Academies and boosting income through investment

What can academies do with cash they don't immediately need?

Even with funding under pressure there are some academies which continue to hold legacy surpluses or which have been able to build up reserves.  For some academies, cash flow may mean that money is being held but not immediately required to meet payment demands.

It is the duty of every academy board to ensure that it has the money to meet its financial obligations as and when they fall due.  In the meantime, what can you do with any surplus?

Recently academies have been investing available surpluses to boost returns at a time when bank interest rates are low.  Academies can invest funds in order to further their charitable aims, provided their investments are considered to be within an appropriate level of risk.

Broadly, academy trusts may invest:

• for financial return;
• to directly further charitable (educational) aims whilst at the same time achieving a financial return, known as programme related investment; and
• in 'mixed motive investments', an investment that cannot properly be classified as a financial investment or a programme related investment.

 Examples of such investments include:

• overnight and short term deposits, and investment funds (which pool and invest on the stock market).  This was recently highlighted by an article in Schools Week;
• establishing or supporting a trading subsidiary offering, for example, lettings and use of school facilities (such as leisure suites, music studios and theatre space for local productions); and
• mixed traded activities, such as 'we can do it' studios, childcare and hair and beauty salons offering vocational training.

Different legal and financial consideration will apply to the different investment objectives. When considering what monies may be available for investment, the academy trustees will need to be aware of any restrictions on those funds, such as the purpose of the General Annual Grant, provisions of the Academies Financial Handbook, and restricted status of donations or other payments received.

Any investment must be properly managed, be at an appropriate level of risk (in order to effectively balance risk and return) and be kept under regular review.  Academy trustees must always take, and document, appropriate advice when making decisions about their investment options.  

A further consideration for those academies which benefit from permanently endowed assets is whether they should adopt a total-return approach to investments.  'Total-return' enables trustees to allocate the investment return in whatever way they determine meets the best interests of the academy trust, regardless of whether that return is generated by income or capital gains. 

The academy trust should have an Investment, Reserves, and Risk policy, each of which should be regularly reviewed as part of the usual programme for reviewing trust policies and procedures.

The Charity Commission has some helpful guidance on investing, "Charities and investment matters: a guide for trustees" (CC14).  Investment decisions should be made in line with the academy trust's investment policy, which is formulated, amongst other things, on the basis of an agreed level of risk relative to an appropriate expectation of return, and the objectives of the academy.

Whilst in the past reserves may have been regarded as simply a "rainy day" fund, they are of real importance for the financial stability and viability of the academy in furthering its charitable objectives.  Charity Commission guidance on this can be found in "Charity Reserves: building resilience" (CC19).  A reserves policy will provide both accountability and a valuable communication tool for engagement with stakeholders. In particular, a clear policy can help the reputational risk of substantial reserves being held at year end. Too high a level of reserves, without explanation, may raise difficult questions with the level of reserves held by academies being the subject of recent FOI requests.  

Academy trusts have the power to make investments.  Some are fortunate to have, or are able to find, the funds to invest.  Advice is essential, both in relation to any restrictions on particular funds but also in what and how to invest. As an educational charity, the decision to invest is not limited to achieving the greatest financial return. Risk must be addressed and a balance found between current needs and a longer term view on what best advances the academy trust's educational purposes.