Deficit recovery guidance

There is increasing emphasis on the importance of budgets and forecasts produced by Academy Trusts and the implications of inaccurate and unachievable targets. The ESFA have released some new guidance to help Trusts manage a deficit and to work towards a recovery. This guidance can be found here. This is helpful guidance, for both those preparing budgets in a deficit position, but also those just looking to achieve maximum value for money, allowing you to spend the maximum on educating your pupils. Those reviewing and approving budgets, such as trustees, should read this guidance to ensure that they are asking the right questions.

It is now common for an Academy Trust to have a deficit budget within their three-year plan. Often there is an explanation for the deficit, for example asset improvement or provision of additional resources for underperforming subjects or cohorts. However, whilst a budget deficit may be explainable a trust must not have a deficit that cannot be covered by reserves (known as a cumulative deficit). If Academy Trusts are predicting deficits in their budgets for several years and do not have sufficient reserve funds to cover these, then this should be of key concern for the board of Trustees and action should be taken. It is possible for Academies to recover from deficits providing there is high levels of financial monitoring and effective management of Academy funds.

In order to recover from a deficit or tackle a forecast deficit, the Academy Trust may need to make cost-cutting decisions to preserve funds and reduce unnecessary expenditure. However, identifying areas in which cost-cutting would be useful is often difficult. Integrated Curriculum Financial Planning (ICFP) can be a useful tool to help assist with this process. Indeed the ESFA have required an independent review of ICFP as a condition to some grants issued for MAT growth in the last year. ICFP is an in-depth review of the Academy’s financials, integrating curriculum needs and matching them to financials. A calculation of a number of financial metrics is then undertaken to identify areas where work should be focused. The benchmark data produced is compared to national benchmarks and a report produced for the trust identifying the main cost-cutting areas and long-term underlying issues that may be contributing to the forecasts deficits.

Annex A of the linked guidance gives some good areas to concentrate on when facing a deficit position. It is worth noting that whilst this guidance is primarily aimed at trusts in a deficit position, the principles remain the same even if your trust is in a surplus position. This should allow these trusts to achieve better value for money and hopefully better educational outcomes along with financial efficiencies.

Some of the key areas for review in Annex A include:

Staffing

Unsurprisingly, as the single biggest expenditure for any trust, ensuring you spend it in the right way is crucial. Suggestions such as reviewing TLRs, natural wastage, internal promotions rather than external recruitment are all suggested. Reviewing fixed term contracts, and how supply staff are procured is also highlighted.

Goods and services

Are you making the most of buying hubs including items such as IT and insurance? Have you undertaken a review of licenses and contracts and ensured that they are all required (i.e. free trial periods haven’t ended and not been cancelled).

Use of funds

Has consideration of use of the correct revenue or capital funds been undertaken?

Deficit recovery payments

Finally if there was debt  on transfer from the local authority, with an agreed repayment plan and these repayments are one of the primary reason for the deficit due to overly optimistic repayment profile, then representations can be made to the ESFA.

Overall this is good guidance that we recommend is reviewed by your trust.

If you have any questions or need help on preparing your budgets/deficit recovery plans then please contact our advisory team.