How finance can help balance budgets
Demand for public services continues to rise, while governments everywhere are under pressure to cut costs. Fortunately, the finance function can play a role in helping to balance the books, according to British research by the Chartered Institute of Management Accountants (CIMA) and Britain’s National Audit Office (NAO) with obvious applications in Australia.
In a recent CIMA-NAO report entitled “Delivering value and accountability: How finance can help,” the two organisations showed that an effective finance function could help the task of curbing government expenditure by improving understanding of costs, showing how inputs translate into outcomes and effectively managing risk.
In one example, Britain’s Network Rail saved more than 300 million British pounds (A$660 million) on London’s Thameslink project by simplifying the track layout, based on costing data which showed the track’s complexity could cause a budget blowout.
Understanding the relationship between inputs and outputs is crucial to making cost reductions without impacting significantly on customer-facing services. The report cited a NAO study on the NHS Ambulance Service, which showed that understanding the variations in performance and unit costs between different ambulance trusts and response models could save up to 280 million British pounds a year.
Enabling the finance function
The CIMA-NAO report identified five key enablers to strengthen an organisation’s finance function and help it to work more effectively with the rest of the organisation. These comprised understanding the business model; leadership demands, uses and rewards the right management information; the finance function has the right structure and skills; there is “one version of the truth” on costs and value; and having the right balance of stability and flexibility in the financial framework.
An example of finding the right structure is provided by British manufacturer Rolls-Royce, which came to understand that its finance team was getting “stuck in the swamp” answering basic questions and validating data, rather than value-adding. By restructuring its finance section into four functions comprising finance service centres, business support centres, centres of excellence and business partners, the firm gained significant efficiency improvements as well as more effective partnering between finance and the operational divisions.
Checklist of questions
The report suggests senior decision-makers ask a number of questions to determine what more can be done to deliver value and support accountability. These include:
* What are our desired outcomes and how do we create value for stakeholders?
* What are the impacts of key external factors?
* What does our business model say about how inputs translate into outputs?
* How can the production and use of management information be rewarded?
* Is the organisation clear about the different services the finance function is providing or could provide?
* Is management information presented in plain language?
* For public sector or non-government organisations, how can more funding certainty be obtained?
With potentially billions of dollars at stake, organisations from both the public and private sectors can get their fiscal houses in order by better utilising the finance function and its vital information.
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