finance

Asleep on the job? How trusts have missed out on £53 million

New research shows academy trusts have failed to capitalize on interest rates and are likely missing out on more this year

New research shows academy trusts have failed to capitalize on interest rates and are likely missing out on more this year

25 May 2024, 5:00

The largest 180 trusts in the country missed out on £53 million of income that they could have earned last year if they had organised their treasury operations more efficiently.  For the current year the amount foregone could exceed £100 million. This is all money that could have been flowing into education from the banking sector.

What is noticeable in the research conducted by the South East Essex Academy Trust Institute is the wide stratification of trust performance at all levels of size of trusts.  Only one-quarter of them were deemed to have performed well in this area, with about half of showing room for significant improvement. 

In the category of large trusts, the best in class was Oasis, who earned £2.2 million in interest on their £56 million of cash.  By contrast, the trust at the bottom of the large trusts earned only £4,000 on their £35 million of cash, missing out on £1.4 million in interest if they had managed treasury as efficiently as Oasis.

Interest rates were low for almost a decade until mid-2022. For this reason, treasury management may have fallen off the radar of trustees and CEOs. It’s not typically an item you see on Finance Committee agendas but it should be carefully scrutinised and CFOs held to account. 

Trustees and CEOs need to raise their awareness in this area.  It is after all public money and we are rightly required to demonstrate good stewardship. That means obtaining a good return on cash while at the same time minimising risk.

There certainly needs to be better sharing of good practice across the sector.  Even if money is kept with a trust’s current bankers, there are a plethora of deposit account types available, including instant access savers, 35 or 95 day notice deposits and fixed-term deposits from one month upwards. These different account types allow for flexibility to suit the cashflow requirements of any school or trust. 

Another practice we sometimes see the most efficient trusts use is to immediately transfer nearly all the funds out of the current account when the GAG money lands at the start of the month and deposit it in an instant access saver account with same-day transfers in and out.  The funds can then be transferred back towards the end of the month for payroll and other bills.

Treasury management should be scrutinised and CFOs held to account

Often, the best savings rates may not be available through existing bankers. Setting up new bank accounts with alternative bankers can be slow and time-consuming but worthwhile once actioned.  One route round this is to use cash management companies. 

As Kreston Reeves highlighted in their Academies Benchmark report 2024: “For those that want to look at the wider market, without the hassle of opening numerous bank accounts there are banking platforms that make this simpler. For these platforms Trusts go through the money laundering process once.”

Trusts can then set their own criteria for how their funds are invested, including the financial strength of the institutions, the length of deposits and the maximum they want to invest with any one institution. However, these platforms do tend to charge a fee, so it’s crucial to ensure those don’t offset the extra interest earned.

One thing that needs to be carefully borne in mind is the risk profile of where money is being deposited.  Many will remember the huge sums lost by local authorities with Icelandic banks in 2008, even though the structure of Icelandic banking was questioned in the financial press at the time.

At the same time, Lloyds and RBS/NatWest had to be bailed out by the UK government as they were seen as too big to fail.  More recently, Silicon Valley Bank collapsed in March 2023. 

In the wake of the 2008 banking crisis, the Bank of England and other EU and worldwide organisations brought in stricter capital adequacy ratios in order to help reduce the chance of future crises in the banking sector. 

The Financial Services Compensation Scheme (FSCS) also protects each legal entity with up to £85,000 deposited with any banking group.

However, the best defence remains a skillful and knowledgeable CFO with good commercial awareness. That goes for maximizing revenue as well as minimizing risk.

Read the full research by The SEEAT Institute here

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