Friday, 29 July 2011

An Insider's guide to finance

This link has been circulated by Lucy Hodson of the National Planner's Group, so genuine insiders will have seen it already.

It's an interesting and useful guide to reading a financial statement, and not too long. there are some issues that get much less coverage than I would expect, though. One key metric I always look at is the proportion of staff costs to all costs. the average in the sector is very high - 58% staff costs - and in institutions with poorly-controlled staff costs the figure can be much higher than that. Staff costs tend to increase faster than inflation due to incremental drift, even when headline pay rises are low. The combination of a below-inflation increase in funding and an above-inflation increase in staff costs when staff costs are already very high can create a continual erosion of funds for non-staff costs. As staff costs are so difficult and painful to remove from an organisation, this can be a very difficult cycle to break out of once it is established and it eats up any freedom to act at the strategic level.

By contrast the level of surplus generated in my view tells you less. When there is lots of money around, you can (and accountants do) change your depreciation policy or make provisions to hide the money, and you can also (more positively) increase your investment in maintenance and so forth; so sustained high surpluses are rare. Equally when cash is short you can change your accounting policies back and cut the maintenance budget to avoid posting a deficit or minimise the size of the deficit.

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