CITY HOSPITALS SUNDERLAND NHS TRUST

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Strictly Private Confidential
CITY HOSPITALS SUNDERLAND NHS TRUST
Board Memorandum on projected working capital
requirements and financial reporting procedures
TRANSACTION SERVICES
Final Draft 10 June 2004
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Table of Contents
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Section 1

• Executive summary

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Introduction and background
Section 1 - Executive summary

• 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 Trusts 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.

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Financial highlights
Section 1 - Executive summary

• 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 IE
  surpluses and the receipt of Strategic Health
  Authority agreed PDC will be managed to ensure
  maximum return from any investment.

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Forecast headroom
Section 1 - Executive summary

• The Trusts 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.

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Financial reporting procedures, systems and
controls
Section 1 - Executive summary

• 3 Audit Arrangements
• External Audit
• Internal Audit
• Internal Audit Working Practices
• Counter Fraud Work

• 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 Trusts 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

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Section 2

• Key income and expenditure assumptions

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Basis of preparation (1 of 2)
Section 2 - Key income and expenditure assumptions

• 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.

• 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 Trusts
  Service Development Strategy dated February 2004
• Activity and resource forecasts to deliver the
  strategic plan submitted by the Trusts 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

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Basis of preparation (2 of 2)
Section 2 - Key income and expenditure assumptions

• 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.

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Key assumptions
Section 2 - Key income and expenditure 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.

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Income assumptions
Section 2 - Key income and expenditure 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 Trusts 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.

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Income phasing
Section 2 - Key income and expenditure assumptions

• 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 1/12ths 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.

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Expenditure assumptions
Section 2 - Key income and 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 _at_ 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.

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Expenditure phasing
Section 2 - Key income and expenditure assumptions

• 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.

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Section 3

• Key balance sheet assumptions

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Balance sheets
Section 3 - Key balance sheet assumptions

• 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.
• IE 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.

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Fixed assets
Section 3 - Key balance sheet assumptions

• 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.

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Stock
Section 3 - Key balance sheet assumptions

• 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.

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Debtors
Section 3 - Key balance sheet assumptions

• Main income providers will settle activity
  related invoices on the 15th 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.

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Creditors
Section 3 - Key balance sheet assumptions

• 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.

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Section 4

• Cash flow projections and headroom

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Cash flows
Section 4 - Cash flow projections and headroom

• 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.

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Operating cash flows
Section 4 - Cash flow projections and headroom

• 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.

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Headroom
Section 4 - Cash flow projections and 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.

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Section 5

• Sensitivities and post sensitivity headroom

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Income and expenditure sensitivities
Section 5 - Sensitivities and post sensitivity
headroom

• 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.

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Cash flow sensitivities/Post sensitivity headroom
Section 5 - Sensitivities and 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.

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Section 6

• Financial reporting procedures, systems and
  controls

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Financial reporting procedures, systems and
controls
Section 6 - Financial reporting procedures,
systems and controls

• 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 Trusts 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.

• This section sets out the details of the Trusts
  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

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Financial reporting procedures, systems and
controls
Section 6 - Financial reporting procedures,
systems and controls

• 2 Financial Controls and Reporting
• 2.1 Finance Department
• Overall, the Trusts 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.

• 1.4   Audit Committee Arrangements
• The Trusts 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).
• .

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Financial reporting procedures, systems and
controls
Section 6 - Financial reporting procedures,
systems and controls

•        
• 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 Trusts 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
  Trusts 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.

• 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 Trusts 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 Trusts 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

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Financial reporting procedures, systems and
controls
Section 6 - Financial reporting procedures,
systems and controls

•        
• 3.2 Internal Audit
• The Trusts 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).

• 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 Trusts 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 Trusts 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 Commissions Code
  of Audit Practice. This includes

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Budgeting and forecasting
Section 6 - Financial reporting procedures,
systems and controls

• 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.

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Appendix 1

• Board Statement to the Regulator

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Board Statement to be made to Regulator
Appendix 1 - Board Statement to the 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 Trusts
  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

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