Spare a thought for your school office: the people there about to take on responsibility for financial services from your local town hall. They will now be struggling with such phrases as “tax deductible at source”, “interest-free lump sum” and “with profits account”.

Labour’s new system of school financial arrangements, Fair Funding: Improving Delegation to Schools, means that, in a nutshell, authorities will have to hand over responsibility for accounts, personnel, payroll and insurance to schools as the final tranche of the school budget is delegated.

There is a two-speed timetable, with former grant-maintained schools being fully delegated on September 1 next year, when they officially transfer to local education authority control, and all locally managed schools changing after March 31, 2000.

As part of their increased funding, schools will have to decide whether to go to a private financial services company or stick with an essentially privatised local education authority accounts operation. The big question is how will schools be able to decide whether they are getting value for money. Published accounts from local education authorities should help.

The new accounting for schools will be a lot nearer the grant-maintained model as outlined in the Funding Agency for School’s guide to accounts, The Rainbow Pack. As schools management accounts are reorganised along a private sector model, so more accountants will be able to offer their services and schools will get a clear set of accounts which they can use to form development plans.

There are economies to be gained from contracting out. Barry McColgan, managing director of City-based Financial Management, says: “Local authority accounting is opaque. Secondary schools with an annual budget of pound;2-3 million are as big as many medium-sized businesses. We can work with governors to establish a budget. We have a software package which prepares management accounts that can be easily understood by non-accountants. For a flat annual charge schools will be better off out-sourcing their accounts and spending the money they save on an extra teacher.”

There are plenty more models of private sector good practice to choose from and a healthy market competition that is driving costs down and quality up.

David Clarke, managing director of The Accounting Centre, a payroll specialist in north London, says: “Schools are afraid of change even though their LEA financial services may be costing them twice as much as a private firm.”

Mr McColgan says: “All schools will be as financially accountable, as GM schools are now. The market will open up immensely.”

Payroll providers are regulated by BACS - the banking automated clearings system - an organisation run by the high street banks which approves salary transfer arrangements. All local education authorities are BACS approved but only about a dozen private suppliers are.

The Accounting Centre provides payroll for 10 local authority and 20 grant maintained schools.

CSL is a much bigger player in this market - it now provides payroll for Oxford, Reading and Berkshire, East Sussex, Sheffield, Kingston upon Thames and Croydon councils.

Mr Clarke says: “With something like 24,000 schools in the country, the local authority market will obviously be one well worth going for.”

Dave Oldman, payroll manager for CSL Croydon, says: “We’ve visited every single school in the borough and we’re looking at ways to help them save time and money.”

In Croydon, CSL is trying out a computer readable timesheet that simplifies payments for casual staff. Mr Oldman explains: “If the schools handle their own part-timers there’ll be less likelihood of monies coming off the wrong account. The school can keep track of its monthly budget.”

Linda Jones, of Haling Manor secondary school in south Croydon, agrees:

“Instead of collating individual timesheets, everything is on one form. It’s much simpler and I’m sure there are savings to be made.”

Private companies will be able to offer greater flexibility and schools themselves may see opportunities for a bit of do-it-yourself. There are many accounting packages available off the shelf that schools could run on an office PC, but for the most part out-sourcing looks the preferred option, especially if financial services companies become one-stop shops.

But the local education authority monopoly will not be broken easily. Some, like Somerset, are now starting to offer payroll and accounting to schools outside their boundaries.

Split away from a local grouping, schools could lose some of their economies of scale. The problem is particularly noticeable with insurance, where local authorities often choose to self insure. Schools might find premiums are too expensive or else may find they are uninsurable.

Derek Archer, scheme manager for GM Schools Mutual, says: “A small primary would cost pound;2,000 whereas a big secondary would be around pound;30,000 to cover. Many would want to take responsibility for arranging their own insurance but until things settle down a great many schools will want to stick with their existing arrangements.”