Many people are oblivious to who is in charge of the finances in their schools. Even more people are unaware of the importance of finance committees. Kerry Ace, finance and policy manager at the Chartered Institute of Public Finance and Accountancy (CIPFA), explains all you need to know.
In an article published in Education Business earlier this year I considered the important role that a finance committee can have in an academy, college or university. Although the governing body (or equivalent) has clear responsibility for an institution’s finances, it often delegates specific powers to committees.
Monitoring and planning for the institution’s financial position and financial control systems is normally undertaken by a finance committee. Its role is key to ensuring that the governing body discharges its financial responsibilities correctly and that the institution remains financially viable at all times.
This article looks at the role of the finance committee in relation to budget monitoring. The duties of a finance committee will normally include responsibility for monitoring the institution’s budget and a requirement to take corrective action to address issues such as potential overspending arising during the year. Generally, a delegated authority will permit the finance committee to agree changes to the budget up to specified financial limits with changes beyond this being referred to the full governing body to determine.
It is important that budget monitoring information prepared by institutions is consistent with that prepared under accounting standards. For academies this means Accounting and Reporting by Charities: Statement of Recommended Practice (SORP) and for further and higher education institutions Statement of Recommended Practice: Accounting for Further and Higher Education. It is also good practice for management accounts information to be produced on a more regular basis, generally monthly.
Management accounts contents
The content and style of the management accounts varies between different institutions. However, the finance committee should ensure that the information which it receives is in a format which enables it to discharge its responsibilities. Key contents include a commentary or narrative summary; an income and expenditure account and variance analysis; a balance sheet; and cash flow forecasts. These are explored in more detail below. Other important contents to include are trading accounts, capital projects and key performance indicators.
The accompanying commentary will allow the detailed financial data to be understood more quickly and easily and is particularly useful for non-finance specialists. As well as providing a summary of the institution’s financial position, the commentary should highlight key risks that may result in non‑achievement of financial objectives and the action being taken to address them.
It is the role of the finance committee members to understand the management accounts and challenge aspects of the report that give them cause for concern.
A common area for such a challenge will inevitably be the variance analysis. Members are likely to query why income or expenditure varies significantly from budget. The commentary will usually provide explanations of some of the more significant variances.
Income and expenditure account
The chart of accounts or coding structure will allow the income and expenditure of an institution to be analysed both subjectively and objectively. A subjective breakdown shows what has been spent whereas an objective breakdown shows who has spent it.
As a minimum, finance committee members should expect to see the income and expenditure account in as much subjective detail as is shown in the financial statements. This would mean a breakdown between pay, non-pay, depreciation and the main different types of income.
Best practice requirements would suggest that a greater level of detail be provided, however there is a cost attached to providing financial reports so a judgement needs to be made about the balance between the cost of producing detailed information and the value of doing so. For larger institutions an objective breakdown of income and expenditure may also be useful as this will enable governors to understand the respective contributions being made by different parts of the organisation.
Without such a breakdown the extent of cross-subsidy within the institution may not be apparent and it may be more difficult for governors to reach informed decisions about how financial performance can be improved.
Whatever level of detail it is decided to report at, the management accounts would normally be expected to include columns showing the original full year budget, the latest approved full year budget, and actual expenditure for the year to date. Reports may also show budget and actual expenditure for the latest month only and a projected outturn column.
Projected figures will vary depending on the method of projection used and therefore it is important that this method is explained by way of a note to the management accounts.
The variance analysis is the comparison between budget and expenditure and this again may vary between different sets of management accounts. Some may highlight the variance in the latest month, others the difference between actual spend and the profiled budget to date (i.e. the proportion of the budget that was planned to have been spent by this point in the financial year), whilst others may highlight the projected variance at year-end.
Variances may be favourable or unfavourable though most attention will generally be required for the latter. Unfavourable variances may arise owing to unachieved income estimates or to expenditure in excess of budgets. The former may be the result of lower than anticipated students, although for academies the majority of grant income is based on lagged pupil numbers and doesn’t vary in year. The latter may relate to pay or non-pay budgets. Variances may be one-off in nature or recurring and the possible options available to the institution to address variances may vary according to the reasons for them. Variances on pay budgets for example are very often recurring and it may require compensatory savings in order to address them. Depending on the financial health of the institution, it may be possible to use reserves or contingencies to fund one-off variances.
Management accounts should be presented clearly so that members of the governing body and senior management understand variances and reasons for them. The accounts should be prepared on an accruals basis, including adjustments for goods and services received or provided for which payment has not yet been made. The value of commitments, that is the value of purchase orders raised for goods not yet received, is likely to be useful for reports prepared for budget holders within institutions but if these are included in management accounts prepared for governors and senior management then a note should clearly indicate that this is the case.
It is good practice for the monthly management accounts to include at least an abridged version of the balance sheet covering the net current assets position shown in at least as much detail as that included in the financial statements. This would mean a breakdown of current assets (including bank balances as well as debtors and stock) and current liabilities (including bank overdraft and creditors). Institutions may also update fixed assets, provisions and long term liabilities on a monthly basis. Alternatively it would be appropriate for institutions to report to governors significant changes in these balances during the year. Finance committee members are most likely to concentrate on current assets and current liabilities and be concerned if the ratio between these, the current ratio, varies significantly from that forecast in the institution’s financial plan.
The management accounts should include as a minimum a 12 month rolling forecast showing the current cash balance and a monthly profile of future cash balances. This may be compared to the original cash flow forecast and explanations provided regarding any significant differences. Depending on an institution’s individual position, a cash flow statement may need to be prepared on a more regular basis, even weekly, if circumstances require it.
The extent of additional reporting should be set out in the institution’s treasury management policy but could include details of where excess funds are invested and/or overdraft or loan facilities obtained from. Cash flow forecasts for three or five years may also be provided though these are likely to be in less detail than the 12 month forecast.
Some institutions may decide that all governors (in addition to senior managers of the institution) should receive the monthly management accounts, however it is a key role for the finance committee and its members to have primary responsibility for ensuring proper budget monitoring is taking place in their institution.
CIPFA’s Guide for Finance Committee Members in academies, colleges and universities (fully revised edition) describes the roles and responsibilities of the finance committee in detail.