Let's Talk About Financial Statements

Preamble (or ramble)

I’m back for another rip-roaring discussion on financial statements in debt advice, can you imagine anything more exciting for bedtime reading tonight? This hot topic is?sure to whet your appetite and get you going on the subject, I do hope you’re ready.

What do “we” mean by Financial Statements?

Starters for 10, they’re not the same as financial accounts in business but there are of course similarities. As an example of differences, Financial Accounts presented for business have a legal framework to conform to, yet financial statements in debt advice have no legal framework or even a self-regulatory framework to work to, even though most debt advice is regulated. Let that sink in..

A financial statement in debt advice does not have a single purpose, there can be different versions, a before and after, an in-between, a what if, a forecast, a budget with a deficit, a budget with a surplus, a balanced budget, a short-term budget. These different financial statements or financial positions don't even reconcile with a bank statement either (those of us who work(ed) in accountancy or in retail banking may be shuddering with absolute horror & condemnation at this point). Not one budget tool we use in our sector includes a bank carry forward figure, whether that be a negative balance or a credit balance month to month on a bank statement. There is never a one size fits all presentation of a financial statement and no such thing as a “universal financial statement” in debt advice - stuff of myth and legend at this time.?

Why so many versions?

For this question we must identify the breadth of debt advice nowadays. I'm not talking about the 90’s, I’m talking about the here and now - 2024. Back in the good old days, it was all pro-rata/token offers, admin orders, bankruptcy and DMPs, and certainly no IVA’s. None of this fancy malarkey of debt relief orders and breathing space schemes. Most of us didn’t do benefits advice and applications, we didn’t do housing advice or grant applications other than for debt solution application fees, we just did debt solutions advice. We had other colleagues who did all the other stuff beforehand or simultaneously - now we seem to do everything because those other jobs are now extinct. Yet somehow, the way we do financial statements hasn’t changed and we still don’t have a standard framework, this needs an urgent overhaul,

Did you know that if you present a budget that does not balance, a grant awarding charity may refuse to help due to “throwing good money after bad”? Yet this intervention may prevent insolvency - maybe we need a different type of financial statement or ‘definitely maybe’ we need an agreed framework of inbuilt variances to choose from (much like “proper” financial accountancy”) - and it's certainly my preferred solution.

Did you know that if you present a budget with a large deficit, a DHP assessor may refuse to help because the applicant is “insolvent” and thus won’t be moved on by a DHP award”? I can see the logic but I can’t see the logic - even Spock would defer to Scotty for a timely “beam me up Scotty” for that one.

Did you know that if you present a budget that does not reconcile with a bank statement, a grant application may fail because the standard for assessment rests on the bank statement information and the assessor’s subjective opinion of what is non essential spending? Some judge one bank statement, others 2 months or 3 months but never a year average.

Do you know how many third parties still do not accept the standard financial statement? (the only financial statement standard we have to work with in debt advice and that’s only to standardise certain spending categories, also formally badged only for regulated debt advice i.e. credit debt). Well “hello”, what about most Local Authorities - all departments, Bailiffs, HMCTS, DRO Unit reviews post the order being made, Energy companies, DWP, Water companies, HMRC, HM Customs? When it comes to priority creditors the gloves are off with any acceptance of spending guideline limits for our clients “your client spends money on takeaways” “your client has purchased a pair of shoes for ￡40” “your client smokes” “your client spends too much on food & a TV package”. And so on and so forth - do they have a point, can we have some defined standards so we and they can manage our client’s expectations and not waste our precious time please?

Do you remember zero hours contracts and understand that students only receive student maintenance loan payments each term or that some school employees only get paid for 39 weeks of the year but some contracts can be paid for 46 weeks depending on the school and the job? Yes, there are variances in income throughout the year that don’t work with a year on year monthly averaged SFS spending guidelines framework.

Do you know how much energy companies over inflate direct debits to cover winter bills and how this can impact disposable income at certain times of the year? Yet still we use averaged yearly spending guidelines for our standard financial statement framework which assumes a position at a given date of monthly static expenses (bad luck if not during winter).

Do the Math - I think we need Vorders on this one

Ever wondered why some budget tools return different auto-calculated values (I know I really do need to get out more)? Well I’ll be darned, we don’t even do mathematical calculations the same way. Budget tool programmers use a different simple equation to convert the frequency of payments to pcm, some convert weekly to monthly using the multiple 52.2 and others use 52, another uses 52.14 - what’s in a couple of decimal points? Well, slight differences for smaller/fewer converted figures, greater differences for larger/multiple converted figures, either way the underlying mild mannered OCD in me does not like this inconsistency and possible confusion for clients - read on to see a further more critical consequence..?

Let’s take the Money & Pension Service as an example, their Money Helper Tool uses a simple conversion equation from weekly to monthly adopting the multiple 52.14. Yet their Standard Financial Statement tool is programmed with the simple conversion equation from weekly to monthly adopting the multiple 52. Some of our clients have noticed this and clearly I have. What’s the right way? Even the same organisation cannot decide it would seem! Why does it even matter, isn’t this petty? Well no, not when it comes to debt advice, standardised accuracy is critical.

How important is an accurate financial statement?

Now let me see, I get the presentation or figures wrong and my client doesn’t get help with a grant and or loses out on help with a housing costs shortfall. Yep, pretty bad.

And further, I use the weekly to monthly 52.14 multiple for a financial statement and my client has too much disposable income to do a debt relief order but if I’ve used the 52 multiple, they are eligible. Yep, pretty bad.

And what about Insolvency Practitioners and IVA’s, I mean they're usually chartered accountants aren’t they? How are they calculating financial statements as accountants - crikey, what multiples does their software use for weekly to monthly? Does this in any way explain why they arrive at disposable income when we don’t? All up for debate.

Isn't it more likely to be only a marginal difference? What about the Official Receiver’s office and bankruptcy income payment orders - a fine line of ￡20 pcm maximum disposable income? We say poe-tay-tow and they say poe-tar-tow. We’ve advised the client that there won’t be an income payment order but the Official receiver calculates there is one for a whole 36 months! Too late to call the whole thing off!

Vorders we need you, we can’t even agree on the basics here.

“Hello Open Banking, my old friend”

Well, it was “All hail this amazing bells and whistles Open Banking thingy me jig” and how it would ‘revolutionise’ and streamline debt advice. We’ve unsurprisingly found the opposite on balance. I mean nobody can claim that our sector did not speak up about this, but of course we’re all a bunch of annoying Luddites who don’t know what the hell we’re talking about, or we’re jealous, or we’re feeling threatened, or we’re troublemakers. Yada yada yada - all manor of patronising and arguably offensive comments and reactions to hardened professionals who in my experience know a lot more than policy makers, bankers and IT professionals when it comes to debt advice. This belittling and downgrading of our debt advice profession must stop, I’ve no idea how it even started but I won’t allow this almost gaslighting behaviour to continue on my watch.?

Open Banking has made parts of our jobs even harder because every minutiae of spending can now be easily inspected by 3rd parties (subject to elective consent or consent by force “you don’t get grant help/we won’t stop enforcement unless you consent to Open Banking sharing” and all without any need to refer to a debt adviser financial statement. This flies in the face of the SFS principles to précis agreed spending categories without 3rd parties nit picking and further, it positively encourages the inspection of bank statements which do not always represent the real picture of a person’s financial struggles. Perhaps there are some gains for speed of getting bank statements, particularly for our own professional purposes and DRO applications, but the losses can be greater for our clients in other parts of debt advice, is that what we really wanted to achieve with the “revolution”? Do we still buy into the SFS principles or do we believe that all access bank statements are fairer for 3rd parties? Do 3rd parties consider or even understand variances, do they ask questions or just refuse applications because they don’t like what they see? Do we understand how to calculate variances and reflect them transparently?

Why are bank statements not always appropriate for an accurate financial position?

It’s all the obvious stuff, I’ll take my own spending habits as one example, for several months I might spend nothing on clothes, I get to January when my council tax ends and I blow out on a load of clothes in February - you check my bank statement in February - I’m a frivolous ‘young’ woman.?

Let’s say Penny B Cashless has self-employed income and gets paid in arrears and the contractor also pays late - Penny has no income for months but then gets a big sum, you average out Penny’s statement to check her monthly disposable income, it’s not reflective of Penny’s actual disposable income, how does she afford fixed payments that don’t bear relation to her income over a fixed term?

We also still have a section of society who make large and repeated cash withdrawals, they may not keep receipts, then it’s all suspicion on what they’re spending their money on.?

Some of our clients still run catalogue club books where they are paid money directly to their bank account but it corresponds to a payment to catalogue purchases not made by them.

Then there’s clients who receive someone else’s benefit or wages into their account, this still happens but we have no functional budget tool options to record these variances.

Add in fluctuating income, the date at which a bank statement is generated and the date the client has accessed debt advice, all averages calculated will likely distort a person’s real financial position month to month. We have no current mechanism to add or deduct adjustments and variances in a transparent way. More pertinent, we are never trained to even consider such variances in any accredited training that I know of. However, kudos to the DRO Unit, they started a conversation and introduced variance with pro-rata’ring the next tax year’s council tax payments as a 12 month moratorium average. A very important variance, but we have no tool for this or functional feature to show that we’ve calculated the variance. I am not sure if every debt relief order intermediary even does this? For lay people reading, if council tax is in default we add in the whole council tax year to the debt relief order but if a new council tax year starts during the 12 month DRO moratorium, we are required to pro-rata the new payments (how ever many months the moratorium covers) over a one year projected financial statement to evidence 12 month DRO eligibility. Confused? You will be!

Possible Solutions - my simple 5 point plan

1. Respect our profession and the immense, collective knowledge we have - we’re not children stamping our feet, we know our stuff. Let's move onwards and upwards together.
2. Acknowledge what we do is complex and specialist, it can’t just be robotised. Do the Math like I have in this discussion. Change is necessary.
3. Build a stakeholder group standardised variance framework and functionality in a debt adviser financial statement tool - with time variances and financial variances. Agree on and simplify these complex computations we should be making - give us a robot tool fit for 2024. All programmable of course.
4. Set a standard for converting weekly to monthly etc that we all use.
5. Work with us not against us even if that means changing direction of policy, practice humility and make amends because we’re good people who really care, the salt of the earth, are you?

See, I told you you’d enjoy it didn’t I? I sure know how to entertain and get those creative juices flowing, who says debt advice ain't sexy? Let me at them! And you’re welcome. I've been Sam Nurse (Samantha Nurse if I've been naughty - you decide) and you've been lovely for reading this article to the end, thank you most kindly for your time and interest. :)