The Education and Skills Funding Agency (ESFA) uses financial health score as a measure of an organisation’s financial status. The health score measures their financial performance and their ability to maintain ongoing financial commitments. It is important for an organisation to understand the guidelines outlined by the ESFA and what they can do to affect their score. We at Cloud Accountant.com take a look at how you can affect your company’s Financial Health Score for the ESFA.
What is the ESFA?
The ESFA brings together the former responsibilities of the Education Funding Agency (EFA) and Skills Funding Agency (SFA) to create a single agency accountable for funding education and skills for children, young people and adults. It is a government agency of the UK, sponsored by the Department for Education.
What is the ESFA Assessment?
Organisations such as independent training providers, special post-16 institutions and non-maintained specialist schools will need to pass a financial health assessment in order to gain funding from the ESFA. The guidance is not for general further education colleges, sixth form colleges, academies, or academy trusts. The assessment is based on three elements taken from the latest available, and where applicable, published financial statements.
How will my company’s Financial Health Score be graded?
The assessment is based on three elements
- Profitability – Operating position after tax as a percentage of income, defined as:Profit after tax / Turnover x 100. For this purpose, depreciation and amortisation are added back to profit after tax and dividends are subtracted.
- Solvency: Current ratio defined as: Current Assets / Current Liabilities.
- Gearing: Total debt as a percentage of reserves and debt. Reserves are defined for this purpose as shareholders’ funds with less intangible assets. If this is a negative figure, an automatic score of 0 is given. Debt is defined as all long-term and short-term borrowings, which include, bank overdrafts, finance leases and hire purchase contracts, credit cards, directors’ loans to the company, inter-company and group loans to the company, personal loans to the company, directors’ current accounts and amounts owed to the directors’. We may include other creditors within the debt figure if we are unable to identify the scope of borrowings contained within this figure. A breakdown of other creditors must be supplied alongside the submission of your financial statements.
Following the assessment, you will get a point score out of 300. When grading, they will take into consideration achievability, potential for delivery against the information submitted and any autoscore recorded. From the point score you will then be graded as follows;
- Outstanding (240-300 points) – An organisation that appears to have robust finances to fulfil its contractual obligations and to respond successfully to opportunities or adverse circumstances. Normally an organisation with Outstanding/Good indicators for profitability, solvency and gearing
- Good (240-230 points) – An organisation that appears to have sufficiently robust finances to fulfil its contractual obligations, and to respond successfully to most opportunities or adverse circumstances. Normally an organisation with at least two Good indicators for profitability, solvency and gearing.
- Satisfactory (120-170 points) – An organisation that appears to have sufficient resources to fulfil its contractual obligations, but also appears likely to have limited capacity to respond successfully to opportunities or adverse circumstances. Normally an organisation with at least two satisfactory indicators for profitability, solvency and gearing.
- Inadequate (<=110 points) – An organisation that is in financial difficulty and very likely to be dependent on the goodwill and/or financial support of others. There is a significant risk of organisations in this group not being able to fulfil contractual obligations because of weak financial health. Normally an organisation with at least two inadequate indicators for profitability, solvency and gearing.
It is important to follow the ESFA guidelines to help academies understand and comply with their financial management and governance requirements. For more information on funding, payments and compliance visit their website.
Cloud Accountant’s qualified, professional accountants value collaborating with our clients and understand the need for clear, concise communication throughout our partnership. Our qualified experts are on-hand to help your business to the next level. If you’d like to discuss how you can work with our experts and reap the financial benefits for your company, contact us today on 0113 323 1960 or Itjustclicks@cloudaccountant.com for a confidential discussion.