With recent reports stating how 8 in 10 academies are in deficit, it is even more important that academies understand how to manage a deficit budget. This article explains what a deficit budget is and what academies can do to manage it, considering everything from financial planning to income generation.
What does a deficit budget mean?
A deficit budget refers to when a budget accounts for more spending than there is revenue available.
As outlined by the ‘Academies financial handbook 2018’, academies must notify the ESFA within 14 days of the date of the board of trustees meeting where the deficit was proposed – this cannot be addressed after unspent funds from previous years are taken into account.
Academy trusts must balance their budgets from each academy financial year to the next; however, this does not stop academies from:
- Carrying a surplus from one academy financial year to the next, if applicable.
- Carrying forward sufficient cumulative surpluses on grants from the Secretary of State, to meet an in-year deficit, if applicable.
- Incurring an in-year deficit on funds from sources other than grants from the Secretary of State in any academy financial year, provided this does not affect the trust’s responsibility to ensure that the academy balances its overall budget from each academy financial year to the next.
Academies can spend and accumulate funds from private or public sources – any surplus of private or public sources other than Secretary of State grants must be separately identified in academies’ accounts.
Academies’ accounts must be approved for each academy financial year by the board of trustees, which must then be submitted to the Secretary of State.
Academies should review their own funding agreements for further clarification; additionally, academies within MATs should confer with their trust for clarification regarding funding and budgeting stipulations.
Sometimes, overspending during the financial year can occur – this is known as an in-year deficit. Academies should refer to the ESFA and their trust for guidelines on whether in-year deficits are permitted in individual cases.
It is important to understand that academies cannot set a budget with the knowledge that they will be in deficit at year end; however, they can become in deficit during the year, so long as the books are balanced come the end of the year.
One academy in a MAT with a deficit
Trustees must be informed of any deficit forecast, as they have ultimate responsibility for the financial performance of the trusts and its academies.
In an MAT, there would likely be a stage where the board of trustees become involved with an individual academy forecasting a deficit budget, so that the deficit could be monitored and recovery plans developed. The board of trustees could suggest budget-saving techniques, such as staffing restructures.
Key considerations for managing a budget
Academies should consider the following areas when they are making decisions regarding budgets:
Income and expenditure:
- Evaluate how money flows into and out of the academy.
- Pinpoint any fixed costs.
- Evaluate income targets.
- Consider and plan for any seasonal costs, e.g. grit for icy weather.
- Establish whether there are any income generation plans coming up and maximising these opportunities.
- Ensure recruitment processes are efficient, e.g. the recruitment panel has a clear idea of the type of person who will be suitable for vacancies.
- Review the roles required and start planning salaries prior to any recruitment campaigns.
- Consider staff collaborations and shares.
- Account for costs such as pension rates.
- Be realistic about supply teacher costs.
- Ensure robust controls are in place for operating bank accounts.
- Conduct finance and banking risk assessments.
- Implement effective and consistent finance policies.
- Ensure clear communication methods are in place for handling budgetary matters.
- Appoint appropriately qualified and experienced individuals who will be responsible for managing budgets.
Existing processes and procedures:
- Conduct reviews into the effectiveness of budgets, implementing improvements where necessary.
- Monitor effectiveness by seeking views from various individuals, e.g. the SENCO, to establish the full scope of budgetary successes and challenges.
- Ensure SDPs are costed at the point of creation.
Collaboration with other schools:
- Seek opportunities with other schools in a variety of ways, e.g. curriculum enrichment opportunities or sharing teachers.
- Evaluate opportunities that are available that could generate an income, e.g. lettings.
- Ensure risk assessments have been conducted, where relevant.
- Ensure individuals are named as being responsible for different aspects of income generation and that they are clear regarding these responsibilities.
Academies should undertake financial health checks to establish how efficient they are with their financial planning and budget management – access the DfE’s financial management resource tool by clicking here.
The following tools can also be used to assess how efficiently budgets are managed:
- Efficiency metrics: indicate how an academy’s efficiency compares to similar schools.
- Benchmarking report cards: encourage comparisons of spending data between similar academies – access the DfE financial benchmarking tool here.
- Top-ten checks list: provide guidance as to the types of questions governing boards may wish to ask their SLT relating to an academy’s financial health.
Be prepared – forecasting
SDPs help academies to be proactive in managing improvements and finances. Developing an SDP that sets out the improvement plans within an academy, accounting for the budgetary limits, should assist academies with providing the best outcomes and opportunities for pupils within the availability of financial resources. Ensure that the SDP realistically considers financial availability. Use our Financial Recovery Plan Template to break down total income and expenditure and clearly identify ways in which financial control can be improved.
Step one is to develop an up-to-date three-year financial plan, which links with the academy’s developmental goals – doing this should help outline what is achievable and what is unaffordable. Unaffordable plans can then be reprioritised.
This planning and prioritising process is often referred to as ‘opportunity costs’, which means the cost of an opportunity forgone.
While planning in advance is often the best place to start, it is also vital that academies are aware of their financial positions as time goes on.
- To ensure financial plans are reviewed throughout the academy financial year, to check that budgets are on track and being adhered to.
- Where budgets have been missed, to ensure that financial planning is reviewed and adjusted accordingly.
If an academy has a healthy level of reserves, it is still important to be vigilant regarding in-year budgets, as relying on reserves can lead to future financial woes. Reserves should be used as a short-term solution; however, a more sustainable financial structure should be adopted.
Acting on forecasting
Where financial forecasting reveals that a deficit, on any scale, is approaching, action should be taken immediately. Being able to spot a budget deficit early is vital to its management.
Read the Controlling expenses section for details on how to manage costs to assist with managing a deficit budget.
Academies should actively look to identify inefficiencies and savings – attention should be paid to the staffing, purchasing of resources, school contracts and income generation.
If a deficit occurs…
- Inform the ESFA immediately, and the board of trustees.
- Develop achievable plans, as outlined above.
- Work with the ESFA and board of trustees to develop a recovery plan.
- Ensure the right people take the lead on implementing financial plans, e.g. the SBM and board of trustees.
- Actively look to identify inefficiencies and implement saving techniques.
The board of trustees and the ESFA will work with academies to develop a plan for recovering a deficit budget.
When faced with a difficult financial decision, KISS analysis is a useful tool for identifying a strategy going forward:
K: What shall we keep doing, which we can afford and improves or maintains the great things about the academy?
I: What can we improve on that’s going to have a greater impact, academically and financially?
S: What can we start doing that we don’t do at present?
S: What should we stop doing? What isn’t delivering the results we need?
Unrealistic and out-of-date budgeting are two of the most common pitfalls when it comes to setting budgets.
In terms of unrealistic budgeting, it is paramount that those in charge of financial planning are accurate when it comes to decision making. Underspending can be just as detrimental as overspending, so making sensible and well-planned financial choices is significant to effectively managing a budget.
Out-of-date budgeting is closely linked to the importance of staying prepared – reviewing budgets at regular points throughout the year will assist academies in identifying budgeting problems and implementing measures to control these problems.
Deficit budgets can be extremely difficult to manage, for example due to staffing costs, so academies must have a long-term plan that takes into account potential staffing changes through retirement, mobility, progression, change in numbers, potential change in the number of pupils on roll and so on. Academies may work with trusts’ central finance teams to predict and manage issues, e.g. with a CFO.
Depending on an academy’s scheme of delegation, the LGB, SBM, academy financial officer or board of trustees may be responsible for forecasting a deficit budget.
As aforementioned, staffing costs are a large contributor to the overall expenses of an academy. Our article, Reviewing Staffing Structures, can be used by academies to monitor and review the effectiveness of staff deployment, variety of staffing roles and appraisal policies.
When it comes to recruiting for a new position, think about how the vacancy requires filling – think about resources and needs, could the role be merged with an existing role or could a neighbouring school offer any assistance?
Reviewing the workforce does not necessarily mean cutting staffing numbers. Consider the curriculum and existing staffing structure, look at the academy’s pupil to teacher ratio, and consider if they are as effective as possible.
Staffing costs make up a large part of any school’s expenses; however, they are among the hardest to reduce. This means that academies should ensure they are making the most efficient appointments.
Academies should ask:
- What percentage of the budget is spent on staffing compared with similar schools?
- How does the percentage for teaching staff, curriculum support staff and other support staff compare with other similar schools?
- How do pupil outcomes compare with similar schools, relative to spending on staff?
- What is the overall staff cost as a percentage of total income? Staffing costs over 80 percent of total income are considered high.
- If teaching costs are high, is this due to the number of teachers or a large proportion being highly-paid?
Controlling expenses is all about understanding what is being paid for within an organisation.
For example, to control the expenses linked with energy usage, academies could develop an Environmental Policy that details how they will work to reduce their energy usage. This will reduce costs, as well as helping to develop a more sustainable environment with new curriculum opportunities. Other resources that incur costs could be detailed in such a policy too, such as paper waste and carbon emissions.
Other areas where spending is high could include departmental budgets. To reduce departmental spending, review previous year’s budgets and establish where spending is a priority, e.g. new equipment. If it is not a priority, consider whether the money could be better spent (or saved).
Academies will often spend a lot of money on cleaning and catering supplies – there should be effective monitoring procedures in place to ensure that these services are efficient, e.g. that food wastage is minimal.
To avoid and/or make up for shortfalls in your budget:
- Align the budget with the SDP: Prioritising funds to be allocated where they can drive improvement or maintain high education standards. Remember to consider the financial position of the academy and how this may change over the next year.
- Challenge every area of spending: Challenge every department to provide evidence of the impact that spending in those areas is having on pupils, then evaluate the value of this on the pupils to ensure funding is prioritised towards areas of the most positive impact.
- Make allowances for unplanned expenditure: There will be things that can’t be budgeted for, which will take priority when the need arises, for instance issues relating to health and safety – review unplanned expenditure on a case-by-case basis and work out where in the budget this can be offset.
- Offset declines in funding: If suffering a reduction in funding, review what is required, challenge areas of spending and see how existing resources can be utilised better.
Academies can take advantage of the national spending deals on offer in the DfE’s ‘Schools’ buying strategy’, and there are many other opportunities to generate income such as:
- Improving procurement.
- Making better use of the resources you already have.
- Boosting your income.
- Improving networking opportunities.
Additionally, academies within an MAT should look at opportunities for shared services and any economies of scale that could be achieved through partnership work in the trust.
Premises lettings is one of the most popular techniques for income generation. If you decide to hire out your premises, you’ll be wanting the comprehensive Lettings Policy and checklist. For more information, including the key considerations for letting your premises, read our article, Key Considerations for Schools Offering Private Hire.
We have a variety of other resources that can help with income generation, such as our Income Generation – Top Tips article, which includes tips for bid writing, crowdfunding and much more.
For monthly updates on the funding opportunities that are available, give our Funding Favourites article a read. We update this article every month, ensuring you remain up-to-date with funding opportunities and don’t miss out. If you would like to receive a notification when it has been updated, simply add the article to your ‘Watch list’, which can be found to the right of the article page.
Access (2017) ‘Budget deficit avoidance guide for schools and academies – part one’ <https://www.theaccessgroup.com/education/resources/blog/budget-deficit-avoidance-guide-for-schools-and-academies-part-one/> [Accessed: 12 November 2018]
Access (2017) ‘Budget deficit avoidance guide for schools and academies – part two’ <https://www.theaccessgroup.com/education/resources/blog/budget-deficit-avoidance-guide-for-schools-and-academies-part-two/> [Accessed: 12 November 2018]
Access (2017) ‘Budget deficit avoidance guide for schools and academies – part three’ <https://www.theaccessgroup.com/education/resources/blog/budget-deficit-avoidance-guide-for-schools-and-academies-part-three/> [Accessed: 12 November 2018]
Burns, J., (2018) ‘Eight out of 10 academies in deficit, say accountants’ <https://www.bbc.co.uk/news/education-43435689> [Accessed: 9 November 2018]
DfE (2018) ‘Mainstream academy and free school: single funding agreement’
DfE (2018) (Telephone conversation regarding the ESFA’s responsibilities for when academies set deficit budgets) [Personal communication: 12 November 2018]
DfE (2018) ‘School resource management: top 10 planning checks for governors’ <https://www.gov.uk/guidance/school-resource-management-top-10-planning-checks-for-governors#staff-pay-as-percentage-of-total-expenditure> [Accessed: 12 November 2018]
ESFA (2018) ‘Academies financial handbook 2018’
Jackson, H., (2018) (Conversation regarding managing deficit budgets) [Personal communication: 13 November 2018]
Wadley, N., (2018) (Email conversation regarding deficit budgets in academies) [Personal communication: 9 November 2018]