trusts tend to have an imbalance of back loaded delivery of the CIP plan therefore leaving insufficient time to respond should the CIP plan not deliver as per expectations;
  • there should be clear executive responsibility for each material project in addition to local management and an overall executive sponsor for the whole programme who is responsible for the delivery and reporting of the programme;
  • once approved it is important that the CIP Programme is reported in sufficient detail to provide assurance and allow challenge at an individual project level;
  • CIP reporting should differentiate between recurrent and non-recurrent savings;
  • where CIP schemes are planned which impact across reporting entities it is important that there are clearly identified accountability arrangements in place;
  • where individual schemes are off track the report should include detail of the actions being taken alongside improvement trajectories which will allow tracking of the impact of each action;
  • there is a clear need for an executive led CIP oversight group which meets regularly in year; and
  • it is important that the organisation has a ‘reserve’ of potential schemes that can be expedited as required.

Financial Management

It is essential that an organisation deploys robust financial management at all levels within the organisation. Back office cut backs and re-organisations have sometimes left organisations with stretched resources to undertake the basic elements of good financial management. Having a high level of ‘financial literacy’ within an organisation is crucial. Organisations should ensure that budgetary training and financial awareness sessions support and develop individuals to understand, interpret and respond to the financial information being presented to them.

Essential to the successful operation of a Finance Committee is having an agile agenda capable of being flexed to respond to emerging issues and being risk based and not rigid.
Understanding the purpose of financial reporting and reflecting on what the reader at each level requires should help inform the development of fit for purpose financial reporting. We have covered the good practice reporting principles earlier in this article and summarise below the key elements by level:

Level Key elements 
Ward/dept
  • Accurate and timely budget statements.
  • Analysis of key variances and movements in period.
  • Agreed budget architecture and hierarchy. 
Directorate/division
  • Use of trends and analytical forward projections.
  • Use of deep dive analysis, benchmarking and comparators of key drivers of variances.
  • Use of SLR/PLICS to report rounded I&E performance.
Finance committee
  • Greater use of aggregation and summaries.
  • Greater use of tables, graphs and visual formats to convey key messages.
  • Use of appendices to aid reporting at granular level of detail and deep dive analysis to support organisational wide key variances and drivers.
  • Greater use of forward look reporting and risk based outturn projections to inform best/likely/worse case scenarios.
  • Greater emphasis on actions and mitigations of key variances and projected impacts/timelines.
  • Increased use of benchmarking and inclusion of external factors.
  • Inclusion of rolling cash flow forecasts, reserve movements and debtor/creditor value trends as useful barometers of financial health.
Board
  • Similar core financial report as the Finance Committee albeit excluding many/all of the appendices.
  • Report supported by the outcome and minutes from the latest Finance Committee which sets out actions taken, assurances provided and risks identified.

For more information, please get in touch with Tim Merritt.