Chapter 2.3: Monitoring
Periodically during the year the board and the Principal will want to assure themselves that the school is on track towards achieving its financial and non-financial objectives. It is up to each board and principal to determine how their school’s progress is monitored. For example, the senior staff and the Principal may report to the board monthly.
2.3.1 Indicators of financial health
- Positive working capital - this shows that the board can pay its current debts - short-term assets, such as cash or assets that can be converted to cash quickly, are greater than short-term liabilities (payments that have to be made soon).
- Operating surplus - income is greater than expenses.
- Positive equity - total assets are greater than total liabilities.
- Cyclical maintenance obligations are up to date.
- Roll information and staffing usage information are on track.
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2.3.2 Indicators that a school is financially at risk
- Negative working capital - this shows that the board cannot pay its current debts - short-term liabilities are greater than short-term assets.
- Operating deficit - expenses are greater than income.
- Any indebtedness outside the board’s borrowing limits (see note below).
- Failure to set aside cash funds for asset replacement (ie, computers) or exterior painting of the buildings (ie, cyclical maintenance provision).
- Failure to have a 10-year property plan in place.
- A qualified audit report.
Each of these indicators in isolation does not necessarily mean that a school is financially at risk as circumstances may vary, eg, a board may have cash reserves to cover a one-off operating deficit.
Note: any borrowing, even within the limits, is always risky. It should be unnecessary for a board to borrow unless it is in financial difficulties (excluding leases).
If a Principal or board is uncertain or believes their school is at risk, they should contact their financial service provider or local Ministry of Education Financial Advisor for help to assess the situation.
The most common reasons for a school finding itself in difficulty are:
- large property projects paid in full or part from local funds
- unsustainable levels of staffing (including teachers) paid out of operational funding and local funds
- unplanned acquisitions and large commitments to ongoing expenditure (ie, long-term painting contracts, ICT leases etc).
- In most cases, these problems can be avoided if the school plans and accurately forecasts what levels of expenditure are sustainable.
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2.3.3 Schools at financial risk, and the Ministry of Education
Each of the indicators outlined above in isolation does not necessarily mean that a school is financially at risk, but schools need to make a judgement based on their circumstances.
If a Principal or board believes their school may be at risk, they should contact the local Ministry of Education Financial Advisor for help in assessing the situation. This does not necessarily imply that more funding can be made available.
A checklist for analysing your school’s financial management and risk is provided in Appendix 1, Chapter 6 of the Funding, Staffing and Allowances Handbook. Boards are recommended to review this checklist annually.
The government requires that the Ministry of Education reviews every school’s audited financial statements and contacts schools where there is an element of financial risk. This does not mean that the school is necessarily at risk. A letter from the ministry may simply ask if the board has taken steps to remedy specific matters.
It is common for boards to have already noted potential problems and have the situation under control. There is evidence that a high percentage of boards exercise robust levels of financial responsibility and effectiveness.
If the board would like some assistance, the Ministry’s Financial Advisors are available to provide advice and support to the school.
If the financial situation of a school becomes critical the Minister of Education can invoke the provisions of the Education Act 1989. These can range from requiring the school to supply information or use expert assistance, the appointment of a limited statutory manager, or even removal of the board and replacement with a commissioner. It is better, for both the school and the ministry, if the school’s situation can be improved before this intervention is necessary. We encourage schools experiencing financial difficulty to contact their local Financial Advisor or other help as soon as possible.