Using accounting principles to improve school financial management

The launch in 2006 of the Financial Management Standard in Schools (FMSiS) can be seen as part of a drive towards the professionalisation of school financial management. The introduction of local management of schools in the early 1990s gave governors and headteachers significantly increased control over financial and other assets. However, there has not historically been a requirement for headteachers or the staff (such as bursars) who offer financial support to have any formal financial management training. Whereas local authorities and the National Health Service have a tradition of appointing and training qualified accountants, school financial management staff have often reached their roles by progressing through a range of administrative functions. This does not mean, of course, that those staff are not extremely competent or skilled at what they do – simply that many may not have had the formal training which is taken for granted in other areas of the public and private sectors.

In this article, I shall introduce the four key ‘accounting concepts’ upon which much financial management is based and which underpin many of the conventions and procedures of day-to-day accountancy. I shall then consider how these concepts may (or in some cases may not) be applied practically in a school setting. I will end by outlining some of the benefits of professional accountancy training for school finance staff and providing information on the courses of study available.

1.    Prudence
The concept of prudence is vital for responsible and effective accounting, but is nevertheless the one characteristic of accountants and finance management which receives the most criticism and negative press. In a nutshell, the necessity for prudence means that in our work – whether we are assessing a proposed project, anticipating income or compiling an annual budget – we need to assume an outcome which errs on the side of caution rather than be optimistic and hope for the best. Ultimately, the application of prudence will always be a judgement call. If we are preparing a spending plan for the coming financial year and we know there are a number of staff vacancies which won’t be filled before the plan is complete, an extremely prudent accountant would estimate costs for those staff at upper pay spine 3. However, we need to bear in mind that the approach taken by many (often naturally optimistic) headteachers would be to estimate vacancies at M1 on the basis that a significant number of new staff may well be NQTs. In this instance, an acceptable compromise would be to estimate that new staff will be recruited at M6 on the pay spine.

The main principle of the prudent approach is that it is always better to find oneself with more money than expected than to end up with less. Other examples of prudence would therefore include:

• Creating contingencies for project expenditure, especially larger buildings developments where it is likely that the project may overrun, that unforeseen problems such as asbestos may be discovered or even that the school’s original requirements may change.
• Not anticipating income unless it is almost guaranteed – eg including only confirmed bookings in projections for a ‘lettings’ income budget rather than anticipating additional bookings in-year.
• Assuming that all staff will receive performance-related pay increases (either going through the threshold or progressing on the upper pay spine) at the earliest time possible.

It may of course be difficult to ‘sell’ the concept of prudence to a headteacher who is keen to make changes in school and who may view finance as a barrier to success rather than as a tool to achieve it. However, the concept exists for a reason – to ensure that organisations do not face financial disaster as a result of over-optimistic approach – and you need to make clear that it is your duty, and that of the leadership team and governors, to ensure that a balance is struck between allowing the school to move forward, and considering risks and remaining realistic.

2. Consistency
The consistency concept requires organisations to apply the same methods to particular aspects of their accounts across financial years. The purpose of this is to ensure that there is comparability between the accounts for different years. Put simply, it means that organisations should not chop and change their accounting and reporting methods and – if they do – they should make it very clear what they have done and why.

In the case of schools, the government has extended this concept through Consistent Financial Reporting (CFR) procedures to ensure that there is comparability between as well as within individual schools. CFR reporting requires schools to summarise their expenditure under a number of nationally set headings. The mechanism for this is through general ledger expenditure codes which ‘report into’ particular CFR codes. For the school, this means that it is important that all expenditure is allocated to the correct ledger code, and the links between your ledger codes and your CFR reporting function (if you have one) are correct.
In some local authorities, CFR returns will be produced centrally, while in others there will be detailed guidance for schools on which codes should report into which CFR categories. Either way, it is important that you are aware of the codes to ensure that you are coding expenditure correctly, especially as CFR information is publicly available and is used by schools for benchmarking purposes.

Consistency is important for internal as well as statutory external financial reporting. Information on financial performance provided to governors or other stakeholders should be easily comparable to information provided in different periods or years. While the allocation of expenditure to cost centres may not be relevant in CFR terms (as only ledger codes are used), if you report regularly at cost centre level it is important to maintain a consistency of approach. If you normally code your cleaning staff costs to a ‘running costs’ cost centre, for example, then if you decide in a particular financial year to code them to ‘support staff’ instead you should state clearly in any notes to the financial reports that this change has taken place, and ideally provide a ‘like for like’ comparison to the previous financial year or period.

3. Accruals
The main tenet of the accruals concept is that income and expenditure should be recognised at the point at which liability for goods and services is incurred, irrespective of when cash may actually change hands. In the case of orders to suppliers, liability is incurred when the goods are delivered. In the case of services, liability is incurred as the services are used, not when they are invoiced. Thus, under accruals accounting, year-end income and expenditure figures should take account of the following, even if bills have not yet been received:

• Orders delivered to the premises up to and including 31 March.
• Gas, electricity and water used to 31 March.
• Repairs and maintenance work undertaken up to 31 March.
• Income due to the school for services already supplied (eg lettings) up to 31 March.
• Any other services used (eg supply teachers) up to 31 March.

In the case of orders, income due and some maintenance work, the actual figures to be included should be known exactly. In the case of services and other maintenance work, you will need to calculate a best estimate based on the information you have to hand. For example, in the case of electricity bills, you could compare each month’s charges in the current year for which you have received bills to those received for the same periods in the previous financial year. You could then calculate an average percentage increase across the year and estimate the outstanding bills based on last year’s charges for the same period, plus the average percentage increase.

The accounting entries required to make accruals in the accounts involve the use of reversing journals. These are journals which will debit a cost centre and ledger code and credit an ‘accruals’ code (effectively a liability account) in the month of March. They will then automatically reverse out in the first month of the new financial year, creating a credit balance on the account which will then be wiped out when the actual bill is paid in the new year. If your estimate was spot-on, then the net effect of this transaction on the accounts in the new financial year will of course be zero (as the charge has already been accounted for in the ‘old’ year through the accrual). If there is a difference between the estimate and the actual bill, then the effect of the balance will be borne in the new year.

The accruals concept can also be applied to goods and services paid for in advance but not yet consumed, and this practice is known as a ‘prepayment’. For example, if you have paid an insurance premium on 1 December 2007 which covers a whole calendar year, then you can decide only to account for the payment (four twelfths) relating to December to March in the 2007-08 financial year. The remaining eight twelfths can then be charged to the 2008-09 year. The accounting entries for this will involve crediting the cost centre and ledger code used for insurance charges and debiting a prepayments (current asset) account.

Most ledger systems, including SIMS FMS, will include the capacity for accruals accounting – ie the option to create accruals/prepayments ledger code and to implement reversing journals. However, whether you use the function or not is ultimately up to you, the headteacher and the governing body. Whereas accruals accounting is a necessity for commercial businesses, and is employed as a matter of course in larger public sector organisations which have their own balance sheets (eg hospitals), many local authorities do not require schools to implement accruals at year-end. Because of the perceived complexity and administrative burden of the process, and the fact that schools have historically not employed accounting professionals, many local authorities are happy for schools to simply report the year’s cash expenditure irrespective of the actual periods it relates to. After all, if each financial year running from March to April actually reports on gas and electricity charges for the period January to December, 12 months’ worth of expenses will still be included. As an accountant, I am not entirely comfortable with that methodology, but if it is perfectly acceptable to your local authority, then there is no reason why a school cannot employ it.
If you do decide to switch to an accruals basis for your year-end reporting, then you should:

• ensure that it is acceptable with your local authority
• explain the proposed change to governors and its relationship to accounting principles. Request their confirmation that the change is acceptable
• allow for increased recorded expenditure in the year of changeover: in the example referred to above, you would end up with 14 months’ worth of gas and electricity accounted for in one year as you will have the full 12 months normally charged plus two months accrued to cover the period to 31 March.
• ensure that the change is explained in any notes to the published accounts – this is of course a requirement in terms of consistency.

Whether or not your school decides to use accruals at the end of the financial year, the concept is a useful one to bear in mind when preparing regular in-year financial reports to internal users such as the leadership team and the governing body. If you are reporting on financial performance to the end of November 2007, for example, then it would give a clearer and more accurate picture of the position if that report could include estimates for liabilities incurred to date but not yet paid out in cash. For example, there could have been a run of teaching staff absence in November, leading to increases in the use of supply agencies. While the invoices may not yet have come in, the services have been received and liability has been incurred. In order to report an accurate financial position, then, you should include an estimate for the cost of supply teaching up to 30 November based on information you can gather within school – eg the number of supply teachers booked in November (details should be available from your school’s cover administrator) multiplied by the average daily rate for agency staff.

Accruals for in-year financial reporting can be entered formally onto the accounting system via a monthly reversing journal and thus included in any trial balance used as the basis for financial reporting. Alternatively, if you (or your headteacher/governors) prefer to have only actual cash payments recorded on the general ledger, then you could include an additional column in financial reports. This would enable you to provide up-to-date figures which take as much into account as possible but which do not require you to enter reversing journals onto your system which will take time and lead to sometimes confusing entries on transaction prints.

4. Going concern
This last of the four key accounting concepts requires financial statements to be prepared on the basis that the organisation in question will continue in operational existence for the foreseeable future. While this is relevant to the compiling of accounts for commercial organisations – in the methodology applied to the valuation of fixed assets, for example – it has no day-to-day implications for the preparation of school financial statements and there is no purpose in discussing it any further here.

Professional accountancy
As I mentioned at the beginning of this article, most state schools do not have a history of training or recruiting accountancy professionals. As schools have taken on more and more responsibility for their own finances, the role of the bursar or business manager has grown organically, often developing from administrative roles within the organisation. The overall financial control of the local authority, and the absence of any requirement for balance sheet accounting, has meant that many of the technicalities of the profession required in industry and other areas of the public sector have had no practical application in a school setting.

Nevertheless, as school financial independence grows and as the role of the business manager continues to develop, professional accountancy qualifications are becoming more and more relevant. The Certificate in School Business Management goes some way towards equipping school staff for the challenges of the emerging role, but it is extremely sector-specific and does not cover theoretical accounting principles in any depth. Furthermore, many of the new academies are advertising finance director posts and specifying that applicants should be qualified accountants. Also, many school business managers may be frustrated by the lack of progression from their roles within school, may well look to develop their careers beyond the state education sector – and often, formal accountancy training will be a prerequisite for candidacy for financial management roles elsewhere. Equally, there is no doubt that a knowledge of the principles and methodologies of accountancy can contribute significantly to a business manager’s ability to understand and function in their day-to-day role. Finally, the introduction of accountancy as a profession into schools can represent another step towards raising the profile of business managers and associated roles towards achieving the status that similar roles enjoy in other sectors of the economy.

Available qualifications
There are four professional accountancy bodies in England and Wales, all of which are members of the Consultative Committee of Accountancy Bodies (CCAB), and with all of whom you can qualify as an accountant. You will need to demonstrate that you are working in a relevant role, and that you have access to support and mentoring from an appropriately qualified person (this function could be fulfilled by a member of your LA finance team, many of whom will have completed or be working towards an accountancy qualification). While all courses will cover much of the same ground in terms of theory, principles, methodology etc, the CIPFA qualification, with its focus on the public sector, is arguably the most relevant.

The four professional bodies are:

• The Association of Chartered Certified Accountants (ACCA)
  
• The Institute of Chartered Accountants in England and Wales (ICAEW)
  
• The Chartered Institute of Management Accountants (CIMA) 
  
• The Chartered Institute of Public Finance and Accountancy (CIPFA)
  

Ruth is assistant headteacher (director of school and extended services) at Ribblesdale School in Clitheroe, Lancashire