Accounting

Financial monitoring

Financial monitoring is vital for both governors and bursars. These measures will help them use the school’s financial information more effectively. By Adam Halsey

Focus for governors
Governors should focus on strategic and long-term matters. Micromanagement should be avoided and the measures used should be consistent with their responsibilities. The three measures are:

Teaching costs/net fee income
This is a measure of how the setting of fees is influenced by the increase in teaching costs. Teaching costs are the most significant part of the cost structure and if fee increases do not cover the incremental increase in teaching costs then the school may struggle. Cost cuts in other areas may in the short-term hide the impact of teaching cost inflation; hence the importance of this measure.

Loans/net fee income
It is common in the sector to use loan financing to facilitate capital developments. As for the commercial sector, gearing must be maintained at an acceptable level. Many schools use this measure for policy-setting as a way of monitoring and controlling debt levels.

Depreciation charge/maintenance cost
This measure matches the use of assets (depreciation charge) to the maintenance of those assets. Although the particular ratio may vary depending upon the age, quality and type of asset held, the ratio should remain constant over time. This ratio is particularly useful during financially challenging times as the motivation may be to unnecessarily cut back on expenditure. This may be to the detriment to the school.

Focus for bursars
Bursars should focus on the day-to-day matters but be aware of the long-term strategies. Management of the finances should intuitively focus on budgetary control and the three measures support this aim:

Debtors/income
(Fee debtors/net fee income) x 365: this computes debtor days and assesses the ability of the school to collect fees. As most schools require fees to be paid in advance of the term commencing, this measure should be targeted at nil. There will be a number of schools where parents are late in paying fees. Here, bursars should focus on the level of debtor days relative to prior periods. If calculated termly, the school will be able to assess whether the
situation is improving or deteriorating.

Weekly cash balances
Schools have highly volatile cash balances due to the differences in timing between cash receipts and cash payments in a particular term. Many schools therefore hold high cash balances, perhaps in excess of needs, resulting in the potential loss of interest. By monitoring on a spreadsheet weekly cleared cash balances and by meeting the school’s bank manager, it may be possible to structure a savings scheme where the school can maximise the earning potential of cash held.

Creditor days
Many schools could improve the use of their purchase ledger to maximise the benefit of the credit period offered by their larger suppliers. Most suppliers offer 30 days’ credit and many schools pay as soon as the invoice has been approved. Creditor days can be calculated as (purchase ledger creditors/purchases) x 365.

There are, of course, many other measures that can be used; however, they should be restricted to measures that can assist in the understanding of the finances of the school. By understanding your finances better, governors and staff alike are more likely to spot both inconsistencies that may be a result of problems, and areas where improvements can lead to improved efficiencies.

Adam Halsey is charities partner, haysmacintyre. Adam can be contacted on 020 7969 5627 or ahalsey@haysmacintyre.com

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