Steve Harper, a partner at accountancy firm haysmacintyre, offers finance advice for heads

Understanding cash flow is a key aspect of understanding the financial health of any school. The purpose of a cash flow forecast is to provide a forward look at the school’s future receipts and payments, and it should therefore show you if the school has sufficient funds.

While the process of building a cash flow forecast will typically fall to the school’s finance team, it often requires input from multiple stakeholders. For example, an estates department will need to provide details of the timing of planned capital and maintenance works to forecast the cash outflows.

Follow the cycles

Understanding cash flow requires knowledge of the cycles of cash coming in and cash going out. In a school environment, many of the cash flows are predictable. For almost all schools, fee income will be the largest income source, and this typically arrives around the start of term. For those schools operating a direct debit system, this can be especially predictable. Staff costs are usually the largest cash outgoing, and they are also largely predictable through the academic year.

While some of the significant cash flows are predictable, there are always a range of assumptions such as the level of fee debtors. There will also be one-off payments to consider, such as those for capital works.

Building an effective cash flow forecast has four key steps:

1. Decide the period you are planning for. This will vary significantly from school to school and depend on its financial circumstances. Some schools need to look a very long way into the future when cash flow forecasting, for example when considering borrowing to fund capital works.
2. Assess and forecast the income. This should include both the core income such as fees and extras, as well as any trading income (for example, any lettings the school makes) and fundraising. It will require a range of assumptions on pupil numbers, timing of payment of fees, the level of trading income, and so on.
3. Assess and forecast the expenditure. As with income, this involves assessing the various expenditures the school must make through the period and when it will be incurred.
4. Using the above information, assess the levels of cash (or rather bank) balances held. This will allow your finance team to identify any actions which need to be taken. For example, if cash appears low in a particular month you may need to draw down from an investment portfolio (if you have one), defer expenditure if possible, or arrange a bank facility such as an overdraft.

Focus on key assumptions

Understanding how a cash flow forecast has been put together will support you in reviewing your cash flow forecasts. You should focus on any key assumptions that have been made and how reasonable those assumptions are. The cash flow forecast will be based on budgets, and therefore its reliability links to the reliability and robustness of the underlying budgets on which it is based.

It’s important that the cash flow forecast doesn’t just sit in isolation, but is a practical document used to inform the running of the school and your decisions. Having a full understanding of cash flow will also help you and the governors in making key decisions, such as investing in capital works. For those schools with significant cash balances, it can also help inform the decision to invest some of the available funds.

For those schools with banking covenants, cash flow forecasting may be especially important. Banking covenants are restrictions that a lender has put on the school. For example, they may require the school to maintain a certain cash level to ensure that it can make loan repayments to the bank. Therefore, it is vital that cash flow is accurately forecasted to identify any issues that might result in a breach of the covenant at the earliest opportunity.

Revisit regularly

Once a cash flow forecast has been prepared, it is important that it is updated and revisited regularly. There will always be variances between the forecasts and the actuals because of the assumptions that need to be made, and therefore keeping the forecast updated ensures that it remains a useful tool.

For those schools with restricted or endowed funds, it will also be important to track these funds separately in the cash flow forecast. These funds cannot be used for the unrestricted (general) purposes of the school, so they need to be considered and tracked separately.

Finally, it can be helpful for your finance team to apply sensitivities to the cash flow forecast. This involves taking a range of assumptions and modelling what happens to the cash flow forecast. For example, if you had five more pupils or five fewer pupils, how does it impact on the cash flow?

Given the current climate, cash flow forecasting is an important part of your financial toolkit. Ensuring that you understand the cash flows, any key uncertainties, and any points at which cash may become too low for comfort, are important factors in enabling you to make effective decisions.

Steve Harper