FINANCIAL REVIEW

I am pleased to present the University’s Statement of Accounts for the year ended 31 July 2003. The Accounts, which also incorporate the results of the subsidiary and associated companies, comply with the Statement of Recommended Practice for Accounting in Higher and Further Education Institutions and the Accounts Direction of the Higher Education Funding Council for England. They have been audited by Deloitte & Touche LLP, Registered Auditors, whose report is unqualified.

The most significant event during the year was the acquisition of the former British Gas Research and Technology Centre, which occupies a site adjacent to the University of obvious strategic importance. A substantial part of the site will continue to be occupied by Advantica Limited, the successors to the research and development arm of British Gas. The remainder will be used to accommodate some of the growing number of industrial partnerships and spin-out activities presently being developed. I consider that the exploitation of our intellectual property through collaboration with industry and commerce is potentially a highly profitable area for the University. The acquisition was financed with a mixture of grants from the Science Research Investment Fund and the East Midlands Development Agency together with a long-term loan from Yorkshire Bank PLC. In the short-term, the acquisition will place an additional burden on our finances, whilst the University realises its plans for occupation.

Besides acquiring Holywell Park, substantial progress was made towards realising the sports facilities which comprise the Loughborough Network Centre of the English Institute of Sport. In addition to those already in the pipeline, we were selected to house the English Cricket Academy. Altogether, our capital spending reached almost £60 million, placing considerable demands on our cash flow. Whilst the cash movements during the year benefited from lower working capital needs, some of these were due to fortuitous timing of payments and the movements in 2003-04 will be much less favourable. These capital developments have had an obvious impact on our Balance Sheet, in particular our long-term debt. Whilst we still have a relatively strong liquid position backed by unused credit facilities, the need to continue generating cash is paramount. Servicing our long-term debt has now reached the stage where Funding Council approval is required and was given during the year. We have targets for both debt servicing and liquidity; both were met at the end of the year.

The underlying revenue position remains sound. Continued expansion of our international student numbers is proving very important in balancing the continued pressure on funding of home students; the increased risk exposure this entails is being actively managed. Overall, student recruitment and retention remains robust. The increased turnover from research grants and contracts is pleasing and our forward orders in this area are strong. However, these results mask the fact that not all our activities are equally profitable; research is critical to our future success, but it does not usually pay its way. The reality is that much of our surplus is the result of successful non-core activities like CASCAiD Limited and our conference operations. The surplus before exceptional items was almost 3%, which is in line with the target in our Financial Strategy and is based on historical cost valuations of fixed assets. I fully support the policy which requires surpluses to be generated, whilst at the same time welcoming a strategic move towards revenue investment as well as capital. There are a number of important initiatives to be financed if we are to realise our strategic aims.

The Income and Expenditure Account contains a number of abnormal items which need to be understood. A large amount of asbestos in a group of buildings was a major operational problem and we dealt with it by spending £1.5 million on remedial treatment. The acquisition of Holywell Park involved some initial costs which will be covered by associated income, once the buildings are fully occupied; these have been recognised in the Accounts as an operating expense. The planned future closure of our operations in Peterborough incurred some termination costs which we have also been recognised in the 2002-03 Accounts. Some minor property transactions have also occurred during the year and contributed to the surplus.
We spend considerable amounts of time and effort on managing risks. Our growing dependence on international recruitment is well-recognised. Now that we are net borrowers, our exposure to higher interest rates is largely hedged. We review all the major risks on a regular and systematic basis, taking care to manage rather than just avoid them. But shocks still come and the moderation of the Funding Council grant for 2003-04 to allow us to adjust to a lower level of grant from that source, was totally unexpected. We recruit high quality students who complete their courses successfully and readily find jobs on graduation. This does not fit well with Government priorities, so we do not qualify well for funding streams directed to improving access to higher education and improved retention of those who are recruited. I fear that we have not heard the last of these developments either.

Being fresh to the affairs of the University, I can take an objective view of its situation. I have found its finances stable and under control. The success of the University’s wider academic and other strategies underpin that position and are the real key to our continued financial stability. The University’s reputation, especially its international reputation, is critical to the achievement of many of its objectives. Recruitment of students is an obvious one, but developing world-class research means seeing the world as our audience. Maintaining our leading position in industrial and commercial partnerships flows directly from our reputation for outstanding teaching and research, which is highly relevant to the needs of our customers. Successfully realising these objectives will require both revenue and capital investment and I look forward to that challenge.

Alan A Woods
University Treasurer