The Education and Skills Funding Agency (ESFA) recently published a new financial handbook on 28 February 2024, with significant implications for independent training providers (ITPs) which will become effective from 1 August 2024.
We asked our very own Martin Ridgeway on his opinion of the new financial requirements and what it might mean for ITP’s post August.
Firstly, what is the financial handbook that the ESFA has launched?
The handbook aims to support ITPs with financial management and governance by setting out good practice and through requiring or recommending specific arrangements to be in place.
Unusually (some might say) for an ESFA published document Annex B to the document lays out quite neatly the core governance and financial requirements for ITPs based on the level of funding they directly draw down from the ESFA.
Will the changes be a challenge for the sector?
I would imagine (and hope) that many of the governance and financial requirements laid out are not a surprise to many larger ITP’s and much of what is prescribed will have been embedded for them for a while.
However, particularly for the second tier of providers, there are a few things that caught my eye:
1. ITP’s that may not meet the threshold for annual financial audit currently laid out by company law will soon be required to present financial statements with an external audit report (if they draw down more than £1M of ESFA funding per annum). This is significant additional burden and cost to many smaller ITP’s who may not be familiar with the requirements and preparation required for an annual financial audit.
2. Rolling 12-month cash flow forecasts are now required for any ITP who draws down more than more than £100K of funding. Many smaller providers may currently only prepare budgets/projections annually, and many more may budget annually with periodic reforecasts. A requirement to maintain rolling 12-month cashflow projections at all times might prove to be a significant burden to some and will inevitably need resourcing for many.
And what about the larger ITP’s? Will they be affected by these changes?
For the largest ITP’s an independent audit and risk committee must be formed, and a recognised code of governance must be formally adopted and then demonstrably adhered to, which is no bad thing, but good process and procedure has a home here. Other interesting points of interest for me include;
1. For larger providers the ESFA now require a copy of the management letter produced as part of your financial audit. Expect these letters to become more detailed, and the work carried out by external auditors to increase (at your cost) as the audit firm engaged will not wish to leave itself exposed to any PI claim raised by the ESFA or a provider for not having carried out a thorough review of internal controls.
2. Preparation of statutory financial statements and any associated external audit will have to take place within timescales much shorter than those prescribed by company law to meet the ESFA reporting timelines. Make sure your annual statutory accounts process is adjusted to take care of this, and make sure you have booked your audit in, in good time to deliver. For ITP’s that are part of a group of companies that need to consolidate their accounts, this may also have implications for the rest of the group that they are part of (this also applies to smaller provider too to a lesser extent).
Do you think the use of funding thresholds to determine which elements of the framework become mandatory could be a confusing benchmark for ITP’s?
Yes, this is an interesting and challenging side issue. Funding levels are rarely certain and can be affected by performance. If you are on the cusp, say, of the £8M threshold for largest ITP’s, do you have to meet all the requirements ‘just in case’ you find your organisation over the threshold due to late performance success or late funding for over delivery being granted. Difficult call.
The need for experienced Non-Executive Directors (NED’s) is now formalised, how do you see this being implemented?
Yes, the need for experienced Non-Executive Directors for the largest ITP’s, not only on the main Board, but also as be part of the audit and risk committee is now solidified. I would advise any larger ITP to engage and appoint NED’s who can not only help you ‘tick the box’ for the ESFA but who can also genuinely help you drive your business forward.
For those providers in the 2nd tier (between £1M and £8M of funding) for whom many of the whilst not mandated, an experienced NED with a financial background in the sector might be just what you need going forward to help navigate the additional requirements imposed.
Martin has a 20+ year career as a Finance focussed Board member for a variety of private training providers in the FE and DWP sectors, typically in the £10M to £20M per annum funding