So, how do I run my college in deficit, yet still survive?
Posted on 16/05/16 | Posted in FE Articles
In the grand scheme of ‘how do they do that?’ questions – is it really possible to run a largely public- funded educational institution at a deficit, yet ensure that it is fit for purpose to serve an uncertain future.
How does that actually work in practice, and is it a sustainable strategy?
Well, like you I read with interest that perhaps one fifth of colleges (let’s call it 70 colleges) are setting off on a ‘financial bearing’ that plans to post a Board-approved deficit. Would you / could you try this at home? It’s risky, it’s a gamble, and it involves ‘working in the blind!’
As a natural follow on to my recent article ‘Can colleges cut it commercially?’ when I challenged whether colleges should be classed as businesses this strategy seems to reinforce my argument; very few (commercial) Boards would ever approve a plan to make an in-year loss. Why? Well, unless you have absolute intelligence about the future (and a crystal ball), and know with some certainty that the ‘good times’ are on their way back – how on earth can you expect things to be better this time next year. Indeed, if my reading of the situation is correct then things may yet be worse!
Notwithstanding, how is it done? Is it all ‘smokes and mirrors’ or can it work?
Well, a college’s finances are largely based on cash. It’s Income and Expenditure Account (I&E) is, with one exception, a cash account that balances itself after say 90 days either side of the year. Colleges typically collect their outstanding revenues (grants and commercial debts) by 60 days after their year end and will have paid all their suppliers by no later than 90 days after the year-end. The only element of the I&E Account (if you accept that the FRS17 Pensions I&E charge is broadly equivalent to in-year pensions contributions) that is non-cash, is Depreciation.
In really simple (and not doctrinally correct) terms Depreciation is the deferred charge on the benefit of previous cash invested in assets that last for more than one year. It is calculated on the value of cash spent previously (historically) so provided that you spend less on new assets in the current year than your in-year calculated Depreciation charge – then you are ‘quids-in’ and can use this element to fund (at least in part) any planned deficit.
As an example, most colleges of scale may have a Depreciation charge of say £1 million per annum. If the college only spends £0.5 million in-year on Capital expenditure (say by only replacing broken assets, taking a holiday on computer replacement and / or only undertaking major / essential large scale property repairs) then it will generate £0.5 million of cash to fund a deficit.
Now let’s look at what is also available on the Balance Sheet to help us.
Again, look at my previous articles to realise the importance of cash – ‘Cash is absolutely King!’ There are however some lucky (fortunate!) colleges that have significant cash balances, and for those their Board(s) could approve a ‘slow drip feed’ of cash to absorb the imbalance of Expenditure over Income. So, for a college with say £10 million in the bank, that only needs working capital of say £4 million it could prop-up a deficit of say £1 million per year for up to 6 years! That said, those colleges that have accumulated such high levels of cash may have done so on the basis of needing to / planning to complete a major building scheme; it is likely that this need still exists so using the ‘family silver’ for house-keeping purposes is naughty! This may also apply to colleges sat on cash due to the sale of a major asset. Such sales do not always generate ‘windfall’ cash that can be used without restriction. Sometimes this cash must be ring-fenced for further re-investment or even returned to the original grant-funder where applicable. Best to check first! Playing around with working capital (extending creditors and pushing hard on debtors, combined with any short term debt (perhaps via overdraft) is generally short-lived in impact (as it has to be set right, and repaid) and certainly is only ever ‘one off’, so isn’t a long-term solution.
One key issue is what I call the ‘in-year cash swing’. Ideally, a college with a £30 million turnover should generate say 3% Surplus – being £1 million. If it is actually running at a deficit of say £1 million then it is actually off target by as much as 7% - and at this level things start to look unwieldy and is unsustainable. Food for thought!
So, in summary it is possible to run a college at a deficit – and potentially for several years. Provided that there is no prior call on cash (such as for re-investment following asset disposal) then it is also within each Governing Body’s delegated powers, hence it is legal. That said, we don’t know what is around the corner in FE next year, the year after and the year after that – so using Reserves originally built up to meet longer-term organisational needs such as Asset Replacement in order to pay house-keeping bills such as wages, energy and software costs is to some extent ‘working in the blind’ and must surely be regarded for what it is; a short term fix to a funding problem with no clear end in sight!
Put in its simplest form, one way to view the impact of any college actually running an approved deficit is to think of it in terms of borrowing against its in-year investment needs such as ICT, and the fabric of the estate. You can do it for a year or two, but ‘robbing Peter to pay Paul’ or using the ‘family silver’ to fund the ‘house-keeping’ is not a recommended strategy!
Ian Sackree is the COO at Protocol and has significant experience of delivering efficiencies in colleges and in leading Protocol’s wide range of cost-effective recruitment services, including its new and innovative Permanent Recruitment, Search and Selection Service tailored for academic and management posts.