Governance: Austerity and financial planning

Written by: Ian Armitage | Published:

How can schools’ governing bodies deal with the challenge of improving outcomes in a climate of static – or falling – school budgets? Ian Armitage offers his reflections

Our schools’ CEOs and heads have many things on their plates – not least of which is improving attainment and progress, retaining and attracting great staff, managing policy changes, staying on top of the risks they face, all while running the rest of their “business”.

These demands arise during a period of structural change in schooling, which makes things more difficult in the short term.

To support them I suggest that, as in business, long-term financial planning should rest on the shoulders of the governing board which has the primary responsibility to ensure that the organisation it governs survives and thrives.

Boards can contribute to the work of school leaders by making sure schools have a sound financial base on which to operate. This gives school leaders the time and space to be able to adapt to and handle shocks so teachers can continue to tackle the huge agenda that is in front of them.

Accordingly, careful financial planning is a high priority topic which should be matched with proven business skills within the board team.

Let us look at the context schools operate in. Today they are faced with three challenges to their financial condition: an increase in the cost of labour – rising faster than the Retail Price Index (RPI) – increasing pupil rolls and static real income. This is producing a squeeze in budgets, estimated at some eight per cent over three years or so.

What can a governing board do to accommodate the planned squeeze on resources?

My starting point would be to plan for the worst and hope for the best. It follows that taking a cold look at data and the way school finances work is the best starting point.

School income is mostly driven by the size and composition of pupil rolls, which are unlikely to change other than by demographic variations. So the first question for any planning exercise is to ask what is the probability that government funding policy for schools will improve over the next three to five years? Here a close look at government finances is your starting point. These tell us that national debt is 82 per cent of GDP and when you add unfunded pensions liabilities, the figure is 191 per cent of GDP.

With a current deficit of three per cent, debt is rising to levels that place us towards the top of the global league table of borrowers. Distinctly uncomfortable for a government of any hue.

So for government expenditure to rise the UK needs either to borrow more or to increase taxes. For the tax take to rise, the behaviour of our citizens needs to differ from the past 40 years.

Data from the independent Institute of Fiscal Studies says that over the past 40 years the government has never managed to take more than 42 per cent of GDP in taxes – even when corporation tax, income tax and capital gains taxes were all higher than they are today.

Currently the tax take is nearer 39 per cent. So there is a modest potential to improve government revenues but we no longer have petroleum taxes boosting taxes to the all-time high percentage. In addition, if the tax take is increased then perhaps we will see the additional money allocated to health and care before schools?

Some might think that by increasing government spending at a faster rate than currently planned growth in GDP and tax take will rise. For this to happen whoever leads us has to perform better than all earlier governments, in effect showing superior judgement and skill than past administrations, while working with the same set of civil servants to frame and deliver policy.

If your conclusion is that your three-year forecasts for income are unlikely to improve then you have to explore costs. If so, time is of the essence.

A board’s work needs to be done sooner rather than later, so that options to improve efficiency – such as back office automation or changes in the curriculum – can be identified, tested, prioritised and implemented.

Why is time so important and delay so corrosive to good outcomes? The answer lies in the cost structure of schools. In short, schools are organisations where fixed costs – costs that do not vary directly with activity unlike say reducing raw material purchases in a manufacturer – represent more than 90 per cent of revenues. Decisions to reduce these fixed costs take time and cost money to implement.

Theory and practice across every continent and industry suggests that intelligent and effective cost-reduction requires careful consideration, good planning, excellent communication with stakeholders and focused execution.

Manage change well in industries where demand is static or growing – like education – and the normal experience is that enterprises then thrive.
If you come late to the problem, especially if you operate under tight cash constraints, then experience tells us that organisations make poor decisions because they value meeting immediate cash pressures above delivering good outcomes and improving effectiveness.

For example automating routine low value-added processes requires money to invest – if you don’t have money you are stuck with expensive manual processes.

In a process of adapting to change everything will be challenged from curriculum to suppliers, from staff composition to generating other sources of income. Typically when businesses undertake these exercises it unlocks better ideas and indeed frees up people with high potential to contribute more.

There are some cost-reduction initiatives – such as better procurement and sharing resources – which are easy to implement if schools pool resources and agree to some form of centralisation of practices. However some ideas floated, such as in-sourcing, are probably blind alleys.

If your supplier is better placed to provide a service than you are, and you set up tight service level agreements and manage that supplier, then you are frankly highly unlikely to obtain better value and you will waste valuable time and money trying to capture savings.

Financial planning in austere times will not be easy. Like it or not our government is asking each board to tighten its belt.

In many cases, it will require reductions in staff levels and it might involve reducing the breadth of activity of a school.

Getting this topic onto the agenda, ensuring it is understood, discussed and decided upon is never easy. We then enter the world of good board craft, dealing with cognitive dissonance and persuasion. That is for another time.

  • Ian Armitage is chairman of SGOSS Governors for Schools, a charitable enterprise offering a free governor search and selection service for schools which need to recruit governors or trustees. Last year it helped 2,047 schools by finding them 2,800 governors. Visit www.sgoss.org.uk


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