Is it time for academies to up their game financially?


By Kerry Ace, Finance & Policy Manager, CIPFA.

Academies are big news and are becoming ever more so as numbers rapidly expand. These are indeed interesting times for these schools with their new found freedoms, new funding methodologies and a new regulator. After 2013, the education leaving age will rise to 17 and from 2015 it is set to rise again to 18 – so there’s potential for a lot more students too. And of course more public money will follow these new students.

In his recent Autumn Statement, George Osborne confirmed the government’s commitment to the sector by announcing an investment of £1bn “to improve good schools” and build 100 new free schools and academies. Of course, academies won’t be the only institutions hoping for a significant rise in student numbers – sixth form colleges and further education colleges will also hope to benefit. In his speech, the Chancellor commented that “since improving our education system is the best investment in a competitive economy, I am today committing £270 million to fund improvements in further education colleges”.

Will colleges and academies be able to compete with each other for students in the future? Will they be able to develop and maintain their facilities to attract students as they would wish? Will they be competing on a level playing field? I was recently reminded of this when I visited a large and clearly well-resourced academy. The principal surveyed a very level playing field and expressed the hope that one day her academy might be able to take out a mortgage to fund a new computer block for her students, which she had in mind to build on part of the playing fields.

This could really happen one day – maybe. After all colleges are able to take out loans, why not academies? But a policy will require more than the Department for Education (DfE) simply allowing academies to borrow against their assets to be successful – they will need to prove to potential lenders that they are a safe financial bet.

The academy sector as a whole would need to demonstrate that it has taken heed of criticisms regarding ineffective financial management and poor internal control. Clearly not all academies have problems, but the perceived risks with the sector are higher because they are new and having to manage their finances themselves for the first time. The tales regarding ill-judged finance leases and expenses fiascos will need to end.

The sector will need to demonstrate a maturity with regard to its financial management and it could do worse than to look to other institutions in education to show them the way forward. Both the college sector and university sector are now mature sectors that can be trusted to take on, and pay back, loans. Universities in particular have emerged from an era when the only capital funding they needed to borrow for was halls and catering to one where capital investment in their academic facilities can be attracted through borrowing.

In the university sector, the funding bodies have a responsibility to protect the public investment in institutions. They require universities to comply with any related guidance issued and to satisfy certain conditions on long and short term commitments. For example, the institution concerned must be able to repay sums borrowed and to repay related interest without impairing its financial and academic viability.

The institution must be able to demonstrate the value to be generated by the transaction, if it involves refinancing, and of any new investments to be financed by borrowing. In addition, any new investment must be in accordance with the institution’s strategic plan. Term loans from banks have been raised by higher education institutions on a large scale since the mid-1990s. Typically 20–25 year terms, secured or unsecured borrowing has been on offer at attractive margins.

On the whole, university loans are of a traditional mortgage nature, with funds secured against assets although there have been instances of more complex arrangements including debentures and securitisation of residential income streams. At the same time, higher education institutions are aware that the price and term of borrowing is driven by their credit worthiness and they therefore strive for a consistent operating performance to ensure that their credit rating remains high.

Like colleges and universities, academies are independent and autonomous. Unlike universities, they generate almost all income according to how many young people enrol with them. Academies have to control their costs and cash flow to stay in surplus and solvent without – currently – being able to borrow. The challenge for all involved with academies is to ensure that they stay financially strong eliciting greater value for money and ensuring resources are focussed on improving the quality of education and opportunities available for young people across England.

Financial management in academies goes well beyond sending in returns to the funding body. It is affected by the skills and knowledge of the academy’s finance director and his/her ability to influence academy senior management and the governing body. This isn’t a new challenge. Schools have always been required to manage within their means. However, the formal legal independence of academies has thrown the need for financial stability in to greater focus for many.

Meanwhile, academies should be checking that existing financial management is sound and financial controls are being properly adhered to. A BBC Panorama programme recently exposed the aftermath of some outrageous hard selling of vastly over-priced IT equipment - and some out-right leasing scams. Their examples included laptops priced by the manufacturer at £458 costing £3,033 and photocopiers similarly priced at £10,995 costing £174,787. The consequences for some schools were debts of £1 million to £2 million. One school came very near to having to close and several sacked their head-teachers.

In the cases discussed in the programme, the problem generally arose where head-teachers were signing leases which would previously have been handled by the school’s local authority. So the first line of defence is to make sure that all decision-makers, especially the academy’s board of governors, are all absolutely clear about who can sign what financial documents – and who cannot without prior approval.

There should be no “rubber stamping” after contracts are entered into. These arrangements would normally be set out in an institution’s financial regulations. One area where CIPFA is assisting academies in developing effective financial management is through its guide to financial regulations which academies are able to tailor to their own requirements. ‘A Model Set of Financial Regulations for Academies, Colleges and Universities’ was published in June 2013.

Secondly, the school should know when to seek expert advice and ensure that this is done. Head-teachers are usually appointed on the basis of their teaching and managerial skills – not their financial and legal expertise. Leases and other contracts involving large sums and long-term commitments are not part of the everyday management of a school that head-teachers should be expected to deal with.

Finally, it is crucial to remember that while academies may enter into operating leases, they are not normally permitted to enter into finance leases. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. Finance leases count as borrowing – and the normal policy of the funding and regulatory agency (currently) is that academies should not be granted permission to borrow.

If academies are to be allowed to borrow some time in the future, then they will need to show first that they can manage their finances responsibilities and safeguard rather than jeopardise the public funds with which they have been entrusted.

To return to the more general issue of overall financial management, to conduct its business effectively, an institution needs to ensure that it has sound financial management systems in place and they are strictly adhered to. Part of this process is the establishment of financial regulations which set out the financial policies of the institution.

Financial regulations make good business sense for education institutions. For academies, their funding agreement sets out the arrangements to be followed as a condition of receiving a grant and refers to the need for them to comply with the requirements of the Academies Financial Handbook. Academies must ensure that they make appropriate arrangements for a sound system of financial management, internal control and risk management. Financial regulations are a core component of such a system.

Financial regulations translate, into practical guidance, an institution’s broad policies relating to financial control. They should set out the policies of the institution in respect of its governance structure – including the body with overall responsibility for the administration of the institution and its financial responsibilities; the committees which have delegated responsibilities together with the staff with financial responsibilities. They should set out the institution’s risk management and supporting procedures and the specific features of its financial management and control activities including arrangements for accounting, audit, treasury management, income and expenditure.

Clarity of financial policies which are well thought out and adhered to are essential for sound financial management in academies – and could help bring the level playing field a little bit closer.