University finance – was 2013 fruitful?

David Barnes, Partner and Head of Higher Education at Grant Thornton UK LLP, looks at the financial year that was and 2014 plans afoot

The UK’s universities are currently facing a set of challenges that the sector simply hasn’t had to deal with before.

Through 2012/13, universities have continued to battened down the hatches and in many cases will show strong cash surpluses and have leaner, more efficient internal structures. However, from 2013/14 onwards, changes in the way students are funded, with the introduction of income contingent loans and the implications this may have on student recruitment, mean that universities will have to continue to assess the way they operate if they are to continue to deliver an appropriate student experience and remain financially sustainable.

Financial year (FY) 2011/12 was the last year under the old funding regime and consequently had high levels of recruitment with universities meeting their targets in this area, which resulted in a strong financial performance across the sector. We expect FY2012/13 to be a further satisfactory year for most universities as, despite slightly reduced domestic student numbers, higher levels of student fees and efforts to supplement numbers by continuing to recruit more students from overseas jurisdictions, as well as maximising other income sources, will have allowed the robust performance to continue.

Although surpluses were down 25% in FY2011/12 compared to the preceding year, they were still higher than that generated in FY2009/10. Universities have been able to manoeuvre themselves into this strong position through rigorous cost reviews, resulting in better management of staff expenditure and course restructuring. The changes in the funding regime, including the introduction of new private providers, will continue into FY2014/15 and it is not certain what impact these changes will have on student recruitment of undergraduate, postgraduate and part-time students so universities will need to ensure they continue to adapt to the situation.

Looking forward, at first glance the indications are that FY2013/14 should also be another good year for the sector as student number applications have increased by 3.1% compared with the previous year and most institutions have, anecdotally at least, reached or are close to reaching their student targets. However, there is likely to be a reduction in the numbers of post-graduate and part-time students, and there is still some uncertainty whether government policies will have an impact on the recruitment of foreign students. Ensuring that student retention is maximised will clearly continue to be important. This ambiguity is being compounded by the changes resulting in government funding being replaced by the new student loan system as payments are now made through the Student Loans Company. As a consequence of the rephasing of the payment profile, there are now implications for the cash management at universities. In the future universities cannot take their income for granted in the same way they were able to do under the previous funding regime and the changes caused by the government policies require added care in financial planning and cash management. To some extent, universities will have to adapt to ensure they are run more like a business than a not for profit organisation

‘There is likely to be a reduction in the numbers of post-graduate and part-time students, and there is still some uncertainty whether government policies will have an impact on the recruitment of foreign students.’

 

A further future consequence of the government changes is that there is less public funding for capital development. Institutions therefore need to ensure they generate sufficient cash reserves to be able to maintain and improve their estates. The level of surplus that now should be a target needs to increase from the 3-4% previously recommended by HEFCE to a much more significant level; we suggest a figure of some 10-15% may be appropriate for many institutions.

At the moment universities are in a strong financial position, and have shown they are able to adapt well to challenging circumstances. This will need to be continued, maximising third income streams, encouraging entrepreneurial flair and engaging more broadly with private and non-commercial organisations. As well as endowments and fundraising, research related activities, IP income and revenues from consultancy are all areas that can be developed further to generate a greater proportion of income as the traditional funding model changes. Universities will need to be prepared to change their operational structures to be able to respond to any challenges that ahead.

 

 

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