Ask the Expert - David Oldham

by David Oldham 01/09/2015

The role of the Finance Director in Social Enterprise spin-offs

As a Finance professional in a Social Enterprise, the first priority is to be committed to the cause – to believe that community services can be delivered better when the people delivering the services have a direct interest in the organisation and the way it runs. But it is equally important to use your professional skills to empower the organisation to build reserves that it can use to develop new and existing services to meet the needs of communities.

The key things to think about in a spin-out are first of all to be very clear about what services you will be delivering and what you will be paid for those services. Then it’s important to plan your finances to make sure you’re viable into the future. Inevitably contracting parties will be looking for savings so you’ll need to work on an assumption of reducing income from your main contract. Next you’ll need to think about what information you need to help you make the right management decisions to make your business a success.

As in any organisation, the role of a Finance Director goes beyond adding up the numbers and producing the annual accounts. Finance Directors need to be forward-looking, planning how the organisation will remain viable in the future, and will have an eye on risk management, making best use of assets, and producing financial information that helps managers understand the business and make decisions that make the business stronger.

What is the difference between how accounting is done inside and outside the public sector?

Public sector organisations are accountable to the public for everything that they do so are very strict about sticking to budget, and can only transfer funds from one activity to another through a formal resolution (this is known as viring). So public sector organisations tend to have accounting systems that are very rigid in structure. This is also necessary because of the size of public sector bodies – very large organisations need uniformity of structure in order to be able to make consistent comparisons between activities.

Spin out organisations tend to be smaller in size and less complex in nature – essentially one activity amongst many in its originating body – so accounting systems can be more tailored to the needs of the activity. This also means that spin out organisations can tailor their financial reporting to generate the information that they need to make good management decisions.

The most important thing for spin outs to do before launch is to plan their processes – think about how you want to manage the organisation and what information you will need to be able to do that. If you are starting with your own accounting systems from day one then you will need to do this to help you to specify what sort of accounting system you want. If you are planning to use the accounting systems of your originating body then you will need to negotiate with their Finance department about how you can adapt their accounting system to meet your needs.

What kind of finance skills do spin outs tend to bring on board when out?

What is usually missing in the early stages is a bit of strategic thinking. Accountants transferring across to a spin-out will usually be great at keeping accurate records, preparing financial reports in line with a timetable and implementing good financial controls across the accounting system. What is needed on top of that is:

  • The ability to think ahead and plan finances in advance;
  • The ability to review processes and see more efficient ways of doing things;
  • The ability to understand risks and implement effective controls to mitigate those risks;
  • The ability to plan business reporting to deliver timely and relevant information that helps management make good decisions; and
  • The ability to look at the organisation’s resources (people, money, buildings, equipment and intellectual property) and decide how they can best be used to meet the objectives of the organisation. 

Does social investment have a role to play in spin outs?

I have yet to see this work in practice, but the potential is definitely there. Social investors are looking for a financial return, but also an increase in public benefit – which is exactly what social enterprises are aiming to achieve. Sometimes where there are opportunities for investment in Social Enterprises, it’s just much simpler to get a loan from your bank, but there are things that new spin-outs often find difficult to do that Social Investors are looking for. These would include:

  • The need to be able to measure and project social impact, and deliver against target;
  • The need to find a project that could not proceed without a significant input of capital;
  • The need for a Governance structure that would allow a social investor to take part ownership of an organisation and take a share of its profits, given the complex nature of the Governance of spin-outs in the first place!

What do you notice most often when you are involved pre-spin out?

How difficult it is to get accurate information pre-spin out. Very large organisations like Local Authorities and the NHS find it difficult to pick out all the costs that will be attributable to the spin-out organisation after go live. This can lead to some nasty surprises after the launch of the spin-out, so it’s really important to go through activities and budget in fine detail to make sure that the outgoings you take on are matched by the promised incomes. After all, something that may seem like a minor variance to a large public body could wipe out your entire planned first year profits in a spin out.

What are the financial 'signs of promise' you look for when assessing a potential spin out?

Earlier today I was reading the Report of the Directors of a Stock Exchange quoted company – a good old fashioned industrial conglomerate. “[The Company’s] strategy” it said “is to buy good manufacturing businesses with strong fundamentals whose performance we believe can be improved”. And essentially it’s the same for assessing potential spin-outs. Ideally you’re looking for something that delivers a good service, but could deliver so much more outside the public sector. For instance by simplifying its processes or by offering its services to people who for one reason or another are ineligible to receive services from the public sector but can afford to pay for similar services. You’d certainly want to look beyond what you could save by changing the pension scheme. And you’d want to see the potential to plough those financial benefits into better support for communities.

What is the biggest financial headache for spin outs and what is the Aspirin for it?

I would have to say the need for the originating public bodies to start saving money from day 1! It’s tough enough trying to hit the ground running and maintain the quality of your services while working out how to run a company without having that pressure of needing to reduce prices at the same time. Not surprisingly many of the answers are shared to the previous question. While it will be possible to save money by the more traditional cost cutting methods, the key questions to ask to make the enterprise more efficient and effective are:

  • What is the most effective way of running my services and what do I need to change to achieve that; and
  • Are there opportunities to deliver our services to a wider audience?

One of the benefits of being an employee owned organisation is that staff are far more likely to get engaged in finding the answers, so having ways of meeting and listening to your teams are an important part of this exercise.

What kind of financial information do Boards need from Day 1?

It’s all about providing the information you need to enable you to make good management decisions. So the sort of questions that you need to ask are

  • Are our costs staying in line with our financial plan?
  • What costs are over-running, and what can we do to haul them back?
  • Where could we make savings to bring the overall budget back in line?
  • Are our customers continuing to use our services?
  • Are we attracting new customers?
  • Are our new services covering their costs?
  • Are our customers paying on time?
  • Do we have enough cash to pay our staff and our suppliers on time?
  • If we have borrowed money from the bank, are we delivering results in line with what we told them?
  • Are our staff happy to work for us?
  • Are we able to recruit good quality staff where we need them?
  • Do our staff have the training and qualifications they need to do their job well?
  • Are we doing the things we need to do to meet our Regulator’s expectations?
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