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Liquidity in Wales and England

September 15, 2020

After my July UCU presentation on institutional finances, I was asked what the situation in Wales was with regard to liquidity and regulation.

Office for Students currently requires institutions to alert them if liquidity falls below 30 days.* This “reportable event” is designed to give the regulator notice that intervention might be required or a “market exit” managed.

It is not to be confused with a prudent level of liquidity. Most universities would specify the equivalent of 45-60 days as required for the “working capital” needed to cover daily activities.

The HEFCW Financial Management Code  doesn’t specify a minimum level, but requires Welsh HEIs to be more liquid.

86f. The institution must ensure that it retains sufficient liquid cash or equivalents to service working capital requirements as well as a prudent level of liquid reserve to be called upon in the case of extraordinary events;

This reference to prudence indicates that Welsh regulation is still aligned with Charity Commission guidance for charities to be able to cover 90 days of expenditure. Or more pointedly, it indicates the difference between the regulation of a quasi-public service and the market competition seen in England.

Some English universities did reason that they didn’t need to have so much cash and near-cash to hand as they weren’t reliant on donations and so income was more predictable.

The last few months have undermined that argument: projected income for 2020/21 has moved dramatically. Those institutions without significant liquidity (which can incorporate overdrafts and revolving credit facilities) were moved to push the expected shock from Covid on to operating budgets and staff pay and conditions. This was clearly bad practice and has affected staff goodwill, even if budgets now look very different for this financial year.

If universities manage to avoid a financial shock from the pandemic, many need to recognise that they were not in a good position. The idea that liquid reserves hoard resources that would be better invested in buildings seems to have had widespread currency. This year should really produce a rethink about the merits of “efficient” or “lean” approaches to treasury practice.

Had the pandemic arrived with the kind of impact that many universities were modelling, then some would have been lucky or unlucky depending on where they were in their capital development cycle. If they had borrowed to invest and not yet spent the money, they would have got through. If they had spent the money …

That’s not good enough. It’s bad governance not to have contingency or “rainy days” funds.

*The “liquidity days” measure calculates the number of days of average expenditure that an institution can cover from cash and current investments (things that can be readily turned into cash like deposit accounts with notice periods) if income were to dry up. It measures the ability to deal with a short-term shock.

Calculations vary but a typical measure would see annual operating expenditure less depreciation and adverse pension movements (both non-cash expenditure items) divided by 365 to give the average daily expenditure. The amount of cash and current investments on hand can be then be used to arrive at the number of days that can be covered.

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