Balance Sheet Management

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Balance SheetManagement

Reviewing & Implementing BestPractice

Joanna WatsonPricewaterhouseCoopers LLP

2PricewaterhouseCoopers LLP

CIPFA in the MidlandsBalance Sheet Management

3 April 2007Session overview

• Introduction

• What is Balance Sheet Management (BSM)?

• Why is BSM important for public sector bodies?

• Framework for assessing good practice

• Applying the good practice framework

• Any questions



3 April 2007What is Balance Sheet Management?

Definition per the CIPFA / PwC framework:

The active assessment and management of all the

organisational, operational and financial activities and

transactions that determine or influence balance sheet

values to promote effective stewardship of public

money and value for money in use of resources



3 April 2007Why is BSM important for the public sector?

• Materiality: balance sheet items usually highly material –both financially and operationally

• Balance Sheet considerations are important elements ofUse of Resources assessments (or equivalent)

• Potential opportunities for efficiency savings

• Current financial analysis may be overly focused on income& expenditure

• Risk of error or unexpected losses / write-offs

• Balance Sheet impacts can arise from a wide range ofoperational activities



3 April 2007

Responsibilities &accountabilities

Governance,Risk &

Controls

Assurance overdischarge of stewardship

responsibilities

Decision-makinghierarchies

Accounting &External

Reporting

Accounting systems& processes

Evaluation of accountingpolicies

FinancialManagement &

DecisionMaking

Translating data tomanagement information

BSM as part of overallfinancial management

Planning, budgeting &internal reporting

OperationalManagement

Day to day managementof assets & liabilities

Links between operationalactivities and impact on the

Balance Sheet

Assets required tosupport service delivery

Governance,Risk &

Controls


Reporting


DecisionMaking

Framework for Assessing Good Practice

Responsibilities &accountabilities

Governance,Risk &

Controls

Assurance overdischarge of stewardship

responsibilities

Decision-makinghierarchies


Reporting

Accounting systems& processes

Evaluation of accountingpolicies


DecisionMaking

Translating data tomanagement information

BSM as part of overallfinancial management

Planning, budgeting &internal reporting


Day to day managementof assets & liabilities

Links between operationalactivities and impact on the

Balance Sheet

Assets required tosupport service delivery



3 April 2007Good Practice Balance Sheet Management

1. Know Your Balance Sheet 2. Assess Your Practices1. Know Your Balance Sheet

• Materiality of values

• Impact on service delivery

• Past experience

• Degree of external scrutiny

• Degree of subjectivity

2. Assess Your Practices

• Are current practices effective?

• Are potential BSM impacts routinelyconsidered?

• When was the last time youformally assessed your approach?

• Is BSM on your Board’s radar?



3 April 20071. Understanding your Balance Sheet

MaterialityBalance sheet component

Recentbalances1 (£m)(Enter values

not RAG)

Balance sheetvalues

Impact onoperating

costs

Criticality ofarea to

operationaldelivery (egassets usedfor delivery-

critical areas)

Pastexperience (eg

history ofmaterial

error/fraud/poor

performance)

Externalscrutiny: area

of political/public

sensitivity?2

Judgement:area where

specificexpertise isrequired?3

Other

1. Tangible Assets 1,447

2. Intangible Assets 0

3. Investments 1.3

4. Stocks 0.5

5. Debtors 174.1

6. Cash & Bank 0.1

7. Creditors 655.3

8. Provisions 364

9. Reserves 76

10. Net book entries 526

Balance Sheet analysis matrix – Analysis of XXX Public Sector Body

Illustrative Example

Highly Material / SignificantArea of Focus

Medium Materiality /Significance

Low Materiality /Significance



3 April 20072. Assessing your BSM practices

Governance, Risk & Controls Accounting & External Reporting

Financial Management & Decision MakingOperational Management

1. Organisational culture: importance placed on BSM

2. BSM embedded in all relevant strategies and plans

3. BSM responsibilities formally assigned

4. Decision-making framework considers BSMimplications

5. Appropriate assurance is provided over all aspectsof BSM

6. Risk management activity includes BSMconsiderations

1. Asset management is effective

2. Stock management is effective

3. Debt management processes are effective

4. Creditor/liability management processes are effective

5. Treasury management processes are effective

6. Provisions are properly managed

1. Accounting framework understood/applied correctly

2. Accounting systems / processes are fit for purpose

3. Complex accounting areas are considered andaddressed

4. Judgemental areas are analysed and reviewed

5. Accruals & prepayments calculated on a timely basis

6. Provisions / contingent liabilities / commitmentstreated correctly

7. External reporting obligations are satisfied

8. Audit trails and evidence are robustly maintained

1. BS factors embedded in planning and budgeting

2. BS factors embedded in IYM & forecasting

3. Internal reporting reflects balance sheet status/issues

4. Activity analysis and costing consider balance sheetimpacts

5. Financial decision support includes BS factors



3 April 2007Assessment of BSM practices

Governance,Risk &

Controls


Reporting

Financial Management& Decision Making




3 April 2007Interpreting the results

GRC 4The organisation'sdecision-making

framework is effectiveand requires appropriateconsideration of balance

sheet implications

AER 4Judgemental areas are

underpinned byappropriate analysis and

management review

FMD 3Internal reporting properly

reflects balance sheet impactsand issues

OM 2 & 3Stock management iseffective in supporting

delivery of theorganisation's outputs

Debt managementprocesses are effective

GRC 4The organisation'sdecision-making

framework is effectiveand requires appropriateconsideration of balance

sheet implications

AER 4Judgemental areas are

underpinned byappropriate analysis and

management review

FMD 3Internal reporting properly

reflects balance sheet impactsand issues

OM 2 & 3Stock management iseffective in supporting

delivery of theorganisation's outputs

Debt managementprocesses are effective



3 April 2007

MaterialityBalance sheet component

Recentbalances1 (£m)(Enter values

not RAG)

Balance sheetvalues

Impact onoperating

costs



critical areas)

Pastexperience (eg

history ofmaterial

error/fraud/poor

performance)


of political/public

sensitivity?2



Other



3. Investments 1.3

4. Stocks 0.5

5. Debtors 174.1

6. Cash & Bank 0.1

7. Creditors 655.3

8. Provisions 364

9. Reserves 76


Illustrative Example

Highly Material / SignificantArea of Focus

Medium Materiality /Significance

Low Materiality /Significance

Interpreting the results



3 April 2007Applying the framework: potential action plan

1. Purchase copy of Cipfa/PwC BSM Framework (www.cipfa.org.uk/shop)

2. Read your new copy of Cipfa/PwC BSM Framework

3. Complete a) BS analysis matrixMateriality

Balance sheet componentRecent

balances1(£m)(Enter values

not RAG)

Balance sheetvalues

Impact onoperating

costs



critical areas)

Pastexperience (eg

history ofmaterial

error/fraud/poor

performance)


of political/public

sensitivity?2



Other



3. Investments 1.3

4. Stocks 0.5

5. Debtors 174.1

6. Cash & Bank 0.1

7. Creditors 655.3

8. Provisions 364

9. Reserves 76


Central finance teamDirectorate finance teamsInternal auditorsExternal auditors

4. Identify material or priority areas

5. Assess any performance gaps

6. Implement improvement plan to address material deficiencies

7. Consider communications required to support implementation (egoperational or other non-financial managers, board members etc)

b) BSM self-assessment



3 April 2007Any Questions?

Joanna Watson

01509 604039

[email protected]

www.cipfa.org.uk/shop

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Balance Sheet Management