Financial Planning Handbook
Financial PlanningHandbookEffective for all colleges’ financial plansThis handbook is of interest to principals and chief executives of colleges, finance directorsat FE colleges and sixth form colleges, financial statements auditors, directors of fundingbodies and other key organisations in the learning and skills sector.June 2015
SummaryThe Financial Planning Handbook (the Handbook) has been prepared toachieve the following objectives:aprovide a ‘one-stop’ document to which colleges can refer whencompleting their financial plansbreadily accommodate changes in generally accepted accountingprinciples issued by the Accounting Standards Board and otherguidance issued by the funding bodiesThis Handbook will be updated periodically and the latest version will bepublished on the GOV.UK and the Association of Colleges websites.
Contents1: Overview of financial planning32: Monitoring the financial health of colleges93: Funding body guidance174: Commentary to the plan185: Guidance on completing the financial plan template24Annex 1: Suggested checklist for the financial plan commentary28Version 1 June 20152
1 Overview of financial planning1.1.This Financial Planning Handbook sets out guidance on financialplanning information that colleges are required to send to the SkillsFunding Agency (SFA) and Education Funding Agency (EFA) by 31July each year. This Handbook has been produced jointly by theCollege Finance Directors’ Group (CFDG), the Association of Colleges(AoC), the SFA and the EFA. Throughout this document the SFA andEFA are referred to as the funding bodies.1.2.The financial plan should show the expected out-turn for the currentyear, the annual budget for the forthcoming year and the forecast forthe year after. The governing body should approve an annual budgetbefore the start of each financial year (1 August) being the first year ofthe college’s two-year financial plan.Intended audience1.3This Handbook will be of interest to all colleges that are required toprovide two-year financial plans to the SFA or EFA.Financial plans1.4The funding bodies monitor the financial health of colleges tounderstand the degree of risk they may represent if they do not havethe financial resources to continue operating.1.5The two key financial documents used to seek this assurance are thecollege’s two-year financial plan and the college’s financial statements.The guidance and submission requirements for the two-year financialplan are provided in this Handbook, while the guidance on thecompletion of the financial statements is provided in the AccountsDirection Handbook on the AoC website.1.6The college’s two-year financial plan should be an integral part of itsown strategic and development plans, as it expresses in financial termsthe cost of implementing those plans and shows the income,expenditure and cash-flows associated with projected levels of activity.Version 1 June 20153
The financial plan is intended to help each college’s governing bodyand funding body to assess the financial effect of a college’s strategicand development plans. It is important to include in the financial planthe costs of implementing the college’s approved property strategy forthe plan period.Information requested in July each year1.7Colleges must return one copy of the documents in Table 1 to theappropriate funding body no later than 31 July.Table 1: Summary of information requested by 31 JulyGeneralFEcollegesSixthformcollegesSubmission to:Financial plans Two-year financialplan electronic(Excel) version Electronic (Word)commentary Scanned copy of thefront sheet of thefinancial plan Two-year financialplan electronic(Excel) version Electronic (Word)commentary Scanned copy of thefront sheet of thefinancial plan SFA at:pfm@sfa.bis.gov.uk EFA ges must only send electronic versions of documents to therelevant funding body. The funding bodies do not require colleges toreturn hard (paper) copies.1.8Where colleges are planning to merge after the deadline for the receiptof financial plans, then all parties must still submit a copy of their twoyear financial plan. If the merger is occurring before, or on 31July, thenthe appropriate funding body should only receive a copy of the mergedcollege’s financial plan by the required deadline of 31 July.Version 1 June 20154
1.9Where a college is developing a strategic recovery plan and cannotprovide a reliable two-year financial plan at 31 July, then it may seekconsent from the appropriate funding body to provide a one-yearfinancial plan (showing the expected out-turn for the current year andthe budget for the forthcoming year). The college must submit thisshortened financial plan to the appropriate funding body by therequired deadline of 31 July.1.10Colleges that need further clarification should contact the appropriatefunding body at the earliest opportunity.1.11The financial planning template is available to download from either ofthe following websites: GOV.UK and AoC.1.12Neither of the funding bodies is in a position to provide guidance in thisHandbook on assumptions to use in the financial plans. The AoC mayseparately suggest possible approaches, but colleges will make theirown decisions as to the most realistic assumptions.1.13Colleges will also wish to consider their financial plans on a worst-casescenario basis. The worst-case scenario may be considered as part ofa sensitivity analysis or a separate financial plan. The sensitivityanalysis may also address more favourable outcomes than thoseincluded in the financial plan, where appropriate. The college’ssensitivity analysis is expected to form an integral part of the college’srisk management plan.Commentary to the plan1.14The commentary to the financial plan is an important component of thereturn and should demonstrate clearly how the financial plan isconsistent with the college’s own strategic plans. A suggested checklistfor colleges is attached as Annex 1 to this Handbook.Benchmarking1.15The relevant funding body publishes a spreadsheet each yearcontaining data from the vast majority of college finance records. AVersion 1 June 20155
copy of the latest financial year’s data is available to download fromGOV.UK.Financial plan template1.16We have made no significant changes to either the structure or contentof this year’s template. However, the funding bodies are committed tofurther improving the financial plan template for subsequent years toensure that, as far as possible, it continues to be simplified and madeeasier to use.1.17Colleges must complete the financial plan template for the followingreasons:acapital project applicationscreorganisations, such as college mergersdrecovery plansethe financial consequences of the college’s strategic anddevelopment plan (submission date 31 July each year).1.18If colleges need to complete more than three years in the financialplan, then they should ‘unhide’ the respective columns in eachworksheet.1.19The templates are available on the websites listed at paragraph 1.11above as Excel workbooks. Colleges should submit completed plans inline with the table at paragraph 1.7 above.1.20For further information, please email the appropriate funding body: SFA: pfm@sfa.bis.gov.uk EFA: l’s statement in the financial plan1.21The college’s accounting officer should sign the Principal’s Statementto confirm that the college’s corporation has approved the financialplans and that the plans support the college’s strategic plan.Version 1 June 20156
Financial plan1.22The financial plans are used for a number of purposes. The fundingbodies expect colleges to use the plan for internal planning andmonitoring purposes, and review each plan alongside the associateddata. This helps them to form an opinion on the financial health of thecollege and to determine whether there are issues to be raised withthem.1.23The funding bodies aggregate all financial plans to give a summarisedview of the financial health of the sector. The information also providesa basis for advice to the Secretaries of State for Business, Innovationand Skills (BIS) and the Department for Education (DfE). Aggregatedata are also used to respond to queries from colleges andgovernment.1.24Therefore, it is important that a college’s financial plan presents arealistic view of its position so that the appropriate funding body andgovernment department obtains a realistic picture of the financialhealth of the college and sector.Risk management and disaster management plans1.25The CFDG published a good practice guide to risk management withinthe further education sector in 2011. This should help colleges todemonstrate compliance with the UK Corporate Governance Code orthe English College’s Foundation Code of Governance.1.26Colleges are not required to submit copies of their risk managementand disaster management plans with their two-year financial plan, butthey are still expected to update these documents regularly.1.27Where a college is submitting a capital project, recovery plan orundertaking a reorganisation, the funding bodies reserve the right toask for a copy of the college’s risk management plan.Version 1 June 20157
Resubmission of plan1.28If the college’s circumstances have significantly deteriorated since thesubmission of the financial plan (for example, if the actual out-turn forthe year to 31 July 2015 was significantly different from the assumptionin the plan), then they may be required to resubmit their plan. Collegesthat are required to resubmit their plans will be advised by theappropriate funding body.Requirement to notify the responsible funding body1.29The college should notify the appropriate funding body in writing if atany time there is a significant deterioration in its financial position.Version 1 June 20158
2 Monitoring the financial health ofcollegesBackground2.1The funding bodies monitor the financial health of the providers thatthey fund. This includes assessing colleges’ financial health tounderstand the degree of risk they may represent if they do not havethe financial resources to continue operating.2.2When a college ceases to operate, or there is a significant deteriorationin its financial position, the funding bodies face the risks of:a. learners suffering when their learning provision is disrupted orterminatedb. being unable to recover any funds owed to them by the college(for example, funds paid on profile in excess of learning providedat the time learning ceases).2.3Both risks, which may be present simultaneously, could compromisethe appropriate funding body’s statutory responsibility to ensure properand reasonable provision of facilities for post-16 learning. To reducethese risks, the appropriate funding body gathers assurance that thecollege has the necessary financial resources to:a. remain able to operate throughout the life of its fundingagreementsb. fully discharge its obligations under those funding agreements.2.4The two key financial documents used to gather this assurance are thecollege’s financial plan and the college’s financial statements. Theguidance and submission requirements for the financial plan areprovided in this Handbook, while the guidance on the completion of thefinancial statements is provided in the Accounts Direction Handbook.Version 1 June 20159
Financial plan2.5The financial plan is intended to help each college’s governing body,and the appropriate funding body, to assess the financial effect of acollege’s strategic plans.2.6Colleges must approve a budget before the start of the academic year(1 August). Colleges are also required to include this budget as the firstyear in their financial plans.Financial health assessment2.7The funding bodies’ approach to grading the financial health of collegesis incorporated into the college financial returns.2.8The financial health grading system will remain unchanged for theacademic year 2014 to 2015. However, as discussed with the AoC andCFDG, the funding bodies intend to consult on proposed amendmentsto the financial health system with the objective on introducing it in thefinancial returns for the academic year 2015 to 2016. The aims of thosechanges would be to reflect the accounting changes introduced by therevised FE and HE Statement of Recommended Practice and to betterreflect the financial health of colleges, especially the level of borrowing.2.9Under the existing financial health grading system a college’s financialhealth is assessed according to one of four grades: outstanding, good,satisfactory or inadequate.2.10Where ta college’s financial health is graded as ‘inadequate’ for theprevious year (forecast or actual out-turn) or the current year (budget),this will form the basis for issuing a Financial Notice of Concern or aFinancial Notice to Improve, in accordance with the guidance publishedby the relevant funding body.Version 1 June 201510
2.11One objective of the approach is that the automatically calculatedhealth grade (autoscore) should require moderation in relatively fewinstances.2.12The moderation and validation process in relation to financial healthassessments requires the appropriate funding body to review andconfirm colleges’ financial health grades based on each financialreturn.Grade definitions and scoring2.13The grade definitions under the methodology are summarised below:GradeDefinitionIndicators1OutstandingA provider that has very robustfinances to fulfil its contractualobligations and to respondsuccessfully to opportunities oradverse circumstances.Normally, a provider withexcellent / good indicatorsfor solvency (current ratio),performance (cash-basedoperating surplus/ (deficit) toincome ratio), and gearing(borrowing to net assetsratio).2GoodA provider that has sufficientlyrobust finances to fulfil itscontractual obligations, and torespond successfully to mostopportunities or adversecircumstances.Normally, a provider with atleast two good indicators forsolvency, performance andgearing.3SatisfactoryA provider that appears tohave sufficient resources tofulfil its contractual obligations,but also appears likely to havelimited capacity to respondsuccessfully to opportunities oradverse circumstances.Normally, a provider with atleast two satisfactoryindicators for solvency,performance and gearing.4InadequateA provider that is in financialdifficulty and very likely to bedependent on the goodwill ofothers. There is a significantrisk of providers in this groupnot being able to fulfilcontractual obligationsbecause of weak financialhealth.Normally, a provider with atleast two inadequateindicators for solvency,performance and gearing.Version 1 June 201511
2.142.15The table below sets out the scoring for each of the three ratios:ScoreAdjusted currentratioCash-basedoperating surplus/(deficit) as a % ofincomeBorrowing as a %of net assets0 0.5 0 / 90 or negative10 / 0.5 / 0 9020 / 0.6 / 1 8030 / 0.7 / 2 7040 / 0.8 / 3 6050 / 1.0 / 4 5060 / 1.2 / 5 4070 / 1.4 / 6 3080 / 1.6 / 7 2090 / 1.8 / 8 10100 / 2.0 / 90The adjusted current ratio excludes restricted cash from disposal offixed assets held for future reinvestment AND assets held for resale(that is, those previously transferred from fixed to current assets).2.16The cash-based operating surplus figure is calculated as operatingsurplus plus depreciation less associated capital grant releases,exceptional support and pension finance income plus FRS 17 (staffcosts) adjustment.2.17The three scores above are then totalled and the financial health gradeis calculated as follows:PointsGrade240 - 300Outstanding180 - 230Good120 - 170Satisfactory / 110InadequateVersion 1 June 201512
Underlying financial health2.18For the financial plan, the financial health grade for each year is initiallycalculated and subject to moderation where appropriate. An underlyingfinancial health grade is then be assessed based on the points scoredand the grades for the immediate past and current years. Thisunderlying grade may be updated subsequently based on the auditedfinancial statements or other new information, until the next financialplan return.2.19Colleges should direct any queries about the approach on financialhealth assessment to the relevant funding body in the first instance.Moderation criteria2.20The financial health grades based on auto scores in colleges’ financialplan and finance record returns can only be moderated in accordancewith the criteria set out below.2.21Where a college scores zero points for one of the three ratios then itcan be graded no better than satisfactory. For the academic year 2014to 2015 this moderation is automatically included in the calculationswithin the financial plan template.2.22Capital projectsFor colleges undertaking a significant capital project (greater than thelower of 5 million or 25 per cent of income) with an autoscore of‘inadequate’ at their 31 July year-end that lies within the capital projectlifecycle. The capital project lifecycle is defined as the date the projectstarted to the financial year in which either the project ends or the finalgrant payment is made by the relevant funding body. The financialhealth grade may be uplifted to ‘satisfactory’ rather than using theautoscore of ‘inadequate’, provided that:Version 1 June 201513
a. The college is graded outstanding, good, or satisfactory at thetime of the detailed project approval.b. It will return to a grade of at least satisfactory by the year followingeither project completion or the final grant payment by the relevantfunding body.c. It performs at least as well (in the opinion of the relevant fundingbody) as forecast in the project proposal during the interveningyears. However, if a college performs less well than it forecastthen the funding body will reflect this in its assessment.This will ensure that colleges which are undertaking a significant capitalproject but which are otherwise financially sound, do not come intoscope automatically for a Notice of Concern for Financial Health orFinancial Notice to Improve in respect of their financial health.2.23Professional fees associated with capital projectsWhere a college has incurred significant professional fees, which couldnot be capitalised, in relation to a capital project development, then itmay make a case seeking moderation (to one grade higher or onegrade lower).2.24Staff restructuringWhere a college incurs significant staff restructuring costs in a singleyear (‘significant’ defined as more than 5 per cent of staff costs), then itmay make a case seeking moderation (to one grade higher or onegrade lower).2.25 Exceptional financial support / advances of fundingThe funding bodies or the Department for Business, Innovation andSkills may provide exceptional financial support / advances of funding toprotect the continuity of provision for learners in cases of financialdistress. Where a college is in receipt of such financial support at theVersion 1 June 201514
financial year-end, this would normally lead to an ‘inadequate’ grade forfinancial health being reported for that year.2.26 Cash generationWhere the cash being generated year-on-year is more than sufficient toenable a college to meet its net current liabilities, then this may lead toan autoscore of ‘inadequate’ being moderated to ‘satisfactory’.2.27 OtherWhere information other than the latest available audited financialstatements or financial plan, supported by factual evidence, indicatesthat the financial health is significantly different from the autoscore.‘Significantly’ would here be defined as sufficiently different to generatean autoscore at least one grade lower. Examples might include (butwould not be limited to):a. a court ruling which has financial consequencesb. the loss or significant reduction of a material contract or area ofprovisionc. a significant recovery of funds following a funding audit orinvestigationd. a contingent liability c
2.4 The two key financial documents used to gather this assurance are the college’s financial plan and the college’s financial statements. The guidance and submission requirements for the financial plan are provided in this Handbook, while the guidance on the completion of the financial statements is prov
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