Unit 14 Managing financial resources

Managing Financial resources in health and social care

Task 1

1.1 Explain what principles of costing and business control systems may be adopted in BUPA.

The principles of costing are to adequately cost a product, obtain stakeholder input – including non-financial staff, obtain quality input data to get accurate results, costing should focus on material costs, minimise subjectivity and costing should be transparent and auditable.

BUPA could use the principles in costing to control its business and allow the clients to get adequate treatment and provide the shareholders a reasonable level of return. BUPA, first has to get an insight and understand the cost of the service i.e. cost per patient. 2ndstep is to analyse, record and classify all the expenditure related to the service. This could be the cost of a hour for a patient with regard to the physician, nurse, attendant etc. staff cost makes up 60% BUPA’s cost, therefore understanding how these costs relate to the patient, will enable BUPA to better cost the patient and even communicate to the local authorities on why BUPA should receive a raise in the fee for a patient. According to Tracy (2002), cost of goods sold is the largest expense for a business, typically 50 or 60 % or more. Thirdly, this information of the cost of the product has to be given to finance for budgetary and control purposes. When actual costs arise these can be compared to budget and reasons sought for the variances. A simple costing system will also assist in the pricing of BUPA’s services.

1.2 What were main heads/amounts of income for BUPA in the last financial year? 

The bulk of the income came from local authorities and private individuals; the amount was £ 479 million from the continuing activities and £ 532 million from the discontinuing activities. The other income was from bank deposits £ 40 million, finance income £ 5.5 million, income from shares in group undertakings £ 324 million and other receivables £ 122 million.

1.3 What regulatory requirements need to be satisfied while managing financial resources in BUPA?

BUPA business structure is one of a public limited company. A public limited company in Britain has to satisfy a number of requirements in the Company’s act. The company’s act has the laws and regulations on how a public limited company should be formed and run. A public limited company can issue shares to the general public, therefore as a mechanism to allow the shareholders and other financial stakeholders to make informed financial decisions on the company, such as to buy and sell shares of the company, the preparation of financial statements of BUPA are governed by the company’s act and the financial reporting council’s requirement of governance and reporting in companies. As pointed out by Lee (2006), a public limited makes its financial information public. BUPA being a public limited company has to prepare its financial accounts in a “true and fair view”. To prepare the accounts in a “true and fair view” the accounting standards provide the guidance.

The computation of tax also has to be done by taking into consideration of the taxation laws. Proper set of accounts have to be maintained so as to determine what expenses are tax deductible and what expenses are not.

The home care centres are regulated by the care quality commission through the Health and Social care Act of 2008. They will impose clinical and health and safety regulations in the homes. There are bound to affect BUPA financial resources as adhering to regulations will incur costs.

1.4 Evaluate the systems for managing financial resources in BUPA?

To manage financial resources, the services of the professional accountant and finance professionals should be sought. The finance department will record and post the income and expenditure to relevant accounts. Books are maintained. Once this is done the monthly financial are prepared for the management to know BUPA financial status and make financial decisions. In addition, the accountants together with the divisional heads prepare sales, production and expense budgets. The budgeting system enables BUPA to manage its financial resources well. According to Horngren et al, (2012), budgets induce a different set of decisions within an organization because of better collaboration, planning, and motivation.

BUPA has something similar to an enterprise resource system. This systems helps in planning, monitoring and control. According to Hansen et al (2009), the processes of monitoring a plan’s implementation and taking corrective action as needed are referred to as controlling. The local councils and the private self-funded individuals make payments to BUPA, so sometime BUPA might provide them on credit and an ERP system through its debtor operation module will generate reports of the amounts due by debtors. BUPA could follow the reports and get the money owed on time, therefore managing its working capital well. The ERP systems will have similar modules for stocks and creditors. In the annual report BUPA says that it has a dedicated IT team responsible for the development, maintenance and monitoring of IT services. This shows that BUPA’s systems are robust and therefore will minimise the risk from abuse and system failure.

Task 2

2.1 What are the diverse sources of income for BUPA? 

The following are the types of income for BUPA:

Local authorities and primary care trust – Over 70% of BUPA’s income come from local authorities and primary care trust. In recent years, the funding received are not adequate to cover the cost of the patient and provide a reasonable return for the shareholders.

Private Self-funded care – These are individuals that do not go through the NHS system to get the home and nursing care needs in their old age. These individual are quite wealthy than the people who go through the NHS home care funded scheme. The private self-funded individuals are 30% of BUPA’s income. BUPA can charge a higher price to these individuals as they aren’t price sensitive. In future, BUPA needs to target this market segment to bring in better income. BUPA needs to think of offering facilities like it did when it opened the first dementia teaching care home.

Government Grants – Government grants are given for specific objectives. One such example, would be to relocate to an area where there is acute short of care homes for the aged. Grants are one-off payments, therefore could not relied for continuous funding. As pointed out by Maynard (2013), monetary assistance maybe given to stimulate employment or in investment to particular geographical areas or for specific industries.

Donations – Donations can from private individuals. Donations are given without any conditions usually, so they can be used for refurbishment of building or IT system upgrades. Like grants they are irregular source of income, therefore BUPA should not rely on these funds for sustenance.

Property Development – BUPA constructs purpose built care homes for other Group undertakings. This property development could extend to private and government sector as well. BUPA is experienced in building homes with the necessary infrastructure. BUPA could charge a substantial profit margin for the development of these homes.

Finance income – BUPA invests its cash in government securities, bank deposits and gives loans to the group. These investment bring interest income to BUPA. In 2012, the interest income was 1% of BUPA’s revenue.

2.2 Analyse the factors that may influence the availability of financial resources in BUPA? 

Price –BUPA is in highly competitive market in Britain, there are about 6,830 home agencies. The local authorities are increasingly becoming cost conscious as the funding has been cut down by the central government. According to Ross (2011), government funding for nursing homes and support has been cut by almost a fifth. Therefore, the local authorities will look to utilise the funds in the best possible manner. In BUPA’s annual report of 2012, they speak of local authorities not increasing the fees to cushion the rising costs. Therefore, offering the right price will influence the availability of financial resources.

Costs – Staff cost make-up 60% of BUPA’s costs. BUPA needs to get the best possible results from the staff. If staff are capable of handling many patients, then productivity improves and hence reduces staff costs per patient. Implementing activity based costing will help BUPA to identify the activities that incur costs and again see whether these activities can be remodelled to lower the costs base. Therefore, lowering costs will enable BUPA to have more financial resources.

Profitability – Good profitability will enable BUPA to raise share capital and debt as the investors feel that investing in BUPA will give them a good return. In 2012, the margin from surplus form operation fell to 4.5% from 5.5% in 2011. Although the gearing ratio is low, the interest cover has come down to 2.5 times. Also, for the year 2012, BUPA has not issued a dividend.

Brand – BUPA has been in business for a considerable period of time and has secured contracts from the local authorities to provide home and nursing care services. Therefore, BUPA could make use these brand attributes to get resources from banks, suppliers etc.

2.3 Review different types of budget expenditure in BUPA. 

There are different types of budget; one of the budgets is the master budget. The master budget will contain all the revenue and the related costs for the next year. Master budget contain all the information from the functional budgets, such as the sales budget, direct labour budget, materials budget, overhead budget and the capital expenditure budget. The income and expenses of the functional budgets are amalgamated to the master budget. According to Linzer and Linzer (2008), the annualised summary budget provides the projected solvency of the institution at the end of the year.

Details of the budgets:

Sales Budget – It will be safe to judge that sales will be the key budget factor or limiting budget factor for BUPA. BUPA operates in a competitive environment where there are many care and nursing homes. Also, BUPA’s homes are located in geographical areas in Britain and it secures its patients from the local authorities. Therefore, it is imperative that BUPA should try to secure the customers first before other budgets can be prepared. BUPA’s price and the facilities it offers are the main attracting points and hence will decide on the number of customers it can get.

Direct labour budget – When the numbers of customers are known to be serviced in future, BUPA can prepare the direct labour budget. BUPA first needs to get the hourly or daily rates, for doctors, physicians, supervisors, nurses and attendants. Secondly, it needs to see how many hours will go in for treating and taking care of a patient. There will be different types of patients, therefore the composition of hours and type of staff will vary for each patient. Once BUPA knows the number of hours that will go in for each patient and the cost for the type of staff used, will enable BUPA prepare its direct labour budget. The direct labour costs are the variable cost for BUPA. According to Horngren et al (2012), a variable cost changes in total in proportion to changes in the related level of total activity or volume. REDUCE

Material budgets – Material budget will contain the cost of catering for each patient, basic medicinal cost, the laundry cost, and the other items such as soaps, linen, towels etc.

Overhead budget – Overheads are expenses that cannot be directly be identified with the service. Some of the overhead costs BUPA will have to incur on yearly basis  will be security cost, janitorial cost, administrative staff salaries, manager salaries and the finance personnel salaries.

Capital expenditure budget – BUPA has over 300 homes and in future they might open new homes. Capital expenditure are the non-current assets: Building, Vehicles, Computer, Bedroom furniture and equipment etc.

2.4 Evaluate how decisions about expenditure could be made in BUPA

When a decision is made on expenditure in BUPA, it should be for a good reason so that revenue can be earned. Below are some of the ways on which a decision on expenditure is decided.

Profitability analysis –A profitability statement could determine whether management should go ahead with certain types of expenditure. If the revenue exceeds the costs then it would be worthwhile to incur the expenditure as it will bring value to the company as profits.

Net present value – Net present value (NPV) appraisal is used when a project goes on for a considerable of period, say for more than 3 years. A NPV analysis is used when there is a large outlay of expenditure in the beginning of the year and gives a net inflow (revenue – costs) from the next year onwards. A discount rate is used to discount the cash flow in order bring its value to the present period. A discount rate considers the time value of money. Cash received in one years’ time is considerable less in today’s value. Therefore a discount rate is used to discount the cash-flows. BUPA opens care home throughout Britain. A NPV analysis could be used to assess the projects financial viability. According to Tracy (2002), Net present value is negative when the PV is less than the entry cost of the investment. REDUCE

Payback – It is usually difficult to predict what is going to happen in the future, the same is for cash inflows and outflows. Projected income for the future requires assumptions to be made, requires forecasting to be done and judgements made. The payback appraisal assesses how long the project will take to cover its initial expenditure i.e. how many years the net cash flow will take to cover the initial project expenditure. BUPA could use the payback appraisal to see whether certain capital expenditure should be made.

Task 3

3.1 Assuming there was financial shortfall in BUPA; explain how this situation could be managed?

Immediate action will have to be taken if the current liabilities have to be paid in the near future. The current ratio was 1.66:1 in 2011 and worsened to 0.66:1 in 2012, this indicates that BUPA has insufficient current assets to pay it current liabilities when they fall due. Therefore, if a scenario arises where BUPA needs to manages its finance and improve working capital. The following strategies can be looked into.

  1. Discounts – BUPA has £ 80m worth of debtors. A discount could be offered, say for example 3%, to pay up dues early. Obtaining the cash early will allow BUPA to smoothen its cash shortfall in short-term. Offering discounts will work only if there is a temporary financing requirement. Bonds or Debenture will be have to be looked into for longer periods of financing. According to Dodge (1997), offering discounts is a way of reducing the money invested in debtors and improving the cash-flow of the business.
  2. Bank Overdrafts –At a time when there is an urgent need to get cash to fund a cash shortfall, a bank overdraft facility could be arranged with the bank. BUPA has secured £ 280,607 committed bank facility. This could be used at a time of financial distress. Bank overdrafts usually carry a high interest rate, therefore it will be costly for the firm. Bank Overdrafts should be used only for short-term financing. As pointed out by Berry (1999), Banks can withdraw overdraft facility with very little notice
  3. Debenture stock or loans – Debenture and loans could be issued by BUPA to get the necessary funds. Debentures and loans are usually issued to get long term funds. BUPA debt to equity ratio is 15:1 and BUPA has settled a preference share capital amount also recently. The low debt to equity ratio will make it easier for BUPA to raise the necessary funds, as loan providers will not see the company as risky.

3.2 What action you would take if you suspect occurrence of financial fraud in your organisation?

When a suspected fraud has happened, a fraud response team will be called in to handle the matter. The team will consist of an accountant, operations manager, a senior person from human resources and 2 executives to investigate and establish the fraud.

The person who suspected the fraud will have to be asked to document his findings in a report and also provide some documentary evidence. The report shall consist of the time and date of the suspected fraud, the name of the person who committed the fraud and the nature of the fraud. According to Conenen (2009), companies with good fraud prevention control continuously monitor and follow up on questionable data and unusual relationship between numbers.

The fraud response team will look into the legal provisions of employment law to suspend the person from work until a complete investigation is done.

When the investigation findings lead to a fraud had taken place, the company should see whether they could recover the loss from the employee. Thereafter, with the available evidence the company will look into to terminate his/her employment contract and the company with presence of a lawyer should give the reasons to the employee on why they had to terminate his/her employment. After this the company should make a complaint to the police and taking the case though legal means in order to get justice.

To prevent the occurrence of fraud of this nature in the future the company needs to submit the findings to the audit committee. According to Braiotta (2010), audit committee should not only be alert to fraud but should take steps to safeguard the entity from such fraud. The audit committee should see whether the internal auditor could introduce internal controls in order to prevent such fraud of this nature in the future.

Finally, the company should call on a staff meeting and communicate that fraud and abuse will not be tolerated in the company and offenders will be sternly dealt through legal means. This action will improve the control environment of the company and will prevent frauds from happening in the future.

3.3 Evaluate budget monitoring arrangements in BUPA.

BUPA’s budget monitoring should be a periodical and ongoing process. Actual results of sales and expenditures could be easily obtained from the company’s accounting system. The actuals result should be compared with the budgeted. Amounts that have variances should be studied and reasons should be sought. A report should be prepared containing the budgeted and actual figures with the reasons of the variances by the financial department and a meeting should be held with the main departmental heads or the people concerned. Once the meeting is concluded and if the budgets needs to be changed to reflect the current operating environment changes, it has to be done so after careful evaluation. The budgets should be realistic, be motivating and drive performance. These consideration should be looked into when preparing budgets. According to Rhodes (2010), effective budget monitoring entails regular scrutiny, making comparison of what was forecasted and what is actually happening in the company.

Task 4

4.1 Identify information required to make financial decisions relating to a health and social care service.

From a perspective of an investor, he/she will want to assess the financial performance of the company. In the income statement, the year on year revenue increase is good indicator that the service the company sells are able to be sold in higher quantities or customers are willing to buy them at a higher price. BUPA year on year increase in revenue has only increase marginally by 0.5%.

The gross profit margin indicates the profit after deducting the costs that are closely related to sales. BUPA operating surplus margin was 8% in 2012 as against 9% in 2011. The reduction in the gross profit was due to the costs increase. BUPA was unable to obtain as higher fees from the local authorities to cushion the cost increase. This shows that the local authorities are in a better bargaining position. According to Norton and Hughes, (2009). A high supplier power will drive down profits of the buyer.

BUPA’s surplus for the year in 2012 was £ 21 m as against £38 m in 2011. The high surplus in 2011 was due to the profit from discontinued activities.

The balance shows the financial situation of BUPA. The calculation of the current ratio will give whether BUPA has adequate current assets to pay for it liabilities. BUPA current ratio has worsened in 2012.According to Tracy (2002), the current ratio is used to test the short-term liability-paying ability of a business.

In the balance sheet also gives the funding that has gone into the business. The long term funding that has gone into BUPA’s business is debt and equity. Therefore, an investor could calculate the return the business has given to the investors. BUPA return on capital employed (ROCE) was 10% in 2012 as against 12% in 2011.

In order to make strategic, tactical or daily operational financial decisions, various information is required to support and guide the decision making process. This information includes awareness of the following;

  • Source of income
  • Cost and expenditure, purchases, pricing
  • What selling techniques to employ for the services/products
  • Knowing the suitability of systems in place e.g. by reviewing what is in place
  • What to produce or the type of service to offer
  • How much to produce
  • Where to locate
  • Who to use and whether to develop new strategies or stick to existing ones

 4.2       Analyse the relationship between care service delivered and ‘costs and expenditure’.

The amount paid to receive a care service or product and the economic costs that a care home incurs through its operations to earn revenue, both have an impact on the quality of care service delivered to every client. That is; the extent to which a health care service or product produces a desired outcome from the client primarily depends on the management of the money available.

Though, there are other factors (respecting and involving people, safeguarding clients from abuse, cleanliness and infection control, management of medicines and meeting nutritional needs), which contribute to the delivery of quality care services; most of these factors need money in order to be applied. Since money is a scare means, costs and expenditure exists as a method to manage money and money is managed in order to ensure the delivering of quality care service.

Moreover, the National Health Performance Committee identified nine areas which states how quality of care must be: effective, appropriate, safe, efficient, responsive, sustainable, capable, continuous and accessible. Again, for these areas to be implemented BUPA needs to use money and the money must be effectively managed by the use of cost and expenditure budgets to minimize waste or shortfalls and maximize profits or quality care service.

 4.3    Evaluate how financial considerations impact upon a service user.

Financial considerations impact a service user in many ways. One such aspect is the financial consideration on staff. They are discussed below:

Cost of Staff training, method of training and mode of training i.e. e-learning or workshops. Considerations on whether to spend or not to spend on suitable staff training will affect the service user. The service user will get quality care if the management invest in good training. If the management does not invest in good training then the individuals would not receive quality care as the staff is incompetent and not capable enough in the basic functions as well.

Cost for Strict recruitment process. The financial considerations on the amount of expenditure allocated for the recruitment and selection process. Strict recruitment would provide staff that is suitable for the job. The lack of it would put the quality of care at a risk.

Adequate staff wages due to the for an acceptable -Staff ratio to the individuals

Considerations on amount of staff wage expenditure and the need for staffing levels according to the individual needs. If enough staff is provided; then personal centred approaches can be implemented. Lack of enough staff ratio could lead to institutional abuse and the lack of accessibility of required services

 

4.4       Suggest ways to improve the care service provided by BUPA through changes to its financial systems and processes.

Payment by Results – The local authorities could appoint an officer to come and verify the results or outcome. Example, the officer could interview the patients.

NHS charging overseas visitors – BUPA could charge a higher price for foreigners who seek care in their homes.

Benefit cap – BUPA could lobby the government on getting a higher benefit cap from the patients before the local authority steps in. Obtaining fees from the patients could enable BUPA to avoid the stringent control imposed by the local authorities.

Funding support and other innovative measures to improve health and social care – BUPA could organize funding campaigns to raise awareness among the younger generation to contribute for BUPA homes.

Equity and Excellence: liberating the NHS;

Pay drug companies according to the value of new medicines,

  • to promote innovation
  • Money will follow the patient through transparent, comprehensive and stable payment systems
  • Providers will be paid according to their performance

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