Lindsey Wharmby puts cost prediction and risk assessment under the spotlight

Over the past few years, the government has been keen to help schools improve their medium term financial planning. It is proposing to provide more stability in school funding and to align the funding and academic years for schools. In return, schools should be developing 3-5 year strategic financial plans.

Looking into the future requires making assumptions. Monitoring the plan requires matching reality against these assumptions and making necessary amendments as more information becomes available or circumstances change. Planning for the future requires you to take some risks and part of the planning is a risk assessment; what is the likelihood of your assumptions being wrong and what is the financial penalty if you are wrong?

Predicting income over 3-5 years
School income comes in three bites:

1. The School Budget Share from your LEA covers the majority of your budget for all pupils from 3-16 (include your LSC grant for post 16 students if you have them). This is your core budget.
2. Standards Funds and Grants are funds from the government to support specific initiatives and strategies. These grants include the general School Improvement Grant as well as school specific grants such as those to specialist schools. These grants may be for a clearly defined time or attached to a very specific plan and targets. A wise governing body is aware of how the money for all grants is being spent and what will happen when the grant ends.
3. Other income could include income from lettings or contributions from parents and so on. It is rarely a substantial proportion of the whole.

The School Budget Share is allocated to the school using the local formula. Your LEA will be able to provide the details of your formula and you make a decision as to how accurately you need to calculate your future budget. At the simplest level, start by finding the amount coming from the Age Weighted Pupil Units (AWPU) and see how this will change over the coming years. In a secondary school this will give you about 80% of your predicted SBS. In a very small primary school, most of the budget share could be in the lump sum.

Below is an example of how to build up a spreadsheet to predict income from the pupil numbers over the next five years for an 11-16 secondary school.

Predicting pupil numbers

Year group Pupils 2005 Pupils 2006 Pupils 2007 Pupils 2008 Pupils 2009
7 162 160 150 145 145
8 180 162 160 150 145
9 180 180 162 160 150
10 180 180 180 162 160
11 180 180 180 180 162

The pupil numbers are counted in January 2005. As you can see, numbers in Year 7 are falling. Only 162 joined Year 7 in September 2004 (counted in January 2005) whereas there are 180 in the year above (Year 8 in January 2005 were Year 7 in January 2004).

You now predict forward to January 2006 and beyond. The feeder primary schools can tell you their numbers over the next six years. Primary schools will have more difficulty here and will need to depend on local demographic data provided by the LEA. In our example, the small Year 7 will be in Year 8 by January 2006 and the larger Year 8 of January 2005 will now be in Year 9.

In this simple model we have assumed that pupils who start in Year 7 will continue through the school until Year 11. In reality there will be movements in and out of the school all the time. In most schools these just about balance but you need to look at your numbers over the past few years to see if there is any identifiable pattern to the comings and going.

We can now put in the best data we have for our imaginary school. Remember that for all years after 2005, we are making some assumptions, albeit based on the best information we have.

Your strategic plan has to cope with these falling rolls. This secondary school was organised into six classes of 30 in Year 7. The timetable was arranged in two blocks with three tutor groups in each half and four teaching groups in each half for the practical subjects. In Year 7 in 2005 there are only 162 pupils, so there are still six classes, but now with an average of 27 pupils and, in the practical classes, only 20-21 pupils. The teachers may be pleased, but the financial situation is tricky.

By September 2007 the predicted numbers in Year 7 have fallen to 150 (as shown in the January 2006 count). You could arrange the classes into five groups of 30 but when you divide again into two halves for the timetable it is not as easy to get the practical groups balanced. You may want to make a change to your timetable plan to make this work. In a primary school this is even more difficult. You may need to look at reorganising classes and having mixed age groups or other strategies to cope with ‘uneconomic’ year groups.

Your curriculum plan in the School Improvement Plan has to take into account these kinds of changes as well as the more interesting ones of expansion and new courses.

To convert this spreadsheet to help with financial planning you multiply the number in each year group by the AWPU for that year. In most LEAs the formula uses a mixture of actual numbers in January 2005 and predicted numbers for September 2006 so you need to make the same calculation of 5/12 actual and 7/12 predicted in the spreadsheet. A competent bursar or local finance officer can help if necessary.

In looking forward, the easiest assumption to make is that the AWPU will stay the same over the five years. Later, when you look at costs, you can make the assumption that there is no inflation (or salary increases). The assumption you are making is that any increases in inflation will be met with increases in AWPU – the risk you are taking is that this will not be the case! You are also making the assumption that the other elements in the formula, the lump sum part, will not change.

The other significant element to your income is the money received through Standards Funds. It is wise to ensure you know how this is spent so that if a part of it is changed you know what you have to do. Some standards grants, for example the specialist schools grant, require quite separate plans.

Predicting expenditure
The simple model of a five year plan looks only at staffing because, just as AWPU are around 80% of your income, so staffing is about 80% of your expenditure. Now is the time to do a root and branch review of your staffing needs, looking not only at the use of support staff but also how teachers’ management roles can be focused on improving teaching and learning.

First of all start with a clear picture of where you are. The table below is a very simple model for teaching staff that at least allows you to cope with incremental drift over the next five years. Remember that you need to calculate the contributions from two different salaries across the financial year just as the pupil number calculation had to have the 5/12 and 7/12 split included.

Predicting staffing costs

Name Sep 2004 main scale point Salary + on costs for April – August 2005 Sep 2005 main scale point Salary + on costs for April – August 2005 Cost for financial year 2005-06
Teacher A M1 5/12 of (18,558+4,640)
or £9,665
M2 7/12 of (20,025+5,006)
or £14,001
9,665+14,601=£24,226
Teacher B M3 5/12 of (21,636+5,409)
or £11,269
M4 7/12 of (23,301+5,825)
or £16,990
£28,259
Teacher C M6 (1st year) £14,126 M6 £19,777 £33,903
Teacher D M6 (2nd year) £14,126 M6+UPS 1 £21,427 £35,553
Teacher E M6+UPS 1
(1st year)
£15,305 M6+UPS 1 £21,427 £36,732
Teacher F M6+MA3+UPS 2 (2nd year) £18,834 M6+MA3+UPS 3 £27,191 £46,205

Again there are plenty of assumptions once you move the model forwards. In this simple model, on costs are assumed to be 25% for all salaries and all staff are assumed to move automatically through the main scale and up the upper pay spine so at least it should not be an underestimate. Whilst there is a grant contribution towards upper pay spine costs, this should be deducted from the final salary estimate. The assumption that there will be no changes to the salary scale is there to balance the earlier assumption of no increases in AWPU over the period.

The school should have a similar spreadsheet for support staff.  As and when information about changes to staff pay or pensions becomes available, the model can be updated. Now at least you know the likely changes in staffing budget even if you make no further changes to the structure over the next five years.

Managing change
Schools are going to have to work through, as part of workforce remodelling, changes to their support staff and to management allowances for teachers. There will also be the usual changes to staffing balance each year caused by staff retiring or leaving and changes to the curriculum.

In the examples used earlier to look at pupil number changes, the secondary school would need to think through the implications to staffing of reducing from six forms to five forms.

The school management team can compile all the basic management information and prepare the spreadsheets to cost existing staff and any models or changes proposed. The responsibility of the governors is to weigh the proposed changes against the overall aims of the school and to make the strategic decisions on the way forward.

If you are facing falling rolls because parents are choosing to send their children elsewhere, what strategies are you going to use to attract more pupils? If you are facing falling rolls because of demographic changes, how can you maintain and improve your curriculum in a smaller school? If you want to introduce a new course at key stage 4, what are the costs and what are the risks and does it fit into the school’s aims and other plans? What strategies do you have for managing changes to staffing, including retraining, voluntary changes to contracts and use of part time contracts? All these issues touch the core ethos of the school and how it values its most important resource, its staff.

This is just an introduction to a simple model for a strategic financial plan. More information and help can be obtained from the NCSL website (search for Financial Management in Schools). This extensive website provides a reference library, links to other websites, sources of support and much more.

The steps to medium term financial planning

1. Establish where you are and where you want to go in the curriculum, changes to teaching and learning and the development of resources and the site in the medium term — this is the School Improvement Plan.
2. Predict major changes to your income over the same period.
3. Cost the planned improvements so that you can predict expenditure over the same period.
4. Look at the risks inherent in your assumptions and choose a level of risk that you are happy with.

Lindsey Wharmby was, until recently, a headteacher in Leeds. She is now the Secondary Heads Association’s Funding Consultant, working on national and local funding issues and supporting schools in financial planning

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