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Enclosure 1a - Projected Working Capital (1.2M PPT)

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  • 1. CITY HOSPITALS SUNDERLAND NHS TRUST Board Memorandum on projected working capital requirements and financial reporting procedures Final Draft – 10 June 2004 Strictly Private & Confidential TRANSACTION SERVICES
  • 2. Table of Contents Section Page 1 Executive summary 1 2 Key income and expenditure assumptions 6 3 Key balance sheet assumptions 14 4 Cash flow projections and headroom 20 5 Sensitivities and post sensitivity headroom 24 6 Financial reporting procedures, systems and controls 27 Appendix 1 Board Statement to the Regulator 33
  • 3. Section 1 Executive summary 1
  • 4. Introduction and background
    • This memorandum has been prepared by the Board of City Hospitals Sunderland NHS Trust (“the Trust”) in connection with the application by the Trust for Foundation Trust status and has been prepared to support the statements to be made by the Board in respect of the Trust’s working capital requirements and its financial reporting procedures. These statements are reproduced in Appendix 1.
    • The forecast and projections set out in this memorandum are solely the responsibility of the Board of Directors of the Trust and were approved at a Board meeting on 10 June 2004.
    2 Section 1 - Executive summary
  • 5. Financial highlights
    • The Trust has a proven ‘breakeven’ history, and will make a surplus in 2004/05 and 2005/06.
    • The majority of income the Trust receives is for patient related activities and is agreed in Legally Binding Contracts for 2004/05.
    • The planned Capital Programme will allow for additional capacity, in particular 72 new beds in 3 wards and 4 new theatres, due for completion in the Autumn of 2004.
    • The Trust does not anticipate having to borrow from the external market in order to finance the planned capital programme.
    • Cash balances will increase as a result of I&E surpluses and the receipt of Strategic Health Authority agreed PDC will be managed to ensure maximum return from any investment.
    3 Section 1 - Executive summary
  • 6. Forecast headroom
    • The Trust’s base case working capital projections indicate that the minimum headroom will be £3.7m in October 2004.
    • After applying the key sensitivities identified in Section 6, the minimum headroom is £2.5m in March 2005.
    • On the basis of the information included in this Memorandum, and taking into account the new Foundation Trust facilities to be made available to the Trust, the Board are of the opinion that the working capital available to the Trust is sufficient to meet its requirements for at least the 12 months from 1 July 2004 and that the Board is in a position to sign the working capital statement set out in Section 5.
    4 Section 1 - Executive summary
  • 7. Financial reporting procedures, systems and controls
    • On the basis of the information included in this Memorandum, the Board
    • confirm that they have established procedures which provide a reasonable
    • basis for them to reach proper judgement as to the financial position and
    • prospects of the Trust. These have been reviewed by Independent Assessors
    • on behalf of the Independent Regulator.
    • Details of the Trust’s financial reporting procedures, systems and controls are set out in Section 6.
    • These provide details of the following:
      • Corporate Governance
        • Governance Structure
        • Management Structure
        • Assurance Framework
        • Audit Committee Arrangements
      • Financial Controls and Reporting
        • Finance Department
        • Finance Systems
        • Maintenance of the Financial Ledger
        • Financial Reporting – In Year
        • Treasury Management
        • Budget Setting
        • Budget Monitoring
        • IT Controls
        • Data Quality
    5 Section 1 - Executive summary
      • 3 Audit Arrangements
        • External Audit
        • Internal Audit
        • Internal Audit Working Practices
        • Counter Fraud Work
  • 8. Section 2 Key income and expenditure assumptions 6
  • 9. Basis of preparation (1 of 2)
    • The projections included in this Memorandum are based on the projections prepared
    • by the Trust in the format provided by the Office of the Independent Regulator.
    • The projections are based on a model of projected activity and costs for the period
    • from March 2004 to 31 March 2006. The key sources of information for the model
    • are set out below:
    • Protected income
      • The strategic direction set out in the Trust’s Service Development Strategy dated February 2004;
      • Activity and resource forecasts to deliver the strategic plan submitted by the Trust’s Clinical Directors/Business Managers;
      • The Host Commissioners’ draft Local Delivery Plans for 2004-05;
      • Signed Legally Binding Contracts with all Commissioners of Patient Care Services 2004/05;
      • Pricing assumptions based on material received from the Department of Health on the National Tariff rates;
    • Non protected income
      • Comprises both Private Patient Income and income from OATs. It is assumed that these increase each year in line with inflation.
    • Other income
      • Based on estimate by the Director of Finance and inflated each year by 3.3%.
    • Staff costs
      • Staff costs are based on the 2004/05 budget and uplifted each year by the national pay award of 3.225%.
    • Non staff costs
      • Based on the 2004/05 budget and uplifted by a composite 2.5%. Within this, high inflation areas such as drugs and blood products are uplifted by a higher amount.
    • Depreciation
      • Has been calculated based on the current value of fixed assets and expected capital expenditure through each year.
    7 Section 2 - Key income and expenditure assumptions
  • 10. Basis of preparation (2 of 2)
    • Public Divided Capital dividends
      • Are based on a 3.5% return on assets employed.
    • Capital expenditure
      • It is anticipated that the Trust will generate sufficient cash through depreciation and ‘surplus’ on national tariff to fund the capital expenditure programme. In addition, PDC funding will be received in 2004/05 as agreed with the Strategic Health Authority.
    • The accounting policies adopted in the financial projections are, so far as the Directors are aware, consistent with the NHS accounting manual and the accounting policies adopted by the Trust in its published financial statements. .
    • In preparing the projections a number of sensitivities have been considered. These are summarised in Section 5.
    8 Section 2 - Key income and expenditure assumptions
  • 11. Key assumptions
    • The 2004/05 position represents the recurring budgeted position and takes no account of any non-recurring income which may be received during the year. Historically, the Trust has received non-recurring income of a minimum of £10m on an annual basis.
    • The Trust has opted to take the minimum income guarantee transition path to National Tariff for baseline activity.
    • Protected Income is for Patient Related Activities and represents that agreed in Legally Binding Contracts for 2004/05. Activity above that included in contracts will be charged at National Tariff Rates and is excluded from assumptions.
    • The Pay Award is included as that nationally agreed pay rate under Agenda for Change of 3.225% and covers all staff groups in the NHS.
    • Individual Non-Pay categories have been examined and uplifted, resulting in a composite non-pay inflation uplift of 2.5%.
    • The Trust will generate income from interest on cash balances of 4%.
    • The Trust will continue to pay PDC dividends which represent a 3.5% return on assets employed.
    • The assumption is that the National Tariff will increase annually by 1% less than the assessed impact of inflation and general cost pressures. The Trust has a strong history of identifying and achieving Cash Releasing Efficiency Savings and it is assumed that the Trust will continue to take savings to offset the impact of this 1%.
    9 Section 2 - Key income and expenditure assumptions
  • 12. Income assumptions
    • Transition to Payment by Results – minimum income guarantee with full transition in 2007/08.
    • No assumptions on activity volume variance from plan are built into our income as surplus as the Legally Binding Contracts, include clear agreed arrangements in case of over/under performance.
    • Patients’ Choice initiative – no assumptions are included on activity likely to be requested from commissioners outside the Trust’s usual catchment areas. If this happens it will be outside the volumes agreed of the Legally Binding Contracts.
    • All Legally Binding Contracts were signed by 31 March 2004.
    • No assumption on ability of commissioners to pay for additional activity in-year is made and the plan is based on signed Legally Binding Contracts volumes only.
    • Capacity on stream over the five years to deliver the plan.
    • Advised levels of research and teaching subsidies.
    10 Section 2 - Key income and expenditure assumptions
  • 13. Income phasing
    • The majority of income to the Trust is for patient related activities and as agreed in signed 2004/05 Legally Binding Contracts, this will be received in equal 1/12 ths in each year.
    • The unusual movements in October 2003 and November 2003 are due to the implementation of a new Financial Ledger System which went ‘live’ in October 2003.
    11 Section 2 - Key income and expenditure assumptions
  • 14. Expenditure assumptions
    • Staff costs
    • Staff costs are calculated at specialty level and it is assumed form 66% of overall marginal rates.
    • Costs associated with the Consultant Contract are included as per national estimates and are fully funded.
    • The Trust is an ‘Early Implementer’ for Agenda for Change and therefore experienced increased staffing costs in 2003/04. All costs associated with Agenda for Change are included as per national estimates.
    • Wage inflation is as nationally agreed @ 3.225%
    • Non staff costs
    • Drug inflation is minimal with drug costs increases mainly due to increases in volume of service activity.
    • Bottom line inflation will average 2.5%.
    • Depreciation is calculated using current asset values plus anticipated capital expenditure. PDC dividends represent a 3.5% return on Assets Employed.
    12 Section 2 - Key income and expenditure assumptions
  • 15. Expenditure phasing
    • The bulk of expenditure is on staff salaries the majority of which are paid monthly.
    • Non-pay expenditure is also anticipated to be phased equally over 12 months, consistent with board activity trends.
    • The unusual trend experienced in October 2003 and November 2003 is due to the introduction of a new Financial Ledger System.
    13 Section 2 - Key income and expenditure assumptions
  • 16. Section 3 Key balance sheet assumptions 14
  • 17. Balance sheets
    • The 31 March 2004 Balance Sheet in the model is an estimated position determined prior to the completion of the draft annual accounts.
    • Fixed Assets
    • Move year on year dependent on capital expenditure and are expected to increase in each year as a result of the Capital Programme, and are reduced by depreciation.
    • Current Assets
    • Will be managed to existing levels. The only significant increase is in cash as balances are allowed to rise as a result of:
      • EFL no longer a financial target.
      • I&E Surpluses generated through profit from national tariff and increases in inflation being slightly less than funding received.
    • Creditors
    • No significant increase anticipated as activity signed into Legally Binding Contracts.
    • Tax Payers Equity
    • The Trust will only receive additional PDC as agreed with the SHA, in 2004/05.
    15 Section 3 - Key balance sheet assumptions
  • 18. Fixed assets
    • The Capital Programme will deliver additional capacity as a result of the conversion of the Multi Storey Car Park into 72 beds in 3 wards and 4 theatres. Completion is anticipated by the end of 2004.
    • The current Capital Programme allows all financial ratios to be met and leaves a level of flexibility.
    • The Trust has a history of delivering completed capital projects to both time and budget.
    • The Trust does not anticipate ‘borrowing’ to enable funding of the Capital Programme being able to generate sufficient resources internally, and through the receipt of additional PDC in 2004/05.
    16 Section 3 - Key balance sheet assumptions
  • 19. Stock
    • Historically stock levels are kept at a low level as the Trust takes advantage of Just-in-Time procurement and consignment stock.
    • The bulk of stock items are drugs and orthopaedic prosthesis.
    • Stock levels will be managed to 2002/03 values throughout 2004/05.
    17 Section 3 - Key balance sheet assumptions
  • 20. Debtors
    • Main income providers will settle activity related invoices on the 15 th of each month as agreed in Legally Binding Contracts.
    • No anticipated increase in bad debt provisions is expected as activity forecasts are prudent and agreed in Legally Binding Contracts.
    18 Section 3 - Key balance sheet assumptions
  • 21. Creditors
    • Creditors are expected to be managed back to historical levels during 2004/05 and the Trust has assumed that creditor days will remain as previously experienced, around 10 days.
    19 Section 3 - Key balance sheet assumptions
  • 22. Section 4 Cash flow projections and headroom 20
  • 23. Cash flows
    • The Trust expects to generate a cash surplus in both 2004/05 and 2005/06, largely as a result of the Income and Expenditure surplus.
    • It is assumed that PDC dividends continue to be calculated and paid as currently.
    • The Public Dividend Capital received figure of £7.036m in 2004/05 has been agreed with the Strategic Health Authority but remains subject to approval by the Department of Health.
    21 Section 4 - Cash flow projections and headroom
  • 24. Operating cash flows
    • Significant operating cash surpluses are anticipated in both 2004/05 and 2005/06. This is mainly due to the large operating surplus before depreciation.
    • Movements in Debtors and Creditors between 2003/04 and 2004/05 are due to the accounting treatment of provisions for Agenda for Change and the Consultant Contract.
    22 Section 4 - Cash flow projections and headroom
  • 25. Headroom
    • The Trust has agreed with its host commissioner, Sunderland Teaching Primary Care Trust, payment of the July block contract element on the 1 July 2004, rather than 15 July 2004 to ensure sufficient cash is available immediately.
    • Discussions have taken place with a number of Banking facilities and the Trust is confident overdraft facilities will be in place by 1 July 2004, should they be required.
    • The Department of Health have indicated that they will consider applications for in-year Short Term Loans at a rate of 4.35% from Foundation Trusts.
    23 Section 4 - Cash flow projections and headroom
  • 26. Section 5 Sensitivities and post sensitivity headroom 24
  • 27. Income and expenditure sensitivities
    • Two sensitivities were run through the model with the results summarised on the attached table.
    • The sensitivities were:
      • Increase expenditure on drugs by £1m in both 2004/05 and 2005/06
      • Increase expenditure by £642k in 2004/05 to reflect non achievement of efficiency savings to cover the ‘risk share’ agreement with Sunderland TPCT.
    • These sensitivities reduce the surplus in 2004/05 by £1.6m and in 2005/06 by £2m.
    25 Section 5 - Sensitivities and post sensitivity headroom
  • 28. Cash flow sensitivities/Post sensitivity headroom
    • Applying the income and expenditure sensitivities has a ‘like for like’ impact on cash balances,changing the minimum headroom required to £2.5m in March 2005.
    • This does not take into consideration cash balances during the month
    • In this instance, the Trust can look at ;
      • Delaying creditor payments
      • Rephasing capital cashflow in order to mitigate the impact.
    26 Section 5 - Sensitivities and post sensitivity headroom
  • 29. Section 6 Financial reporting procedures, systems and controls 27
  • 30. Financial reporting procedures, systems and controls –
    • This section sets out the details of the Trust’s financial reporting procedures,
    • systems and controls and covers:
      • Corporate Governance
      • Financial Controls and Reporting
      • Audit Arrangements
    • Corporate Governance
    • 1.1 Governance Structure
    • The Trust is managed by a Board consisting of:
      • a Chairman and five Non-Executive Directors, all of which are ‘termed’ appointments made by the independent NHS Appointments Commission; and
      • five Executive Directors, although the Director of Finance post has been vacant since February 2003. A new Director of Finance has recently been appointed and is due to come into post later this year.
    • The Board is supported by five sub-committees:
      • the Audit Committee;
      • the Remuneration Committee;
      • the Corporate Governance Committee;
      • the Clinical Governance Committee;
      • the Investment Committee; and
      • the Tendering Committee
    • The Trust plans to merge the Corporate and Clinical Governance Committees into one Governance Committee (covering clinical and non-clinical risk) after incorporation as a NHS Foundation Trust.
    • 1.2  Management Structure
    • The operations of the Trust are managed within a divisional structure, with six main Divisions (plus Trust Headquarters Department) as follows:
      • surgery;
      • medicine;
      • family care;
      • clinical support one;
      • clinical support two; and
      • estates and facilities.
    • Each of the Executive Directors of the Trust (excluding the Chief Executive and Medical Director) is responsible for a range of Clinical Directorates, grouped into Divisions. Each Clinical Directorate is supported by a dedicated Business Manager.
    • The Trust Board meets every other month in public, meeting in the intervening months in private (as the General Purpose Committee).
    • 1.3 Assurance Framework
    • The Trust’s formal Assurance Framework document was approved by the Board in March 2004. The Framework is split into ten categories and identifies the gaps in controls and assurance across each area. A lead officer is responsible for each category. The Corporate Governance Committee will be responsible for reviewing the Assurance Framework and progress against any action plans on a regular basis. The Trust Board will receive updates on the Framework twice a year.
    28 Section 6 - Financial reporting procedures, systems and controls
  • 31. Financial reporting procedures, systems and controls –
    • 1.4   Audit Committee Arrangements
    • The Trust’s Audit Committee consists of three Non Executive Directors as follows:
      • Margaret Forbes JP (Chair):
      • Margaret Forbes trained as an executive secretary working locally for Tyne Tees Television and abroad. She has been a local councilor since 1983 and is a local School Governor. She was a member of the Family Practitioner Committee from 1989 and an FHSA member to Sunderland Health Commission from 1994;
      • Ailsa Martin:
      • Ailsa Martin was appointed co-coordinator for the Princess Royal Trust Sunderland Carer's Centre in 1994. She is a Committee Member of Sunderland Art Studio. She is also a Director of ETEC (Sunderland) Ltd; and
      • David Clifford OBE DL:
      • David Clifford has 40 years experience in the region's transport industries. He retired as Managing Director at the Port of Tyne Authority in 2002. He has previously been Chairman of South Tyneside Enterprise Partnership and East Durham Groundwork Trust and a member of regional committees. He is a Deputy Lieutenant of County Durham.
    • The Audit Committee meets at least three times a year. Also in attendance at the Committee are the Trust Chairman and Director of Finance, along with the Head of Internal Audit and external auditors (although the external auditors are not invited to every meeting).
    • .
    • 2 Financial Controls and Reporting
    • 2.1 Finance Department
    • Overall, the Trust’s Finance function is considered to be adequately resourced and fit for purpose. This will need to be kept under review as the impact of NHS Foundation Trust status on future resourcing requirements becomes clearer.
    • The Finance Department is led by the Director of Finance, who is supported by the Head of Finance. The Director of Finance post has been vacant since November 2003, as the former Director of Finance was appointed Chief Executive of the Trust. An appointment to this post has recently been made, with the new Director of Finance due to start later this year.
    • There are three Assistant Directors of Finance (covering financial services, financial management and internal audit). Each Division has a Finance Manager.
    • 2.2 Finance Systems
    • On 1 October 2003, the Trust moved onto a new financial ledger, Oracle 11i. This was procured under a shared services arrangement, led by a neighbouring acute trust. The ledger is maintained by a central team who maintain all ledger systems under the shared ledger arrangement.
    • The other three key finance-related operating systems used by the Trust are:
      • Payroll – McKesson system;
      • Stock – Resus system; and
      • Fixed Asset Register – FMIS system.
    29 Section 6 - Financial reporting procedures, systems and controls
  • 32. Financial reporting procedures, systems and controls –
    • 2.3 Maintenance of the Financial Ledger
    • The financial ledger is updated and maintained by the financial services team, led by the Assistant Director of Finance/Procurement. This team is also responsible for the key control account reconciliations.
    • Responsibilities held by the central team (provided under the shared services arrangement) include updating user access levels (if amendments are requested by the Trust) and the provision of technical support for the ledger system.
    • 2.4 Financial Reporting – In Year
    • The Trust produces a formal financial position for the Trust Board/General Purpose Committee on a monthly basis.
    • Detailed monthly finance reports are prepared for each Directorate. A detailed commentary as to the performance of the Directorate, including reasons for overspends, is produced by Finance Managers. This information is used by the Head of Finance to prepare the summary financial report that goes to the Trust Board/General Purpose Committee.
    • 2.5 Treasury management
    • The Trust’s treasury management function seeks to ensure adherence to NHS directions that:
      • funds held in commercial bank accounts of NHS bodies do not exceed £50,000 at any time; and
      • NHS bodies do not overdraw on these accounts.
    • The Trust holds one commercial bank account with HSBC, with the remaining cash balance being held in the Trust’s PGO account. These accounts are managed via the online Masterline (for the PGO account) and Hexagon (for the HSBC account). The following key controls are in place over treasury management:
    • .
    •        
      • documented procedure notes exist covering key treasury management processes, such as making transfers/payments; and
      • arrangements are in place for the management and oversight of bank accounts, including bank account reconciliations and cash requirement forecasting.
    • Key controls per the Trust’s Treasury Management financial procedure notes include:
      • a daily cash flow statement is completed showing balances held in accounts and funds available for spending;
      • the Treasury Manager prepares and updates cash flow forecasts on a monthly basis looking forward twelve months;
      • the Treasury Manager prepares and updates cash flow forecasts on a daily basis looking forward 30 – 60 days; and
      • the Assistant Director of Finance for Financial Services reviews cash flow forecasts monthly to ensure that cash management projections are geared towards an outturn position within the Trust’s External Finance Limit and initiates amendments as required.
    • 2.6 Budget setting
    • For 2004/05, the budget baseline has been derived from the recurrent (budget) position as at Month 9 (December 2003).
    • The Finance Managers were required to submit details of financial pressures experienced in each Directorate to identify potential pressure areas in the budget. The Head of Finance and Director of Finance decided on the necessary budget uplifts to be applied in the next financial year.
    • A final adjustment was then made for any recurring budget uplifts occurring in the final three months of the 2003/04 financial year.
    • The 2004/05 budget was approved by the Trust Board in April 2004.
    30 Section 6 - Financial reporting procedures, systems and controls
  • 33. Financial reporting procedures, systems and controls –
    • 2.7 Budget Monitoring
    • Budgets are managed at both Directorate and Divisional level. Budget holders receive a copy of a standard Oracle financial report following the period end close. Business Managers, Clinical Directors and Divisional Directors also receive a report prepared by the Divisional Finance Manager highlighting the major features within the period.
    • 2.8 IT controls
    • The IT control environment within the Trust is reviewed by the Trust’s internal audit provider.
    • 2.9 Data quality
    • Three Audit Commission reviews on NHS Data Quality have been undertaken at the Trust as required as part of the mandatory external audit programme, and these specifically assessed:
      • the adequacy of overall data quality management arrangements;
      • the adequacy of data quality in relation to data which supports the NHS Performance Assessment Framework; and
      • the robustness of the Trust’s HRGs and reference costs data.
    • 3 Audit Arrangements
    • 3.1 External Audit
    • The Audit Commission (Operations) is the appointed external auditor to the Trust. A full programme of work is undertaken at the Trust annually in line with the Audit Commission’s Code of Audit Practice. This includes:
      • a requirement to comply with Statements of Auditing Standards in undertaking the audit of the financial statements;
      • the application of specific targeted work on the financial aspects of corporate governance; and
      • undertaking all relevant mandated performance audit reviews, such as on the progress with the NHS Plan and Data Quality arrangements.
    •        
    • 3.2 Internal Audit
    • The Trust’s internal audit function is provided by Sunderland Internal Audit Services (“SIAS”) which is hosted by City Hospitals Sunderland NHS Trust. SIAS provide internal audit services to eight NHS clients and operates with 20 staff.
    • 3.3 Internal Audit Working Practices
    • Internal audit activity has been designed to comply with the requirements of the mandatory NHS Internal Audit Standards.
    • 3.4 Counter Fraud Work
    • There is a Proactive Fraud Programme covering the period 2002/03 to 2004/05. In 2003/04, a number of local proactive reviews have been completed including:
      • Patients’ Travel Expenses (Sunderland Eye Infirmary and Sunderland Royal Hospital);
      • Library Income and Petty Cash; and
      • Petty Cash Expenditure (Sunderland Royal Hospital).
    31 Section 6 - Financial reporting procedures, systems and controls
  • 34. Budgeting and forecasting
    • Prior forecasting history
    • The budget is set in April of each year, based on the recurring budget position. This changes significantly over the course of the year due to non-recurring income being received, for example, activity.
    • Historically, the Trust has always achieved the statutory requirement to ‘breakeven’.
    • The movement in 2003/04 is due to the reduction/reclassification of PDC capital from 6% to 3.5%.
    32 Section 6 - Financial reporting procedures, systems and controls
  • 35. Appendix 1 Board Statement to the Regulator 33
  • 36. Board Statement to be made to Regulator
    • Private & Confidential
    • Independent Regulator of NHS Foundation Trusts
    • 10 June 2004
    • Dear Sir
    • City Hospitals Sunderland NHS Trust
    • Working Capital
    • In connection with the application of City Hospitals Sunderland NHS Trust (“the Trust”) for NHS Foundation Trust status, the Board of Directors of the Trust has reviewed the Trust’s future working capital requirements from 1 July 2004 to 31 March 2005. The results of this review are set out in the attached Board Memorandum dated 10 June 2004 which has been prepared after due and careful enquiry.
    • In the opinion of the Board of Directors, the working capital available to the Trust is sufficient for its present requirements, that is at least the 12 months from 1 July 2004.
    • Financial Reporting Procedures
    • The Board of Directors confirm that they have established procedures which provide a reasonable basis for them to reach proper judgement as to the financial position and prospects of the Trust.
    • The basis of the Board of Directors’ confirmation is set out in the attached Board Memorandum dated 10 June 2004 . The Board of Directors confirm that it will continue to maintain procedures at or exceeding this level of quality subsequent to 1 July 2004.
    • Yours faithfully
    • For and on behalf of the Board of Directors
    34 Appendix 1 - Board Statement to the Regulator