Finance: Lessons in freedom for colleges grappling with finances

For the past year Britain's institutes of further and higher education have been freed from local authority control and in effect have effectively become separate companies. But the difference with the rest of the commercial sector is that their managers generally have little or no business experience.

Moreover, they are likely to be sceptical of the benefits of receiving their funding directly from the Further Education Funding Council rather than via the local education authorities, and so compound the problems.

In an effort to provide some much-needed help for managers trying to grapple with this tricky area, the Chartered Association of Certified Accountants has just published (6 oct) what it calls 'a comprehensive and practical guide'.

Written by Graham Carr, of North Hampshire (correct) Business School, which is part of Farnborough College and one of the 600-odd organisations affected by a change that came into operation in April 1993, it focuses on internal or management accounting systems. Among the topics covered are unit costing, profit centre financial management, budget development, financial controls, performance indicators and inter-college comparisons.

As Mr Carr points out, all of this is second nature to the average business but largely absent from the education arena. The funding council offers guidance on the presentation of basic accounts.

But, there is such due to the a shortage of material on such matters as costing individual courses, that he says he has had to take a largely prescriptive approach and describe the advantages and disadvantages of different methods and leave it up to individual colleges to pick what was is best for them.

Even colleges that have recruited accountants to deal with their new responsibilities have had trouble as result of the need to develop appropriate systems from scratch and without the aid of suitable models.

Nor is such information of merely theoretical interest. With colleges for the first time having the 'freedom to fail', it is possible for them to develop serious financial problems without knowing why.

This is likely to be because - although the managers can report either a small surplus or a loss over the year - they will not be aware of which aspects of the college are making money. and which are not. In a true business context such an approach would be like a manufacturing company trying to survive without product costing, says Mr Carr says.

However, obvious as is the need to break college costs down to the course level, is, finding an effective way to do it break costs down to the course level is difficult. The typical college - which may be a sixth-form college or a further education institute where less fewer than half the courses are of degree level - will have an annual budget of about (pounds) pounds 15m.

About 60 per cent of that is accounted for by salaries, with teaching staff taking up the biggest share.

But the rest is made up of indirect costs, such as running the building and administration, and it is here that the problems start. 'There is no obvious way to break it down,' says Mr Carr says. , adding that All he has set out to do is to tell colleges of the issues at which they need to look at.

He came to the subject because, besides working at one of the organisations affected, he and his colleagues had previously looked at the transformation in the National Health Service and advised on the development of accounting in the changing economy of Russia. He realised that the situation was broadly similar because it involved people who had not previously been exposed to a financial environment.

Acknowledging that the changes are creating a lot of stress, he hopes the guide will make managers - reluctant or otherwise - better able to make difficult decisions about such matters as closing courses.

(in italics) Effective Financial Management in Colleges of Further and Higher Education, by J G Carr, is available from the Chartered Association of Certified Accountants, PO Box 66, Glasgow G41 1BS. Price (pounds) pounds 15.

(Photograph omitted)