Academy trusts: don’t hide your deficits!

Schools shouldn’t try to hide their deficits, writes Phillip Reynolds, or they’ll only get into more trouble down the line.

The budget forecast return outturn (BFRO) deadline is creeping up on academies, and business managers have no doubt taken advantage of the “quiet” time at school this past couple of weeks to begin working on the form. No sooner has the BFRO been submitted than attention will turn to setting the budget forecast return (BFR) for 2018-19 and beyond. The deadline for the BFR is Monday 30 July and it must include three years of forecasts.

There have been rumours that some academy trusts will submit a BFR which shows them in a better light than reality. Many are worried submitting a BFR which effectively shows they will run out of money unless funding improves. Speaking speculatively, trusts are likely to be concerned how the ESFA will react to a budget deficit, and about the questions which will follow.

The 2017 academies financial handbook (AFH) offers conflicting guidance. It clearly states in section 2.2.2 that “the board of trustees must approve a balanced budget”.

However, the definition at the back of the AFH is much clearer, stating “trusts do not have to balance income and expenditure in each year to zero, and can draw on unspent funds from previous years”. In other words, trusts can incur an in-year deficit.

Should your trust be in a position to submit an overall deficit revenue budget for the current year, the ESFA must be notified within 14 days (section 2.2.5). This should not act as a deterrent though.

Trusts should be producing a BFR that is as accurate as possible and represents their expectations. Unfortunately for some, this may mean showing that they’re entering an overall deficit position or an in-year deficit.

The sector is consistently making noises that funding needs to be increased. The Kreston academies benchmark report 2018 further supports this, and claims that the sector will run out of reserves in two to three years.

Trusts need to demonstrate that this is the true picture if they want change to happen. Lying about the real state of affairs will only reduce the pressure on government to act. Trusts should be aware that the ESFA is prepared to work with them.

If a trust, however, submits a balanced budget and then a few months later claims it has no cash to pay staff salaries, the ESFA is likely to take a much sterner approach, and could issue a financial notice to improve or worse. Academy trusts which fall into this category should follow the action in section 2.2.5 of the AFH and notify the ESFA, which will send a template recovery plan.

The plan should provide the ESFA with the trust’s history, how it has come to enter an overall deficit position, and how it plans to recover. It is likely that the trust will require advances to assist with short-term cashflow – the ESFA will want to know how any advances in funding are to be repaid.

The recovery plan should contain some basic elements such as:

  • Pupil numbers (actual and forecast)
  • Budget forecast
  • Cashflow forecast
  • Details of the trust’s year groups (teaching periods, class sizes, cost of staff)
  • Benchmarking details (pupil-to-teacher ratio)
  • A recovery plan showing how any ESFA advance will be repaid

It is vital that the trust reviews all costs and can demonstrate cost-cutting has been undertaken as far as possible. Other useful information would be any letters of support (e.g. from the local authority regarding future pupil numbers) and demonstrating your assessment of risks to the trust recovering as expected (e.g. Ofsted reports).

It is not easy for the sector at the moment and that is why it should look to work together and be consistent in its approach to give the sector the best opportunity for change.

Phillip Reynolds, Academies and education specialist, Kreston Reeves

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