Budget, Cost Cutting and the Risks


Financial management refers to the process of planning for and allocating the organization’s financial resources with the objective of creating more wealth, generating more income or ensuring an adequate return on investment. Financial management as discussed by Henning et al (34), involves three main elements; financial planning, financial control and decision-making. The international accounting standards body considers financial management as a key factor in determining the success of any organization.

Operational boundary and authorized limits

Operational boundary in an organization relates to the level of operations in an organization when measured against the available resources. The value of the operational boundary in a given period is determined by calculating the value of external debts that have been used in the organization’s operations. These debts are often used for financing capital requirements, and a small amount on revenue requirements.

Authorized limits on the other hand are the boundaries set on the operational boundary to make a provision for the unanticipated cash flows. “This is determined by allowing a 5% upper and lower discrepancy on the operational boundary and the resultant figure is rounded up to the nearest £0.5 million” (Compton and John 21). This is however not the standard percentage since the management can change it if the need arises.

Main Considerations of FRS 17

Financial reporting standards are statements put forth by a governing body to guide organizations in preparing their financial reports so that they are consistent with the international standards. FRS 17, for example, is a guideline for employers in providing a complete report of the pension benefits earned by their employees irrespective of whether they have been disbursed or not. “The total liability brought about by this scheme is divided between the local government pension scheme and the fire service scheme which includes the firefighter’s pension scheme and the new fire fighters scheme” (Financial Management Association 10).

The directors of the organization are faced with the responsibility of establishing a procedure to ensure that the finance department complies with FRS 17. They should also delegate some of these responsibilities to other people owing to the fact that they may not have the skills needed to carry out the valuation of assets and liability in conformity to FRS 17. They may also lack the right of access to some reports making it impossible for them to carry out financial reporting effectively.

FRS 17 defines retirement benefits to be inclusive all the benefits that accrue after retirement such as life insurance, health insurance and disability provision regardless of whether such arrangements are legislative, inherent or contractual as per the actions of the employers. Retirement benefits should also include the “post retirement benefits payable under a formal trust together with those payable pursuant to an informal agreement, such as a promise, a public statement or a similar commitment made by the employer” (Baker et al 3).

In the management of the benefit schemes, FRS 17 maintains that the assets and liabilities of the scheme should be valued consistently. Any surplus should be considered as an asset and deficit as a liability in the report, and any additional disclosures should be mentioned in the statements.

FRS17 has been considered in the Greater Manchester fire and rescue services financial reports. “This organization has a liability of £925.7m and this is allocated between the local government pension scheme which gets £5.8m and the fire service scheme which gets £919.9m” (Financial management association 34). The liability that is allocated to the fire service is further divided in to the firefighters’ pension scheme of 1992 and the new firefighters’ scheme established in 1996.

In their financial statements, they have a separate division that only deals with the pension fund for the purpose of accountability. This is a requirement by the code of practice on local authority accounting 2007, which requires all the organizations to run a separate pension fund. This code specifies as well the amount of cash that should be deposited or withdrawn from the account at any given time. Besides this, there are other arrangements that have been put forth concerning the fire fighters pension fund account whose main purpose is to place the pensions under a plan referred to as the defined benefit schemes.

The fire service pension scheme is not a funded scheme and is governed by the management in agreement with the DCLG guidelines. This means that investment assets do not exist in this scheme hence FRS17 requires that the pension reserve and the liability be recognized in the financial statements (Income and expenditure account and the balance sheet). The local government pension scheme on the other hand requires that the assets of the organization should be attributed to the governing authority. All these assets together with the liabilities are posted on the balance sheet according to the guidelines specified by the actuarial society, which uses the projected unit procedure.

Any change experienced in the disposable pension’s liability should be evaluated into four elements. The first one is the current cost of service defined as the increase liabilities resulting from the cumulative years of service in relation to the current year as stated in the income and expenditure account as well as the revenue accounts of the services that have been rendered by the employee. The second element is the cost of past service defined as “the increase in liabilities arising from current year decisions whose effects relates to years of service earned in the past” (Micocci et al 45). The third element is the cost of interest and it refers to the anticipated increase in the liabilities’ present value in the current year.

The forth element is the contribution made by the employer towards the pension fund on behalf of his employees. Appropriations are made by the governing body on the pensions reserve to ensure that notional credits and debits are eliminated and replaced with the debits for the cash paid to the pension fund and any other outstanding arrears.

Characteristics of the fire and rescue services

One of the major characteristics of FRS17 is that it is a defined benefit scheme. In such a scheme, the assets are stated as per their book value at the end of the specified period. These assets include, quoted securities, unquoted securities, unitized securities, tangible property, insurance policies and notional funding among others. The liabilities on the other hand are estimated based on the actuarial figures (Martin 45). Examples of these liabilities are promised benefits and constructive rules created in the public statements. Surpluses in this scheme are recorded in the balance sheet as assets while deficits are recorded as liabilities.

This feature of FRS17 is enshrined in the standards used in Greater Manchester in the sense that the financial management team ensures that proper balance sheet entries have been made concerning the pension funds surpluses and deficits. Their assets and liabilities are classified according to the general financial reporting standards described above (Henning et al 36). This is an indication that the organization is operating in line with the international accounting and finance standards.

Areas for cost-cutting

The government’s intention to reduce the funding available for public agencies may have significant implications for Greater Manchester Fire and Rescue Authority (GMFRA). At this moment, this organization has a negative fund balance in particular – 17,765 (GMFRA, 2010, 9), which means that its expenditures exceed their budget. Provided the government decided to reduce the funding of this organization, this deficit will further widen, and in the long term GMFRA may have to make a great number of employees redundant. Moreover, it is quite probable that the quality of their services will greatly decline with time passing unless they do not develop strategies for improving their financial performance. They should be aware of such dangers as massive redundancies and poor quality of their work.

Therefore, it is vital for them to identify the areas of cost-cutting. One of them is salaries and wages, paid to the employee. GMFRA spends £ 81. 605,000 on the compensation to the employees; and this portion constitutes 69 per cent of their expenditures. If the management of GMFRA reduces the salaries by at most 3 per cent, this organization will be able to save £ 2.230 000. It has to be admitted that this change will not be accepted readily by the majority of employees, it is quite likely that many of them will protest against this policy. This is why the management should explain to them the reasons for this reduction. In particular, they should stress the point that it is necessary for retaining their jobs.

The second area for cost reduction is operational expenses of the company. Currently, they constitute £ 17, 202,000 which is approximately 12 per cent of their costs (GMFRA, 9). One should bear in mind that these expenses include refurbishment of buildings, procurement of computers and communication equipment, etc. For instance, approximately £ 2.703 millions will be spent on the refurbishment of buildings (GMFRA, 11). By cutting operational expenses by 5 per cent, this organization will be able to save £ 0. 85 min. Overall, it seems that operational expenses are the area which requires full attention of GMFRA administration.

Again, there is great likelihood that these cuts will result in poor performance of GMFRA and inability to respond to emergencies. It is possible to argue that the management should particularly focus on such aspects as refurbishment of buildings. These activities do not seem to be essential for the work of firefighters and the quality of GMFRA work will not deteriorate. We can emphasize the point that these cuts should not affect the amount of money allocated for the training of firefighters and rescuers. Such a reduction can create a large number of risk for the lives and risks of firefighters. This policy will contradict the very mission of GMFRA which is to protect the life and property of community members.

When speaking about operational expenses, we should also mention equipment and fire vehicles. This organization has to spend a substantial amount of money on the procurement of these items, in particular,1 612 (GMFRA, 11). However, in many cases, these costs can be avoided, for instance, through effective repair. Another area that we can identify is administrative costs. For instance, the organizational structure of GMFRA includes a large number of administrative positions.

Many of these positions are not directly connected with the work of firefighters and rescuers. The thing is that this agency still continues to recruit and hire a large number of people who will work in administrative positions, for instance, the assistants of senior officers, secretaries, HR managers, etc. We are not disputing the fact that these professionals are essential for the work of this organization.

However, in the light of recent budgetary cuts, the increased expenditures on administrative personnel are not permissible. Overall, the strategies that we propose can allow GMFRA to save more than £ 4 min without compromising the quality of their work and endangering the lives of firefighters and rescuers. By adopting these strategies they will manage to keep within budgetary limits and subsequent funding cuts will not produce profound effects on them.

Potential Risks

In the previous sections we have already identified some of the potential risks. One of them is the discontent of the personnel. The pay cuts can entail significant dissatisfaction among firefighters, rescuers, and administrative personnel. There is great risk that they will lose their motivation and their performance will decline. Again, as it has been said before, the administration should clearly explain the rationale for these changes.

It is necessary that they hold meetings with employees and accurately describe the current situation, and especially financial constraints. Their major argument should be this cuts will enable this organization to decrease its current budget deficit. Most importantly, these measures help avoid massive lay-offs and redundancies. To some degree, these changes will help to minimize the impacts of budget cuts implemented by the government.

The most important thing is that the administration of GMFRA makes its policies as transparent as possible. In other words, they need to show the employees which areas should be subject for cost reduction and why. Furthermore, the administration should remember that the employees can make many valuable recommendations as to how reduce operational expenses of GMFRA and their suggestions should be overlooked. Thus, cooperation with employees is indispensible for the success of this strategy; without it the attempts of the administration will not yield the expected results.

Among other risks that this organization can face is inability to respond to emergencies which can result from the reduction in organizational expenses. However, while discussing the areas for cost-cutting, we have deliberately excluded the costs of trainings or repair of vehicles. They are essential for the performance of firefighters and rescuers. Overall, these problems can be avoided only through careful assessment of equipment, fire vehicles and information technologies. The most important task is to determine what kind of equipment or which vehicles should be substituted or replaced. This policy is essential for effective use of resources and cost reduction.


Therefore, in this paper we have evaluated financial performance of Greater Manchester Fire and Rescue Authority. The government’s intention to reduce funding of public agencies can significantly affect this organization.

The results of this analysis suggest that it is necessary some operational expenditures of GMFRA should be minimized. This policy includes 3 percent decrease in the wages of the personnel and 5 per cent decrease in running expenses. Additionally, we suggest that GMFRA should reduce the number of employees whom they hire on a regular basis. This argument is particularly relevant when we are speaking about administrative positions. Finally, one can say that this policy cannot be successfully implemented without active participation of the frontline personnel.

Works Cited

Baker, August J, Dennis E. Logue, and Jack S. Rader. Managing Pension and Retirement Plans: A Guide for Employers, Administrators, and Other Fiduciaries. New York: Oxford University Press, 2005. Print.

Compton, Dennis, and John A. Granito. Managing Fire and Rescue Services. Municipal management series. Washington, D.C: International City/County Management Association, 2002. Print.

Financial Management Association. Financial Management. Atlanta, Ga: Financial Management Association international, 1972. Print.

Greater Manchester Fire and Rescue Authority. (2010). “Statement of Account 2008/2009”. Web.

Henning, Charles N, William Pigott, and Robert H. Scott. International Financial Management. McGraw-Hill series in finance. New York: McGraw-Hill, 1978. Print.

Martin, A. “The Impact of Frs17.” Pensions Management. (2001): 60-61. Print.

Micocci, Marco, Greg N. Gregoriou, and Giovanni B. Masala. Pension Fund Risk Management: Financial and Actuarial Modeling. Boca Raton, FL: Chapman & Hall/CRC, 2010. Print.

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