How does the managing of school finances differ from business?

9 Dec

It is not unusual for a governor with an industrial background to seek clarification on how the management of school finances differs from a business.

In brief, a school’s income comes from government – and, where the school is not an academy or free school – via the local education authority.   It is fixed, predicated on the wealth of the nation and reliant on the public taxes. In other words, you and I, who benefit from education, also pay for it.

A business, on the other hand, derives its income from providing goods and services that generate profit.   The better the product is the greater will the income be enabling the business to grow.   The worse the product, the less the income resulting in the company shrinking until it goes to the wall.     Initial success creates the inertia to have future successes.  If nothing succeeds like success, nothing fails like failure.

The budget allocated to a school is based on the total sum of money that the local authority receives from the government.  It is reliant on a formula that would test the mind of Einstein.   Once the local authority receives the funding, it develops a local formula to distribute the finance based on directions it receives from the government.  The main element in the formula is pupil numbers which are age-weighted.   In broad terms, secondary schools receive much more than primary ones.  Older pupils attract greater funding owing to the need to recruit extra staff for the purpose of promoting subject choices.   However, nursery pupils receive more funding than children in Key Stages 1 and 2, because of the need to fund extra care and attention for children who are semi-independent and children with special needs also receive more than the rest.

For the financial year 2014/15, the government was keen to ensure for needy pupils in schools to be given the best possible deal. Accordingly, it allocated an extra £350 million for them.   Also, a minimum funding level was awarded to every school to ensure that losers were appropriately compensated.  Where local authorities received the minimum for them, there was no change.   Where it received less, more money was allocated.

The minimum funding level was calculated based on five characteristics:

(i)            a per pupil amount – age weighted;

(ii)           pupils from deprived backgrounds;

(iii)          pupils who have been looked-after by the local authority;

(iv)         pupils with low attainment before starting at either their primary or secondary schools; and

(v)          pupils who speak English as an additional language (EAL)

In addition, the government used two other school characteristics:

(i)            a minimum funding level for each school on top of its per-pupil funding (a “lump sum”) and

(ii)           a minimum funding level for small schools, which is essential to schools in rural areas (a “sparsity sum”).

The indicative minimum funding levels were as follows.

(i)            A basic per pupil amount – primary: £2,845; key stage 3: £3,951; key stage 4; £4,529

(ii)           Deprivation – between £893 and £1,974

(iii)          Looked-after children – £1,009

(iv)         Low prior attainment – primary: £878; secondary: £1,961

(v)          English as an additional language – primary: £505; secondary: £1,216

(vi)         A lump sum for every school – primary: £117,082; secondary: £128,189

(vii)        Additional sparsity sum for small schools serving rural communities – up to £53,988 – with higher labour costs (i.e. staff salaries).

Local authorities that suffered adversely by the formula were given extra to come up to the minimum level of funding through a formula.

This year, the government also funded the school meals of all Key Stage 1 pupils with a view to promoting healthy living.   This caused many to question the efficacy of this aspect of government policy and whether it was best value for money given that many Key Stage 1 children come from affluent families.

Schools in deprived areas also benefited from receiving extra funding from the Pupil Premium.   This grant is to raise the attainment of disadvantaged pupils from reception to year 11.   In April 2011, the fund was worth £625 million and each school was given £400 extra for every child who was registered as eligible for free school meals or who had been looked-after by the local authority for six months or longer. From April 2012, the government extended the Pupil Premium funding to children eligible for free school meals at any point in the last six years.

For the 2015/16 financial year, funding for the Pupil Premium will be increased to £2.545 billion.  Schools will receive

  • £1,320 per (eligible) pupil of primary-school age (rising from £1,300 this financial year);
  • £935 per (eligible) pupil of secondary-school age; and
  • £1,900 for every pupil who has been looked after for one day or more or has been adopted from care or has left care under a special guardianship order, a residence order or a child arrangement order.

A child who has at least one parent working in the army, navy or air force, will continue to attract an additional £250 for her/his school as part of the Pupil Premium.

This funding must be targeted at the pupils for whom they have been allocated.  Ofsted is holding schools to account for this and wants to see evidence that the gap between the attainment of disadvantaged pupils and their peers is closed. There is now growing evidence that this is occurring.   The percentage of disadvantaged pupils meeting the expected levels in both, reading and mathematics at the end of the primary stage, rose from 62.2% in 2011 to 69.11% in 2013 and the gap between disadvantaged pupils and others narrowed from 18.5% in 2011 to 14.8% in 2013.

Because income is fixed by government, schools fret about how much they are to receive year-on-year.  Where schools manage their finances well, they ensure that they construct their budgets to include contingencies.  For a primary school, this should be no more than 8% of the school budget share; for a secondary school, it should be no more than 5%.

However, before we sign off on the subject, it is worth remembering that in some fundamental ways, managing the finances of a business is similar to that of a school.

For both to succeed the best value principles must apply.  They are based on the four c’s.

  • Comparing: How does the school/business compare with other schools/businesses?
  • Challenging: Is the school’s performance (like the business organisation’s) high enough,and how does one know if not by benchmarking?
  • Competing: How does the school or business secure economic, efficient and effective services
  • Consulting: Does the school seek the views of stakeholders about its services in a similar way to a business through feedback on its performance from its customers?

There is also an expectation that both, the business and school, operate with integrity.   In the private and public sectors, there have been high-profile examples where this has been conspicuous by its absence.  We have seen this with some banks as well as in schools and academies.  In fact, in the latest issue of the Education Funding Agency Financial Handbook published in August 2014 (see here), 13 of the 16 changes have to do with explicit requirements of trustees, governors and managers to operate with integrity.

On 13 November 2014, the National Audit Office produced a report into the EFA’s oversight of related party transactions in Durand Academy Trust.  The report highlights party transactions and conflicts of interests in academies and the EFA’s oversight (and in certain instance, a lack of it).

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