Section 2: Managing School Finances print

Thu 13. Apr 17 09:23

Managing School Finances

Introduction
Successfully managed schools are well run, with good organisation and transparent procedures. Financially successful schools contribute to the success of learners through helpful and effective allocation of resources.

As the finance expert, you ensure your school's success in this area by:

staying up to date with regulations
initiating procedures
educating and advising colleagues as to their responsibilities

Learning outcomes

On successful completion of this unit, you will be able to:

understand the legislative context of school financial management and the requirement for probity and accountability in the management of school finances
understand the different levels of roles and responsibilities of those involved in the school's financial management
apply general accounting principles to school financial management to evaluate a school's systems
summarise findings from an evaluation of a school's financial policies and make recommendations for improvement





Scenario: Cash management and accountability

While the SBM may carry major responsibilities for the school's finances, it is important to remember that these responsibilities are often shared with other staff and that part of the SBM’s role may be to coach them into understanding their responsibilities.

In the following scenario, you can see how an SBM deals with the often tricky area of school trips and how to account for associated income and expenditure.

As you follow the scenario, you will find opportunities to test your knowledge and understanding of the legal framework that applies to school trips, the use of petty cash and so on.


Introduction
In this scenario, you will follow David Stocks, the Head of Drama at St Anne's High School.

David is trying to organise a trip to see an RSC performance of Julius Caesar and needs help from Amanda, the school business manager.

In this scenario you will see:

the importance of staff understanding the need for financial accountability
how important it is for staff to balance delivering a good education with maintaining financial compliance


Question
David says: "I'm taking a group of my keenest students on an extra-curricular trip to see a Royal Shakespeare Company production of Julius Caesar. I've organised plenty of these trips before and they're always great fun. We'll take the school minibus. I daresay I can ask the parents to pay for their kids, eh? I've got every penny of the department budget earmarked for other ventures." What do you think Amanda's response be?


Which answer would you go for?
A: Hang on a minute, David! You know we can only ask for voluntary contributions for school trips!
B: That's fine, David. I don't see a problem with that.
C: Hold on there, David! You know that we can't charge for school trips!

Amnda's  Answer
B: That's fine, David. I don't see a problem with that.

How will it be paid for?
David tells Amanda how he plans to fund the trip: "If we split the cost of a tank of diesel and the cost of the tickets between the ten students, that should work out at, say £50 for the fuel and £16.95 per ticket. £21.50 each. That sounds OK. What do you think?" What do you think Amanda's response should be?

Select the statement you feel is most appropriate
A: Sounds like you've got it all worked out, David. £21.50 sounds about right to me.
B: Actually, you can charge no more than the exact cost of the tickets and diesel.
C: I think you'll definitely have to charge more.

(Yes. C A trip of this kind will inevitably involve all sorts of 'hidden' costs. David needs to conduct a comprehensive analysis of the potential costs)

The trip must be properly budgeted
(Amanda can see that this trip isn't being costed properly. She needs David to realise that he is accountable when it comes to identifying the true budget costs.)

Playing by the rules
Amanda is amazed at David's response. What should she say to him?

Select the statement you feel is most appropriate.
A: Any extra costs must come out of your department budget and you must help me put the budget plan form together afterwards.
B: Fine. If you say your way works, then we'll do it your way.
C: Sorry, we need to cost this trip properly. The trip can't go ahead until we have completed the budget plan.

(FEEDBACK: Although this trip is extra-curricular, it does have an educational purpose and should go ahead. However, David must take his financial responsibility as budget holder seriously and he must be encouraged to write the budget plan - with Amanda's support.)

What are the costs that David should consider?
David: "OK, I've got half an hour now to work on this, if I must. Don't make it too long-winded, will you, or I might never arrange another trip." Which of the following costs do you think David needs to consider in his calculations?

Select any factors you feel are appropriate.
A: Tickets – £16.95 each
B: VAT implications
C: Fuel cost calculated on the mileage for the round trip
D: Small contingency
E: Parking
It's the night of the trip...
As Amanda is leaving work, David comes running over. Amanda can see that the students are sitting in the minibus and looking very anxious. David says: "We've got a small problem - the minibus is almost out of diesel! I don't have a credit card with me. Most of the students are paying for the trip with cheques so I don't have much cash on me, not enough for the diesel anyway. Can you sub me £50 out of petty cash?" What do you think Amanda's response should be?

Select the statement you feel is most appropriate.
A: Sorry, David, but the limit on petty cash is £20. It looks like you'll have to cancel the trip.
B: I can get you £20 out of petty cash. Why don't you check if you collected any cash from the students to cover the rest?
C: Although there's a limit on petty cash withdrawals, just this once I'll waive it and get you your £50.


The morning after
Amanda's response: 1
Feedback 1
Amanda's response: 2
Feedback 2
Halfway through the following morning, David goes to Amanda's office looking for some help. He has a handful of receipts and needs to reconcile what he has spent. The first receipt that Amanda picks up from the garage, and is a receipt worth £50 for diesel.

Have a look at the receipt, and then decide what you think Amanda should say to David.
Amanda says:

Excellent! We have a receipt for the diesel, that's all that we need.

What do you think? See the Feedback 1 tab.
That's not right, this isn't a tax receipt. Consequently, the VAT can't be used as input tax to offset against the school's VAT bill.

Amanda needs to make David aware of the implications of not getting a VAT receipt. However, it would be unreasonable to deduct this expense from his department's budget.
Amanda says:

I'm sorry David, we've got a problem. This receipt is no use to us.

What do you think? See the Feedback 2 tab.

That's right! This isn't a tax receipt. Consequently, the VAT can't be used as input tax to offset against the school's VAT bill.

Amanda needs to make David aware of the implications of not getting a VAT receipt. However, it would be unreasonable to deduct this expense from his department's budget.


The final reckoning

David has provided receipts for all the costs. When these are compared against the budget, there's a small surplus. The Governors' Recharging Policy allows for a small surplus to be retained in a trip's budget to provide financial support to students – so there's no problem with helping Juliette the way David did.

You have now completed this scenario.

In this scenario we have seen the importance of:

effective petty cash management
the difference between VAT receipts and normal receipts
getting and keeping receipts
introducing robust cash management procedures
ensuring that staff are aware of the cash management procedures





Role of the SBM

It is essential for anyone working in the school environment to have an understanding of the differing levels of delegation, and the controls and procedures necessary to manage school finances honestly, reliably and effectively.

The school business manager, as the expert, will play a pivotal role in ensuring that the governing body and school staff fully understand their respective roles and responsibilities, that there are appropriate financial regulations and procedures in place, and that these are complied with.

This unit discusses:

roles, responsibilities and accountabilities
probity in the public sector
financial risks management including internal controls and financial management procedures
auditing
general accounting principles including fixed asset accounting
school accounting systems
taxation

Financial regulations and procedures

All schools should have financial regulations. These are a set of requirements, restrictions and guidelines aimed at maintaining financial integrity and compliance with relevant statutory legislation. Maintained schools will be expected to comply with their Local Authority's financial regulations.

Academies and other schools which are registered at Companies House and/or with the Charity Commission will need to ensure their financial regulations comply with the statutory requirements of these organisations. Guidance on how to comply with the requirements of these organisations is given in the 'Academies Financial Handbook' produced by the Education Funding Agency (EFA).

Underpinning the financial regulations should be a financial procedures manual which guides day to day operations and lays out how your school uses and manages its money. The financial procedures manual helps to establish financial controls within the school; ensuring accuracy, timeliness and completeness of financial data. The manual is generally used by finance staff, but it should also act as a reference for trustees, governors, managers and other staff.

The regulations and procedures should be updated and approved by governors on an annual basis and be accessible at all times to provide a definitive guide to best practice.

For further guidance on financial regulations and procedures, visit the Department for Education (DfE) schools financial management web pages or see the 'Academies Financial Handbook'.

Further Reading


Roles, responsibilities and accountabilities

The school should have a clearly defined organisational structure with identified lines of reporting for all operations. The arrangements should encourage regular interaction between the school's financial and non-financial operations and activities.

The diagram below provides an overview of the roles and responsibilities of the different levels of financial management.

Your school's finance regulations and financial procedures manual should clearly state these different levels and identify different levels of delegation.

Finanical roles and Responsibilities

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Activity

1.1: Financial regulations and procedures review

Obtain a copy of your school's financial regulations and procedures. Carry out a review of them using the following questions as a checklist.

Are the roles of the governors, headteacher, finance staff and budget holders defined?

Is the delegation of responsibility to the headteacher regularly reviewed?

Are authorisation limits included?
Do you think that the school business manager’s authority level is too high, too low or just right? Explain your answer.
What is the authority level of the school business manager in your school?
How are the financial regulations and procedures communicated to budget holders?
Could this section of the manual be improved? Explain your answer.




Probity

It is important that the governing body and members of staff not only act in a legal and ethical manner but are also seen to do so. In May 1996, the Nolan Committee published a report on standards in public life applicable to local public spending bodies, including schools. The report identifies seven principles that should be applied in public life.

It could be argued that the key principles that those responsible for the school finances ought to demonstrate in all their work and transactions are:

objectivity
accountability
openness
integrity
honesty

Fig 2.png

These five principles are the foundation of the concept of probity, and should be reflected in the school's financial regulations and financial procedures. It is worth remembering that the application of these principles not only protects the organisation from impropriety, but also safeguards those involved in the financial processes of the school from accusations of impropriety.

The failure to apply these principles can lead to three different levels of impropriety, as shown in the diagram opposite.

The governing body is responsible for ensuring that the following reasonable steps are taken to prevent and detect any of these levels of impropriety:

being able to provide reasonable assurance that activities are conducted honestly and assets are safeguarded
ensuring that to the best of their knowledge and belief the financial information reported is reliable
establishing arrangements designed to deter financial irregularities or fraudulent conduct and detect any that occurs

If fraud or other financial irregularities occur or are suspected, the governing body must carry out a vigorous and prompt investigation, taking appropriate legal or disciplinary action, and effect any necessary changes to systems and procedures to minimise the risk of reoccurrence.

Activity

1.2: Preventing and detecting impropriety

Consider the governors' responsibilities to prevent and detect impropriety, and in particular that they should establish 'arrangements designed to deter financial irregularities or fraudulent conduct and detect any that occurs'.

What are the arrangements in place in your school?
Do they follow the recommendations made by the DfE or the 'Academies Financial Handbook'?
How would you ensure the arrangements are made known to staff to ensure compliance?

Internal controls are those processes and procedures that the school adopts through the financial regulations and financial procedures to guard against financial irregularities and fraud. Internal controls should provide as much reassurance as is reasonably possible that:

assets are safeguarded
transactions are properly authorised and recorded
material errors or irregularities are either prevented or can be detected promptly

The internal controls should include:

segregation of duties
appropriate levels of delegation
regular reconciliation
cash management
procurement policies
monitoring and reporting
appointment of a responsible officer
annual audit or self-evaluation
risk assessment
whistle-blowing

Statement of internal control
It is now common practice in both the public and private sectors that an annual Statement of Internal Control (SIC) is agreed and signed by the governing body, trustees or board. The SIC acknowledges the governing body's responsibilities for the system of internal control from which those operational and financial outcomes are derived. It is also used to highlight any known problems with that system.

Those schools which have a charitable trust with a prescribed level of income will be required to demonstrate their compliance with Statement of Recommended Practice (SORP).


Whistle-blowing
The Nolan Report also includes recommendations on the difficult issue of setting up clear mechanisms for dealing confidentially with allegations of malpractice (known as whistle-blowing) and describes a system for ensuring that good practice is maintained (see the Public Concern at Work website for further details).

Schools should have a whistle-blowing policy available to all staff, which provides a route for staff to properly raise concerns without prejudice to their personal position. This should include:

respect for staff confidentiality
an opportunity to raise concerns outside the line management structure
an indication of the proper way in which concerns may be raised outside the organisation, if necessary

Auditing

The role of the auditor is to provide a systematic process which will identify areas of risk and the effectiveness of the controls in place. Auditors follow general accounting principles to arrive at a true and fair view of whether the school is accounting for funds correctly and the accounts of the school give an accurate and up-to-date picture of the finances.

Auditors will never give full assurance of what's right in an organisation. They will identify what is wrong and give a view on whether it is capable of achieving what it wants to achieve. Auditors will often express their findings in terms of degree of risk to the school. The table below provides an example of an audit report highlighting risks and recommendations.

Fig 3.png

In maintained schools, it is the local authority's responsibility to arrange for audit to take place. It will depend on the individual local authority as to how often these audits will take place.

Academies are required to employ external auditors to audit their annual accounts. The Secretary of State can appoint auditors to review an academy’s accounting systems. Academy trusts must put in place a process for independent checking of financial controls, systems, transactions and risks. Multi-academy trusts and large single-school academies must have an audit committee appointed by the governing body.  However in smaller schools there are several other methods that are acceptable to the EFA, which are set out in the 'Academies Financial Handbook'. One of these is the appointment of a 'responsible officer' (RO).

The responsible officer should be an appropriately qualified and experienced individual who is not an employee of the school. They could be a governor or the principal financial officer of another academy trust. Their role includes sampling transactions to ensure that correct procedures have been followed. Maintained schools are encouraged to adopt a similar procedure as it is considered to be good practice.

To read more about the role of the responsible officer and how their appointment can provide additional security, look at the scenario in the next topic, which describes how the RO and SBM can work together.


Activity

1.3: Segregation of duties

Track one recent transaction made by your school from the initial order to the reconciliation of the payment.

Identify where segregation of duties did or did not take place.
Compare the process with your school's financial procedures and consider if the procedures are appropriate and complied with.
Suggest recommendations for improvements to procedures where necessary.

Risk management – insurance
The governing body has a duty to annually review the strategic risks to the school's financial management. It would be expected that the school business manager would provide an input into this process.

Once risks have been identified and assessed for their impact and likelihood, the school needs to identify how to mitigate these risks. The internal controls already discussed will often be sufficient but there are some risks that are best indemnified through insurances.

For those state-funded schools working under the umbrella of their local authority there is likely to be appropriate insurances negotiated by the local authority which give the required indemnity. Other state-funded schools like academies will be required to negotiate their own insurances. It is important that these cover public liability, professional indemnity, and employer indemnity, as well as standard building and plant cover.





General accounting principles

A further means of ensuring propriety is through the adoption of generally accepted accounting principles and processes. Accounting is carried out either on a cash accounting or accruals accounting basis.

Cash accounting shows actual cash movement as a basic in or out transaction on the day it happens.

Accruals accounting is more complex but it provides a more accurate view of the financial position of the school because:

expenditure is shown in the accounts when goods are received or services are used, whether or not an invoice has been received or payment made
income is recognised at the point when it is due, whether or not the cash associated with the transaction has actually been received
committed expenditure for items ordered, but not received, by the date of the return is excluded from financial monitoring returns

Schools should use accruals accounting.

Fixed asset accounting
The purpose of fixed asset accounting is to spread the cost of buildings and equipment in the income and expenditure account over their useful life. For many schools, this may not be a concept that they currently apply but there will be an increasing need to understand this concept.

Fixed assets include land, buildings, fixtures and fittings, furniture and equipment, and vehicles. Items like exercise books have zero value the moment the pack is opened.

The concept of a year-by-year reducing value is called depreciation, which is a common sense concept, but the reverse is less obvious: if an item will be of use for a number of years its full cost is spread over a number of years.

Land is usually considered to have an infinite life; the cost therefore remains in the balance sheet.

Items that are to be disposed of by sale or destruction must be appropriately authorised for disposal and, where significant, should be sold following competitive tender.

Accounting systems

All maintained schools are required to follow financial reporting procedures laid down by their local authority in their scheme for financing schools (section 48 of the School Standards and Framework Act 1998), and other associated local documentation. In the case of academies they are required to follow reporting procedures laid down by the DfE and in line with company law and the Charity Commission's Statement of Recommended Practice (SORP) framework.

In all cases, these reporting procedures are in place to ensure that the school is managing public money honestly, reliably and effectively.

Schools can choose their own accounting systems, provided they ensure that it properly records and monitors expenditure throughout the year, and that all transactions can be traced. This is commonly called the audit trail.

This is an important aspect of accounting as it demonstrates the ‘proper’ use of the funding and acts as a safeguard for those operating the system. This means that if a mistake has been made in recording financial transactions then the user must ensure that any adjustments made are accurately recorded within that system so that others can follow how the adjustments have been made.


The accounting system must also be capable of producing management information for use by the governors and budget holders in addition to providing the figures from which the financial statements are prepared.

Computerised systems must have sufficient management controls to ensure the integrity and confidentiality of the information and access to the system should be restricted on the basis of what an individual needs to be able to do or see.


Activity

1.4: Review of management controls

Refer to your school's financial regulations and procedures, and review the management controls that are in place to ensure that computerised financial systems maintain the integrity and confidentiality of the financial data.

First, identify the controls that should be in place.

Second, compare this list with your financial procedures and consider if the procedures are appropriate and complied with.

Finally, provide any recommendations for improvements to the procedures.


Taxation – value added tax (VAT)

As part of a school's compliance requirements, the school business manager needs to be aware of the principles of value added tax (VAT).

The supply of education by an eligible body for a fee or other form of payment is exempt from VAT. Therefore for the most part, education is non-business and outside the scope of VAT, but goods and services purchased do attract VAT in many cases. Similarly, some income streams attract VAT. Maintained schools are normally able to recover the VAT via their local authority, whereas independent schools and academies cannot usually do so.

The Finance Act 2011 made provision for a VAT refund scheme for academies. Under the scheme, academies’ non-business VAT costs are reimbursed by Her Majesty’s Revenue and Customs (HMRC) through a refund scheme similar to the scheme that applies to local authority maintained schools.

Any school generating income by business or entrepreneurial activities should take advice from either their local authority VAT officer or other specialist to establish if they need to be registered for VAT. For more information, visit HMRC's website.


Further Reading



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