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Opinion: Surpluses – do they tell the story behind the numbers?

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Opinion: Surpluses – do they tell the story behind the numbers?

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Published by Max Salsbury for 24dash.com in Housing and also in Finance

Surpluses  do they tell the story behind the numbers? Surpluses do they tell the story behind the numbers?

Image: Money via Shutterstock

Robert Kerse, finance director, Circle Housing group

Record-breaking surpluses are hitting the headlines as the first associations publish their March 2014 results.

This raises the debate of whether housing associations are using their balance sheets appropriately to invest in their social purpose. But, more importantly, is this fixation on surpluses right and is it telling us the whole story?

With decreased government funding for the development of more much needed affordable homes and an increase in private investment, in particular corporate bonds, we have to behave very differently as a sector. This is about strong governance and leadership, an even stronger focus on efficiency and value for money, and rigorous risk management. There is no one size fits all approach and different organisations have different strategies.

Risk management is the critical point here in terms of surpluses, as we need to ensure that we have the right buffers in place to protect the long term security of our customers. Generating a surplus that is proportionate with the level of business risk you are taking to generate the resources you require to deliver your social business purpose is an important control here. Either way, funders, investors and indeed our regulator need to be satisfied that robust financial management is in place.

Focussing purely on surplus is telling a very one dimensional story. After all, surplus is a representation prepared by accountants of the financial picture – not everything is included in the income and expenditure accounts when it happens.

Potentially more illuminating is the level of cash that has been generated after all major repairs to existing properties and interest costs have been met. Not all of these costs are shown in the income and expenditure account in the year that they are paid. 

This is a truer picture of the ‘surplus’ resources generated. As an absolute minimum we want to generate enough cash to fund all of our major repairs and interest cost.  But we also have an upper limit to ensure we are not generating excess levels and are investing back into building more homes, and our wider social purpose. During 2013/14 we generated £12.2 million of cash after these costs compared to an accounting surplus of £44.5m.

And then there is the silent figure that is rarely reported yet is at the heart of what we do – social dividend. We have a collective responsibility to invest as much as we can back into homes and communities. So, last year as well as investing £88.4m in building more homes, which was in part funded by the £12.2m ‘surplus’ cash we generated, we invested £3million from our surplus back into supporting our customers to become more financially resilient and independent.

We know from our social return on investment model that for every £1 we invested, we generated a return of £12, creating an SROI of £34.7m. Perhaps this is the real figure that should be hitting the headlines?

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