Financial sustainability of the public sector

Long-term societal and demographic shifts are placing significant strains on the ability of public and private organisations that rely on pay as you go financing and are influencing their resource allocation decisions. However, the financial sustainability of what they decide is often hidden or obscured by a focus on earnings management. This is relevant to equity holders but not to the much broader set of societal stakeholders who rely on the services that these organisations provide. This paper develops a free cash flow (financial sustainability) approach to evaluating the financial dimensions and management control implications of these long-term trends on the delivery of public services. We illustrate our approach evaluate the inadequacy of current reporting practices of two failing UK health care trusts. We identify an agenda for research which can usefully further apply the proposed framework to other contexts.