Date updated: Thursday 27th February 2020

Over the past year we have seen an increase in financial distress work for academies and, as a result, undertaken more preventative compliance-based work with the sector to help avoid financial distress.

Of course, trustees must always be mindful of the implications of insolvency law which applies to academy trusts, and their Companies Act duties.

There are growing concerns about increases in costs and the tightening of the public purse, particularly with staffing costs, and further cost increases are being phased in over the next two years.

Senior Leadership Teams (SLTs) must ensure trustees to receive timely, well-presented financial information, and also provide the appropriate level of challenge.

They must also be very aware of the risks associated with relying on academy reserves in order to stay afloat. 

Trustees must be aware of the insolvency regime and what it means for them – insolvency law applies to academy trusts and the Insolvency Act 1986 defines the circumstances in which an academy trust will be deemed insolvent.

Broadly speaking, an academy trust is deemed insolvent if it is unable to pay its debts as they fall due (Cash Flow Test) or where the value of the academy trust’s assets is less than its liabilities (Balance Sheet Test). Trustees should keep both tests, as well as other similar indicators, under review.

Sufficient governance and financial training should enable trustees to provide appropriate challenge to the SLT and to be aware of the warning signs.

Practical tips for trustees

  1. Finances: Keep an eye on monthly cash flow – it is just as important as the year-end position. This information can be requested from the SLT.
  2. Engage with the ESFA early on if your trust has financial concerns – if they are approached too late the options may have diminished.
  3. SRMA: consider accessing the school resource management self-assessment tool, which will show how the trust’s own data compares against a range of performance measures.
  4. Employment: What is the staffing ratio and are there options to reduce expenditure?
  5. Procurement: are you getting value for money and are your contracts proportionate to the risk? Can you collaborate with other academy trusts to save time and money?
  6. Income: can income be generated from other sources?
  7. Demographics and Competition – knowledge is key to financial planning.
  8. Policy: keep abreast of policy developments, for example -the new trust capacity growth fund.
  9. Training: provide governance and financial training to the board.
  10. Keep accurate financial records: it is important that decisions and challenges are recorded as they may be called upon later.
  11. Board assurance: make sure the risk register is up to date and that risk is being measured and monitored and appropriate controls are in place.
  12. Estate: develop an estates strategy over 5-10 years – plan and budget for future needs and the “what ifs”.
  13. Call in the experts: engage professional advisor to gain professional advice and support at the earliest possible stage if there are concerns about financial viability.