Do you know what you don’t know? Key financial reporting to Boards

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gill-powell-240-x-260Registered providers are operating in an increasingly complex and uncertain environment; timely and accurate financial reporting to boards, and challenge by board members, is more important than ever. 

To provide effective governance, all board members should be providing challenge and scrutiny of their organisation’s financial strengths and weaknesses.  For this oversight to be effective it is crucial that boards are receiving the right financial information on which to monitor performance, assess current and projected positions, and make decisions on appropriate corrective action.

Regular financial information for board members should include:

  • The management accounts: setting out the organisation’s financial performance in the current financial year, highlighting variances against budget. Understanding and questioning variances will provide insight into any performance issues, with the right level of granularity to highlight key risks to business performance.
  • Treasury reporting: particularly cash against forecast, reporting on lending covenants and headroom, and compliance with treasury policy requirements. Getting the right balance between exception reporting, which is typically used for many organisations and detailed spreadsheets is something that is worth always keeping under review.
  • Key Performance Indicators: measuring performance against key targets to deliver the business plan. They should include some leading indicators that highlight potential problems, e.g. changes to demand and void levels, rather than just current performance. Effective organisations use KPIs to help guide activity as well as to measure current performance.

Other reporting boards should regularly see and understand includes:

  • Value for money (vfm), to give assurance that tenants are receiving a value service. And it should not just be the annual reporting on performance for the annual statement. It should be a core part of business decision making.
  • Business plan projections and robust stress testing.
  • A summary of the Asset and Liability register and assurance that this is live and complete.

Stress testing

Regulators across the UK expect boards to fully understand inherent risks through robust stress testing of business plan financial projections.  This means varying key assumptions within the financial model, looking at their impact on the surplus, lending covenant conditions, such as the gearing ratio and interest cover ratio.

Testing should cover the main macroeconomic risks, such as inflation, interest rate fluctuations, etc., and risks specific to the organisation and its strategic plan, e.g. new development assumptions, potential crystallisation of contingent liabilities.  The process should test a variety of scenarios both individually and in combination to show what could happen. Although the principle of multi-variant testing is now commonly understood by the sector, we still see organisations not truly testing their business plans to destruction.

Taking the real example of welfare reform, the impacts could be numerous: universal credit may reduce the ability of tenants to pay their rent pushing up rent arrears, more focus on rent collection increases staff costs, bad debts increase, properties become empty as tenants cannot afford the rent – the cumulative impact on cash flow and the surplus could be substantial.

Stress testing should model the perfect storm – what combination of adverse factors would break the plan, make the business run out of cash or break covenants?  If this were to happen, the funders may want to call in their debt, seize securitised assets or (more likely) look to renegotiate and push up the cost of borrowing, putting further pressure on the longer term plan.

This process should then turn boards’ attention to action planning and mitigation measures. Actions will differ depending whether a crisis is cash flow or covenant breach driven – both would involve discussions with lenders, stopping discretionary spending and potentially selling properties.  Considering and preparing for the worst financial case will put organisations in a stronger position to limit and avoid the worst impacts. It is the responsibility of boards and executives to get it right

Some questions for boards

  • Does your board understand FRS 102 international reporting changes?
  • Does everyone understand financial/treasury arrangements?
  • What is your current headroom on your covenants? Which is the most sensitive to the external environment now?
  • How do you monitor and gain regular assurance on vfm and KPIs?
  • How will you gain continued assurance that the Asset and Liabilities register is complete?
  • Are you aware of any areas of long-standing poor performance, and what if any corrective action is being undertaken?
  • Stress Testing – what has your board done? How was it involved in developing the scenarios?
  • Were the assumptions challenged?
  • What would break the business?

For more information or advice, contact Gill Powell – Director at Altair | 07887 791 381 | gill.powell@nullaltairltd.co.uk

To find out more about our financial consultancy services or discuss a potential project, please contact Susan KaneJim Lashmar, Gill Powell or Hugh Coll