It can be daunting, but academy trustees are legally bound to understand the financial position of their school. Read on . . .
Academy trust finances continue to be a hot topic and one of concern to many of those responsible for them.
The board of trustees, or governors, shoulder this crucial obligation and must ensure academy funds are used in accordance with the law, its articles of association, funding agreement and the Academies Financial Handbook (AFH).
This can be daunting, particularly for anyone with minimal financial knowledge. Inexperienced trustees often ask: “How do I know if the trust’s financial position is at risk?”, “do we have enough money?” and “are we within budget?”.
The net current assets of an academy trust are one area that trustees should be monitoring to give them comfort that the trust is in a sound financial position. These are essentially its “working capital”, the funds with which it can survive on a day-to-day basis.
If you are not given a cash flow forecast, ask for one immediately
Net current assets, which can be found on the trust’s balance sheet, consist of debtors; cash at bank and in hand; creditors due within one year.
As this figure starts to decrease, the more likely it is that the trust will struggle to meet its day-to-day liabilities and continue “trading”.
Comparative figures should be placed alongside the current position in the reporting packs provided to trustees by the finance team. These can help them to monitor progress and to question effectively any fluctuations.
In addition, using the working capital ratio (current assets/current liabilities) can help to indicate whether the trust has enough short-term assets to cover its short-term debt. Many believe that a ratio of 1.2 assets to 2.0 of debt is sufficient. Anything above 2.0 would indicate the trust is not investing its excess assets – unless, of course, it is building funds to spend on that new technology block in 2020!
Should the working capital ratio indicate that the trust may struggle to cover its short-term debt, then monitor the cash flow forecast. This will show what cash is coming in month by month and what the monthly obligations are, such as payroll and other expenditure.
The forecast is the only place trustees will be able to see, for example, that even though the trust is due a grant from the Education Funding Agency (EFA) in the current financial year, this may not arrive in time to meet short-term obligations.
If your board is not being presented with a cash flow forecast, you should request one immediately.
It is an absolute requirement that the monthly management accounts are presented to trustees as prescribed in the AFH paragraph 2.3.3, and these must include a cash flow forecast.
The AFH is vital reading as it sets out the required financial framework for academy trusts. Trustees should ensure they have a copy and that they understand it. It covers the academic year to August and is updated annually by the EFA.
An academy trust board must understand its statutory duties as company directors under the Companies Act 2006. One of their duties is to “exercise reasonable care, skill and diligence”. Trustees are at personal legal risk if they are found not to have complied with their statutory duties should the trust collapse, and for not understanding the content of the AFH. This could potentially lead to trustees being disqualified to act as directors or trustees of other organisations.
Finally, a trust’s budget is not prepared solely for the EFA. It is a working document. Regular comparisons with appropriate commentary to actual results should be provided to trustees regularly, preferably as part of the management accounts.
Increasing financial pressures are raising the risk that an academy trust could collapse in the future. In such a climate, trustees must ensure they act with reasonable care and consideration and can interpret their trust’s financial position to the best of their abilities. The consequences otherwise could be serious.
Your thoughts