As featured in FE Week

Well, is it? And will it be in 2 years time? If you are unsure, then your college might be suffering from early or later symptoms of perhaps the fastest growing virus (I am calling this ‘Going Concernitus’) that the sector has ever seen. My advice to you, as Principal and CEO, and Accounting Officer is to get this checked out, as for some this can prove serious!

OK, so I have your attention; forgive my dramatic and possibly unrealistic entre! However, things are changing and our focus needs to shift and adapt with these changes.

Five to ten years ago measuring a college’s financial health was easy, as easy as A, B, C and D. The elementary alphabet placed the large majority of colleges in Category A, with copious amounts of cash in the bank and a seeming inability not to make money. The alphabet was replaced with some basic numeracy through the Framework for Excellence, and Scores of 1, 2, 3 and 4. This measure, with its focus on Liquidity and Profit (Operating Surplus!), underpinned by the longer-term viewpoint of Debt (Gearing) was, to be fair much more relative – but also led us to focus on the short-term, and to pay less attention to longer-term financial indicators essential to long-term survival; being here to meet all immediate and future obligations; a good definition of ‘Going Concern’ also, (Little Oxford Dictionary: ‘A thriving business’).

Like many of you I am sure, I like to volunteer and have been Chairman of Lincolnshire YMCA and Nomad Trust for some years. As part of our portfolio we operate a 21 bed night shelter for the homeless and every night it provides essential life support to those who have fallen off society’s mainstream. Many clients have addiction issues and talking to them frequently, as I do over a cup of tea is a very levelling experience. But interestingly, not all service users are addicts, indeed there are always people who ‘fell foul’ of the ‘3 pay cheque’ rule. Not heard of this one? Look at your own financial situation (or perhaps that of others you know) and imagine life without the next 3 pay slips and without replacement employment. Some commentators suggest that more than 80% of us could be facing mortgage arrears or eviction if we had to go 90 days or more without income, but with the same level of expenditure. A practical, sobering interpretation of Going Concern!

The problem with Going Concern is that you generally only hear the term from your auditor, once a year at Accounts sign-off time. Given that the number of acutely balanced colleges is believed to be 50+ and rising, I suggest to you that ‘Going Concern’ and ‘Organisational Sensitivity – the What if? Questions’ ought (if not already) to rapidly become part of your daily and weekly leadership and management overview. If Going Concern catches you unawares then it is a very difficult situation to recover and reverse!

Now I know that for every financially qualified or savvy Principal there is a Principal / CEO out there who prefers only to know the necessary when finance is concerned. Now that’s OK to a point – what on earth would the sector look like if it were led by just accountants?! But let’s not forget the role and responsibility attributed under the FE Act to the Accounting Officer. This cannot be delegated so my advice is to start to ask some frequent and regular questions of those in the college that do and should know about the factors associated with Going Concern. Do not leave it to the Finance Committee that meets too infrequently to be wholly effective; start to take an interest today!

These are my top tips for those who are feeling the financial noose tightening:

  • Monitor (and discuss with your SLT) reported Bank Balances and Cash Projections weekly; make it your business to understand where the cash is coming from over the next 12 months, and any timing issues that may arise between significant payments out and receipts in.Remember, cash is king!
  • Understanding Cash Days is key; its your 90 day plan to avoid a night in the Nomad Shelter!
  • Guard your college’s cash; avoid Capital project-creep or the ‘can you just’ jobs in Estates and ICT that may unwittingly eat in to your cash.
  • Ask questions about long-term debtors. Are there any chunky ones over 90 days, if so, why? Effective credit control is essential.
  • On the journey in to college each morning ask yourself a new ‘what if?’ question… what if the SFA withheld payment for 45 days, could we run the Payroll? What if the SFA clawed £1 million back under audit, could we pay the final balance on the new build? If the answer is ‘No’ then you have a challenge!
  • For cash purposes remember that Depreciation is your friend! It is a non cash expense in the Income and Expenditure Account, which effectively makes it cash generative. It is not the long-term solution to ‘feed off the estate’ but it will get you through the next 3 years if you can spend less than your Depreciation Charge on estate and ICT infrastructure!
  • Make a point of asking your FD to reconcile monthly management accounts to the college cash forecast. If a planned surplus of £500k switches to a deficit of £500k then you have a ‘negative swing’ of £1 million in your bank account that needs financing!
  • Make it your business to know your College Bank Relationship Director, and keep your borrowing facilities (short-term and long-term) under regular review. Include this as Board-business!
  • Watch the use of ‘Income Accruals’. Its a common trick to replace income not yet invoiced with income that we think in an ideal world has actually been earned. If used correctly, no problem! In difficult times they can however be used to ‘prop up’ income when delivery may actually be behind the level of income recognised!

In summary, I think that one of the most (if not the most) important tasks for the college’s Accounting Officer, is to ensure that the college remains a Going Concern – and is that ‘thriving business’, even in the most challenging of times. To fulfil this responsibility it is not necessary to be an accountant, but it is essential to ask the right questions of the accountant, and often. Should you wish to continue this discussion piece then please do get in touch, I would welcome your views and an opportunity to share my experience of corporate governance and corporate finance with you.

Ian Sackree FCCA is the Chief Operating Officer at Protocol. Ian joined Protocol in September 2014 having previously spent 10 years as Vice Principal and Deputy CEO in a hi-performing large GFE College.

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