Saving your bacon

The cash-strapped Treasury may have its eye on the nearly £2billion in reserves tucked away in schools, warns Lindsey Wharmby. It's in everyone's best interest to manage the issue now.

In these uncertain times, school funding is a small oasis of relative stability. Schools with their three-year indicative budgets are in a better position than many businesses.

At the school level, three-year budget information is helpful but uncertainty about funding or cost levels is not the real barrier to good strategic financial planning. The real barrier is a cultural one, both with schools and politicians.

Schools have to recognise that they are running businesses where the purpose is not shareholder profit but the best education possible for students, given the resources available. Everything should be geared towards using resources as efficiently and effectively as possible to obtain the best conditions for learning.

A particularly knotty problem is the size of any reserves in the revenue account at the end of the year. On the one hand any prudent business will ensure that there are at least some reserves in the accounts at the year end, if only to allow for a sensible cash flow. On the other hand, the size of the balances or reserves in the revenue accounts of some schools is a growing concern. DCSF figures last April put the total budget surplus at £1.83billion.

A school is not like a for-profit business because the purpose of the revenue is to educate the students; salting away large reserves is to the detriment of students in the school. If the money is not being spent, then the politicians will quite rightly suggest that schools are over-funded and in these straitened times, the Treasury will be looking for any spare cash lying around.

The funding for schools is, compared with most businesses, relatively predictable. Student numbers may change slightly year on year but schools are not facing the level of uncertainty of most retailers. The kind of working balance common in most prudent businesses is simply too high for a school with its regular income from the local authority (LA).

Some schools will be smiling wryly at the thought of a carry forward reserve at all, let alone a large one. Most schools carry forward a prudent amount each year that enables them to manage unforeseen contingencies but does not lead to the bad practice of spending recklessly at the end of the financial year for fear of losing the funding. The percentage of schools that are carrying forward very large balances is relatively small.

Up to 5 per cent of a secondary school budget and 8 per cent in a primary school is deemed by the DCSF to be the maximum sensible amount of carryover. The larger primary figure recognises the reduced flexibility in primary schools. ASCL guidance to members has been to aim for a 2 to 3.5 per cent carryover.

Which money counts

First of all, let's decide what the end of year balance (or reserves) should contain. We are talking about the revenue for the school from the LA formula and standards funds. If your school manages a fund on behalf of a group of schools (Sports Partnership monies is a good example), this money should be kept quite separate from the school revenue account.

In the same way, money raised by the school for its private account should also be kept separate. It may well be used for the purpose of the school but it is not part of the revenue account from the local authority.

The next step is to ensure that all commitments are included in the end of year balance. Bills that are in the pipeline should be included, even if the payment has not gone out by the end of the year. The same applies to any income expected but not yet received. This accrual accounting may mean some adaptations to your present system but is essential to reach a true carry forward figure.

Some income is intended to cross the financial year. Standards funds and post-16 funding are based on academic years. The post-16 is relatively straightforward because the school is always given the details of the total funding for the Learning and Skills Council (LSC) funding year and the breakdown for the local authority financial year.

The only problem is likely to occur if you have your own bank account and the LA gives your funding allocation for any of the April to August period before the end of the school financial year.

Standards funds are more problematic. Most schools will use some standards funds for staffing that will be in place for the full academic year. If we assume that a school spends 60 per cent of its standards fund on teaching staff, then it would need to hold on to 25 per cent of the standards fund to cover the 5/12 of the new financial year.

It would therefore seem to be a sensible policy to allow schools to retain standards funds to cover these staff costs where their development plan clearly shows this expenditure and exclude this from the carry forward balance.

Prudent schools will put between 2 and 3 per cent of their revenue budget aside for contingencies at the start of the financial year. By the end of the year this will probably have been used - all sorts of budgets (supply cover, heating, boiler breakdown) are unpredictable and will eat into this.

If it has been a very good year and by February there is money in this contingency fund, a sensible school can look ahead and buy some resources for the next development plan early or simply carry forward this contingency budget into the next year.

The purpose of three-year budgets was to encourage schools to plan over at least that time period so, obviously, there are some circumstances where sensible planning over three years will result in a larger balance building up at the start and being used over three to five years. Holding back large amounts of the revenue account for longer periods is to do an injustice to the students currently in the school.

Managing falling rolls

It is possible to make a rough estimate of the kind of funding that might be needed to help a school manage changing circumstances. The following is a simple example based on a secondary school that is facing a reducing intake over two years. The figures used are rough averages that are probably sufficient for outline planning but can be calculated more accurately for an individual school.

The school has six forms of entry but knows that for the next two years the intake will be five and a half forms before finally reducing to five forms in the third year. How much does it cost to provide the teaching for one form for the three years of Key Stage 3?

Each class has 25 lessons per week and the average cost in teaching a lesson is £2,000 per annum. So the school faces a bill of £50,000 in the first year and then £100,000 for the second and third years and £50,000 in the fourth year. By that time the first small year group will be in Key Stage 4 and it is easier to make some adjustments to reduce the need for a whole extra class.

So the school needs a total of £300,000 - but of course that is an over-estimate because there will be at least some students in the 'part class'. The cost is probably nearer £100,000-150,000.

With careful planning the cost can be spread over the three years of the plan but a prudent school would certainly try to put aside a fair proportion of the £150,000 (say, £100,000) before the falling rolls really begin to bite. For an average secondary school this is somewhat less than 5 per cent of the revenue budget. Schools should have the costs for their curriculum plan already worked out when rolls begin to fall (or grow) and should be able to use these plans when explaining their reserves.

Capital projects

The other main area of contention is the use of reserves to support capital projects but holding on to large amounts of revenue money for long periods of time does a disservice to the students in the school who will have left long before the capital project comes to fruition. We need a debate on the use of revenue for long-term capital projects or we are all likely to see our revenue budgets reduced.

At the moment it is the responsibility of the local authority to deal with schools that retain excessive amounts of revenue funding. The LA should have worked with its schools forum to produce a policy appropriate to the local circumstances. Once the policy is agreed, it is in all our interests to make sure that excessive reserves are taken back by the local authority and redistributed to schools. The local policy should include:

• agreed accrual accounting for balances (that is, ensuring bills and income in the pipeline are attributed to the correct financial year) and a clear definition of what constitutes the local authority revenue account (excluding all partnership monies).

• an agreement about the amount of standards funds that can be reasonably carried through and therefore excluded from the reserve and the evidence required to show the plans for these funds.

• locally agreed exemptions - a good example may be where an authority has yet to complete its single status agreement and has recommended that schools have put aside appropriate amounts over a few years.

• locally agreed, acceptable capital projects and the level of evidence required to show the plans and timescale for these projects.

• curriculum plans to deal with known changes, in particular falling rolls, again with the level of evidence required showing an appropriate cost for these plans.

• the maximum level of reserves allowed once all these have been sorted - this should be as a percentage of the revenue income.

• the policy for redistributing any funds recovered.

Then it is the responsibility of all of us to ensure that we support the local authorities in managing the agreed policy. The alternative is a far less subtle national system.

The Treasury may yet turn its beady eye to the very large amounts of money that some schools are not using for its intended purpose - you have been warned.

Lindsey Wharmby was ASCL's funding specialist until she retired at the end of 2008.

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Further reading

• For more guidance on reserves and balances, see ASCL's guidance paper 16 at www.ascl.org.uk/guidance