Financial Strength
Operating Performance Education Specific EBITDA as a % of Income
The education specific EBITDA as a percentage of income is a measure of the underlying operating strength of the College. The higher the percentage measure, the stronger the operational performance. A measure of 8% and above is recognised the benchmark by the FEC.
The investment made by the College in our Dudley and Brierley Hill Learning Quarters resulted in growth in learner numbers and income. Historically, this enabled the College to deliver a sector leading operating performance, despite the challenging financial environment faced by the FE sector. The College however has not been immune to the financial issues experienced by the sector, and due to the lagged funding methodology, the growth in 16-18 students has required immediate cost outlay with the corresponding increase in income not being received until the following academic year. The annual impact of this has resulted in a depressed EBITDA up to and including 2020/21.
Covid-19 has had a significant impact on the College, with Apprenticeship and commercial provision particularly severely hit, leading to large decreases in income in those areas. The College has taken action in 2020/21 to re-align its future costs with its reduced post Covid income levels, and as a result EBITDA is slightly higher than forecast. EBITDA is forecast to increase from 2021/22 as a percentage of income to around the benchmark of 8.
Total Income
Total Income (£m)
Total College income has grown steadily year on year up to 2019/20. The growth has principally been in the core 16–18-year-old ESFA income and Apprenticeships , although adult and other income has continued to rise every year too following the strategic capital investment undertaken over recent years. This growth in income reverses the general trend experienced elsewhere in the sector.
Income reached £49.3m in 2019/20, an increase of £5.3m on 2018/19 as a result of the transfer of assets and operations from BMet in August 2019 as well as from the strong and growing Apprenticeship provision and learner numbers.
As a result of the pandemic income fell in 2020/21 by £3m mainly in commercial, Apprenticeship and adult delivery areas, where Covid-19 has resulted in significantly lower learner numbers. However the College estimates that income will increase by £2.5m in 2021/22, virtually regaining the lost income caused by the pandemic. Initial signs of economic growth are positive and Apprenticeship recruitment is particularly buoyant.
Staff Cost as a % of Income
Annual inflationary pay pressures, additional employer National Insurance contributions, pension cost rises and the recruitment of staff to meet growing 16-18 student numbers with a subsequent delay in funding, have increased the College’s staff costs year on year. Funding rates have not kept pace with the rate of increase of costs, particularly in pay. This has resulted in the College’s staff costs rising above the FE Commissioner’s benchmark of pay costs as a 65% of income.
The impact of Covid-19 significantly reduced income levels in 2020/21, and the College has responded by restructuring its staffing base accordingly. The College has also been mindful of the need to retain staff with specialist skills in order to remain flexible and respond to emerging demand in the adult and Apprenticeship market. Inevitably this has resulted in a higher level of costs, as the pandemic has resulted in a slower reopening of the economy.
Actions taken in 2020/21 to re-align college costs with post Covid income levels will start to see a reduction in pay costs as a percentage of income in 2020/21 and the full effect of these actions will be realised in 2021/22 and ongoing, when pay costs will reduce to around 67% of total income. A robust curriculum planning process to maximise efficient programme delivery leading to higher class sizes and staff utilisation will also help support this measure.
Adjusted Current Ratio
The current ratio is a measure of current assets compared to current liabilities and is used as an indicator of a college’s short-term liquidity. Whilst not a direct measure of cash, the higher the percentage measure, the better a college’s liquidity, which means the more cash, or assets that can be easily converted into cash, a college has got compared to its short-term liabilities. The ESFA ‘good’ benchmark is a current ratio of 1.2, whilst the FEC benchmark is 1.4.
The investment in the Dudley and Brierley Hill Learning Quarters, has stretched the College’s cash and liquidity position and is weaker than it would otherwise have been, because cash generated from the College’s operations has been invested in these capital projects. Although the IoT has been largely funded by the DfE and WMCA, a shortfall in funding has put further pressure on the College’s cash position.
Following the outbreak of Covid-19, the College closely monitored cash balances and only made essential purchases, thereby conserving cash ahead of the low income months between January and March 2021. Cash management will continue to be a very important task going forwards, however, we anticipate that the College’s current ratio is set to be improve over the next few years as the College re-aligns its costs with its reduced income levels post Covid-19 and limits capital expenditure.
Cash Days
Cash days is the number of days that an organisation can continue to pay its operating expenses given its current T-Level of available cash. The FE Commissioner’s benchmark is for colleges to have sufficient cash to cover 25 cash days.
The investment in the Dudley and Brierley Hill Learning Quarters, has stretched the College’s cash reserves and resulted in the College’s cash position being much lower than it otherwise would have been each year. This has meant that historically the College’s cash days measure has been relatively weak and some way below the FE Commissioner’s benchmark.
However, strong cash generation from operating activities supported by a re-structure of our bank loan facilities helped improve the College’s cash days to 20 in 2018-19. Following the outbreak of Covid-19, the College closely managed cash balances and costs, thereby conserving cash for the year ahead. This helped to increase the year-end cash balance and cash days to 42 at 31 July 2021, well above the FE Commissioner benchmark of 25.
Cash management will continue to be imperative going forwards as we navigate through the challenging post Covid period. We anticipate that cash, and cash days, will stabilise as we feel the full effects of the cost reduction actions taken in 2020-21, helped by modest increases in income arising from the need for more training and upskilling to drive the economy forward post Covid. This, along with maintaining a controlled investment approach into future capital and estate maintenance projects, is forecast to increase cash days to 44 by July 2023.
Borrowing as a % of Income
Borrowing as a percentage of income (also known as gearing or leverage) is used to measure the proportion of assets invested in a college that are financed by borrowing. It also provides an indicator to the longer term financial stability of a college, because the higher the level of borrowing, the higher the risk to a college since more cash will have to be set aside to meet debt and interest repayments, leaving less cash for everything else. The lower the percentage measure, the better a college’s gearing and its prospects for long term stability. Colleges with a financial health score of Good are likely to have borrowing at 35% of income or less.
The College’s borrowing has increased over three years after a re-structure of bank loan facilities and to fund the transfer of assets and operations from BMet. However, as income also increased, the College’s level of borrowing remained within the same ESFA scoring category between 35% and 40% of income. The increase seen in 2020/21 is not a result of an increase in borrowing however, it is because income has dropped by £3m and borrowing levels as a percentage of this is therefore higher. With income forecast to increase in 2021/22 and continued repayments of capital, borrowing as a percentage of income is set to reduce, and will fall below the 35% benchmark in 2022/23.
ESFA Financial Health Scores
The College’s financial health grade is assessed by scoring the adjusted current ratio, EBITDA as a percentage of adjusted income and borrowing as a percentage of income. The total scores provide an overall financial health grade, based on a banding structure illustrated in the chart.
Historically, the College has been graded Requires Improvement. The College moved towards the top of the Requires Improvement band following the restructure of its bank facilities, which significantly increased its current ratio score. The severe impacts of Covid-19 on college finances and operations has resulted in a lower score up to 2020/21 but the College remains in the Requires Improvement category. The College has taken action in 2020/21 to re-align its future costs with reduced income levels post Covid, and the full impact on the financial health grade will be seen in 2021/22.
With the operating performance set to improve from 2021/22, a reduction in the level of borrowing and improving liquidity through planned borrowing repayments, the College’s financial health grade is forecast to increase to ‘Good’ in 2022/23.
