Governors should plan their assessment of going concern well in advance of the date set for approval of the financial statements. Detailed board papers will be needed and, potentially, discussion with bankers, funders, regulators and auditors. The governors’ conclusions and their basis should be formally minuted.
In the sections below we set out some areas for you to consider.
Forecasts and budget
- does the college have monthly cash flow forecasts and monthly budgets covering at least 12 months from the expected date of approval of the financial statements?
- are the underlying assumptions reasonable?
- in line with LSC Financial Planning Handbook or other guidance for your areas
- in line with published levels of funding
- achievable, fundable growth, considering activities of other providers and government priorities
- fee income assumptions; is the expected employer/learner contribution achievable?
- inflation levels
- salary increases
- pension costs
- overhead levels
- working capital requirements
- potential bad debts; cash collection periods
- How accurate have past forecasts been?
- Have sensitivity analyses been carried out and 'what if' scenarios tested?
Capital project
For many colleges the funding for capital projects in development (ie not yet with approval in detail) is uncertain. Colleges are unlikely to gain funding for major projects and may not be granted support for costs already incurred. If funding is given it may be over an extended period, leading to increased interest costs.
Governors should request worst case scenario modelling from management.
Pensions
Salary and related costs (particularly pensions) account for over 70% of expenditure for most colleges. It is anticipated that pension costs - contribution and scheme deficits will increase.
Demand led funding
With the introduction of demand led funding future levels of funding are now uncertain.
It is vital that governors receive prompt and accurate data about the current level of provision in order that they can prioritise medium and long term strategies and plan for any recovery of funds.
Robust controls over the recording of data are essential in ensuring that college management, and the governing body, are being provided with the most up to date and relevant information regarding the college’s provision.
The Audit Committee should be paying particular attention to the findings of internal and external audits and ensuring that the college management is following up recommendations quickly and effectively.
Borrowing requirements
- are the covenants on current borrowings met as at the balance sheet date? (if not; borrowings will need to be reclassified as current liabilities)
- are there any arrears of interest as at the balance sheet date?
- are there any projected short falls in borrowings available compared to borrowings needed?
- have forecasts been tested against covenants for any anticipated breaches?
- have any necessary negotiations with the bank been held?
Governors should be wary of banks seeking higher margins where there are actual or potential covenant breaches.
Contingent liabilities
Have contingent liabilities been considered? for example:
- legal proceedings
- grants received that are subject to conditions
- claw-back of demand led funding
- penalties in not going ahead with building contracts
- anticipated disposal proceeds not being achieved
Political environment
The changes in machinery of government have significant implication for colleges. Is the college doing all it can to mitigate any negative impact?
It is proposed that responsibility for commissioning education and training for 16-18 year olds transfers to local authorities. Have you got a good working relationship with your local authority?
Responsibility for post 19 provision will rest with the Skills Funding Agency. An added complication is the merger of the Department for Innovation Universities and Skills with Business Enterprise and Regulatory Reform to form the Department for Business, Innovation and Skills. At least initially, this is likely to bring more uncertainty to the post 19 market.