Part 2: Main financial requirements

The financial management requirements for colleges.

Financial oversight

2.1. Governors, the accounting officer and executive management must maintain robust oversight of the college’s finances.

2.2. The college corporation must take responsibility for the college’s financial affairs and for stewardship of assets and must use resources effectively, efficiently and economically, to maximise outcomes for learners.

Scheme of financial delegation

2.3. The board cannot delegate overall accountability for the college’s funds. However, authority to make financial commitments will usually be delegated to various leaders within the college and, if so, the board must approve a written scheme of financial delegation (which may be or may form part of the college’s financial regulations) that maintains robust internal controls. The scheme of financial delegation must be approved by the board and reviewed by the board:

  • regularly
  • at least once every 3 years
  • when there has been a change in college management or organisational structure (such as a college merger) that would impact the effectiveness of any existing scheme of delegation

2.4. The college’s governance model must ensure effective financial scrutiny and oversight. The board may delegate scrutiny and oversight to a finance committee, though responsibility for approval of budgets, the safeguarding of assets and the financial sustainability of the college cannot be delegated.

Basic control principles

2.5. The college must have a sound internal control, risk management and assurance framework, comprising:

  • clearly communicated procedures, structures and training of staff
  • appropriate day-to-day supervision and checks by management
  • risk management procedures
  • a programme of internal review overseen by an audit committee, ideally supported by an internal auditor
  • external audit and assurance

2.6. The internal control framework will cover both financial and non-financial elements. The financial elements of the framework must:

  • ensure delegated financial authorities are complied with
  • maintain appropriate segregation of duties
  • coordinate the planning and budgeting process
  • apply discipline in, but not limited to, financial management, including managing debtors, creditors, cash flow, monthly balance sheet control account reconciliations, payroll, procurement and submission of individualised learner records (ILRs) and other funding returns and claims
  • plan and oversee capital projects
  • manage the estate, taking note of the further education estates planning guide, as appropriate
  • manage, oversee, monitor, review, inspect, and verify the existence of all assets (estates and non-estates) and maintain a fixed asset register
  • ensure regularity, propriety and value for money in the college’s activities
  • ensure a risk register is maintained and reviewed by the board, drawing on advice provided to it by the audit committee
  • reduce the risk of error, fraud and theft
  • deliver independent checking of controls, systems, transactions and risks

Find additional guidance at Internal financial controls for charities (CC8)

Financial planning

Responsibilities of the board

2.7. The board must:

  • ensure that financial plans are prepared and monitored, satisfying itself that the college or college group remains financially sustainable
  • take a longer term view of the college’s financial plans, consistent with the requirement to submit budget and forecast information to the Education and Skills Funding Agency (ESFA) in accordance with the College financial planning handbook.

2.8. The board should set and regularly review the college policy for holding reserves. Colleges should refer to the expectations relating to the management of reserves set out in the Further education corporations and sixth-form college corporations: governance guide and in the Charity Commission publication Charity reserves: building resilience (CC19).   

Setting a budget

2.9. The board, and any separate committee responsible for finance, must ensure rigour and scrutiny in budget management, taking into account both recurrent and capital budgets.

2.10. In accordance with the College financial planning handbook, the board must approve a budget, and any significant changes to it, for its financial year. The board must consider the impact the budget will have on the college’s future financial sustainability.

2.11. The board must ensure budget forecasts for the current year and beyond are compiled accurately, based on realistic assumptions, including any in relation to the sustenance of capital assets, and reflect lessons learned from previous years.

2.12. The board should challenge the learner number estimates on which the budget is based, as these underpin revenue projections.

Sending your budget to ESFA

2.13. The college must submit its budget forecast to ESFA, in a form and manner specified by ESFA in the College financial planning handbook and in accordance with deadlines published annually. This is necessary for ESFA to be able to formally assess the financial health of individual colleges, and of the sector as a whole.

Financial health and intervention

2.14. The college’s budget information is used by ESFA to formally assess its financial health on the basis of the methodology set out in the College financial planning handbook.  

2.15.Colleges should consider the FE Commissioner Benchmarks: Definitions, April 2022 set out by the Further Education Commissioner (FEC) when setting budgets.

Monitoring the budget     

2.16. The board must ensure appropriate action is being taken to maintain financial viability, including addressing variances between the budget and actual income and expenditure. In discharging this responsibility, boards may find it useful to refer to the FEC’s College management accounts good practice guide, which sets out key principles of good practice to support the sector to improve the quality, consistency and effectiveness of in-year reporting of financial performance.

2.17. Should signs of financial difficulty emerge, either as an immediate issue or anticipated risk, the college should liaise with DfE. Governors have a duty as charity trustees to ensure good financial management of their college. This duty is all the more important in the event that a college encounters financial difficulty that could result in insolvency. Colleges should not rely solely on ESFA’s financial health assessment, or other review ratings to give an indication of solvency. These will be based on either historical data, which may not reflect the college’s current financial performance and position, or on forecasts, as an indicator.

2.18. The college must select key financial performance indicators and measure its performance against them frequently and regularly, including analysis in its annual strategic report as explained in paragraphs 3.23 to 3.26 of the Further and Higher Education Statement of Recommended Practice (SORP).

Cash and working capital management

2.19. The college group must manage its cash position robustly, taking into account the working capital requirements of the whole group. It must not undertake any new borrowing, including overdrafts, without ESFA consent. It may be required to report on its cash position to ESFA where there are concerns about financial management or financial health. The college must advise ESFA in good time of any projected shortfall in working capital that might indicate a requirement for support from ESFA. The college must also have accounting processes in place that allow for the separate identification of capital grant receipts, as well as the proceeds of asset disposals.

Procurement and spending decisions

2.20. As a public sector entity bound by the requirements of public sector procurement, the college must be able to show that public funds have been used as intended by Parliament. This means that steps must be taken to ensure that the letting of any contract follows due process, and that appropriate contract monitoring is in place, once a contract has been awarded. This includes when ESFA-funded delivery is subcontracted to a third party. Colleges are accountable for all funded delivery, whether that is delivered directly or through a subcontractor.

Procurement basics

2.21. The college must ensure that:

  • spending has been for the purpose intended
  • there is propriety in the use of college funds
  • spending decisions represent value for money
  • internal delegation levels exist and are applied
  • a competitive tendering policy is in place and applied, and the procurement rules and thresholds in the Public Contracts Regulations 2015 (which will be superceded by the Procurement Act 2023 when it comes into force in October 2024) and Find a Tender service are observed
  • appropriate due diligence is in place
  • there is proper monitoring and assurance when the delivery of learning is subcontracted to a third party

In order to achieve these ends, the board should consider approving a procurement policy and keeping it under regular review, or building these requirements into the college financial regulations.

2.22. ESFA has produced a subcontracting standard to provide colleges and other providers with a clear and consistent approach for the delivery of funded provision through subcontracting arrangements. Colleges must ensure that any delivery for which they are funded, whether delivered directly or through a third party, meets the necessary standards. All providers who subcontract £100,000 or more within any funding year, must engage a reporting accountant to obtain a report which complies with the Assurance reviews of the subcontracting standard for post-16 providers: framework and guide for reporting accountants.   

Find additional guidance in:

Colleges planning to undertake major capital projects should have due regard to HM Treasury’s Green Book on project appraisal and evaluation. Managing public money sets out that public sector organisations shall not engage in tax evasion, tax avoidance or tax planning. HM Revenue & Customs (HMRC’s) Introduction to tax avoidance provides further guidance.

Setting executive pay

2.23. Colleges must adopt one of the following remuneration codes or explain in their annual report and accounts why they have not done so:

Any college not adopting one of the codes must set out how its alternative arrangements meet the principles of transparency, accountability, proportionality, understandability, value for money and the extent to which remuneration for senior people is evidence-based. Colleges must also follow the requirements to disclose certain matters relating to executive pay set out in the College accounts direction.

Senior pay controls

2.24. Colleges are subject to central government senior pay controls. Since 1 May 2023, DfE must support remuneration proposals, as noted below, prior to applications being reviewed and agreed by Chief Secretary to the Treasury (through HM Treasury). Further details are provided in the DfE guidance Apply for FE senior pay approval.

2.25. For new appointments with proposed remuneration at or above £150,000, or the pro rata equivalent for part-time staff or performance-related pay above £17,500, approval is required before the post is advertised. For existing staff, approval must be sought in relation to any adjustment of total remuneration or terms and conditions which takes an individual to, or above, the defined threshold.

2.26. For existing appointments:

  • where remuneration already exceeds £150,000, approval is required for any pay award above 9%, through the senior pay controls application process, before the pay increase is confirmed
  • where current remuneration is below £150,000, approval is required when a pay award of over 9% takes it to or above that figure – approval is not required if a pay increase of up to and including 9% takes the remuneration above £150,000

2.27. Before submitting applications colleges should familiarise themselves with:

Tax arrangements for senior employees

2.28. The college must ensure its senior employees’ payroll arrangements fully meet their tax obligations and comply with HM Treasury’s guidance about the employment arrangements of individuals on the avoidance of tax. This is described in HM Treasury’s Review of the tax arrangements of public sector appointees, which explains that senior managers with significant financial responsibilities should be exclusively on payroll, and therefore subject to Pay As You Earn with income tax and national insurance (NI) contributions deducted at source.  

Income generation

2.29. The college should set fees for its chargeable services at full cost, but can apply an additional rate of return when in a commercial environment. The college must also comply with its subsidy control obligations and should refer to the UK subsidy control statutory guidance to assist with this. The subsidy control rules are designed to prevent, or at least significantly curtail the extent to which, public authorities, such as colleges, provide financial assistance to businesses in a way that could distort competition.

Risk management

Oversight of risk and the risk register

2.30. The college must manage risks to ensure its effective operation and must maintain a risk register. Overall responsibility for risk management, including ultimate oversight of the risk register, must be retained by the board of governors, drawing on advice provided to it by the audit committee. However, other committees may also input into the management of risk, at the discretion of the board. Aside from any review by individual committees, the board itself should review the risk register frequently and must conduct a full review least annually. For the avoidance of doubt, the board of governors must have ownership of risk management in respect of all entities in the college group, drawing upon appropriate advice, including that of the audit committee.

2.31. The college’s risk management should cover the full operations and activities of the college, not only financial risks. The management of risks must include contingency and business continuity planning. Colleges should also consider any risks associated with delivery of funded provision through a subcontracting arrangement and whether adequate and regular contract monitoring is in place to mitigate such risks.

Insurance

2.32. The college must have adequate insurance cover in compliance with its statutory and contractual obligations, including that required by its accountability agreement with DfE.  

Find out more about Management of risk: principles and concepts, including:

  • HM Treasury’s suggested structure for a risk register
  • the Charity Commission’s guidance on how charity trustees can identify, assess and manage risks in Charities and risk management (CC26)

Whistleblowing

2.33. The Public Interest Disclosure Act protects workers from detrimental treatment or victimisation from their employer if, in the public interest, they blow the whistle on wrongdoing. The college must have procedures for whistleblowing, to protect staff who report individuals they believe are doing something wrong or illegal.

2.34.The governors must approve the whistleblowing procedure, review it regularly and publish it on the college’s website. The board should:

  • state in its policy the process for reporting concerns
  • ensure all staff are aware of:
    • the whistleblowing process
    • how concerns will be managed
    • what protection is available to them, if they report someone
    • what areas of malpractice or wrongdoing are covered in the policy
    • who they can approach to report a concern

2.35. The board must ensure all concerns raised by whistleblowers are responded to properly and fairly.  

Find out more at:

Provision of information

General information requests

2.36. The college must provide DfE, or its agents, with information required to meet funding and other regulatory requirements. This information must be of sufficient quality, and provided when, and in the form, requested.

2.37. College managers and their staff must ensure information submitted to DfE and ESFA that affects funding, including learner number returns and funding claims (for both revenue and capital grants) completed by the college and (for college groups with multiple colleges) by constituent colleges, is accurate and complies with funding criteria. This includes when funded delivery is through a subcontracting arrangement.

2.38. Occasionally DfE will require urgent information from the college, usually because of requests to DfE to fulfil its duties to provide information to the Secretary of State for Education and account to Parliament. DfE will act reasonably in requests for information and have regard to costs and timescales of providing it, and its confidentiality. In requesting information, DfE will consider information previously supplied by the college to DfE, or other stakeholders with whom DfE is able to share information.

Governance

2.39. DfE has produced the FE and sixth-form college corporations: governance guide, which sets out the key governance requirements for colleges.

2.40. All colleges must comply with at least one of the following governance codes:

  • Charity Governance Code (endorsed by the Charity Commission)
  • Code of Good Governance for English Colleges (developed by Association of Colleges)
  • the UK Corporate Governance Code (2018) – colleges that adopt this code are not expected to comply with those requirements that are not relevant to further education and sixth-form college corporations, however they should have due regard to the principles and guidance insofar as they apply to the further education and charity sectors

2.41. Colleges must adopt the code that best reflects their legal structure and operations. If a college does not fully comply with the code adopted, it must have due regard to its principles and disclose in its annual report and accounts which aspects of the code it does not comply with, and the reasons for non-compliance.  

Avoiding conflicts of interest with related parties

2.42. This part of the handbook deals with goods or services provided by, or to, individuals or organisations related to the college.

Related parties include persons and entities with control or significant influence over the college, and members of the same group (such as parent and subsidiary companies, key management personnel and close family members).

The above description is not comprehensive. Find the full definition in:

The ‘related party transactions’ section of ESFA’s College accounts direction provides further information.

2.43. Colleges must be even-handed in their relationships with related parties and must ensure that:

  • governors comply with their duties as charity trustees to avoid, or appropriately manage, any conflicts of interest, so that they act only in the best interests of the college, rather than in their personal or private interest
  • they do not accept benefits from third parties and declare any interest in proposed transactions or arrangements
  • all governors and senior employees complete the register of interests, in accordance with sections 2.47 to 2.50 of this handbook
  • no governor, employee or related individual or organisation, uses their connection to the college for personal gain, including payment under terms that are preferential to those that would be offered to an individual or organisation with no connection to the college
  • no governor, or party related to a governor, will receive payment for goods or services provided to the college except as provided for by section 185 of the Charities Act 2011
  • there are no payments or other personal benefits to governors, or anyone closely related to them, by the college, other than reasonable out-of-pocket expenses, unless approved in advance by the Charity Commission, and any such payments comply with any relevant agreement with the Secretary of State for Education – colleges will need to consider these obligations where payments are made to other business entities that employ, or are owned by, the governor (or someone closely connected with them), or in which the governor (or someone closely connected with them) holds a controlling interest

2.44. The board must comply with the Charity Commission’s guidance for trustees Trustee expenses and payments (CC11). It should also be aware of the Charity Commission’s guides to managing conflicts of interest:

2.45. The board must ensure requirements for managing related party transactions are applied across the college group, including any subsidiaries. The board chair and the accounting officer must ensure their capacity to control and influence does not conflict with these requirements. They must manage personal relationships with related parties to avoid both real and perceived conflicts of interest, promoting integrity and openness in accordance with The Seven Principles of Public Life.

2.46. Colleges must recognise that some relationships with related parties may attract greater public scrutiny, such as:

  • transactions with individuals in a position of control and influence, including the board chair and accounting officer
  • payments to organisations with a profit motive, as opposed to those in the public or voluntary sectors

2.47. The college must keep sufficient records and make sufficient disclosures in its annual report and accounts, to show that transactions with these parties, and all other related parties, have been conducted in accordance with the high standards of accountability and transparency required within the public sector.

Managing conflict of interests

2.48. The board must have  a policy for managing actual and potential conflicts of interest and keep it under regular review.

2.49. The board’s register of interests must capture relevant business and financial interests of governors and senior employees, including:

  • ownership, directorships, partnerships and employments with businesses, including with subsidiaries and joint ventures of the college
  • trusteeships and governorships at other educational institutions and charities
  • for each interest, the name and nature of the business, the nature of the interest and the date the interest began

2.50. The register must be reviewed at least annually and  must identify relevant  interests arising from close family relationships between the college’s governors. It must also identify relevant interests arising from close family relationships between governors and employees. ‘Close family relationships’ means a close member of the family, or member of the same household, who may be expected to influence, or be influenced by, the person. This includes, but is not limited to a:

  • child
  • parent
  • spouse or civil partner

2.51. Colleges should consider whether other interests should be registered, and if in doubt should do so. Boards of governors must keep their register of interests up to date.