Scottish university finance directors have welcomed a Government green light for building up institutional surpluses.

Institutions have been wary of building up surpluses in case their apparent wealth leads to further cuts in Government funding. This has been particularly acute in the former central institutions, which were banned by the Scottish Office Education Department from carrying over money from one year to the next.

But SOED secretary Gerald Wilson has stressed that the Scottish Higher Education Funding Council's funding methodology takes no account of the existence or scale of reserves or other kinds of surplus in institutions' annual accounts. There were no plans by either the SOED or the SHEFC to take reserves into account in decisions about the funding of higher education in general.

"We would, however, expect potential private investors to take institutional reserves into account," he said. "Reserves are an important indicator of financial health. They are vital in demonstrating stability and good financial management."

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Reserves had to be used appropriately, and this would be monitored, he warned. But it would be contrary to the spirit of the Private Finance Initiative to plan to introduce additional controls on institutional wealth.

Michael Yuille, Aberdeen University's director of finance, said: "This is a very welcome steer, and removes a worry that efficiency gains would be tighter if we were seen to be operating with a surplus. Clearly, if universities are to thrive and not merely survive, they need a surplus to generate cash to fund new activities."

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George Sutherland, Edinburgh University's director of finance, who formerly worked for Shell International, said: "This emphasises a policy that those of us who come in from commerce would see as necessary and desirable."

Mr Sutherland is advocating even tighter budgets within the university, specifically to build up a surplus, and said Mr Wilson's statement would help in the debate with academics who opposed this strategy.