HEFCE’s latest assessment of the financial health of universities in England, including forecasts up to 2017–18, shows three key findings:
Aiming for a sufficient margin is a key part of a university’s financial strategy. A margin is used as a buffer against uncertainty, be it over domestic and international student numbers, or the risk of significant reductions in government funding (as widely expected in the government’s spending review on 25 November). The sector operates within very fine margins, and small changes can quickly have a material impact – for example, HEFCE’s report shows a public funding reduction of 5% per year would mean the sector as a whole would end up in deficit by 2017–18.After covering unanticipated outcomes, universities reinvest what cash remains of their margins back into capital investment. This was covered in my colleague Chris Hale’s recent blog. HEFCE’s report shows that internal cash was the single largest source of finance for capital expenditure in 2013–14, and it is estimated that by 2017–18 internal cash will fund over 75% of capital investment. Mortgages and loans are the second most important source.External borrowing is set to increase from 26.3% of income to over 30% in 2015–16 and borrowing requires cash to be available in order to service debt. The ability of universities to meet their immediate and short-term obligations through holding cash or near cash assets is forecast to fall by 45%, from 122 days’ worth of expenditure in 2013–14 to 67 days in 2017–18. This takes the sector from a relatively comfortable position of having cash available to meet four months of expenses, to a more precarious position of just over two months.This is not an indication of a sector awash with cash – in fact, quite the opposite. The forecast for liquid funds in July 2018 is the lowest level reported since 2006.HEFCE’s report states that the trend of falling liquidity and increasing borrowing could be unsustainable for the sector in the longer term. Sustainability depends on universities covering the costs of staffing and services, and also their investment in infrastructure and future capacity. HEFCE’s report shows that a sustainability gap of £883 million exists in covering long-run costs, equivalent to 3.5% of total income. Universities generating larger margins of income over expenditure would help to close this sustainability gap.However, immediate prospects for increasing margins look slim. A survey by Deloitte showed that 69% of higher education finance directors expect surpluses to decline in the next 12 months. This compares to 22% of finance directors in the corporate sector. HEFCE’s latest assessment shows that operating surpluses for universities are expected to fall from 3.9% of total income in 2013–14 to 2.4% in 2015–16.