Universities: Navigating the financial challenges

The Office for Students (OfS) has published a November update to their May 2024 report Financial sustainability of higher education providers in England showing that UK undergraduate entrants were 10% lower than the sector’s previous forecasts for 2024-25. International entrants were 23% lower than those forecast.

These new figures will be of significant concern to universities. According to the overly optimistic predictions in the May report, universities were already forecasting a deterioration in their short-to-medium-term financial outlook. Now, the OfS concludes that without mitigating action, by 2025/26 this decline in student numbers could result in:

• a net reduction in annual income for the sector of £3.4 billion compared with the previously forecast position
• up to 72% of providers being in deficit
• 40% of providers having fewer than 30 days’ liquidity.

Universities have managed multiple financial challenges over the past few years, protecting their viability by strengthening student recruitment. These latest figures lead the OfS to say that an increasing number of providers will need to make a substantial change to their funding model in the near future to avoid facing material risk of closure.

Domestic and international student enrolment below expectations

While the number of UK undergraduate students accepted via the Universities and Colleges Admissions Service (UCAS) increased by 1.3% in 2024 compared to the previous year, it was far below the sector’s expectation of a 5.8% increase.

Fierce competition for domestic students has led top tier Russell Group universities to reduce their entrance requirements to maintain numbers. This has a knock-on effect on mid-to-lower-tier universities, who have seen the largest fall in UK student numbers.

​The larger decline in international student numbers is more concerning for many universities. International students can pay up to two to three times the amount of UK students and have become essential for some universities' financial viability. Measures taken by the Government, such as restrictions on bringing family members to the UK and changes to student visas, have discouraged many international students from pursuing education in the UK.

The decrease in student visa applications from countries that traditionally have been a major source of students to the UK is particularly worrying. For example, the number of applicants from India fell by 28,585 (20.4%), and the number from Nigeria decreased by 25,897 (44.6%).

UK tuition fees frozen since 2017

The decline in student numbers impacts universities fee income; universities are heavily dependent on tuition fees, which account for over half of their funding. In addition, annual tuition fees in England have only risen by £250 since the Government set the cap on fees to £9,000 a year in 2012, which presents a significant challenge for the sector. Universities say they make a loss of more than £3,000 on each domestic student, leading to a reliance on international students to help bridge the funding gap caused by the domestic tuition fee freeze.  

The announcement of increased tuition fees from 2025 to £9,535 provides some relief for the sector, and is expected to raise an additional £320 million. However, there is concern that this benefit will be negated by the rise in National Insurance contributions for employers announced in the Autumn Budget. The OfS has estimated this will cost universities £430 million each year from 2025/26.

Rising costs across the board erode margins

​Inflationary and economic pressures on operating costs, including the costs of developing buildings and facilities, and increasing salaries and pension costs, have contributed to the overall financial strain and eroding gross margins.

For example, universities that are members of the Teachers’ Pension Scheme saw their pension contributions rise to nearly 29% in April 2024, compared with 16.4% in 2019. National Insurance increases and a further rise in the minimum wage announced in the Autumn Budget will add additional strain to university finances across the board.

Universities have implemented cost-cutting measures, such as voluntary redundancy processes, course reductions and delaying investment in infrastructure, to mitigate these financial challenges. But management will be acutely aware that this must be balanced against the need to meet their regulatory obligations and remain competitive in the global higher education landscape.

How we can support universities

The OfS emphasises that proactive financial and strategic intervention is critical. This isn't always easy for management teams in academia, however – many of whom have seen significant personnel changes in recent years – who may not have commercial or financial experience.

It's important that universities develop robust and realistic financial plans that incorporate granular stress testing and contingency planning.

Here are areas where we can support universities to navigate their financial challenges:

1 Cash flow optimisation

Offer strategies to manage working capital more effectively, including stratification of capital projects and divestment opportunities.

2 Scenario planning

Modelling the impact of various financial and demographic scenarios to develop resilient strategies.

3 Debt advisory

Management need to be aware impact of a reduction of fee income on the universities' covenant compliance in any debt facilities. If breaches are forecast, there may be an impact on the ability of auditors to sign off accounts as a going concern. We can review the current capital structure and debt obligations to assess the consistency with strategic plans, assess actual covenant compliance against budget, and offering refinancing advice if necessary.

4 Cost-reduction measures

Recommend alternative options available to you – in particular reflecting on strategies that should be followed should you find yourself off track against budgets and forecasts.

5 Expansion monitoring

Conducting a detailed analysis of future growth strategies, including assessing costs, revenue projections and funding requirements.

6 Independent review of the business

An independent review of the the financial health of your institution, including comprehensive analysis of financial statements and cash flows against budget.

7 Organisational structure support

Advice on the structure of your leadership team and governance, make up of board of governors and finance committee, and recommendations on how to strengthen these teams if needed.

8 Partnership and collaboration strategies 

Identifying opportunities for shared services, mergers or partnerships that can create efficiencies and synergies.

9 Stakeholder engagement

Supporting transparent communication with students, staff, funders, regulators and other financial stakeholders such as pension schemes to foster trust and alignment during times of transition.

Our turnaround and performance optimisation team specialises in helping educational establishments navigate complexity, financial challenges and safeguard their long-term viability.

For more information and advice, contact Kevin Coates or Chris Petts.