Many college heads say their problems have been exacerbated by the failure to meet the Government's target of an 8 per cent expansion in student numbers.
Some of the largest colleges are making up to 100 staff redundant. A handful are in such a serious state, they will be lucky to escape bankruptcy.
Four large colleges in one of the most deprived areas of London stand to lose a further Pounds 2 million unpaid cash for contracts with the South Thames Training and Enterprise Council which went bankrupt last month.
Sir William Stubbs, chief executive of the Further Education Funding Council, reveals in his first annual report that the sector had such "slender reserves" it was close to bankruptcy last summer.
"Overall, colleges were forecasting that they would have enough cash at the end of July 1994 to meet only 12 days' expenditure. Colleges identified a need to invest Pounds 400 million a year for the next three years in order to achieve their strategic goals," he said.
One-in-three colleges reported serious financial worries. Following the Public Expenditure Settlement and Government demands for 5 per cent efficiency gains, these colleges may now have to make staff redundant.
Liverpool College is laying off up to 100 staff. North Trafford is making 25 full-time-equivalent staff redundant to save Pounds 600,000. Southwark is laying off 38 full-time equivalent lecturing staff. Most colleges contacted by The TES reported at least six redundancies.
In some, such as Southwark, the picture is complicated by demands for curriculum reforms and the closure of buildings. Southwark is also one of four colleges, including Lambeth, Lewisham and Woolwich, hit by the collapse of the TEC. The worst-affected will be Lambeth, which stands to lose up to Pounds 800,000 in addition to demands from the FEFC to drive down costs as, historically, it has a high average level of funding.
The principal, Adrian Perry, said: "We have quite enough to put up with, without this. It will gravely affect our strategic plans."
The collapse of the TEC has alarmed many colleges. Despite Government assurances that it was a "one-off" at least three TECs are understood to have financial difficulties.