18 May 2023

What are the financial considerations for academies this year? 

There is no denying the financial strain facing academies this year. The pandemic caused significant disruption and more recent macro-economic pressures have added to the commotion. It’s a challenging time for schools as the pressures on budgets continue to rise. With spiralling energy costs reaching an increase of 400% for some schools, it is inevitable that Trusts may look to cut both resources and staff to reduce their outgoings.

In my experience, the areas that are often cut are the ones with the most flexibility, including teaching assistants, special educational provisions, and IT infrastructure. The difficult decision of cutting these resources will undoubtedly impact the overall success of the school and leave some students at a disadvantage.

In addition, the delayed and highly anticipated announcement of teacher pay rises in the summer meant many schools had to revisit the budgets previously set to accommodate this.

The Chancellor’s £2.3 billion cash injection announced in last year’s Autumn Budget has barely touched the sides when it comes to solving problems in the sector and reports have shown most schools are concerned about financial stability. Many are digging into their reserves to cover general costs.

A recent report states just 2% of academies said they would break even this year, highlighting the vast number of schools that are facing an unsustainable position.

What can academies do to get through challenging times ahead?
Firstly, Trusts need to ensure that their Management Accounts incorporate robust forecasting and modelling. In my experience Trusts too often focus on historical information, but this doesn’t help Trustees and Management understand the Trust’s financial trajectory. Maintaining a focus on the future is an important aspect to surviving turbulent times.

Understandably, plans should be developed with caution. Schools often have three to five-year plans in place which they want to keep in sight but looking that far ahead can be challenging. Furthermore, it is my impression that many Trusts create these long-term plans on a very pessimistic basis. I think it is helpful to plan for the worst-case scenario so you know what your approach would be if it all went wrong, but when setting budgets and making decisions it is advisable to act from more pragmatic forecasting. Therefore, it is important to model a number of scenarios.

How can reserves help?
All academies must have a reserves policy. This is a statement which outlines the level of free reserves the academy should aim to hold. Free reserves are the funds which the school has available to freely spend on any of its activities or overheads.

Free reserves allow academies to manage emergencies or other unforeseen needs, such as unexpected costs. Other reasons to having reserves include:

  • To meet working capital requirements
  • Being able to manage a restructure if grants are not renewed or are cut
  • External changes requiring additional spend or reduced income
  • Short-term deficits in budgets
  • To “seed fund” a new project before other funds are made available (such as a new 6th form).

Having the reserves available should give schools an extra layer of security and resilience to financial risk. It is helpful to revisit the reserves policy in times of financial turbulence and financial professionals (such as auditors) should be able to help Trusts with this exercise if they are unsure.

Many Trusts struggle to have the internal skills to manage their budgets and reports show a fifth of schools claim they don’t feel qualified to take responsibility for them. In very small Academy Trusts (such as primary schools) it is not uncommon for the same individual who is patching up knees at break time to be managing the school budgets. Sometimes the individuals can feel overwhelmed – but for a Trust of this size there often isn’t an alternative option due to lack of resources. In this situation it is important Trusts have some form of additional professional support. The day-to-day management is one part of the picture and academies should also be considering the expertise amongst the board of Trustees. Finding financially literate Trustees can be hard – but critically important during financially difficult times.

If you are a standalone Trust, it may be helpful to periodically consider joining a Multi Academy Trust (MAT). Although some feel that this reduces autonomy which might return the Trust to a “local authority” type scenario, there is potentially greater financial stability in joining forces in this way because MATs typically have stronger reserves.

In a doomsday scenario where a Trust ends up using all its free reserves, the outcome is likely to be a financial notice to improve from the Education and Skills Funding Agency (ESFA) and being forced to join a MAT – so it may be better to be in control of the process while it is possible.

Being equipped with options to tackle the next few years is essential. To understand the best route for you, contact me directly for help and advice.

James Gare