This article was first published in the January 2015 UK edition of Accounting and Business magazine.

The introduction of tuition fees in 1998 – and their subsequent large rise – has had a major impact on the way universities are run. They have become more like businesses in outlook and are starting to see students as customers.

‘We have moved from an environment of largely entitlement funding to one in which we need to earn most of our income from tuition fees, research bodies, public and private sector partners and funders, both at home and overseas,’ explains John Cunningham FCCA, director of finance at Manchester Metropolitan University. ‘We don’t have the situation we used to have where a significant proportion of our income came from block grant, which was dependable and reasonably predictable year-on-year.’

The national policy environment remains uncertain for tertiary education. ‘The just-published green paper does not contain much policy detail as to what the future size and shape of the sector might be,’ says Cunningham. ‘But we will probably have a much more diverse and competitive higher education market than we do today.’

That government green paper, Higher education: teaching excellence, social mobility and student choice, published in November, did sketch in some indicators of future direction. It signalled the creation of an Office for Students regulator, promoting choice and competition in the sector.

Other priorities outlined in the green paper include raising productivity and teaching standards within universities, improving social mobility for students, and matching the skills output of higher education institutions with the needs of the economy and employers.

Fees here to stay

While future higher education policy remains incomplete, we do know that high tuition fees are here for the foreseeable future. Their effects have been profound in England and Wales (the policy and fee structure is different in Scotland and Northern Ireland).

Students now have higher expectations of universities – in many cases, demanding improvements in teaching standards, support services and accommodation.

‘Student expectations have changed because they are now paying and they are much more savvy about what they are getting and the value for money,’ says Stella Atherstone FCCA, head of finance for the University of London’s service departments.

Higher student fees have also led to a need to increase investment in universities’ estates – in teaching facilities, the built environment and student accommodation.

The University of London is upgrading its halls of residence, embarking on a major renovation project to improve 1,000 bed spaces in partnership with student accommodation specialist UTP.

‘More money is being spent on the estate, because for decades we have done very little,’ says Angela Ireland FCCA, the University of London’s head of estates finance. That investment also responds to changing expectations from students, who have adjusted their behaviour as a result of internet technologies. In particular, demand for libraries has fallen, potentially freeing up vast spaces for other uses.

Investment in infrastructure was highlighted as a key issue for universities in a recent report, Financial health of the higher education sector, from the Higher Education Funding Council for England (HEFCE). Universities told HEFCE they expect to use £10.4bn from reserves, supported by £3.5bn in borrowings, to invest in infrastructure and strengthen their capacity to compete for students.

Funding of infrastructure has changed significantly in recent years, points out Richard Dale FCCA, executive director of finance at Newcastle University. In the past, investment was financed by HEFCE. ‘Now there is virtually no capital funding from government,’ he says. Investment has to be raised from commercial and other sources.

The haves and the have-nots

However, many universities cannot afford to invest in infrastructure – a third are cutting their capital spending. This reflects differences in financial capacity between the highest and lowest-performing universities, points out HEFCE.

Weaker universities are struggling financially. Universities predict average operating surpluses this year below the 2.5% level that HEFCE regards as necessary for sustainability. ‘If surpluses do not increase, there is a risk to the quality of higher education infrastructure, which will harm the long-term sustainability of the sector,’ says the HEFCE report. Financial health now means achieving ‘5%, 6%, 7% surplus in net margins’, explains Dale.

A major risk to universities’ finances is that even minor changes to public funding could significantly change their financial position. A 5% cut in public funding could put many universities into deficit. There is already evidence that universities have increased borrowings and cash balances have fallen – the sector held liquid funds of £7.7bn in 2014, and this is projected to fall to £4.6bn by 2018. Borrowings are rising from £6.7bn to £9.2bn over the same period.

As funding arrangements for universities have changed, so have the demands on finance functions. In the case of Newcastle University, regular payments during the year of £10m from HEFCE have been replaced by three a year from the Student Loan Company. That has elevated the importance of the university’s treasury management team and its relationship with the Student Loan Company.

Finance teams step up

Overall, the reforms have made the finance function much more central to the strategic management of universities. Dale says that while the impact of higher tuition fees has not been great for him as finance director, it has much more impact on his role as a member of the university’s executive team.

The pressures on universities mean, in addition, that the finance team must be good communicators. ‘We have had to get better at telling the narrative than the classic number-crunching, explaining why things have to happen. I think we have done that quite well,’ says Dale.

Atherstone adds: ‘The most definitive change in the three and a half years that I have been here is that we have moved from a very traditional accounting role where finance was not considered to be hugely important to a situation where finance and business partnership are the big jargon words.

‘It is now recognised that we are there to support departments, not to police them. I am now much more central to their decisions: strategy decisions, business decisions.

‘Before, we were on the outside, looking in.’

Paul Gosling, journalist