Robert Hill, Visiting Professor at UCL Institute of Education, policy adviser to Prime Minister Tony Blair and other Cabinet ministers, senior research manager for the Audit Commission, management consultant and social policy researcher, has written three guest blogs on the topic of MATs for Capita Sims. These blogs are bing posted here with Capita Simms kind permission. Below is the second blog of the series. To read the original please click here.
Making the sums add up: financial challenges facing academy trusts
The financial outlook for many schools is tough. In July 2017 the Department for Education re-allocated part of its budget and increased school funding by £1.3 billion for two years starting in April 2018. The additional money will help ease the introduction of the national funding formula (NFF) – though some schools will still lose out as the NFF kicks in. Overall, however, while spending per pupil is now being maintained in real terms between 2017 and 2019, if you take the whole of the spending review period from 2015 to 2019 then, according to the independent Institute for Fiscal Studies, the impact of inflation and increasing pupil numbers, means that there will have been a real-terms cut of nearly five per cent.
Schools and academies also face the issue of how they are going to fund a pay increase for staff if there is a settlement of more than one per cent – the level assumed when the funding settlement was fixed. Single academy trusts will find it hard to navigate these financial pressures on their own, but multi-academy trusts (MATs) also have some big challenges to confront.
The challenge for MATs
The first is whether to allow each academy in a MAT to receive its total General Annual Grant (GAG) or whether to pool GAG funding between schools and for the trust board to allocate it according to the needs of particular academies. At the moment only a small minority of MATs are using the provisions for pooling set out in the academies financial handbook. But the DfE Academy Trust Survey 2017 reports that over half of MATs are planning to do this. However, the advent of the NFF may well push policy on pooling in the other direction. Academy leaders and local governing bodies are likely to argue that the NFF means they are entitled to the formula allocation for their school – if a MAT starts to reallocate funding between schools then it could be argued they are acting like a local authority under the funding system that is being replaced and that this undermines the whole point of the NFF.
The second big strategic issue for MATs to wrestle with is how to manage reserves. There is a strong case for saying that as a MAT board legally holds the risk for all schools in the trust, it should set the rate and pool and manage reserves centrally. The fact that capital and condition improvement funding is allocated to a MAT, rather than an individual academy, reinforces this approach. However, when schools join a MAT they are either in deficit or have reserves. If it is the latter they might well argue that they have been putting money aside for a particular project and would want a guarantee that they could access ‘their’ balance when they were ready to spend it. These are tricky waters to navigate but some MATs have worked through the issues and come up with a comprehensive reserves policy.
Efficient management of academies and MATs finances
More generally my five top tips for developing sound financial management of both standalone academies and MATs would be:
- Plan your budget over a three-year time horizon – the advent of the NFF should help to do this and trusts can also project forward pupil numbers for each school to provide an estimate or potential scenarios of their likely income. Boards are under an obligation to set a balanced budget for their trust. They should avoid approving a deficit budget for any particular academy unless there are exceptional one-off costs, there is a clear and swift path to balancing the budget and reserves and cash-flow are sufficient to cover the shortfall and sustain smooth and timely financial transactions across the trust.
- Authorise your director of finance (trusts are required to appoint an appropriately qualified chief financial officer) to integrate financial management systems, reporting and personnel as early as possible in the life of the trust. This will support better internal assurance and understanding of each academy’s finances. Also ensure that the scheme of delegation and, if the trust has one, governance handbook make crystal clear the respective responsibilities of the trust board, finance committee and local governing bodies for drawing up, approving and monitoring budgets.
- Optimise the use of procurement frameworks. The DfE Academy Trust Survey 2017 revealed that only 55 per cent of trusts were using a procurement framework. Both standalone academies and small MATs that do not have purchasing muscle in their own right, can draw on established procurement frameworks to start benefiting from economies of scale.
- Benchmark your costs and use this information to highlight areas where there could be the greatest scope for efficiencies. The Education and Skill Funding Agency’s benchmarking tool provides a starting point for doing this. The chart below shows where academy trusts say they are currently making savings. Some trusts are using activity cost budgeting (ACB) to take a more fundamental look at the finances of individual schools. ACB involves analysing and comparting how much it costs to teach a course, subject or group, for a given number of pupils, and then analysing how and why some schools are able to achieve comparable or better outcomes for less cost than others.
- Use clusters to help realise economies of scale. A report by the Education Policy Institute has found that MATs that are more geographically dispersed tend to spend more per pupil on back office costs. Clusters also provide the basis for sharing leadership posts and specialist teaching roles. Obviously this point applies primarily to MATs, but standalone academies should increasingly be thinking about sharing functions or using local consortia for their back-office and support functions.