Academies and commercial trading

22-03-2017

By Lisa Forster, Principal Consultant, CIPFA

Public sector austerity measures, imposed since 2010, have resulted in significant changes to the local authority landscape. Schools and academies, however, are to a large extent only just feeling the financial pinch, and are facing tough decisions on how to deal with this.  

Although education funding fared relatively well up to 2015 (3% in real terms according to the IFS) the quantum is now under intense scrutiny. Rising pupil numbers alongside spending pressures such as increases in pay, pensions and national insurance contributions are causing significant financial concern for schools and academies. The Department for Education estimates that between 2015 and 2020, schools and academies will need to find savings of £3bn (equivalent to an 8% real-terms reduction in per-pupil funding) to counteract cumulative cost pressures. 

The cry that there is not enough funding to support basic provision is one that is echoed across the public sector, however the status of education and the implications of the UK falling behind in international league tables may give it added credence.

What can schools and academies do? 

There are three main ways schools and academies can try and bridge the funding gap, they can:

  • do more for less, ie 'salami slicing' budgets, routing out inefficiencies, assessing the value for money of contracts, increasing teacher contact time, having larger class sizes and multi-year teaching 
  • close or reduce services. Examples include reducing GCSE and A level options, and as some schools are promising – close one day a week!
  • generate additional funding. 
The last point can cause consternation from those that feel income generation is a private sector matter and goes against the grain of what education and public sector services are all about. Financial necessity may, however, override this sentiment. 

Where can this income come from?

There are a range of possibilities and some will be more pertinent that others; these include: 

  • Fundraising/donations for specific items or causes. This includes school staff asking for sponsorship for activities such as the Great North Run or London Marathon, or the school organising events to raise money for school resources. 
  • General fundraising and donations. Recently there have been a spate of letters from schools and academies to parents asking them to donate – on a regular basis by direct debit – to the schools general operations. Levels of contribution are often packaged under schemes such as bronze, silver and gold. It is worth noting that no state-funded school or academy can by law charge for education in school hours, but no law prevents them from asking for voluntary contributions for the benefit of the school or any school activities. However, the pressure on parents to comply or keep up with their peers is an issue that some feel uncomfortable with.
  • Fees and charges are common income-generators, particularly for things such as lettings. The costs must be fully covered, so overheads such as utility costs, insurance and staffing must be factored into calculations.  
  • Bidding for grants. This requires capacity and capability in bid writing. 
  • Business opportunities. Trading goods and services – outside the provision of education. This can be both passive (income that once set up, will continue to be generated without significant further effort such as tariffs from green energy and rental property) and active. 
There are already a large number of academies benefiting from business opportunities and generating commercial income across a range of activities including, equipment hire, reprographic services, business sponsorship, laundry services, sports lettings and gym memberships, catering, conference facilities and wedding venues. 

Some of the key considerations in any commercial enterprise are:

  1. Decide on a strategy and plan. It is essential the academy has a vision, supplemented by a business plan for its income generation activities, particularly if this involves commercial opportunities. A plan will clarify the direction, avoid priority disputes and assign ownership and roles to different activities.  
  2. Does your academy need to set up a separate trading company to trade commercially? The answer here can usually be found in the funding agreement – some academies will need to establish separate companies in order to meet DfE requirements, or because activities fall outside their charitable objects. Other reasons for having separate entities run these activities include: managing risk (ie protecting the academy's assets), tax implications (including gift aid possibilities from the trading company to the academy, thus negating corporation tax liabilities) and of course organisational clarity over who does which activity and for what purpose. 
  3. Know your costs. Successful income generation requires having absolute confidence that your costs and assumptions are accurate and credible. There should also be challenge to costing assumptions, ie will fluctuations in demand affect costs, and are profits predicated on attaining certain levels of demand? It should also be recognised that establishing a separate company will involve additional administration and incur additional costs. This includes registration with a regulatory body – usually Companies House – accounting and audit requirements and possibly extra tax computations and payments.
  4. Is there a market for your product/service? As local authorities have found out, there are often more sellers than buyers. Research is essential to establish market appetite, and also decide on the academies positioning in the market in respect of price and level of service.
  5. Consider your resources – these are physical, financial and human. Both capacity and capability must be addressed. In respect of physical assets, the academy could identify if there are any parts of the estate and infrastructure that can be used to generate income (ie sports facilities and conference/room hire). Clear rules and procedures on issues such as car parking and responsibility for damage to equipment should be clearly laid out if any assets are used for community use. Knowledge capital is also a possibility here in respect of identifying what expertise staff have (ie IT, financial management) that could be traded outside of the academy.
  6. Understand risk and governance. Many academies are reluctant to venture down a commercial road as they fear being targeted for misusing public monies. However this is about being risk aware rather than risk averse, and although any commercial venture is open to risk, robust planning should minimise the unexpected – in the controllable factors at least.

Governance and potential conflicts of interest for separate trading companies should be carefully considered. Having to make decisions on an issue that benefits the academy but doesn't benefit the company could lead to conflicts and poor judgement. 

There are many success stories out there, but there are also those where things haven’t gone quite so well. Planning, planning and planning again is the absolute key to getting it right! 

Some original ideas 

Many public sector organisations are coming up with new and original ideas to generate income, for example the Grant Museum of Zoology, in London, decided its quirky setting was the perfect location to stage stand-up comedy gigs – or how about a museum where you can try your hand at taxidermy or visit ‘lawnmowers of the rich and famous’?

On the other side of the pond, schools in the USA are much further down the commercial line than in the UK – and although this is (at present) unlikely to catch on here, it’s interesting to see their strategy. A well-known burger chain, for example, is sponsoring school report cards; the higher the pupils' grades, the better the fastfood reward. Or how about having a soft drinks company sponsor all school lockers by emblazoning their logos and adverts across the whole cabinet? Schools in Canada that held real casino nights were pocketing thousands of dollars, and despite the Archbishop's disapproval were reluctant to cease this venture because it raised an estimated $6m in 18 months.

Discover more

Attend the seventh CIPFA Academies Conference, 27 June, London