Dozens of colleges face a cash-flow crisis next spring with many budgets falling short by pound;1million, principals’ leaders have warned.

This is because of changes in the way their funds are to be shared out over the next 12 months, says the Association of Colleges.

Monthly funding allocations for 20045 were issued on the eve of the summer holidays. Colleges discovered they would receive, on average, pound;1m less than they were expecting to have by next March.

Though the money will be made up in increases in payments in the last four months of the academic year, many colleges say they still may be forced to borrow.

The Learning and Skills Council told colleges they would get only 60 per cent of their annual funding allocation by March 31, instead of the 67 per cent expected.

As a result, some colleges in poor financial health fear they will need to seek bigger overdrafts.

The LSC announced the changes late last month - after colleges had set their budgets for next year. The AoC says up to 80 general FE colleges will face difficulties because of the changes.

Julian Gravatt, AoC director of funding and development, said: “More and more colleges are in a position where they are borrowing money, and these changes will put them under more pressure.

“The LSC didn’t tell anyone about the changes until almost the last day of July, after colleges were required to set their budgets for next year.” The changes could mean increased interest charges, cutting the amount of education and training colleges could afford in following years, he warned.

Colleges are paid by the LSC in monthly instalments between August and July. But next year they will receive less cash than they were expecting in January, February and March.

The AoC highlighted the problem in a briefing note to college principals and finance directors, saying that several colleges have already raised concerns. “We have registered these concerns in a letter to the LSC,” Mr Gravatt said.

He added that the changes provide “further evidence that the LSC’s 20056 funding round will be tougher than ever. This illustrates the pressure on the LSC in its 20045 financial year. Delaying the spring 2005 payments transfers more than pound;250m into the following year.”

The LSC, however, insists that colleges will benefit, as the changes match college income with expenditure patterns.

Rob Wye, director of the LSC’s chief executive division, said: “At the beginning of the college year, new staff and new courses mean that costs are higher. Similarly, colleges incur additional costs at the end of the year for both end-of-year expenditure and pre-expenditure for the following year.

“The revised payment profile means a cash-flow benefit for all colleges from August to December. There is a corresponding reduction in the profile in January to April, before funding levels increase.

“The LSC has considered the potential risks for colleges in financial difficulty. Local LSCs are already working with these colleges to put in place development plans that will strengthen their positions, and will review any cash-flow issues accordingly.”