For many colleges, juggling finances is no longer simply a means to make ends meet and be more “efficient”. Instead, it is a desperate bid for survival against the threat of going into administration, unless they are bailed out by the government.

Ahead of the introduction of a new insolvency regime for failing colleges, which comes into force later this year, a Tes analysis of the latest college accounts shows that more than one in eight colleges are in such poor financial health that they are in danger of not being able to pay their bills - and are likely to be reliant on the “goodwill of others”.

By applying the scoring system used by the Education and Skills Funding Agency (ESFA) to the financial health measurements included in the latest college accounts (borrowing and earnings as percentages of income, and the ratio between current assets and liabilities), Tes can reveal that more than one in four colleges would be rated “satisfactory” when measured against ESFA’s standard, which means they have “limited capacity to respond successfully to opportunities or adverse circumstances”. Some 12.8 per cent would be graded “inadequate”, which ESFA defines as being in “financial difficulty and likely to be dependent on the goodwill of others, with a significant risk of not being able to meet obligations”.

Barely one-third of colleges would be graded as “good” and about a quarter would be “outstanding” - which means they have “robust finances”, according to ESFA’s scoring system.

‘Fragile state’

The research “underlines yet again the continuing fragile state of many of our FE colleges”, says Gordon Marsden, Labour’s shadow minister for FE. “This is a result of the cumulative underfunding by government in the sector, as well as their failure to expand initiatives such as traineeships, which could broaden the reach of those colleges.”

More than 40 colleges currently have notices of concern against them due to their financial health, which means they are failing to meet acceptable financial standards, and Department for Education officials are currently reviewing the funding arrangements for FE.

Julian Gravatt, deputy chief executive of the Association of Colleges (AoC), says: “Colleges are under increasing financial pressure because the DfE hasn’t changed post-16 funding rates to take account of inflation for five years, while staff costs and expectations have continued to increase.”

The financial health of the FE sector is “of growing concern”, according to James Kewin, deputy chief executive of the Sixth Form Colleges Association. “Even the most efficient sixth-form colleges tell us that their expenditure will soon start to exceed their income. We are hopeful that the government’s review of FE funding will provide an evidence-based assessment of what the national funding rate should be. We conducted our own research in 2015 that concluded 16-19 funding needed to be increased by at least £1,000 per student.”

The scale of financial problems within the FE sector prompted the government’s area reviews, launched in 2015, which have already resulted in a number of colleges being forced to merge to survive as going concerns.

The government admits there is less funding going directly to colleges - due to “funding moving directly into the hands of employers and learners, and a declining adult skills budget” - in its policy document on dealing with colleges in financial difficulty. It warns: “Where colleges have not taken sufficient active steps to address potential poor financial health or to adjust their business model in response to the changing economic environment, they have placed their existence at risk.”

The document adds that the education secretary “has no obligation to meet the liabilities of a college which gets into financial difficulty or faces closure”.

As well as cutting staff, many colleges are having to resort to selling off land and buildings to stay afloat. The value of fixed assets, such as land and buildings, held for sale tripled from £25.4 million in 2015-16 to £77.4 million in 2016-17, the latest college accounts show.

‘Not bombproof’

One college in “inadequate” financial health is Stoke on Trent College. A spokesperson says its “well-documented financial situation is primarily due to historical debt issues, which have been exacerbated by the reduction of funding for FE in recent years.”

The college has staked its future on getting a £21.9 million grant from the DfE, and the spokesperson explains that “once this funding is secured, Stoke on Trent College expects to return to a position of “good” financial health within two years”.

While the problems of colleges like this are evident, even those that are in good financial health should not rest easy. Deputy FE commissioner Andrew Tyley, speaking at the AoC’s finance conference last week, said: “What is surprising me is just how quickly colleges that were ‘good’ or ‘outstanding’ and looked pretty bombproof through area review, within the space of 12-18 months, all of a sudden, are in a really tough place.”

Mo Nisbet, principal of Longley Park Sixth Form College in Sheffield, where more than 50 jobs have been cut in the past five years, warns that “the pressures are not just financial”. She says: “There is also a human cost in additional workload, and high levels of stress and anxiety. I worry that it will take a catastrophic drop in educational standards and/or significant harm to young people before the funding crisis is recognised.”

A DfE spokesperson says: “We have protected the base rate of funding for all 16- to 19-year-old students until 2020 to make sure every young person has access to the education or training they deserve. Exceptional financial support is available to make sure learners at FE colleges facing financial difficulties have the provision they need.”