Transcript CBR - Finance

Capability-focused Resource Management:
Financial Decisions
Dr Teri McConville
Cranfield Defence and Security
Some Basic Economics
To understand debates about defence
spending and its impact, we need some idea
of what happens in an economy
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Capbility-focused mgt -
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‘The Economy’ is made by people
Taxi
driver
Shoe
maker
Teacher
Doctor
The
economy
Carpet
maker
Farmer
Miner
Tailor
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Each contributes to the economy
Taxi
driver
Shoe
maker
Teacher
Doctor
The
economy
And (in the
cash economy)
gets back cash
Carpet
maker
Farmer
Miner
Tailor
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National Income
= total of all incomes
or total of all production
for cash
4
Sudan 2010
Everything has a price
supply
price
more
demand
less
less
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product
more
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Trade = goods in & goods out
Trade balance
Taxi
driver
Shoe
maker
Teacher
Doctor
The
economy
Carpet
maker
Farmer
Miner
Tailor
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Sudan 2010
Impact of Government
Taxi
driver
Shoe
maker
Teacher
Doctor
Government
The
economy
Carpet
maker
Farmer
Miner
Tailor
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collects taxes
and pays
people to
provide some
services,
including
defence and
security
Inflation
• Things cost more
• money is worth less
because
• The supply or flow of money
grows faster than the
growth in the production
of goods and services
• The government spends more than receives;
• Full employment raises cost of labour
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Sudan 2010
Impact of Defence Spending
Advantages
 Provides security: which
encourages investment
 Provides employment
 Stimulates technological
advance that might be
applied in civil sector
 Can train soldiers with skills
that are useful in civil the
sector
But defence spending …
x … takes government
resources away from other
priorities
x … may lead to Government
over-spending, causing
excessive taxation and/or
inflation
x … absorbs good brains in
non-productive activity
x … can cause neighbours to
spend more on defence
Defence Spending:
How Much is Enough?
• Defence is like an umbrella
• Defence sector can have power as a single
customer, but
– It has the capacity to absorb infinite resources
• Defence industries might have a monopoly
• Defence & security spending should not damage
the society it is supposed to protect.
• IMF and NATO – 2% of GDP is maximum/norm
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Financial management
& planning - Why?
• To provide Commanders with a means of
planning, resourcing and assessing the
delivery of security outputs, in particular the
delivery of Capability, in the most effective
and efficient manner
– i.e. financial management is central to effective
overall security management
Top levels of balance of investment
Government
revenues
other
Personnel
Defence
Infrastructure
New
equipment
Equipment
Modernisation
In-service
support
Training
disposal
Basic terms
Budget
– a year’s envisaged income and expenditure
– predicted flow of income and expenditure over
the year
– the predicted breakdown of spending over the year:
labour, materials etc
 The bottom line of the defence budget, and the information
about how it is derived, should tell the legislators and public
about how much money is to be devoted to defence and
security
… and how much is spent.
Basic terms
• Budget
• Plans
– Multi-year anticipated/assumed income and
expenditure
– Enables affordability forecasts to be made
– Countries vary in how they plan
• UK rolling four year spending plan and 10 year equipment
plan
• France - five year spending plan including capital investment
• Georgia?
• Others?
Basic terms
• Budget
• Plans
• Current spending and capital
spending (investment)
Salaries
Rations
Current
Training
Ammunition
Easy
distinction
in principle,
hard in
practice?
Tanks
Buildings
Capital
•
•
•
•
Basic Terms
Budget
Plans
Current spending and capital spending
Inputs – resources used to carry out particular
tasks (money, people, equipment, time,
information)
Outputs – results of an individual’s or an
organisation’s activities
– pieces of equipment delivered
– soldiers trained for a task
– policy guidance agreed
Output
______ = Productivity
Input
Basic principles of public
expenditure management
•
•
•
•
•
•
•
Responsibility
Accountability
Transparency
Oversight
Comprehensiveness
Predictability (Stability)
Efficiency?
• What am I responsible for
producing (outputs)?
• Am I managing the
finances/other resources (inputs)
involved in responsible manner?
– efficiently and effectively?
Basic principles of public
expenditure management
•
•
•
•
•
•
•
Responsibility
Accountability
Transparency
Oversight
Comprehensiveness
Predictability (Stability)
Efficiency?
•
•
•
•
•
How well have I delivered the outputs for
which I am responsible?
Do I answer to someone if I haven’t?
Are there penalties for me or my
organisation?
Are funds being used legitimately?
– For purpose intended and in accordance
with law/rules
Need to combat fraud & corruption
– control procedures and supervision of
staff
– separation of duties: those who decide
what is to be bought should not actually
buy
Basic principles of public
expenditure management
•
•
•
•
•
•
•
Responsibility
Accountability
Transparency
Oversight
Comprehensiveness
Predictability (Stability)
Efficiency?
•
•
•
Clarity of roles and responsibilities
Openness in budget preparation,
execution, reporting.
Benefits
– helps ensure accountability
– reduces scope for abuse
– allows society to question
government
– helps people to know what they
are entitled to
Basic principles of public
expenditure management
•
•
•
•
•
•
•
Responsibility
Accountability
Transparency
Oversight
Comprehensiveness
Predictability (Stability)
Efficiency?
• Set objectives
• Set resources
• Hold to account
UK Oversight mechanisms
External
Parliament and specialist committees
Defence & Public Accounts Comms.
Auditor General/National Audit Office/
Finance Ministry
Internal:
Minister of Defence/ Defence Council
Inspector General: Internal Audit
& anti-Fraud Unit; (MOD) Police
Basic principles of public
expenditure management
•
•
•
•
•
•
•
Responsibility
Accountability
Transparency
Oversight
Comprehensiveness
Predictability (Stability)
Efficiency?
• Include all payments and receipts
• Allows prioritisation
• Essential for effective
accountability, transparency &
oversight
Basic principles of public
expenditure management
•
•
•
•
•
•
•
Responsibility
Accountability
Transparency
Oversight
Comprehensiveness
Predictability (Stability)
Efficiency?
• Resources being available in
long term
• Longer term strategic
objectives
• Essential for effectiveness
BUT counter to control by
the legislature
Basic principles of public
expenditure management
•
•
•
•
•
•
•
Responsibility
Accountability
Transparency
Oversight
Comprehensiveness
Predictability
Efficiency?
• Economy
• Efficiency (Doing things
right!)
• Effectiveness (Doing the
right things!)
Value for
money
Budget process
Policy
Review
Strategic
Planning
Budget
preparation
Reporting
& audit
Accounting &
Monitoring
Budget
execution
Budget process
Transparency
Oversight,
Accountability
efficiency
Policy
Review
Oversight, responsibility,
predictability
Strategic
Planning
Reporting &
audit
Budget
preparation
Accounting &
Monitoring
transparency
efficiency
Budget
execution
Transparency,
comprehensiveness
Delivering Value
FINANCIAL DECISION MAKING
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Making Financial Decisions
• Costs versus benefits
• Notion of Relevant Costs
– Future costs
• How do we value
intangible outcomes (e.g.
morale, reputation)?
Escalating Commitment
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Example of Relevance
•
A.
B.
C.
D.
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A defence supplier invested
£50 000 in equipment for a
new project. The project has
been cancelled. Should the
company:
Leave everything intact and
look for a new contract?
Scrap the equipment (save
£1,500)?
Use the equipment for spares
(cost £500 but save £8 000)?
Modify equipment for an
existing project (cost
£15,000, saving £35,000)?
Extra
cost
Benefit
Net
Benefits
A Nil
Nil*
Nil
B Nil
£1500
£1500
C £500
£8000
£7500
D £15000
£35000
£20000
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Make or Buy
• Motor transport spends
£65 per day on hospital
transport.
• Two private bids:
– £46
– £43
• Make or buy?
• Other considerations
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Cost (£)
Labour
Fuel
19
6
Operating
costs
40
Total
65
80%
fixed
Need to account for the fixed cost (£32) –
real saving is 19+6+8 = 33
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Return on Investment
• Expected
benefits
• Minus initial
cost
• Divided by
number of years
• Timing may be a
problem
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Initial cost (£000)
benefit↓
Red
50
White
70
Blue
50
Year 1
10
10
10
2
20
10
20
3
20
10
10
4
20
20
13.5
5
10
30
3.5
6
5
30
3.5
7
2.2
30
3.5
Gross benefit
87.2
140
64
Nett benefit
37.8
70
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Average return
5.4
10
2
As %
10.8
14.3
4
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Pay Back (Rate of Return)
• How long does it take for
initial costs to be
recovered?
• If income is steady:
= Initial outlay / number of
years
• If income varies we need
to do some arithmetic!
Red
50
White
70
Blue
50
10
10
10
2 20
10
20
3 20
10
10
4 20
20
13.5
5 10
30
3.5
6
5
30
3.5
7
2.2
30
3.5
Year 1
Gross 87.2
benefit
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140
64
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Discounted Cash Flow
• Considers what money
will be worth in the
future.
• Discounting is the
opposite of compounding
– (There are tables to work
this out!)
• Example:
• £1000 attracts 20%
compound interest over 4
years = £2074
• £1000 with inflation at
20% will be worth
£482.3 after 4 years.
Expressed as ‘Nett Present Value’
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For our three projects:
Discount rate at 10%
Initial Outlay
Net benefit
Net Present Value
Red
50
37.8
14.466
White
70
70
19.486
Red
50
37.8
6.365
White
70
70
3.430
Discount rate at 15%
Initial Outlay
Net benefit
Net Present Value
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The End
Well done for persevering.
Any questions?
Let’s take a break!
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