Financial Strength
Operating Performance
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 limited spend on capital projects in 2022 has resulted in an improved cash position and therefore a better current ratio. Cash management will continue to be very important going forward as we balance the College’s liquidity needs against the requirement to repay short term borrowing. We anticipate that the College’s current ratio is set to be improve over the next few years as the College maintains control on costs, limits capital expenditure and has a prudent repayment plan of short term borrowing.
Total Income
Total Income (£m)
College income dropped to £46m during the pandemic and has stabilised in 2022. The increase in income in 2023 is largely driven through higher levels of ESFA funding for students aged 16-19. There are smaller increases in adult and apprenticeship income.
Staff Cost as a Percentage of Income
The College continues to meet the AoC recommended pay awards for staff and despite a (temporary) increase in National Insurance contributions, pay costs continue to be tightly controlled. A restructure in 2021 resulted in a resizing of the College’s establishment which now effectively matches the resource requirements.
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 puts pressure on pay budgets and increases the risk of carrying vacancies for skilled staff.
The controls over pay spending will ensure a continued reduction in pay costs as a percentage of income in 2023 and means that the College remains at or below the FEC benchmark of pay being 65% of turnover.
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 limited spend on capital projects in 2022 has resulted in an improved cash position and therefore a better current ratio. Cash management will continue to be very important going forward as we balance the College’s liquidity needs against the requirement to repay short term borrowing. We anticipate that the College’s current ratio is set to be improve over the next few years as the College maintains control on costs, limits capital expenditure and has a prudent repayment plan of short term borrowing.
Cash Days
Cash days is the number of days that an organisation can continue to pay its operating expenses given its current level of available cash. The FE Commissioner’s benchmark is for colleges to have sufficient cash to cover 25 cash days.
Strong cash generation from operating activities supported by a re-structure of our bank loan facilities helped improve the College’s cash days since 2020. Closely managed cash balances, capital investment and costs, has helped to increase the year-end cash balance and cash days to 60 at 31 July 2022, well above the FE Commissioner benchmark of 25, and facilitated early repayment of some short term borrowing.
Cash management will continue to be imperative going forwards as we navigate through an economically challenging period. We anticipate that cash, and cash days, will continue to stabilise as we feel the full effects of careful financial management in 2022
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 reflects a re-structure of bank loan facilities and funding of the transfer of assets and operations from BMet in 2019. Although the absolute level of borrowing has dropped through capital repayments, a reduction in income in 2021 and 2022, means that as a percentage of income, borrowing peaked at 40% in 2021. This has now dropped to 38% in 2022 and is set to drop further in 2023-24. The College’s positive cash position means that borrowing is set to reduce to 31% in 2024.
ESFA Financial Health Grade
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 improved operating position and higher than expected cash levels resulted in a sharp increase in financial health score in 2022 to Good, despite the College’s aim of reaching this in 2023.
The College expects to maintain its Good financial health score into 2023 and 2024.
