Guidance

Management accounts: good practice guide for colleges

Updated 16 March 2023

Applies to England

1. Introduction

1: The purpose of this guide is to set out key principles of good practice to support the FE sector improve the consistency, quality and effectiveness of in-year reporting of financial performance. Given the strictly advisory status of this good practice guide, the intention is not to impose prescriptive requirements and should be read in conjunction with the statement of recommended practice: accounting for further and higher education and the requirements of Education and Skills Funding Agency (ESFA) as summarised in any Dear Accounting Officer letters and Bite-size guides to aid colleges in meeting new requirements following reclassification. Colleges should also be cognisant with the principles of Managing Public Money (MPM).

2: College finance directors/chief finance officers should periodically review the format and content of their management accounts and consult governors and senior leaders on whether they meet their needs. This guide can serve as a reference point to help inform this process. Reports should be tailored to local requirements, not simply cut and pasted from the exemplars.

3: Management accounts are one of the critical tools that enable college boards and senior leaders to exercise effective financial oversight and control. Management accounts may also be required by external stakeholders, notably banks/lenders and (for example, in intervention cases) ESFA and the FE Commissioner.

4: Whilst in many cases the format and content of the management accounts will be the same for all audiences, some colleges provide fuller and more detailed reports for senior leaders and middle managers. Whilst this can be appropriate, care must be taken to ensure consistency of data and key messages and that where governors require supplementary information, this can be readily made available.

A good set of management accounts should serve 2 main purposes

a) Timely and effective budgetary control: reporting on actual financial performance to date compared to budget to date.

b) Reliable financial forecasting: projecting the forecast financial out-turn for the year, taking into account actual performance to date.

It is important to strike the right balance between these 2 objectives to ensure that there is sufficient accountability for actual performance to date, whilst at the same time looking forwards and informing corrective actions that may be necessary to achieve full-year targets and objectives.

2. Core contents of monthly management accounts

5: It is important to provide the right level of detail in the management accounts, noting that some colleges provide too much, rather than too little information:

• too much detail can make the management accounts harder to digest and reduce the clarity of key messages
• insufficient detail may make it harder to scrutinise performance and place too much reliance on the assessment and interpretation of the finance director/management accountant.

6: Table 1 below sets out the key aspects of financial performance that the management accounts should enable senior management, governors and third parties to assess:

Table 1: Key contents of monthly management accounts

1. The surplus or deficit for the period, the financial year to date and the forecast for the end of the financial year (typically to include both operating performance and Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA).
2. An understanding of how the surpluses or deficits have been arrived at, how and why they vary from budgets and what may need to be done to bring the college back on plan.
3. The financial position of the college at both month-end and as forecast for the year as a whole and whether its control of assets and liabilities, solvency and financial stability is satisfactory.
4. The cash flow for the period, financial year to date, forecast for the remainder of the financial year and at least the next 12 months.
5. Actual and forecast compliance with any loan covenants.
6. Forecast financial health for the year-end.
7. A schedule of planned and actual capital expenditure.

7: Colleges are encouraged to include such additional information in management accounts as it may be considered relevant to users.

3. Commentary

8: Practice across the FE sector varies considerably regarding the format and length of the management accounts commentary. Whilst there is no prescriptive minimum or maximum, care should be taken on the one hand to avoid complete reliance on tables and graphs and on the other hand to avoid lengthy blocks of text that will deter all but the most determined reader. Terminology and abbreviations (both financial and college-related) should be either avoided or fully explained along with appropriate signposting and explanation of tables, graphs and the source of information.

9: External users, such as the banks and ESFA, have confirmed their preference for short and concise commentaries. There are good examples where colleges use a PowerPoint format to aid visual presentation and force concise analysis and observations, assisted by effective use of RAG ratings. It is recommended good practice to include a short 1 to 2 page headline summary at the front of the management accounts to capture and convey key points and issues.

10: Increasingly colleges are making effective use of bridge or waterfall analysis to explain variances between budget and forecast performance in an effective way without the need for lengthy commentary.

11: The exemplars included within this guide underline the importance of a summary page of key headlines that signal performance against key performance targets, as one way of ensuring key messages are highlighted and understood.

Two alternative exemplars have been developed:

A. POWERPOINT FORMAT

B. TRADITIONAL WORD FORMAT

3.1 Non-financial information

12: A careful balance needs to be struck within the management accounts to avoid duplicating information provided in other reports and overloading readers with too much detail.

13: However, summary level non-financial data can be invaluable in helping to triangulate financial performance with other data. The 2 main examples of good practice include:

i) Student numbers

Analysis of actual headcount student numbers by funding type compared with the full year budget, full year forecast and full year actuals for the previous year

ii) Staffing

Actual staff headcount or full-time equivalent numbers month by month for the preceding 12 months, broken down by functional headings or by department

14: Colleges sometimes include specific risks within their management accounts that correspond with the risk register. An alternative approach is the effective use of RAG ratings in the management accounts which reduces the potential for repetition or duplication with the risk register. Care should be taken wherever possible to use consistent and objective methodologies for RAG ratings.

3.2 Key performance indicators

15: Inclusion of a selected range of key performance indicators (KPIs) within the management accounts is a helpful way of summarising overall performance to date and the forecast out-turn for the year. Practice varies as to the range and type of KPIs included, which needs to take account of other reporting arrangements such as quality KPIs which tend to be reported separately. A number of colleges use the “balanced scorecard” approach to reporting KPIs which can be a very effective approach.

16: Table 2 sets out examples of suggested KPIs for inclusion in the management accounts:

Table 2: Suggested KPIs for inclusion in management accounts

• turnover
• operating Surplus/Deficit (including as a % of turnover)
• education EBITDA (including as a % of turnover)
• cash reserves
• cash days in hand
• loan balance
• staff numbers
• pay costs as % of turnover
• debtor days
• creditor days

3.3 Loan covenant compliance

17: The majority of colleges have long-term loans with defined covenants attached that are measured monthly, quarterly or annually. Failure to comply with loan covenants can result in a reservation of rights by the bank and will in normal circumstances result in the re-classification of loans as current liabilities.

18: The consequences of non-compliance with loan covenants can be a serious issue, particularly if the opportunity is missed to secure a waiver or agreement not to measure covenants before the balance sheet date. It is therefore considered good practice to report on actual and forecast covenant compliance in the monthly management accounts. This will maintain awareness of covenants and provide advance warning of the risk of breach.

19: Finance directors should exercise discretion as to how much detail is provided in the management accounts but, as a minimum, reports should set out clearly whether the college expects to remain covenant compliant and the degree of headroom before the risk of a breach. Where an actual or forecast breach is identified, reports should set out clearly the implications and actions in hand to address the issue. Colleges are reminded that since the ONS reclassification of colleges as public sector bodies, they must obtain the written consent of the DfE before entering into any amendment to arrangements for existing borrowing within the scope of MPM.

3.4 Financial health

20: The ESFA’s financial health scores play an important role in college oversight and intervention policy. They also provide a useful (if imperfect) indicator of colleges’ general financial performance and sustainability.

21: Colleges are therefore recommended to report regularly on their forecast financial health autoscore and self-assessment in their management accounts. Reports should set out clearly any risk of a decline in financial health and any implications arising.

22: In reporting financial health it is important to focus on the forecast out-turn position noting that in-year measures can be misleading.

4. Income and expenditure forecasts

23: One of the important functions of the management accounts is to provide a forward view of the projected out-turn for the year as a whole. Good practice is to start this process as soon as is practicable. Monthly review and updating of the forecast out-turn should be undertaken with appropriate involvement of budget holders to improve accuracy and ensure ownership. Where appropriate, forecasts should also reference forward implications for future years.

24: In addition to monthly review and updating of the forecast out-turn, some colleges undertake a more comprehensive review at mid-year. This can be a useful way of testing the forecast in more depth that also provides a useful baselining exercise to inform budget preparation for the year ahead.

25: Where colleges revise budgets during the year to reflect known and approved changes to income and expenditure plans, this practice can make it harder to report transparently on the extent to which the college has met the original budget targets set at the start of the year. As long as there are clear and effective arrangements in place to monitor and control overspends against approved budgets, colleges are recommended to avoid making in-year revisions to budget targets and report actuals against the original budget. Finance directors can instead use the forecast out-turn process to highlight material variances in financial performance.

26: Forecasts should ideally be used to update not just the statement of income and expenditure but also the cash flow forecast and projected balance sheet for year-end. Use of integrated financial reporting tools can assist in this process as long as data integrity is maintained.

27: Key forecasting assumptions should be clearly explained in the commentary to the management accounts and referenced to actual performance to date and relevant non-financial data. Where there is material uncertainty regarding the out-turn position, it can be helpful to set out a range of potential scenarios (for example, best case, worse case and base case) as long as this does not undermine accountability for under-performance. At the same time, material risks of underperformance should be reflected in updates to the college’s risk register.

5. Cashflow forecasting

28: Reliable cash flow forecasting has become an increasingly important part of the management accounts pack since the introduction of the insolvency regime and the limitations on new private sector borrowing (including overdrafts) since the reclassification of colleges as public sector bodies.

29: Colleges must ensure that sufficient priority is given to the maintenance of a robust and up to date rolling cash flow forecast that projects forward at least 12 months, noting a number of colleges project forward 24 months which is considered good practice.

30: As a minimum, colleges should capture monthly cash flows, though in practice these will usually be supplemented by more detailed weekly or daily short-term forecasts. ESFA reporting returns offer an integrated model of cash flow forecasting, the use of which may complement direct cash flow forecasts. Whether or not colleges use an integrated forecasting tool, it is important to give careful attention to the profiling of income and costs and avoid blanket or over-simplistic flat monthly profiles.

31: Colleges should not rely solely on graphical presentation of the cash flow forecast in their management accounts. Use of graphs can helpfully highlight trends and projections but these should be supplemented by appropriate commentary and a summary cash flow forecast in the appendices that enables the reader to isolate critical variables, milestones and transactions such as one-off capital receipts and funding recoveries. Where the cash flow forecast is not driven by an integrated forecasting tool, checks should be performed to ensure key control totals reconcile to the balance sheet.

32: Colleges should routinely measure and report cash days in hand and also model transparently the extent of cash headroom.. Where forecasts assume any material plans to stretch creditors, these assumptions and the associated risks should be clearly articulated taking appropriate account of MPM and the duties place on public sector bodies regarding supplier payments (see MPM Annex 4.8 and [The Prompt Payment Code] (http://www.promptpaymentcode.org.uk). Any risk of a shortfall in working capital should be reflected in the updated risk register with proposed mitigations. Sensitised forecasts may also be appropriate.

6. Capital

33: Practice varies across the FE sector regarding the level of detail reported on capital expenditure within the management accounts. Too often this is an area that is not covered in sufficient detail, despite the potential for significant variations between planned and actual expenditure and the consequential cash impact.

34: Table 3 sets out the minimum recommended information that should be included:

Table 3: Minimum monthly reporting for capital expenditure

1. Actual expenditure to date.
2. Committed expenditure to date.
3. Full-year budget.
4. Balance uncommitted (overspent).

The above details should be reported for each for each main project or scheme, noting that in some colleges commitment data may not be readily available.

35: Given the magnitude and complexity of some capital projects within the sector, separate project progress reports may accompany the management accounts, dealing with costs, variations, claims, percentage completion by stage and timescales against plans.

36: For major capital projects it may be more relevant to recognise expenditure based on valuation certificates, particularly if the valuation takes place before the period end but it is likely that the contractor will not submit the invoice or application for payment until after the period end, when the accounts have been closed. This approach also ensures that retentions are accrued.

7. Contribution analysis and trading performance

37: Contribution analysis is an important tool in resource allocation and curriculum planning in the FE sector. Whilst a number of colleges have implemented sophisticated costing tools to report on contribution at departmental, curriculum area and course level, practice and methodologies varies considerably.

38: All colleges should have in place robust curriculum planning and costing processes. However, there are differing views as to how such information should be presented and reported. As a minimum this information should be taken into account as part of the budget preparation and curriculum planning process to inform decisions about course viability, the college’s capacity to meet funding targets and strategies to ensure optimal staff utilisation.

39: A number of colleges find it useful to provide summary level contribution analysis as part of their monthly management accounts. However this can add to the overall volume of the monthly reports and in some cases presents information that changes only at the margins from one month to the next. As such monthly reporting of contribution analysis is considered as optional rather than essential content. Colleges should however at least periodically report on actual contribution rates compared to the original budget and curriculum plans.

40: In the same way, multi-campus colleges or groups should also consider the benefit of contribution analysis by site. In some cases it will be beneficial to include this in the monthly management accounts, though as a minimum such analysis should be used to inform annual budget setting and forward financial planning.

41: Where colleges operate discrete trading units with material volumes of activity, the management accounts should provide sufficient information to enable their overall financial performance to be regularly monitored. Where this does not include a full apportionment of indirect overhead costs this should be made clear.

8. Accounting concepts and policies

42: The fundamental accounting concepts of matching, prudence, accruals and consistency should be applied to management accounts, so far as practical. To avoid misunderstanding, the accounting policies used for the college’s annual financial statements should be used for management accounts as far as possible and applicable.

1. This does not mean that the format of the management accounts must follow those of the annual financial statements in every respect. An important example of this is the difficulties of accurately reporting FRS102 pensions adjustments in-year, given these can swing dramatically at year- end due to factors outside a college’s control. Many colleges exclude FRS102 pension adjustments from their management accounts and this is considered acceptable practice. Colleges may decide to include the last reported pension liability in the balance sheet, in which case net assets and reserves should be shown both before and after FRS102 adjustment.

2. Where accounting treatment in the management accounts differs from the financial statements this should be properly disclosed and explained. At year-end when the provisional financial out-turn is being finalised, it is good practice to provide bridge analysis to compare the final out-turn forecast with the provisional financial out-turn, highlighting the various adjustments, such as FRS102, and explain the impact of key movements post year-end.

8.1 Income recognition

45: Colleges will need to consider whether to adjust monthly income receipts such as ESFA 16 to 19 funding and HE fees to reflect more accurately the activities that relate to that period. Practice varies across the FE sector and the most important issue is to ensure internal consistency in the way budgets are profiled and how actuals are reported and presented.

46: Use of accruals can smooth irregular funding profiles and match income more appropriately to costs of delivery. However this can involve complex accounting assumptions and adjustments and make the reconciliation between cash and income and expenditure performance more complicated.

47: Colleges therefore need to weigh up the benefits of either approach, noting that clear and effective reporting of forecast out-turn performance can be a simpler and equally effective solution that avoids the need for excessive use of month-end income adjustments.

48: Regular checks need to be undertaken as part of the management accounts preparation process to ensure that income recognition is in line with learner recruitment and completions. This is particularly important where payment is made “on profile” such as Adult Education Budget (AEB) with a retrospective reconciliation process at year-end. Material underperformance should therefore be highlighted in-year. Whilst colleges may report separately on enrolment and funding performance, it is considered good practice to provide at least summary performance within the management accounts to demonstrate consistency between operational and financial performance indicators.

49: Tuition fees, fees for full cost activity and education contract income should be spread over the relevant periods of expected activity, in accordance with the 2019 SORP. This can be an issue for colleges with programmes of varying length, or significant employer engagement initiatives where sales teams may expect credit to be recognised in the management accounts at the time the ‘sale’ is secured. In the case of education contract income it should be the period in which costs are expended that determines when income will be recognised. Preparers of management accounts may need to adopt appropriate estimation techniques and will need to carefully consider the prudence of recognising any income that has not yet been paid. Whatever basis for income recognition is adopted needs to be clearly explained to users of management accounts and consistently applied.

8.2 Expenditure

50: Pay costs will generally be accounted for in accordance with the payroll period. Exceptions will arise in the form of holiday pay accruals and for holiday periods when either hourly paid staff have not been working or when timesheets may be submitted after payroll deadlines. It would be appropriate to make accrual for these pay costs, if significant.

51: Colleges operating bonus schemes should follow the interim reporting principles, for example, to accrue pro-rata in management accounts if there is a contractual or performance-related entitlement, but with no accrual for discretionary bonuses.

52: Particular care should be taken to ensure the correct classification of sessional, agency and consultancy staff within pay (as opposed to non-pay costs) and to ensure there is clarity around staff restructuring costs and inclusion (or not) of FRS102 pension adjustments. Colleges are reminded that certain special severance payments, compensation payments, write-offs and all ex-gratia payments will require DfE consent following reclassification. Transactions by colleges or their subsidiaries that may be considered novel, contentious and/or repercussive must always be referred to DfE for prior approval. Further information is available at: Bite-size guides to aid colleges in meeting new requirements following reclassification - GOV.UK (www.gov.uk)

53: In accounting for non-pay expenditure, it is common practice within the sector to accrue costs based on purchase orders. This provides a more prudent approach but if significant orders distort the results for the month then it may be appropriate to reverse all or part of the cost if the goods have not been delivered (or included in stock) or services have not been performed. This situation may arise with blanket orders (for example, for supplies to be delivered over a period of several months).

54: Similarly, significant costs such as premises rents, insurances, annual maintenance contracts and annual licences may need to be prepaid. On the other hand, it is important to review certain individual accounts for significant missing accruals at the period end (for example, utilities, service charges).

55: For significant expense areas where there are inevitable timing differences between supplier payment and the cost being incurred (for example, examinations costs or bus contract costs) it is recommended that the estimated cost is spread over the period of study, but with regular revisions of the total estimated cost having regard to actual costs paid and other available data (for example, student numbers).

56: Colleges with their own catering and retail operations and franchising are recommended to check whether the margins for the accounting period for these activities are in line with expectation. Significant differences may be due to cut-off issues that need to be adjusted for prior to publishing the management accounts.

9. Timeliness

57: Timely production of distribution of management accounts is critical if they are to inform actions that may be necessary to address emerging indications of underperformance. Current practice varies widely and whilst some colleges are able to produce reports within less than 10 working days, others take over 20 working days.

58: Whilst there may from time to time be exceptional factors that delay a particular set of management accounts, governors and senior leaders should reasonably expect management accounts to be available within 15 working days of month-end (or less). There should be a clear, documented month-end closedown process in place as part of the production cycle for the management accounts.

59: Most colleges should (as a matter of course) produce monthly rather than quarterly or half-yearly management accounts.

60: However, it is common practice in the FE sector for colleges to publish the first full set of management accounts for September (such as period 2) rather than August. This reflects the exceptional pattern of delivery during the month of August that can give an unrepresentative picture of financial performance.

61: Whilst it is important to maintain key financial controls and month-end closedown routines for all periods (including Period 1), colleges should exercise discretion over whether or not to publish their August management accounts, recognising the competing priority with preparations for external audit and finalisation of the financial statements for the preceding year.