MST’s no-nonsense series on school finance continues as Malcolm Trobe gets to grips with reserves, balances, rollovers and the funding of sixth forms.
In the first article of this series I looked at the concept of ‘best value’ and how schools can make good use of consistent financial reporting (CFR). In this edition, in preparation for examining how financial planning can be linked with strategic and longer-term planning, I will examine the issue of reserves, balances and rollovers, as well as looking at the current issues concerning the funding of sixth forms.
The introduction of local management meant that individual schools were required to close their accounts at the end of each financial year. Any surplus (or deficit) at the end of the financial year was termed a ‘rollover’ and transferred into the following financial year. Over several years there has been regular criticism that the level of rollovers (often incorrectly termed ‘balances’) has been too high. This criticism has, in general, been based on raw data only and often showed a lack of understanding of the school budget process and what was included in the total rollover.
There are two main ways of accounting used in schools. Accrual accounting was introduced in schools that were grant-maintained, and has been adopted by a number of local authorities. This takes into account the committed expenditure from the financial year and gives an accurate picture of the end-of-year balance. However, some local authorities still use an actual expenditure method, which does not take into account committed expenditure, these costs appearing the following financial year. This gives a false, and usually inflated, view of the true end of year financial situation. There can be many reasons for this, including late invoicing, orders made but not received, and late claims from March.
Although the annual budgets – supplied through the local authority and grants such as Standards Fund and Standards Grant – are essentially revenue budgets and meant to be spent on students attending the school in that year, longer-term planning does need to be taken into account. This is particularly relevant in schools with falling rolls, as funding will be required to pay for the higher level of staffing in the first five months of the financial year before reductions in staffing are made for the smaller number of students. Standards Funds, including Formula Capital Grant, can be held over into the following financial year and this can inflate the end-of-year balance. It is therefore good practice that these end-of-year balance figures are reported separately. Schools should be open about the breakdown of any rollover, giving reasons for the planned hold-over to the following financial year.