Powys County Council announced that the Clyro school governing body had their right to control the budget suspended on December 18 2020.
This allows the council to take over control of staffing and other spending decisions and address the projected deficit budget over coming months.
It is expected that the headteacher, Sarah Groves, will need to put together detailed business plans of how the school will get the finances back on track.
Chairman of School Governors, Mari Fforde, spoke at an online meeting with concerned parents.
Ms Fforde, said: “A business plan is being put in place with several options being put forward.”
The school has seen a drop in funding for Additional Learning Needs as well as a number of pupils leaving the school.
Covid has also meant that money raising and pupil recruitment events that should have taken place last year, had to be cancelled.
They have already raised over £2,500 with an online gofundme.com campaign.
Ms Fforde added “Throughout the last year we have been cutting the budget wherever we can, we can show that we are trying.
“What they (PCC) said is that we had not given a realistic recovery plan.
“We as governors had stuck to our guns that moving to four classes was not realistic.”
This could have seen a class of 38 children created and some children moved up age groups.
Councillor James Gibson-Watt who represents Clyro, said: “Removing Clyro’s delegated financial powers is unjustified and I have made that clear to the council.
“While the school’s budget deficit is of concern and needs to be dealt with, there are others in a much worse position, yet they have not been subjected to this sanction.
“I fear that the council has decided to make an example of Clyro.”
A spokesman for Powys County Council, said: “An education management board has now been established, which will consider proposals and a business plan put forward by the headteacher to address the deficit.
“The governing body have been aware for some time of the projected deficit and declined to submit any recovery plan to address this.
“Other schools in Powys that were projected to go into deficit all submitted recovery plans to the council and these have been accepted.”
School finances has long been a problem for the authority, with the last set of figures for budgets in 2020/21 discussed by the cabinet in November showed that they would be £2.3 million in debt by the end of March 2021.
Figures show that the original Clyro budget was expected to have a deficit of £15,534 by the end of March 2021, which would climb to £66,361 for the end of March 2022, and fall back to £53,031 by the end of March 2023.
After submitting a recovery plan these figures changed to deficits of £9,352 by the end of March 2021, £57,716 by the end of March 2022 and £43, 382 by the end of March 2023.
In the same set of figures, other primary schools could face deficits of nearly double and triple that of Clyro.