This blog was kindly contributed by Matt Sisson, Head of Membership at the British Universities Finance Directors Group (BUFDG).
Universities are complex and unique organisations, with an impact that stretches beyond teaching and research on contained campuses. They have become key anchors in their local communities and regional hubs of economic activity. They are major employers, magnets for national and international collaboration and an important pillar of civil society. No other kind of organisation comes close to the variety and scale of universities’ educational, entrepreneurial, charitable and social activity.
Having a unique place in the world requires an unusual business model that facilitates such a wide range of operations. It also requires a unique way of accounting for how universities generate and spend their income and create value for all their stakeholders. It is a topic that is little-, or often mis-understood, beyond the walls of university committee meeting rooms. But it should not be niche or out of bounds for non-accountants. In the current climate, it has become more important than ever that the broad church of university stakeholders understand how universities report their finances.
UK universities operate in a higher education sector that is competitive, complex and changing constantly. They are part of a society where uncertainty seems to be the norm, whether that is in politics, demographics, student preferences, or the march of technology. To succeed in this environment, universities need adequate and sustainable funding, a sound financial plan and competent financial management.
An issue of trust?
They also exist in a world where ‘trust’ seems to be an increasingly scarce resource. Some institutions have been slow to understand that not everyone knows or thinks that their intentions are wholly benevolent and they have been naïve to assume that they are organisations only capable of good. Many are realizing, perhaps belatedly, that ‘transparency’ in how they create value cannot just mean publishing a set of dull and impenetrable financial statements every year. Just as they are finally getting to grips with presenting financial information to students, many institutions are adopting integrated frameworks for reporting so they can present more balanced views of their performance and in more accessible formats.
But these can only go so far. Some stakeholders, including university governors and even some managers themselves, need to understand better the paramount importance of cashflow, the impact of changes in pension assumptions on income and expenditure statements and balance sheets, or, among other pressing issues, know on what reserves can actually be spent. Spoiler alert: they probably cannot. There is a reason that universities account for these and report in the sometimes-complex way they do. It is often the best approach and, anyway, it is a statutory requirement. Universities can do more to provide narrative that explains these in simpler language but, as the recent pensions dispute has proven, sometimes only wrestling with the complex stuff will do.
Become an explorer
For this, more university stakeholders need to become brave Annual Report explorers. Fortunately, they do not have to adventure alone. Over the years the British Universities Finance Directors Group (BUFDG) has worked to improve understanding of university business models and financial accounting and today we’ve launched an accessible new guide, Understanding HE Finance, to be a useful companion along the way. The guide builds on the 2011 publication An Insider’s Guide to Finance and Accounting in Higher Education that was published jointly by BUFDG, the University and Colleges Employment Association, and the sector unions.
Understanding HE Finance aims to explain university finances and funding so that those with little or no financial background can understand it. It looks at how: institutions ‘tick’ from a financial perspective: where they get their money from; how they spend it and why; and how the financial statements demonstrate this. It also helps readers navigate the thornier issues of monitoring financial performance, university investment, cross-subsidies and costing activities, and even how to tell if an institution is in trouble. We’ll keep updating the new guide, notably to reflect updates to the terminology used in next year’s financial statements onwards, and in response to feedback. Also, look out for two supplementary guides, on Accounting for Pensions in Higher Education Institutions and on Tax in Higher Education early next year.
Back in fashion
Despite the challenges, the university sector is still a jewel in the crown of the UK. And despite our many differences, those of us who work in the sector want to see our universities on a strong financial footing and run and governed effectively. Improved understanding of university finances can play its part, but for this both sides will need to put the work in. After that, some old-fashioned compromise, and maybe even more old-fashioned ‘good faith’, may be required.