From the magazine: making sense of numbers

‘Money makes the world go round…’ and, in the world of the SBL, finance is a central concern. In this, part V of ‘The Really Important Bits (RIBs)’ series, featured in the April issue of Education ExecutiveStephen Mitchell, chief operating officer at the Spencer Academies Trust, Nottingham, focuses on finance and driving efficiency

From the magazine: making sense of numbers EdexecFinance…it’s something we all deal with daily in the SBL world. It forms part of everything that happens in schools – the allocation of funds, the approval of money and the reporting of spend, not to mention the annual accounts, the AAR, BFRO, BFRs and multiple other acronyms. Given our status as not-for-profit organisations, the traditional range of ratios that business leaders work with are largely irrelevant to us – but there are key metrics that we can make use of. This RIB explores a few of them and draws out some nuances from the management accounts to help focus attention on how and where to drive efficiency.

The tools of efficiency

The DFE has published an efficiency toolkit. Although it takes a few reads to understand what it’s telling you, it basically identifies your statistically significantly similar schools and compares your progress figures – relative to your income – to effectively provide a progress-per-pound figure.

This is quite telling – and certainly provokes conversations about how efficiency can be improved on – after all, there is something quite moral about making sure that we’re making the most progress for every pound received. Given that schools get varying levels of income, if we accept that progress is impacted by funding – and some would argue it’s not a linear relationship – then it makes sense to measure progress/revenue per child. (Perhaps one of the reasons I like this tool is that the school I was finance director at came second in our comparable list!)

However, this tool has been supplanted by a revised benchmarking offering, which allows you to compare your school to others based on a range of criteria and gives much more information, gleaned from the academies accounts return, which can give insights into areas where financial efficiencies can be made. Often, though, benchmarking isn’t enough; we need to set our own views as to what we value, and measure those.

To lead a healthy budget, I would suggest that you have regular oversight of the following 10 points.

  1. Staff pay as percentage of total expenditure
  2. Average teacher costs
  3. Leadership pay as percentage of total expenditure
  4. Pupil teacher ratio (PTR)
  5. Class sizes
  6. Teacher contact ratio
  7. Proportion of budget spent on the leadership team
  8. Two to five-year budget plan/projections
  9. Spend per pupil on non-pay expenditure lines compared to other colleges
  10. College improvement plan priorities and the relative cost of options.

As the vast majority of our funding walks out of the door every day after the school bell rings it makes sense that we keep a close eye on payroll costs.

Lessons based on practice

Curriculum-led financial planning (CLFP) is something I’ve talked about in previous RIBs and I make no apology for mentioning it again. It is something beloved by the ESFA at present and there are many examples of schools using the methodology to streamline their costs without negatively affecting curriculum delivery. It’s driven by looking at the contact ratio – the amount of time that teaching staff spend in front of a class every week – and gives you a cost per lesson figure, which, if you’ve never seen before, is often illuminating and also incredibly useful for appraising all kinds of decisions. Suddenly, you’ll find yourself working out the cost of the three-hour SLT meeting every Tuesday afternoon, or realising that giving a teacher one additional lesson out of the classroom every week costs £x. I know one secondary school that shaved £130k off their salary bill and they don’t feel that they have compromised their curriculum in any way.

Credit terms

‘Cash is King’ is a phrase often bandied around, particularly when income is tight – and we all know it is tight at the moment. It’s worth checking to see how you’re applying credit terms to your suppliers and, also, your trade debtors where you have them. Big trusts will have received letters reminding us of our obligations to report our payment practices by the March 30. This forces us to report how many of our suppliers we pay within 30, 45, 60 and above days; the emphasis is that we should be supporting businesses and paying promptly – particularly prescient considering the troubles many businesses encountered after the Carillion collapse and being owed money by their customer. We are publicly funded and receive most of our money in advance. There is a moral case that we should pay quickly but, also, I totally get the financial training in me that wants to maximise the credit terms I receive and minimise the ones I give – after all, cash is king!

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Cash flow

Talking of cash – it should be the number that you’re looking at daily. Income is vanity, cash in the bank is sanity. If you don’t have effective cash flow planning in place, can I suggest it goes to the top of the to-do list. It helps give you some clarity over what you can afford to invest in and when.

Gross and net margin

I know we’re not in the business of making money but, as SBLs it is our responsibility to ensure that our schools operate efficiently and that we’re working with the rest of the management to ensure stability. Therefore, you need to be able to operate within the funding you receive. It’s common sense really but, there are a scary number of schools and academies that are increasingly setting deficit in year budgets just to fund normal operating costs.

That is not sustainable and, arguably, goes against the moral principles that we as SBLs should be upholding. Give consideration to what level of margin you want the school to be operating at – for example, for every £1000 received how much do you want left after direct costs (student facing salaries and classroom resources) and after overheads are added? This ties to the following point.

Reserves

We recognise we need to operate within our means this means having something in the bank for the rainy day – or the day when the boiler breaks down unexpectedly. Consider what level of turnover you want to hold in the bank as an appropriate amount of reserves and focus on getting your business plan to help you deliver that over the medium term. Some schools will say three per cent of turnover – others say 10%. It really is down to the level of risk that your governors are happy with.

Acid test

One of the classic accounting ratios – this is very simple to work out, and very informative. It basically asks, if you had to close tomorrow, could you pay all of your debts? It is calculated by taking your current assets and dividing by your current liabilities. In other words, cash and money you can quickly get as cash (including stock/trade debtors, etc.), against the amount of money you owe out in the short term, i.e. creditors, HMRC, pension contributions, etc.

But…let’s not get carried away

Finance is often seen as the primary focus of the SBL, and for very good reason. However, I’ve mentioned a couple of times already in various articles the power of the balanced scorecard as a tool in the SBL’s arsenal. This is a widely used tool in business, as it gives a framework to measure performance across all key areas, rather than just focusing on financials. Whilst money counting is important, we shouldn’t get hung up on it completely. It is essential that we keep an eye on the holistic picture of the way our schools are run because it’s only by doing so that we can help to deliver our own school’s strategies.

This article featured in the April issue of Education ExecutiveSubscribe now to keep up-to-date with the latest in school business management and leadership.

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