Financial Health
The LSC monitors the financial health of providers and has well-established and accepted procedures for fulfilling this need. Where a provider’s financial health is identified as being weak, the LSC typically requires the provider to develop robust plans to improve its financial health, drawing on a range of intervention measures as appropriate.
Under the Framework for Excellence, the LSC will continue to monitor provider’s financial health as a key performance area, based on three performance measures, rather than the existing six ratios, with the expectation that providers perform well in all areas.
The financial health performance indicator looks at the overall picture of a provider’s financial position, with the expectation that the provider performs well in all areas.
This performance indicator comprises three financial health measures relating to the solvency, sustainability and status of a provider. The proposed definitions of the three measures differ slightly between FE colleges and other providers, but they serve the same purpose: to assess the overall robustness of a provider’s finances. The measures are the following ratios:
i) Solvency (current ratio)
for colleges:
Adjusted current ratio, defined as:
Current Assets
Current Liabilities
for all other providers:
Current ratio defined as:
Current Assets
Current Liabilities
ii) Sustainability (operating surplus or deficit as a percentage of total income)
for colleges:
Operating surplus or deficit before tax x 100
Total income
for all other providers:
Net profit after tax x 100
Turnover
iii) Status (borrowing as a percentage of certain reserves and debt)
for colleges:
Total borrowing as a percentage of reserves and debt
for all other providers:
Total debt as a percentage of reserves and debt
Each of the three measures will receive a score ranging from zero to 100, where zero represents a low value and 100 represents a high value. The scales on which the scores are based may vary by provider type. The overall score for a provider will be obtained by totalling the scores for the individual measures and adding a further score to recognise consistent good performance across the three ratios.
The total score, including a score for consistent good performance, will be translated into an overall grade for the financial health key performance area of outstanding, good, satisfactory or inadequate.
It is proposed to extend the current approach used for the FE college sector to test its operation in relation to other providers during the pilot period. FE colleges formally consider whether their automatically calculated financial health grade appropriately reflects their position.
The LSC carries out the final professional validation of all the automatically generated financial health grades. Under the Framework for Excellence this validation could be reflected either in the scoring or by reference to transparent criteria.
Colleges
The required data for the financial health ratios is received routinely twice a year from colleges as part of the finance record and financial plan electronic returns submitted at the end of December and July respectively.
Currently, six ratios (rather than the three proposed ratios under the Framework) are calculated using an auto-score, which is used as the basis for assessment.
Under the Framework, the new auto-score will be built into colleges’ electronic returns. LSC validation processes will be confirmed during the pilot.
Other providers
For non-college providers, there is no standard means of submission or collection of this data. Much of the data is readily available, for example, from Companies House. Where additional information is required this is likely to be readily available from providers’ existing records. Options for data collection to support data already collected may include the use of an electronic submission via the existing provider gateway or the collection of financial accounts within the LSC’s contracting processes.
Further to the guidance published in Framework for Excellence: Provider Guide 2008/09,we would like to confirm that any provider who has an LSC contract value of less than £50,000 is exempt from the Financial Health Performance Indicator. This is in alignment with the Financial Health Assessment of Non-College Providers statement in March 2007. This exemption applies to all providers in scope for the Framework in 2008/09.
