Our financial focus became shorter-term as we were confronted by a series of external shocks.
The market volatility that characterised the first few months of the year was exceptional. Gas prices soared as the impact of the Russian invasion of Ukraine on gas supply for the forthcoming winter became apparent. Given the energy-intensive nature of much of our activity, our cost base is sensitive to fuel costs. The government price capping helped mitigate the impact until it expired at the end of March.
We were shielded from any adverse impact related to the rapid movements in interest rates in the autumn as nearly all our debt is on fixed-rate terms. Higher interest rates meant we earnt more than we had anticipated on our cash balances. These higher rates are also contributing to a more favourable valuation of the Universities Superannuation Scheme, as the scheme’s liabilities are more heavily discounted as a result. The latest valuation is still underway and is not reflected in the figures reported for 2022/23.
Whereas higher interest rates have had some benefits, the rise in inflation that drove them higher in the first place has been unwelcome and challenging to manage. Higher prices adversely impacted the cost of living of all our staff and students and also led to a jump in our operating costs. We have paid particular attention to those in most need, weighting salary increases towards those earning less and increasing the amount available in hardship funds for students. We made a one-off payment to all staff to help alleviate the pressure of winter bills and brought part of the 2023/24 pay settlement forward into the last quarter of the year.
In the early months we revisited our contingency plans to safeguard our longer-term financial sustainability in case the economic situation deteriorated further but did not need to deploy them. Timing issues played a part in the surplus that was recorded for the year. With capital grants and donations we typically recognise income ahead of the related expenditure being incurred. This contributed significantly to the reported operating surplus of £29 million, with capital income reaching £49 million.
Liquidity was not an issue as cash balances remained healthy throughout the year. Our strong statement of financial position provides a source of stability in volatile times and gives us resilience to manage unexpected events in the short-term and adjust operations in a more measured way if required.
One of the ways of protecting against downside financial risks and reducing the likelihood of needing to rely on contingency plans is to further improve our underlying financial performance. A key measure for us is the cash from operations we generate each year. As well as providing a buffer against external shocks, it enables us to invest in our physical and digital infrastructure to meet the expectations of our students and staff and help us maintain our pre-eminent global position. Operating cash first needs to meet our debt servicing requirements with the former at £56 million and the latter at £26 million, overall margins are tight. In the five years prior to the pandemic our cash from operating activities was averaging nearly £100 million per annum and we are targeting returning at least to this level in the short to medium-term.
For years we were constrained by space, but we now have capacity to expand and are reviewing the appropriate size and shape for Imperial over the next decade to ensure we can continue to do what we do best and deliver our academic mission in a financially sustainable manner. This will help us determine our future campus plan. The pace of development will need to reflect affordability and funding available. Philanthropy will need to play a greater role.
We look forward with confidence. Our research order book has never been larger and our courses remain in high demand. 2022/23 again saw us having to navigate multiple challenges and we came through it, maintaining a sound financial position. However, there is no room for complacency. In the absence of changes to the funding model we will need to be bold and potentially accept more financial risk in the short-term to realise our long-term ambitions. These are many choices to be made and trade-offs will be inevitable. We are ready for the challenge.
Dr Tony Lawrence
Chief Financial Officer