Cash management and board visibility of cash position thrown in the spotlight

It has hard to miss the recent publicity around the separate financial difficulties of Barking, Havering and Redbridge University Hospitals NHS Trust and construction/facilities management company Carillion.

Both cases have highlighted the use of delaying payments to creditors as a working capital management technique and the perils of not reporting this key performance metric to boards in an accessible way.

In their annual report and accounts, NHS bodies are required to report their performance against the better payment practice code of paying all payables within 30 calendar days of receipt of goods or a valid invoice. There is no requirement for it to be reported to boards more frequently than that. However, recent experience shows that this one metric can act as an early indicator of bigger financial problems.

NHS Improvement’s Single Oversight Framework (SOF) includes two metrics that relate to cash management:

• Capital service capacity – the degree to which income covers the provider’s financial obligations
• Liquidity – the number of days of operating costs held in cash or cash equivalent forms

Again, there is no requirement to report the metrics that feature in the SOF other than, for foundation trusts, in their annual report. However, if these are the metrics that the regulator is looking at, then it makes sense that they should be reported to board members and senior management.

Cash management – covered in a new briefing* from the HFMA – is more than simply delaying payment of creditors. On the cash outflow side of the equation, it involves entering into a constructive dialogue with suppliers. Some will accept longer payment terms for the peace of mind of knowing when they will be paid and not having to chase further for payment. Others may need to be paid within 30 days (or even the 10 days that central government bodies work towards).

Some NHS bodies are only making a single payment run each month, which has efficiencies and allows time for proper review of invoices.  Others are changing authorisation levels to manage outflow.

On the cash inflow side of the equation, income streams are largely predictable for most NHS bodies. Commissioners in England, as well as health bodies in the devolved nations, are funded direct from government through allocations that they can draw down monthly. 

NHS provider bodies in England rely on the standard contract for the majority of their income, so the payment terms are known – although this is not always advantageous as it can take three months for ‘over-activity’ to be paid. Recent guidance aimed at maximising overseas patient income can be used for other income streams, such as private patients.

Overarching all of this, cashflow forecasts are vital to ensure that finance is available when needed. Forecasts should be routinely made for the short term (to the end of the current financial year and milestones within that year) and reported to senior management.

Medium- to long-term cash forecasts (two to five years) will be made as part of the annual planning cycle, but may need to be reviewed more frequently if plans change.

The more precarious the financial position, the more important it is to be able to accurately predict how close to cash plans the organisation will be at the end of the financial year (the short term) and in the longer term.

The frequency that cash forecasts are prepared and reviewed will vary from NHS body to NHS body. However, as cash balances become smaller, accurate and regular cash forecasting becomes more critical.

A deteriorating cash position may be an early sign that an NHS provider is in financial distress. The cash position should always be considered alongside other metrics.

For example, if cash balances are declining, but there is no corresponding deterioration in the surplus/deficit position, questions may be asked about why this is. It may be due to a capital project which will not impact the revenue position, that the level of receivables is increasing and income is not being collected or that savings plans are showing reduced expenditure but are not affecting cash flow (for example by reducing depreciation charges).

* Treasury and cash management in the NHS is due out in June.
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