Budget setting and the importance of a three-year plan
Budget setting and review is an important part of a trust’s strategic planning process. It is not a one-off piece of work, and, with rising costs and ever-increasing financial pressures, it should form part of the trust’s overall financial management processes.
In this blog, we are going to look at the importance of preparing robust three-year plans, key items to consider and how to approach this task when there is so much uncertainty around future funding and increasing cost pressures.
Three year budgets
It is not a new requirement for trusts to prepare and submit three-year budgets – trusts have been preparing these for a number of years now – however it is becoming more and more relevant to review not just year one, but the financial picture for years 2 and 3 as well. With the increasing financial pressures, academy trusts need to be fully informed on their three-year position so that they can take action now to avoid financial deficit and the risk of a Notice to Improve. This will also ensure that the academy trust remains compliant with the Academy Trust Handbook.
The budget setting process
Setting the budget should not be a one-off piece of work, completed once a year and then not touched again. Instead, it should form part of the trust’s ongoing financial management processes.
Understand the current year
When looking at future budgets, it is important to consider the current year budget and expected outturn. What areas are showing underspends/ overspends? Are these one-off changes or do these need to be reflected in future year budgets?
Whilst budgets should not be based on current year spending rolled forward, it is important to understand how the current year budget is tracking against actual, so that where costs and income are different from budget, these can be factored into the working budget.
Key assumptions
Before starting work on the budget, the school/ trust must agree the key budgetary assumptions for the next three years. These will include:
- income inflation and future funding
- local income generation and future plans, including understanding local competition
- staff pay awards
- general inflation
- specific inflation, including energy and the impact of living wage on services
It will be impossible to predict with certainty the exact future income and costs in all areas; instead, trusts will need to be clear on the assumptions made and key factors. This will make it easier to monitor and stress test the budget for different scenarios and to understand the impact of any announcements, such as on pay, as these are made.
Strategic plans
A trust’s budget should reflect its strategic plans for the next three years, a budget should never be set in isolation without reference to the school/ trust level development plan, the asset management plan or without understanding key strategic objectives over the medium term, such as the trust/ school’s IT strategy.
There may be one-off costs to consider in future years, which will need to be included in the budget. Equally, trusts may wish to consider ring-fencing monies each year in the budget to be held aside for future spend and projects. This would then form part of the reserves at the end of the year, to be used to off-set planned additional spend in future years.
Staffing structure
Staffing costs generally account for around 80% of the school’s total budget. Schools and trusts should regularly be reviewing their staffing structures to ensure that they are still fit for purpose. Is the structure still delivering the outcomes required? Is it still fit for purpose and are you expecting to roll forward the same structure across the three years, or are future changes expected? For example, are there any bulge classes leaving or joining the school that could have an impact on the staffing structure and requirements? Are there any fixed term contracts coming to an end that won’t be renewed?
It can be tempting to leave the staffing in future year budgets as it is now, working on the assumption that all leavers will be replaced like for like. Whilst this is a prudent option, this can lead to inaccuracies within budget setting, particularly where schools are expecting staff on a high pay grade to leave who won’t be replaced similarly. If these changes are not reflected in the working budget, this can skew the overall financial position, and risks difficult decisions being made that could be avoided. Whilst it is often difficult to know exactly what staff changes may occur, it is nevertheless important to ensure that consideration is given to reflecting the most likely staffing situation over the next three years.
Contracts register
The school should have a contract’s register, with details of all contracts including price and end date. This should be referenced and reflected in the budget, with clear adjustments made when contracts are expected to end where these are not going to be renewed. Where contracts are expected to change to a new supplier, this should be included in the budget, particularly where this is expected to result in a cost saving.
Scenario planning
Once you have pulled together all of the information you need to set a budget, the detail can be prepared. It is strongly recommended that schools run a series of scenarios to look at a range of situations. There is so much uncertainty in the current climate that schools will want to stress test their budgets, to understand the impact of changes in certain areas to the budget e.g. decrease in income, increases in staffing costs, higher than expected income in certain cost areas of the budget.
It won’t be possible to have absolute certainly over all of your figures in the budget however by scenario planning and stress testing, schools will be able to better understand the areas of high risk and to begin to take mitigating action to manage these.
Approval and monitoring
Once the final budget has been prepared, this will need to be approved by the Trust Board, before being submitted to the ESFA via the BFR3Y.
This isn’t the end of the process, as soon as a budget has been approved, this should be locked and then a copy taken to use as a working budget. It is best practice to keep this up to date throughout the year – budget setting isn’t just a one-off piece of work and trusts should be regularly revisiting the budget and understanding the current three-year financial position.
Actuals should be reviewed and monitored against budget every month, with clear explanations for differences. As we note above, this will then begin the whole process again.
