Financial Strength (Updated In-Year)
ESFA Financial Health Assessment Metrics
Operating Performance Education Specific EBITDA as a % of Income
The education specific EBITDA as a % of income is a measure of the underlying operating strength of the college. The higher the percentage measure, the stronger the operational performance. A measure of 8% and above is recognised as outstanding under the ESFA grading system.
The £60m+ investment made by the college in our Dudley and Brierley Hill Learning Quarters resulted in growth in learner numbers and income. Historically, this enabled the college to deliver a sector leading operating performance, despite the challenging financial environment faced by the FE sector. The college however has not been immune to the financial issues experienced by the sector, with government funding not keeping pace with the level of cost increases putting pressure on the college's EBITDA. The college anticipated improving its EBITDA levels through greater efficiencies arising from the transfer of Stourbridge operations from BMet in August 2019, which would increase learner numbers and income. However that was before the Covid-19 pandemic. Covid has had (and continues to have) a significant impact on the college, with apprenticeship and commercial provision particularly severely hit, leading to large decreases in income in those areas. In the short term the college was unable to reduce its costs as quickly as income fell, which resulted in the 2019-20 EBITDA decreasing to 4.5% of income. The college has taken action in 2020-21 to re-align its future costs with its reduced post Covid income levels, which makes limited impact on the 2020-21 EBITDA as costs have to be incurred in-year to deliver future cost reductions, but is forecast to increase future EBITDA as a % of income back up to around the outstanding benchmark of 8%+ under the ESFA measures.
Adjusted Current Ratio
The current ratio is a measure of current assets compared to current liabilities and is used as an indicator of a college's short-term liquidity. Whilst not a direct measure of cash, the higher the percentage measure, the better a college's liquidity, which means the more cash, or assets that can be easily converted into cash, a college has got compared to its short term liabilities. The maximum 100 points are awarded for a current ratio above 200%, which means that current assets have to be at least double current liabilities.
With the £60m+ development of the Dudley and Brierley Hill Learning Quarters, which commenced in 2011-12, the college's cash and liquidity position has been stretched since then and is weaker than it would otherwise have been, because cash generated from the college's operations has been invested in these capital projects.
The college re-structured its bank loan facilities in 2019, which transferred some short term debt into long term debt and increased the level of cash held by the college. This resulted in a strong improvement in our current ratio in 2018-19. Following the outbreak of Covid-19, the college closely monitored cash balances and only made essential purchases, thereby conserving cash ahead of the low income months between January and March 2021. This helped to increase cash and maintain the current ratio at a reasonable level at July 2020. Cash management will continue to be a very important task going forwards, however we anticipate that the college's current ratio is set to be maintained at existing levels over the next few years as the college re-aligns its costs with its reduced income levels post Covid-19.
Borrowing as a % of Income
Borrowing as a % of income (also known as gearing or leverage) is used to measure the proportion of assets invested in a college that are financed by borrowing. It also provides an indicator to the longer term financial stability of a college, because the higher the level of borrowing, the higher the risk to a college since more cash will have to be set aside to meet debt and interest repayments leaving less cash for everything else. The lower the percentage measure, the better a college's gearing and its prospects for long term stability. The maximum 100 points are awarded for £nil borrowing.
The college's borrowing increased in 2018-19 after a re-structure of bank loan facilities and further increased in 2019-20 to fund the transfer of assets and operations from BMet. However, as income also increased, the college's level of borrowing remained within the same ESFA scoring category between 35% and 40% of income. With income forecast to decrease in 2020-21 due to the impact of Covid-19, borrowing as a % of income is set to rise a little, but remain below the FE Commissioner's 40% benchmark.
The college's level of borrowing is forecast to reduce over the next two years through the planned repayment of loans and leases.
ESFA Overall Financial Health Assessment Grade
Through measuring the three ratio's above, the ESFA adds up the individual scores and provides an overall financial health assessment grade for a college, based on the banding structure illustrated in the chart.
Historically, the college has been graded 'Satisfactory', which the ESFA renamed as 'Requires Improvement' in 2019. The college moved towards the top of the Requires Improvement band in 2018-19 following the restructure of its bank facilities, which significantly increased its current ratio score. The score dropped in 2019-20 following the severe impacts of Covid-19 on college finances and operations but remained in the Requires Improvement category. The college has taken action in 2020-21 to re-align its future costs with its reduced income levels post Covid, but this will have a limited impact on the 2020-21 financial health as costs have to be incurred in-year to deliver future cost reductions thereby suppressing financial health measures.
However, with the operating performance set to increase from 2021-22, a reduction in the level of borrowing and improving liquidity through planned borrowing repayments, the college's financial health grade is forecast to increase to 'Good' in 2022-23.
College Financial Metrics
Operating Performance - Education Specific EBITDA
Education specific EBITDA (£m)
The sector measure used by the ESFA in its financial health assessment for operating performance is the education specific EBITDA as a % of income. EBITDA stands for Earnings (Profit) Before Interest Tax Depreciation and Amortisation. This is an appropriate measure of underlying operating performance as it includes items which are largely within the control of the college.
Growth in learner numbers and income arising from the strategic capital projects undertaken by the college over recent years has enabled the college to deliver a sector leading operating performance over that time.
However, the college has not been immune to the under-funding experienced by the college sector over recent years, which has severely impacted the financial health of the wider FE sector. This resulted in a reduction in our EBITDA from over £5m in 2016 to £3.2m in 2019, which was still over 7% of income. We anticipated that would be the low point in our operating performance cycle with the transfer of assets and operations from BMet in August 2019 helping to drive financial improvements. However, the Covid-19 pandemic had a significant impact on the college's finances, reducing income from apprenticeships, commercial activities and adult delivery, which resulted in a substantial reduction in EBITDA in 2019-20 to £2.2m as the college was not able to reduce costs as quickly or to the same extent as the fall in income.
The college has taken action in 2020-21 to re-align its future costs with its reduced post Covid income levels, which makes limited impact on the 2020-21 EBITDA, forecast to remain broadly unchanged from the previous year at about £2.1m, as costs have to be incurred in-year to deliver future cost reductions. However, these actions will have a full year cost benefit in 2021-22 and onwards, which when linked with the gradual increase in income levels as the economy slowly starts to recover post Covid, is set to see a rise again in EBITDA towards £4m (8%+ of income) over the next two years.
Total Income (£m)
Total college income has grown steadily year on year since 2011-12. The growth has principally been in the core 16-18 year old ESFA income and apprenticeships, although adult and other income has continued to rise every year too following the strategic capital projects undertaken over recent years. This growth in income reverses the general trend experienced elsewhere in the sector.
Income reached £48.9m in 2019-20, an increase of £5.3m on 2018-19 despite the substantial negative impact on activity and income levels from Covid-19. The 2019-20 growth followed the transfer of assets and operations from BMet in August 2019 as well as from the strong and growing apprenticeship provision and learner numbers built up over many years pre-Covid.
The college estimates that income will fall by almost £6m in both 2020-21 and 2021-22 compared to pre-Covid projections. This is mainly in commercial, apprenticeship and adult delivery areas, where Covid-19 has resulted in significantly lower learner numbers and where there is little to no external funding support.
We anticipate that income will gradually start to increase again from 2021-22, helped by a slow recovery of apprenticeship (assisted by the opening of the Black Country & Marches Institute of Technology in September 2021) and commercial activity, although we do not consider that either area will get back up to pre-Covid levels within the forecast period to July 2023. The growth will however principally come from 16-18 year old funding, helped by the increase in the core funding rate from 2020-21, but delivered mainly through aprojected increase in learner numbers funded on a lagged basis.
Staff Cost as a % of Income
Annual inflationary pay pressures, additional employer National Insurance Contributions, pension cost rises and the recruitment of staff ahead of income generating activities following the opening of Advance II and from having to invest in the staffing infrastructure following the change in the apprenticeship funding and rules with the introduction of the levy, have increased the college's staff costs year on year. Austerity and the funding constraints that has brought to the FE sector, has meant that funding has not kept pace with the rate of increase of costs, particularly pay costs. This resulted in the college's staff costs rising above the FE Commissioner's pay costs as a % of income benchmark of 65% in 2017-18 and 2018-19.
The impact of Covid-19 significantly reduced income levels in 2019-20, but the college was not able to reduce costs to the same extent or as quickly as the fall in income, which resulted in our pay costs as a % of income increasing to 68.5% in 2019-20.
Actions taken in 2020-21 to re-align college costs with post Covid income levels will start to see a reduction in pay costs as a % of income in 2020-21 to 67.5%, but the full effect of these actions will not be realised until 2021-22 and ongoing, when pay costs will reduce to around 65% of total income. A robust curriculum planning process to maximise efficient programme delivery leading to higher class sizes and staff utilisation will also help support this measure.
Cash Days at Year Ending 31 July
Cash days is the number of days that an organisation can continue to pay its operating expenses given its level of available cash. The FE Commissioner's benchmark is for college's to have sufficient cash to cover 25 cash days.
The £60m+ development in to the Dudley and Brierley Hill Learning Quarters, which commenced in 2011-12, has stretched the college's cash reserves and resulted in the college's cash position being much lower than it otherwise would have been each year. This has meant that historically the college's cash days measure has been relatively weak and some way below the FE Commissioner's benchmark of 25 days.
However, strong cash generation from operating activities supported by a re-structure of our bank loan facilities in 2019, which transferred some short term debt into long term debt and increased the level of cash held by the college, helped improve the college's cash days to 20 in 2018-19.
Following the outbreak of Covid-19, the college closely monitored cash balances and only made essential purchases, thereby conserving cash for the year ahead. This helped to increase the year-end cash balance and cash days to 29 at 31 July 2020, above the FE Commissioner benchmark of 25.
Cash management will continue to be imperative going forwards as we navigate through the challenging post Covid period. We anticipate that cash, and cash days, will steadily increase from 2021-22 as we feel the full effects of the cost reduction actions taken in 2020-21, helped by modest increases in income arising from the need for more training and upskilling to drive the economy forward post Covid. This, along with maintaining a controlled investment approach into future capital and estate maintenance projects, is forecast to increase cash days to 34 by July 2023.