The answer to this question is …………………………………………… almost always!
Colleges are required to develop a Recovery Plan when they experience financial problems, of that there is no doubt.
However, in nearly every case I have ever encountered during 20 years in the FE sector the problems are not caused by pure financial issues, but by operational issues which give rise to financial problems!
Therefore, a college’s financial malaise can be the symptom of other problems rather than the problem itself!
The way FE providers are funded means that their finances are very finely balanced, even in good times.
The funding they receive is designed to cover reasonable operating costs. It does not take much, therefore to disturb the finely balanced equilibrium between income and expenditure, causing a financial problem.
If the disturbance is allowed to persist for an extended period of time, say a few years, then the whole thing spirals downwards into a crisis. Such crises are by no means unusual!
So what are the main reasons for the equilibrium between income and expenditure in colleges being disturbed?
There are two main causes;
First, weak income forecasting leading to a consequent failure to meet income targets, and
Second, which is by far the most common reason, a lack of adequate control of staff costs. In my experience the main reason in over 90% of cases.
In the early days following Incorporation, after the 1992 Further and Higher Education Act, recovery plans were common. Those colleges which did not have adequate control systems, and there were a significant number, lost control of their finances. In the Local Authority days, prior to 1992, the key control mechanism was cash.
If there was money in the bank, then everyone relaxed. But, of course in the real, independent world, in which money was not so freely available, in order to prevent problems, more advanced financial control systems were needed.
Colleges began to recruit accountants from outside the FE sector and gradually their systems began to become more sophisticated. Managers became more interested in looking forwards and forecasting Income and Expenditure as a way to anticipate problems, rather than just perusing the bank account, for comfort.
The early recovery plans were indeed often referred to as financial recovery plans, which was a misnomer, which led to many being developed by college Finance Directors in glorious isolation from their colleagues!
Consequently, when the funding authorities asked to see supporting operational plans, in particular curriculum plans, they were not available, or even worse, were available but conflicted with the financial plans!
Then the penny dropped! Everyone realised that to develop robust, realistic and achievable financial plans, a thorough review of the college’s curriculum plans was first required.
After all, curriculum delivery is the reason for the existence of colleges. It is no surprise, therefore to put this at the heart of its planning.
A well thought out curriculum plan, in addition to providing essential operational controls, also provides the key figures to be included in the financial forecasts.These are income and staff costs, i.e. the two areas in which things usually go wrong!
Therefore, by starting with the curriculum plan and using the figures it generates for financial planning provides a closure to the loop, linking the two key control mechanisms together!
To develop a sustainable recovery plan requires in-depth analysis of the financial contributions being made by each income-earning department.
Contribution is the term used to represent the difference between income and direct costs, i.e. those costs specific to each department.
Costs that are shared by all college departments, which are commonly referred to as overheads, can be evaluated both in financial terms and as a percentage of total college income. This percentage then becomes the target for the contribution to be made by the income earners.
The way to improve college financial performance, the raison detre for recovery plans, is to focus on the low-contribution departments and identify the reason their contribution is low, enabling corrective action to be taken.
Adopt this approach, and you are on the road to developing a robust, realistic and achievable plan!
Malcolm Cooper, MD, MCA Cooper Associates