Performance outcome 7 - Financial Viability Guidance

What is Financial Viability?

Financial viability is the ability to generate sufficient income to meet operating payments, debt commitments and, where applicable, to allow for growth, while maintaining service levels. A community housing provider must be financially viable at all times.

Assessment of financial viability

Overview

The assessment of financial viability is an integrated process involving analysis of historical and forecast financial data and a review of the strategic/business plan, risk management plan, and other information that supports the Registrar’s financial analysis.

The financial analysis considers the audited financial statements and the financial performance report (FPR) to produce ratio and trend analysis, to compare the overall performance of the provider with the budget and prior year(s), and to understand the assumptions underlying the forecast.

To place these results into a broader context, the provider’s strategic and business plans are used in order to understand the environment in which they operate and the strategic objectives as well as their perspective on business growth (where applicable) and any risks around operating and growth activities.

The Registrar’s assessment also requires information around financial plans including funding arrangements, and sensitivity and scenario testing. Other considerations are a provider’s capital structure, its liquidity and treasury management practice. The provider’s risk management plan is also key to understanding what risks have been identified and associated mitigation strategies.

Evidence of financial viability

Ongoing compliance with the financial viability outcomes of the Code will be assessed through a review of the documents submitted by the provider and according to the provider’s registration tier.

The approach taken to assessing viability is proportionate to the tier of the registered provider as follows:

Tier 1 housing providers submit two years of historical and ten years of forecast information.

Tier 2 housing providers submit two years of historical and ten years of forecast information.

Tier 3 housing providers submit two years of historical and two years of forecast information.

There are a range of evidence sources. They are not intended to be prescriptive or exhaustive and providers may use alternative evidence or data.

For more information see Evidence sources to demonstrate financial viability capacity and compliance (PDF , 304.4 KB)

Financial performance reports (FPR)

As part of their Registration Application or on-going compliance, providers will prepare a Financial Performance Report (FPR) with financial and non-financial information. The report is designed to allow for analysis of organisational performance, using a comprehensive suite of financial measures. When reviewed alongside business planning documents and audited financial statements, the FPR is a tool for the assessment of organisational performance and the impact of future decisions on the provider’s viability.

The FPR is a Microsoft Excel spreadsheet featuring:

• instructions for use and definitions
• financial worksheets with historical and forecast sections
• development and funding assumptions
• ratio analysis, trend analysis and charts (automatically generated from data entered), and
• some non-financial measures.

Income and expenditure is segmented into business activities, and separates owned from managed assets and housing business from other business activities to give Registrars a clear understanding of the provider’s ability to meet debt covenants and any significant reliance on other segments to cross-subsidise operating performance. Documents can be attached with the FPR as supporting evidence.

Financial performance requirements and measures

For financial viability, the performance requirements are:

• ensuring a viable capital structure
• maintaining appropriate financial performance
• managing financial risk exposure.

Each financial performance requirement has an associated set of:

• performance indicators
• thresholds: as an indicative guide to measuring performance results against the Code outcomes and requirements
• recommended evidence sources to demonstrate capacity
• recommended evidence sources to demonstrate ongoing compliance.

Financial viability measures and data definitions

The financial viability measures are a suite of indicators to assess financial performance.  There are 11 key measures and associated ratios used to measure financial performance. The financial measures include performance thresholds for some requirements as an indicative guide to assessing performance results. The thresholds do not determine capacity or compliance per se. Rather, they provide a transparent level of performance as a starting point against which results can be assessed.

Performance results that are below or are trending below a threshold or a combination of thresholds will raise a flag that there may be a performance concern to be addressed in the assessment of the provider’s capacity or ongoing compliance

The Registrar will seek to understand whether the provider is not complying with the performance requirement or whether the level of performance relates to particular circumstances.

For more information see Financial viability measures and data definitions (PDF , 134.7 KB)

Other financial performance ratios

There are six other measures used in the assessment of financial operating performance.

For more information see Other financial performance ratios (PDF , 35.9 KB)

Other relevant information

In assessing overall provider’s financial viability the Registrar will also consider:

• history and management of the provider, objectives and strategies, business risks and mitigation strategies
• operating environment, external factors, nature of the entity, financial and accounting policies, and internal control systems
• operating surplus, in particular looking at operating margins and financial efficiency after removing the impact of capital grants, non-cash income, fair value gains, profit and loss on disposal of assets, and other unusual and non-operating items
• cash flow dynamics and the organisation’s ability to meet its financial obligations
• capital structure and debt management
• governance, in particular the role of the governing structures in the financial planning and monitoring, and the decision-making process of financial matters
• development activities and plans for growth.

A comprehensive financial assessment not only focuses on available financial data, but also on non-financial data and qualitative factors that will determine the success in overall financial viability. This includes:

• group structures and partnerships
• debt financing arrangements (debt covenants)
• asset management plan
• level of involvement in diverse business activities.

Financial ratios quantify and highlight key financial relationships but have limitations. They do not explain underlying causal factors and whether such factors might improve or worsen.

Financial data is considered within the context in which the organisation operates, including the quality and experience of management, the organisation’s strategic objectives and the risks to achievement of those objectives.

Before making a final assessment, the business plan and other performance outcomes (including Governance and Management) are used to apply a context to financial information.

The Registrar looks for evidence that management is aware of key assumptions and business drivers and has conducted sensitivity and scenario testing as part of a strategy for managing the risks to achieving organisational objectives.

A number of structural factors that have implications for the provider’s financial position and performance are also taken into account during assessment, such as the:

• asset management and maintenance plans
• level of involvement in support housing activities
• level of involvement in diverse business activities
• level of involvement in contract income, rather than asset based activities.
• level of involvement in property development
• the number and nature of any affiliated entities
• financial policies and procedures

Addressing issues and reporting findings

The first course of action where an issue is identified is discussion with the registered provider to ensure an accurate and comprehensive understanding of the issue. This will be done via Lines of Inquiry.

A collaborative approach is undertaken to resolving the issue in a timely and logical manner. Where an issue is more significant, the Registrar may seek specific undertakings that require action to be taken. When unsatisfied with progress made by a provider in resolving an issue, we inform the organisation and clarify expectations. The Registrar may also issue a notice of non-compliance and is empowered to use enforcement powers, such as binding instruction, under the National Law where a provider is unwilling or unable to remedy the issues in a satisfactory way.

Financial information provided to the Registrar is treated as inconfidence and will not be disclosed as per Section 26 of the National Law. However, in the case of multi-jurisdiction providers, some or all information on the financial performance may be shared with relevant Registrars.