Colleges lambast ‘disastrous’ changes to financial year

College leaders have branded plans to bring their financial year in line with the public sector as “disastrous” amid fears the move would wreak havoc on their finances.

Colleges currently manage their budgets along the same timescales as the academic year, with the financial year and the academic year both beginning on August 1 and ending on July 31.

But FE Week understands this could all change as government officials draw up plans to force colleges to adopt a public sector financial year, which begins on April 1 and ends March 31. 

This follows the reclassification of colleges to the public sector which requires college accounts to be consolidated into the accounts of the Department for Education and the rest of the government.

The year-end change from July to March has been described as an “unnecessary distraction” by the College Finance Directors Group, which has voiced its concerns in an 11-page letter, seen by FE Week, to Education and Skills Funding Agency chief executive, David Withey.

As it stands, the college financial year runs in parallel with the academic year, the latter also being the timescale for most funding contracts held with the ESFA, combined authorities and other agencies.

The change would mean that the college financial year would awkwardly straddle two academic years, causing a huge amount of increased administration and raises the risk of weaker oversight and monitoring of college finances by governors and regulators.

For a financial year that begins in April, college boards would have to approve their budget in March at the latest. The knock-on effect is that college managers would have to estimate learners, and therefore income, at least six months before learners start (or don’t start) their courses.

“Curriculum plans for the next academic year will not be available in February, so income forecasting will be a best guess, not based on a plan,” the letter states.

Management accounts would need to change so managers, governors and regulators can monitor perforce around a financial year end which is different from most of their funding agreements.

This would make managing in-year financial performance “unbelievably difficult”, according to the finance directors, who go on to warn of expensive audit costs and weaker oversight.

Graeme Lavery, chair of the College Finance Directors Group and vice principal at Reaseheath College, told FE Week: “The level of complexities of delivering FE are becoming significantly more, and we need to find a way of decluttering and not putting more clutter in so that we are putting as much funding as we can do to support learners.”

When colleges were reclassified to the public sector in November, skills minister Robert Halfon told principals: “The department will eventually be required to consolidate the accounts for all FE colleges into one.”

FE Week understands officials have floated working towards implementing the new financial year end in 2025/26, with an eight-month financial year running from August 2025 to March 2026.

A similar move was attempted in Scotland but was quickly abandoned when the Scottish Government realised it was a “mess”, according to a college CFO working in a Scottish college at the time. The change meant an eight-month financial year in 2013/14 to accommodate the change, then a 16-month financial year between April 2014 and July 2015 for the backtrack, leading to several years of “meaningless” financial data.

Both the finance directors’ group and the Association of Colleges point to academies as they have managed to retain their August financial year end despite some pressure from the National Audit Office on the Department for Education to “resolve the assurance gap arising from the non-coterminous year end”.

The complexities of college finances compared to academies make a compelling case to retain the July year end, according to Lavery.

David Hughes, chief executive of the Association of Colleges, raised his concerns with the chairs of three House of Commons committees, the public accounts committee, education committee and treasury committee, last week.

“Changing the year-end for colleges would be a disastrous move for the management of public funds because it would take the accounting year out of line with the academic year, staffing and DfE funding cycle; make it impossible for colleges to close their accounts precisely, resulting in audit qualifications; and require an upsurge in college spending on accountants to minimise the consequences,” he said.

Hughes argued that a year-end shift would only work if college funding moved to two-to-three-year cycles, a sector-wide project to update accounting, audit and IT systems, and an implementation date, for schools and colleges, of 2029.

Concerns are shared by the Sixth Form Colleges Association. Deputy chief executive James Kewin told FE Week, “If you set out to design a policy that wasted a lot of busy people’s time while delivering no tangible benefits, you’d struggle to come up with a more effective one than changing the financial year end of colleges.

“This is an exercise in futility that will distract already overstretched colleges from dealing with issues that actually benefit students. The government should abandon this unnecessary tidying up exercise and focus on reducing the bureaucratic burden on colleges, rather than finding new ways to add to it”.

The Department for Education told FE Week it “recognises the challenges that this may create for FE colleges and is working with HM Treasury to explore all available options to address these requirements considering the context and arrangements in the FE sector.

“We have been consulting the sector to understand the implications of a change to the financial year and working with Treasury to address risks and concerns. No decision has yet been made on whether any changes will be necessary and therefore we are not working towards any set timetable.”