Examining National Data on HEIs Finance

Andrew McConnellDirector of Finance,

University of Huddersfield

Appendix A(iv)

Financial Health & Sustainability

How can a governing body ensure financial health and sustainability whilst maintaining institutional morale and performance?

What questions should governors be asking? [Especially in a downturn]in order to reassure themselves that the institution is monitoring the risks?

What are the strategic opportunities in a challenging climate?_____________

Leadership Foundation/CUC Guide: Getting to Grips with Finance

Reasons to be Cheerful!

Demand (too?) strong

Borrowing costs low – good credit risk

Export competitiveness – weak currency

Low dependence on investment returns

Opportunity to make efficiencies

Opportunity for modernisation

Strategy Map and KPIs

Overall context – not just financial challenges

Is the Strategic Plan fit for purpose in a Downturn?

Are the Key Performance Indicators still relevant?

Strategy Map and KPIs

Monitoring and Risk Management - Audit Committee role

Full Council responsibilities

Financial Context

HEFCE : Annual Accountability Returns for 2009 (July 2010)

• “Fairly sound financial position”• “Marginal deterioration on previous year”• “Strong cash balances and reserves”• “Cushion for likely risks”• Total income growth of 8.5%• Operating surplus of 1.4%• Staff costs at 55.3% of income (up 7.9%)

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13Total income £19,146M £20,777M £21,439M £21,905M £22,418M £22,948MOperating surplus £395M £296M £170M £249M £254M £215M

as % of total income 2.10% 1.40% 0.80% 1.10% 1.10% 0.90%

Historical cost surplus £709M £524M £199M £390M £327M £329M

as % of total income 3.70% 2.50% 0.90% 1.80% 1.50% 1.40%

TRAC operating deficit (£1,056M) (£1,267M) n/a n/a n/a n/a

as % of total income -5.50% -6.10%Cash flow from operating activities as % of total income

6.00% 6.90% 3.60% 4.10% 4.90% 4.70%

Net liquidity as number of days’ expenditure

84 83 68 57 51 49

External borrowings as % of total income

21.20% 21.20% 23.10% 24.30% 24.80% 24.00%

Discretionary reserves exc. FRS17, as % of total income

44.40% 44.00% 43.50% 44.80% 45.70% 46.50%

Actual Forecast

Financial ContextDec 2009 : £600m reduction in funding for 2011/12 and 2012/13

• Science and research.• Student support.• Efficiency savings.

Feb 2010 : £449m reduction in funding for 2010/11 (compared with original CSR announced in Jan 08) ie

• 5.75% of 09/10 allocation of £7.8bn.• Actual cash increase of 0.9% for T, R and HEIF compared with 09/10.• 14.9% reduction in capital funding.

June 2010 : £200m further reduction for 2010/11 • Mod Fund now £152m (from £270m).• £52m T; £30m capital.(Including proportionate in-year cut wef April 2010)

Oct 2010 : CSR savings of XX% over 4 years?In-year cut wef April 2011?Capital grants? Browne?

Financial Strategy and KPIs

Qu: Do we have a financial strategy?

Qu: Is it robust enough in a downturn?

Annual Report on KFIs (HEFCE Metrics)

Sector/Peer Group averages (HEIDI)

Full Council monitoring

Financial Strength

Qu: How are we positioned to meet an economic/funding downturn?

Qu: How financially strong are we?

2008-09: Pattern Chart 24 - The Security Index

Huddersfield 2007-08, 349.5

Huddersfield, 439.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

Lower Quartile Mid Section Upper Quartile Delegates' Institutions

Lower Quartile 265.00Median 335.00Upper Quartile 408.00

Financial Sustainability

Qu: Are we making a surplus?• Scenario planning

Qu: Why do we need a surplus? Is it enough? How much should it be?

TRAC data

Surplus may not be enough: • Economic costs – backlog maintenance?• Infrastructure Adjustment/Return on Financing

and Investment

2009 surplus of £5662k = adjusted deficit of (£1936k)

“Many institutions’ surpluses appear too low for sustainability – are they sacrificing the long term?”

HEFCE Sustainability Metrics

Surplus does not equal Cash

Qu: Why do we need cash?• Reserves – Liabilities/Risk/Downturns• Working capital – Cash flows• Sustainability – Infrastructure and Strategic Investment

Qu: How much cash do we need?• Strategy for Surplus and Reinvestment• Contingency

Qu: Are we making enough cash?

Cash Flow Required for Strategic Investment and Contingency

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year

£kActual

Target

Historical Average

Forecast Average

2008-09: Percentage of Historical Cost Surplus to Total Income (excluding FRS17)

University of Huddersfield 2009-10, 14.48

University of Huddersfield, 8.02

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

Lower Quartile Mid Range Upper Quartile Delegates' Institutions

Lower Quartile 0.58%Median 2.47%Upper Quartile 5.13%

Vulnerability to downturn risks

Qu: Where are we vulnerable?

Income

Teaching Funding

2008-09: HEFCE T Grant as a percentage of Total Income

Huddersfield (2009-10), 38.92

Huddersfield, 42.03

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Lower Quartile Mid Range Upper Quartile Delegates' Institutions

Lower Quartile 19.05%Mean 29.33%Upper Quartile 39.44%

Vulnerability to downturn risks

Qu: Where are we vulnerable?

Income

Tuition Fees

Research (and Enterprise) Funding

Vulnerability to downturn risks

Qu: What should be our mitigating actions?• Strategic focus/growth• Portfolio planning/review• Scenario planning – where could we be?• Contingency funds

Vulnerability to downturn risks

Qu: Where are we vulnerable?

Expenditure• Pay• Non-Pay

2008-09: Percentage of Staff Costs (excluding FRS17 adjustments) to Total Income

The University of Huddersfield, 58.79

The University of Huddersfield 2009-10, 54.50

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

Lower Quartile Mid Range Upper Quartile Delegates' Institutions

Lower Quartile 53.36% Mean 55.79% Upper Quartile 60.24%

Pay cost risks

Qu: What should be our mitigating actions?• Rigorous planning process• Squeeze devolved allocations• Monitoring procedure• Extend turnover period• Process improvements• Rationalisation (voluntary/retirements/compulsory)• Severance costs – without enhancement?• Pension benefits• Reputation/morale/performance

Non Pay Costs

Qu: What should be our mitigating actions?• Squeeze devolved allocations• Question specific areas eg maintenance,

IT investment• VFM - Procurement

- Reporting • Shared Services

2008-09: Days of Net Liquidity to Total Expenditure (excluding depreciation and FRS17 adjustments)

The University of Huddersfield 92.26

The University of Huddersfield 2009-10 115.22

-50.00

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

Lower Quartile Mid Range Upper Quartile Delegates' Institutions

Lower Quartile 45.50 Mean 83.90 Upper Quartile 113.26

Liquidity Risks

Qu: Do we have a borrowings strategy?

Reduced income from investmentsInvestment risk v returnTreasury Management Policy – Audit CommitteeDebtors (in a downturn)Creditors – 10 day payment initiative

2008-09: Percentage of Long Term Borrowings to Total Income

The University of Huddersfield 2009-10 9.01

The University of Huddersfield 10.57

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

Lower Quartile Mid Range Upper Quartile Delegates' Institutions

Lower Quartile 4.53% Mean 19.05% Upper Quartile 29.74%

Borrowings Risks

Absolute borrowings/debt servicingCosts (margin and LIBOR)Availability of lendingPressure on Borrowings StrategyEstate StrategyTeaching and Research Infrastructure planningIT investment

2008-09: Total ratio of Estate falling in condition A or B (non-residential)

Huddersfield 2010-11 (forecast), 85%Huddersfield 2009-10, 82%

Huddersfield, 77%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Lower Quartile Mid Section Upper Quartile Delegates' Institutions

Lower Quartile 61% Mean 72% Upper Quartile 87%

Infrastructure Investment Risks

Qu: What is the current condition of our estate?

Academic space per student

IT strategy (Qu?)

NSS scores

Funding Council grants (in a downturn)

Qu: Can we afford to do it?

Can we afford not to do it?

Strategic Opportunities?

Fit for purpose?Focus and InvestmentMarket positioningPortfolio reviewDownside planning Budget managementWorking practicesValue for MoneyRestructuringPerformance issuesManagement structures and leadershipManagement informationFraud