Financial forecasting and scenario planning for the academies sector: what's the point?


By Paul Connew, CIPFA Academies Advisor

Many headteachers, governors and directors question the value of preparing financial forecasts for future years. How can academy trusts accurately predict the income they will receive, they ask, let alone the costs they will incur a couple of years or more hence? Even where forecasting is part of the financial management processes, finance officers and school business managers put it down their list of priorities, preferring to focus efforts on the immediate problems of balancing the budget. 
Those that don’t see the value of looking into the future finances of their academy trusts and use uncertainty as an excuse to only focus on the present are misunderstanding its vital role. Using different scenarios to predict the outcome of changing external and internal variables helps in understanding what drives organisations’ income and expenditure. Forecasting provides governors, trustees and managers with early warning of the future impact of past decisions enabling solutions to be worked through and avoiding the need for crisis management. It enables effective and realistic strategies for academies to be established that will deliver the best outcomes for pupils and is a vital tool for managing risk.

The IFS forecasts that school spending per pupil is likely to fall by around 8% in real terms between 2014/15 and 2019/20 Consequently, difficult decisions will need to be made to ensure education standards are maintained and improved in line with government expectations. As a result, sound financial planning is becoming increasingly essential to avoid deficits and the potential of an EFA financial notice to improve.  

So, how can forecasting assist financial planning and effective decision making?  

Initial forecasts should be prepared based on current actuals and budgets. They should project income and expenditure into future years (at least three years) based on known factors or at least commonly accepted judgements including inflation and funding levels. This will show what is likely to happen if current staffing or pupils levels are maintained.  To this forecast should be applied known changes such as expansion projects, changes to the curriculum, etc. 
The impact of these forecasts on reserves should be considered. Is the status quo affordable and therefore a realistic proposition? If not, what can be changed in order to ensure the trust remains viable? Various scenarios should be prepared. Changes in the curriculum, senior leadership team, support arrangements and pupil numbers should be considered. The outcome should be options for resolving the problem that can be presented to governors and directors for decision.  

Putting off decisions will always make the problem worse and put pupils’ education at risk.  Forecasting and the consideration of scenarios will provide the information and time necessary for changes to be considered carefully and thoroughly.  
The above describes forecasting as a defensive technique. However, it also has a role in supporting positive changes and enhancements with academy trusts. These will be discussed in future articles.  

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