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Mike Giddings, director of education services at accountancy firm Clement Keys

Budgeting focus is wake up call for cash-strapped academies

Mike Giddings from Clement Keys considers the funding options for schools ahead of the next academic year

Posted by Hannah Oakman | April 27, 2015 | Law, finance, HR

Schools that find themselves short of cash and under pressure to make cuts as part of their budgeting for the coming academic year need to take urgent action to avoid walking into a crisis.

Amid pressure to complete budgets for the forthcoming academic year by 31 July 2015 and having recently received funding statements from the Education Funding Agency, some individual academies are only now realising that their future viability has worsened considerably since recent changes in both funding and fixed costs.

The cash reserves that many had built up immediately after transferring to academy status have been eroded as a result of increasing staffing costs and pension liabilities. Some elements of funding have also fallen.

Many schools opted for academy status a few years ago precisely because they wanted more control over their future. Unfortunately, a growing number of individual academies are only now realising that their business model is not sustainable and in some cases, they have only a short period remaining before reserves run out. Funding per pupil has been decreasing steadily year-on-year and individual schools, particularly those with lower pupil numbers, are particularly exposed to this.

The Education Services Grant (ESG) which represents the additional grant received by academies has just been reduced by £53 per pupil from 2015/16, a reduction of 38%.

When you consider that a large secondary academy we are advising received an additional ESG grant of £500K four years ago and in 2015/16 will receive just £130k, it is easy to understand how drastic the situation has become for some schools.

To make matters worse, when some schools found that they were struggling to balance the books they started setting deficit budgets, which allowed them to leverage their cash reserves, in the hope that they could be repaid and return to a surplus once funding improved. These improvements have not materialised in most cases however, and while overall funding has remained flat, pension and National Insurance costs will increase salary costs by up to 5% in 2015/16.

Ahead of the General Election, the political parties seem to be in agreement that funding for schools will remain flat and the Department for Education is urging schools to find ways to improve their efficiency. In this funding environment, schools can no longer afford to rely on funding improvements in the future and they must take stock of their financial position now.

Schools that find themselves in an unsustainable financial position do have options they can take and it is important that they react sooner rather than later to avoid running out of cash altogether. All schools should develop three-year forecasts that draw on demographic information about pupil numbers along with financial data. In some cases where there is a strong business case, it may be possible to restructure the school to put it on a more sustainable footing and borrow money from the Department for Education to assist with this. Other schools may choose to join forces with others by merging into a larger Multi Academy Trust (MAT) in order to benefit from significant economies of scale achieved as a result of pooling teaching resources and increasing buying power.

As they prepare budgets for the coming academic year, some individual academies, particularly smaller ones in the primary sector, will be coming to the realisation that the time to act has come. By taking the matter in hand and considering their financial options fully, it is still possible to create a path to a more sustainable future.

Mike Giddings is director of education services at accountancy firm Clement Keys

 

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