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.
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 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:
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:
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.
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.
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:
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.
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