Financial sustainability is a key focus for all academy trusts, with the main challenges being that recurring income does not always match increasing costs. This, combined with falling pupil rolls can rock an already uncertain financial boat.

Whilst there is a general view that there will always be sufficient funding to ensure schools remain financially viable, there is no certainty over this as revealed in the 12^th Kreston Academy Benchmarking Report.

The report shows that 47% of trusts had an in-year deficit, and on average the surplus is down on last year between 83% and 95%.

Schools saw three additional income streams in 2022/23: Mainstream Schools Additional Grant, Schools Supplementary Grant and the Energy Efficiency Grant. The figures suggest that without these grants, most trusts would have been in a deficit position for the year.

Spreading the financial burden

Among the dilemmas affecting the sector is that reserves are held unevenly, with some trusts holding large levels of reserves.

One way to resolve this could be for financially successful multi academy trusts (MATs) to take on more schools in financial difficulty.

This would spread reserves out because at MAT level, financial reserves belong to the trust not individual schools. The full implementation of the National Funding Formula would also help as it would give all schools their full entitlement, without any top slicing by the local authority.

Trends in pupil numbers

The questions all trusts are increasingly asking is how many school places will be needed in the future – and importantly, what additional funding will be available to alleviate the peaks and troughs of changing pupil numbers in schools.

Detailed forecasting of pupil numbers is essential for accurate budgeting. However, accurate forecasting is not easy to achieve. There is data available from local authorities on pupils in the school system, but there is still a level of estimation required to ascertain pupil numbers in individual schools. Numbers depend, amongst other things, on local birth rates, new housing in a school’s catchment area and the reputation of the school which is often based on the Ofsted grading.

The Office for National Statistics predict a total decrease of 802,000 pupils by 2032. Those trusts with a good handle on their pupil number projections for the next 5 years are in the strongest position to make important decisions on class structure, curriculum, mothballing of classrooms and other measures that impact on finances.

A trust must give equal importance to planning for growth. Trusts with a mix of school type and size will be able to minimise the risk of pupil number fluctuations and help stabilise income levels.

There are rules around Growth and falling rolls funding which are complex, but should be thoroughly considered by trusts, particularly if they apply to one or more of their schools.

Examining costs

Our report shows that on average staff costs as a percentage of total costs have fallen from 75.6% two years ago for a small MAT, to 70.8% in 22/23.

Whilst salaries have been increasing for all staff, trusts have been able to keep costs under control through a range of strategies including restructuring, leaving vacancies unfilled and replacing more experienced staff with those in earlier stages of their careers. There is still pressure on budgets though as the pay reviews are not fully funded, meaning trusts have to find additional annual savings.

Non-staff costs have been among the sector’s biggest challenges as we have seen a 16% increase in the year. An significant element of this can be attributed to energy costs which have increased by at least 49%.

These costs need to be budgeted using a realistic inflation rate and school level spending must be monitored closely to ensure budgets are not exceeded. Non-staff costs are now 29% of total costs, so it is essential that trusts look to control these outgoings and budget to include an appropriate rate of inflation.

Estates costs are now rising up the agenda for academy trusts too. Trusts eligible for School condition allocations (SCA) have more certainty over capital grants and can therefore formalise spending plans with greater accuracy.

That said, the National Audit Office report – Condition of School buildings – Value for money, - states that 700,000 pupils are learning in a school building in need of major refurbishment or rebuilding. This highlights the scale of the problem.

The current School Rebuilding Programme plans to deliver just 50 schools per year so this is unlikely to solve the issue. A number of newer schools have also already run into problems, with some earmarked for demolition and rebuild.

Despite the extra Energy Efficiency Grant, there is still a lot of work to do to address the DfE’s plans for net zero too.

Average capital spend per pupil varies across the type of trust and is between approximately £400 and £500 per pupil, including capital spend on energy efficient items. At 5-8% of total income, this sounds a lot but is not enough to address the level of refurbishment needed. This is also not being fully funded as the average capital income grant is £375 per pupil meaning trusts are dipping into revenue funds to pay for capital items.

Improving efficiency  

Improving efficiency is a strategy that can deliver better financial outcomes for the sector. A trust that has schools located close together can maximise the use of staff, for example, including supply cover. How many schools this requires in a location depends on local circumstances, but it can offer the flexibility to cope with challenging circumstances by maximising the use of the trust’s own resources.

Trusts can also consider fully centralising to help reduce costs. Our report shows 68.2% of large MATs are now fully centralised compared to medium MATs at 50% and small MATs at 63.6%.

A fully centralised MAT holds higher free reserves per pupil too, at £742, which is 7.4% more than combination and 71% more than decentralised.

The challenge of accurate budgeting 

For most trusts, they must maintain a tight financial discipline as they are only one bad year away from financial difficulties. This means accurate budgeting is critical, however, information is usually not available in time for trusts to submit their Budget Forecast Returns (BFR).

It is therefore essential for trusts to submit their BFR using information that “reflects the actual circumstances at the trust as you see them at the time.” Trusts should also do scenario planning so that they can adopt an alternative plan if urgent action is required.

With so many variables to impact on trust finances, a combination of measures will be needed to deliver financial sustainability across the sector in the coming year.

This guest blog has been written by Kevin Connor - Head of Academies at Bishop Fleming. 

You can learn more about similar topics at our upcoming National Schools and Academies Leaders Show and Exhibition 2024

View the Full Agenda and book your tickets.