Stephanie Mason, Head of Further Education and Skills, RSM

Following the latest education funding statistics from the Institute of Fiscal Studies, it appears that further education and sixth-form funding has been fallen by 8 per cent in real terms since the peak in 2010-11.

In addition, funding for adult education has reduced by 45 per cent since 2009-10 – highlighting severe pressure across areas of the further education sector.

This will not come as a surprise to many FE organisations which are struggling to balance delivery for students, a worsening fiscal position and still trying to achieve challenging sector benchmarks.

These benchmarks, set by government in 2016 include financial indicators and a target range for colleges in strong financial health which are widely used within the sector, despite many regarding the parameters as unachievable.

However, if you look at the data published by the Education and Skills Funding Agency (ESFA) one of the key, and most controversial, measures of surplus/(deficit) as a percentage of income it shows the sector is struggling to deliver on this return.

Many sit way outside of the three to five per cent benchmark with the ratio at 0.3 which is slightly up from 0.1 in 2015-16. Combining ‘weak’ financial health and the continued real term decreases in core funding only serves to make it harder to achieve - presenting a real problem for the FE sector.

The liquidity of colleges (measured using the adjusted current ratio) remained above the one per cent benchmark at 1.18 per cent, a small improvement from 1.11 per cent in 2015-16.

Again, this masks that nearly a third of all colleges were below the benchmark, with one region, the West Midlands, being significantly under the target at an average of 0.69.

In respect of staff costs as a percentage of income (income being adjusted for subcontracted provision), the target range is to be less than 65 per cent, recognising that it will be higher for sixth form colleges.

The sector failed to achieve this, the overall per cent remaining at 67 per cent with a similar outturn in each region. 

The position for all types of colleges remained very consistent year on year too. General further education colleges had the lowest average at 57 per cent, however, there was an enormous range from approximately 40 to over 90 per cent.

Those colleges at the higher end were generally those with a large proportion of subcontracted or partnership provision, which is unlikely to be sustainable as the funding regimes change and tighten.

Loan funded provision can no longer be subcontracted, for 16-18 provision distance subcontracting is being much more closely scrutinised and for apprenticeships the lead provider now has to deliver some of the provision.

We are also seeing more investigations into activity of subcontractors and requests for exceptional financial support linked to subcontracting issues.

With increasing pressure on pay from several angles, including public sector settlements, recent strikes and likely hikes in pension contributions further education colleges are likely to be hard pushed at this stage to reduce staff costs as a percentage of income, whilst also maintaining quality.

Borrowing levels in the sector remain positive against the benchmark, with the average borrowing as a percentage of income showing a slight fall from 26 to 24 per cent, well below the 40 per cent target.

Although this is encouraging on the face of it, the developments in the sector continue to impact on the appetite of lenders and hence colleges may find it harder to raise finance in future. It could, therefore, be argued that further decreases could be a concern for the sector.

Whilst the sector has been through significant change over the last few years and many of the potential benefits of consolidation may not yet be showing through, the benchmarking and funding data shows a sector which continues to struggle to improve its financial position.

With the impending insolvency regime and removal of exceptional financial support, there is an increasing risk for colleges that are unable to meet their debts as they fall due, which could lead to further consolidation in the market.

Although, the further education sector has proved itself to be resilient for over 25 years the context of factors including real term reductions in core funding, continuing demographic downturn, a developing apprenticeship regime and significant pay pressures, all suggests that the next few years may be more challenging and critical than ever.

Stephanie Mason, Head of Further Education and Skills, RSM

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