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Deficits put ideas at risk

The first answer is always "no". No matter how good the idea or how much you like its proponent, you need to say "no".

The inspectors may insist, the auditors may command, it may even be a health and safety priority. Doesn't matter. Your job is to guard the budget and control the spending.

If you say no, they may go away and find the money without your help. It may even be unnecessary. Occasionally, you must say "yes". For the want of a fuse, the college could close.

But most of the time, it's no. You are the finance person and it is your job.

Not, to tell the truth, a job that is always understood in colleges. The popular image is Silas Marner, enjoying saying no so that he can close the door at the end of the day and count the money. The less spending, the better. The more control, the happier. Never mind the quality, feel the size of the surplus.

The important issue is not whether you like or loathe your finance director. The issue is whether colleges should be making surpluses at all.

One school of thought says they shouldn't bother. Isn't a surplus simply money that should have been spent but wasn't? Take the Learning and Skills Council in its first year. It underspent its budget by 3 per cent and made a surplus of pound;150 million. Couldn't this money have been spent on students and staff?

Down at the college level, 3 per cent is the target for a clean bill of financial health. If a college runs a surplus at 3 per cent of its income, it is halfway to the coveted grade A status.

Some colleges mention this in their job adverts. To what end? Is this just so the principal can look good or is there something else?

A lecturer I respect told me that it doesn't matter if the college makes a deficit. "All good organisations make deficits."

It's a fair point. Football clubs do it. Theatres are notorious for it.

Even many secondary schools have done it.

Take a step back. There's a difference. Chelsea Football Club has millionaire backers from Russia. Local authorities pay the bills for schools. Who will bail out your college if it makes repeated deficits and runs out of cash, and at what cost?

Money in the bank is the first step to independence. Is there a point where a college has more than it needs? Definitely. Some charities have reserves that could last them for years if nothing else came in.

The Charity Commission says that two years' worth of reserves is enough.

Most colleges have much less. Their cash would last them three to six months. Increasingly, they'll need more to pay for long-term commitments like staff pensions and up-to-date facilities. If colleges want to survive to 2020, they will need reserves and they will need to make surpluses.

That brings us back to the LSC's own surplus. The official reason for this is college under-performance. According to LSC staff, 75 per cent of colleges missed their 2001-2 targets. As a result, the LSC had to take back some of its grant and unexpectedly made a surplus.

The reasons are complex. In curriculum reform 2001-2 was a transition year.

Budgets fell between two funding councils. The then Further Education Funding Council handed out the money. The LSC checked whether it had been spent, using auditors instructed to find mistakes. The auditors were successful.

The LSC used the errors to claim back money. It made a surplus. Many colleges made deficits because they had spent the money on staff a year before they lost the money to the LSC - 2001-2 was a sign of how complex and risky the funding method has become for colleges.

In 2003, there is a heightened state of nervousness surrounding budgets.

College managers know they should be making surpluses but find deficits.

Changes to systems meant that they spent most of 2002-3 in the dark over their performance.

At the end of the year they may find they have missed their targets - retrospectively and because of rules their staff failed to comprehend. More certainty in 2003-4 would help but instead there are more targets. Reform is promised but it will not happen until next year or later.

Surpluses create confidence. Deficits, funding audits and year-end clawback have created fear, uncertainty and doubt. The surpluses made by the LSC in its early years have their mirror image in college budgets.

The impact will be seen in behaviour. As colleges find that their greatest risk is LSC funding they will inevitably take fewer risks in how they deliver government targets. Whether this produces the desired outcomes remains to be seen.

Julian Gravatt is finance director of The City Lit, London

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