FINANCIAL MANAGEMENT, GOVERNANCE AND RISK

Presentation to the DHET Workshop for the Council Members of the HEI’s

of the Central Region

Presenter: PF GrantHead: Financial Accounting & Risk GovernanceUniversity of Cape Town

GOVERNANCE STRUCTURES IN THE FINANCE CLUSTER

COUNCIL’S KEY FUNCTIONS AND RESPONSIBILITIES ARE TO ENSURE THAT:

• The University has clear strategic goals and objectives:– The Executive Officers (the Vice-Chancellor and the Deputy Vice-Chancellors) are held to account in

achieving these;

• The University financial position is sound in the short term and the long term;

• No fees are set, and no financial appropriations made, without its approval;

• Risk management and internal controls are in place;

• All its members (staff, students, and alumni) donors, customers, and suppliers are treated in an appropriate manner;

• There are sound governance and ethics standards in decision-making;

• The University complies with all relevant laws, regulations and accounting policies; and

• The committees and sub-committees necessary to achieve the above are in place, are properly constituted with a relevant composition and have appropriate terms of reference and reporting procedures.

COMMITTEES THAT SHOULD BE IN PLACE

COMMITTEE COMMITTEE OF COMPOSITION

Finance Council and Senate Members of Council;Members of Senate;Student representatives;Members of the Executive

Audit Council External members of Council

Risk Management Management, and Chaired by the VC

Investment Council Investment experts including management

Remuneration Council External members of Council, together with relevant management

Tender adjudication Council Members of Council and management

ROLES OF THESE COMMITTEES - 1COMMITTEE PURPOSE

Finance Advises Council on financial strategy;makes recommendations on revenue and capital budgets; and monitors and reports on progress against these budgets

Audit and Risk Ensure that there is an effective process for assessing and managing risk;Assess the financial statements for reasonability and accuracy, and for compliance with accounting policies and regulations laid down by the Minister under the Act;Recommend to Council the approval of the Annual Report, incorporating the Annual Financial Statements;Review and approve the scope of the internal audit programme;Recommend the appointment and retention of the independent external auditors;Review the scope of the audit conducted by the independent external auditors;Review on its own and with the help of internal audit, the adequacy and effectiveness of internal control.

ROLES OF THESE COMMITTEES - 2COMMITTEE PURPOSE

Investment Advise Council on investment strategy; the appointment of investment managers in terms of that strategy; and in setting the mandates within which those managers operate.

Remuneration Advising the Council on remuneration policy;Sets mandates for consultation and negotiations on conditions of service and remuneration with staff bodies and trade unions;Evaluate the performance of the Vice-Chancellor and senior staff; andDetermine the remuneration of the senior leadership group members in terms of the performance management system.

Tender adjudication Advise Council on the validity and fairness of the tender process and compliance with Councils adopted policies.

COUNCIL’S FIDUCIARY RESPONSIBILITY

NOT FOR PROFIT v.v. SUSTAINABILITY• Sustainability - “having, over an extended period,

secure, stable and sufficient financial resources (free cash) which can be allocated in a timely and appropriate manner to ensure that the organisation is managed effectively and efficiently”

• Primary goal is not to make a surplus for its own sake, thus surpluses should always tend towards an appropriate level that is financially responsible and ensures sustainability

Not For Profit does NOT mean Not For Surplus

TRIANGLE OF PRESSURES• The financial stability of the university, and its

resultant sustainability, is reliant on a delicate balance between subsidy, fees and costs

• Pressures:– quality in teaching and research– Capital Expansion/Expenditure– social responsibility & community engagement, – access – transformation– positive working environment

Staff demands v.v. Funder and Student constraints

TRIANGLE OF PRESSURES – cont.

Fees Subsidy

Costs

Surplus=

SustainabilityOpportunitiesExcitement

Fees Subsidy

Costs

Deficit=

PressureStagnationFrustration

Payroll is the single biggest driver of costs, but costs of choice such as Financial Aid can have a major influence

HIGH OPERATING LEVERAGE• Operating leverage is the relative effect on the bottom line (net

surplus or deficit) by changes in levels of income or expenditure• small change in any major variable has a multiplier effect on the

bottom line, however• Many costs (payroll, utilities) difficult to contain in the short term• Thus, core costs that are seen to be of choice (maintenance,

replacement of IT machines) are easy targets for ‘balancing the budget’

• Real costs of choice (Financial Aid, Research Support and Awards) can have a disproportionate impact on the bottom line

High leverage indicates high risk

FORMAT OF THE INCOME STATEMENT

COSTS FALL INTO TWO DISTINCT CATEGORIES

Continuing - • Educational Operations• Housing Operations• Core/Recurrent Capital

to maintain fabric of institution

Non-Continuing• Contract Research• Capital Expenditure

DIVERSITY OF OPERATIONS - 1

Continuing educational operations: • These encompass the main recurrent operating activities

that provide and support teaching and learning activities• Includes the management infrastructure of the

university• Third stream income is increasingly important • Target a small surplus from recurrent operations to:

– Provide a hedge against unforeseen circumstances– Enable new initiatives– Finance capital expenditure

DIVERSITY OF OPERATIONS - 2

Staff and student housing operations: • Should cover costs and provide resources for

– long term maintenance and – replenishment of stock

Capital expenditures: • Capital expenditure is undertaken in terms of the university

strategic priorities• Constrained by affordability as evidenced by available cash

resources and borrowing capacity

Investment income and financing expenditure

DIVERSITY OF OPERATIONS - 3

Research and other operations similarly dependant on specific funding: • Usually outside the decision rights of university

management (who nevertheless usually retain monitoring rights and approval rights)

• Important academic and social value • they add considerably to the financial risk:

– Direct impact on cash flows and accounts receivable management

– Overhead Cost Recovery– Hidden costs – extra offices, electricity, insurance, etc.

THIRD STREAM INCOME(The Holy Grail?)

Opportunities include, inter alia: • Campus Traders (Take-Aways, ATM’s, Cell-phone Masts,

Advertising, Film & TV Shoots, etc)• Short and executive courses – set policies in advance for

use of Brand, sharing of surpluses;• Conferencing;• Travelling Academics & Staff Accommodation;• Vacation accommodation, summer school etc.

Consider separate, focused & incentivised operationNeed to sweat the assets

THIRD STREAM INCOME (cont.)

Contract research, donations and related income streams do NOT constitute 3rd steam incomeHowever:• There are substantial administrative and overhead

costs which must be recovered• Contracts must be fully costed so that the price at

which the work is undertaken is agreed with full knowledge of under/over recovery

Specifically funded activities should carry full cost and should not be cross-subsidised

Risk:The University has 3 risk domains

Risks associated with Teaching:These risks are managed through the Academic structures of the University

Risks associated with Research:These risks are managed through the Academic structures of the University

Conventional Operating and Business Risks are managed by the Risk Management Committee

Management’s Assessment of Conventional Operating and Business Risks

Funding

• Change in Govt funding policy• Infrastructure funding with

caveat• Relationship with Hospital,

Province and State• Loss of use of assets due to

withdrawal or undue cost escalation (rent)

• Funders reneging on commitments

Financial/Commercial

• Inadequate financial strategy• Poorly devolved financial

control• Over extension of resources

resulting from increased activity, both teaching and research

• Investments• Fraud and theft• Tax Risks, both VAT and PAYE• Compliance in complex and

onerous legal environment

Management’s Assessment of Conventional Operating and Business Risks (cont)

Property and related

• Crime• Health and safety• Maintenance backlog• Breakdown of services –

Electricity, water etc.Human Resources

• Attract and retain staff• Lack of accountability• Labour Law• Succession planning v.s. Low

staff turnover

Student and Related

• Inadequate student housing• Financial Aid• Fairness of admissions process

ICTS

• Disaster recovery and losses due to changes to the IT environment

• Overdependence on individuals, both internal and external

A Further Perspective on Risk

For many institutions the research enterprise:• Represents a material component of activity• Is the area least understood by management• Is the hardest to manage• Is the riskiest part of the enterprise• Plagued by inadequate financial reporting• Totally over regulated• Under immense scientific and financial pressure

RISK IN THE RESEARCH ENTERPRISE

• Financial–Requires more investment–Lack of reporting

• Operational–Admin infrastructure–Business processes

• Compliance–Unclear governance and

accountability–Proliferation of Units

• Scientific– Integration of scientific strategy– Conflict of interest

• Technology– Integrated systems– Shadow systems

• Reputational– Mismanagement– Clinical Trial Improprieties– Animals in research

Research Leaderships interest is in leading, as opposed to managing, research?

Cash Budget• University cash operating cycle means that it can have surplus cash for

much of the year• This can provide a false comfort as income is received early and the

spending is fairly even through the year, thus • Important to have a clear understanding of the expected position at the

end of the cycle• The different types of activities in terms of decision rights and governance

throughout the university, can mean that the true financial position is not clear

• Therefore we must understand the free reserves position for the medium term (five year horizon)

Free Reserves are defined as:• The assets that are under the decision rights of university

management and Council,• which are alienable and relatively liquid, • less liabilities

UNIVERSITY RESERVES

GRANULATION OF RESERVES

• Endowed Funds

• Reserves in subsidiary and associated entities

• Assets that at the time they were initially given to the university were specified by the donor to be held by the university in perpetuity

• Reserves restricted for use within the separate legal entity

GRANULATION OF RESERVES (cont)

• Reserves held by operational units within the institution – Departmental Funds

• Research Funds

• Donations or reserves arising from contractual activities, including consulting and contract research, within an operational unit and retained by that unit

• Funds held for continuing research or related activities (includes internal awards)

GRANULATION OF RESERVES (cont)

• Discretionary Funds

• Council Controlled Reserves

• Funds which may be made available to operational units in terms of policy from savings on operational costs

• All other funds over which council has decision making rights, includes funds set aside for specific purposes

THINGS TO LOOK FOR WHEN CONSIDERING THE ANNUAL BUDGET

• Staffing ratio –the percentage of staffing costs to total expenditure (55% – 65%)

• Free Reserves – This could be measured as:– How many months payroll can you cover– What percentage of fees or subsidy you could live without

• Fee increase setting:– Internal inflation, as apposed to CPI– Consultation process followed– What is your net fee income after bad debt, institutions

contribution to financial aid etc.

MORE THINGS TO LOOK FOR WHEN CONSIDERING THE ANNUAL BUDGET (Budgeting tricks)

• Staffing “churn” in the budget– Budget set for all posts for the full year

• Over budget for expenses – Can give rise to accelerated spending in the 4th

quarter• Under budgeting for fee and third stream income

revenues by unitsHave a rigorous interrogation of actual results against original approved budget and REACT!

OTHER MATTERS THAT NEED TO BE IN PLACE

• Council approved delegated authorities– Financial– Human Resources– Research and related contract signing

• Schedules of risk and responsibility– Insurance

• Policy on Ethics, particularly Conflict of Interest• Approved tendering procedures• Audit committee, possibly including Risk oversight• Policy for rotation of auditors

OTHER MATTERS – Cont.

• Institutions should have financial plans with:– targeted surpluses, both before and after net

investment income– targeted free reserves, (minimum and maximum

holdings) – targeted staffing ratios

• Consider incentivising NON spending budget in final quarter– ‘Use it or lose it’ can come back to bite you

THANK YOU