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Is Your School Recession Ready?

 

Recession ready?
BLOG by John Somerset 

Along with the Financial Performance Survey, another of my passions is motor vehicles. I am Treasurer of a local drivers’ club and I am a long-term member of the RACQ. In the latest RACQ Road Ahead magazine an article by Nathanael Watts, RACQ Financial Analyst, discussed how to prepare for the possibility of a recession. I couldn’t help thinking about its applicability to school business.

The article talked about interest rate cuts sparking recession fears – a recession being two consecutive quarters of negative economic growth. The main symptoms are a rise in unemployment due to less demand for goods and services. The RBA is trying to stimulate the economy with a record low Official Cash Rate with further cuts predicted. Nathanael mentioned when consumer confidence is down people are less willing to spend their money for fear of losing their job, which can result in reduced business profitability and job losses – a downward spiral.

Nathanael’s three tips, and how they can apply to schools, are:

  1. Try to build a savings buffer to help weather the impacts. The 2019 (2018 school-year) ASBA/Somerset Non-Government Schools’ Financial Performance Survey (FPS) indicates that the average school has a Working Capital ratio of 1.1. This means they have $1.10 in current assets for every $1.00 in current liabilities. My research on Defining a Financially Sustainable Independent School in Australia indicated that not-for-profits should consider holding at least three months of trading expenses in cash reserves. That may be more than required for a school due to the predictability of cash flows from government grants and also the national average Working Capital ratio of 1.1 is measured at December, the lowest point for cash reserves for a school with significant Commonwealth Grants expected in January.
  2. Try not to resort to debt. The 2019 FPS indicated average debt of $7,800 per student with a median debt of $6,000 per student. This indicates the average independent school of 500 students has total debt of between $3 million to $4 million. Hopefully the debt is incurred for capital purchases, not to fund recurrent operations as that would be a warning that you are not trading with an adequate operating surplus. The average independent school has a Net Operating Margin of 12.7%, meaning $127,000 operating surplus before interest and depreciation for every $1 million of gross recurrent income from Fees, Grants, and Other income.
  3. Review your budget and identify savings. At this time of the year, schools should be preparing their 2020 budget. Use the FPS to compare your financial performance with a sample of similar schools. It will help identify and quantify strengths and weaknesses. My research indicated that schools with relatively high costs are more financially sustainable, because there are more savings to be had in the event of a financial shock. So if your costs are relatively high, look at that as a positive buffer. Use the FPS to build cost-saving strategies into your 2020 budget and assess its reasonableness.

The FPS is a wonderful tool available to independent schools. I encourage schools to participate every year to help identify changing circumstances, identify and quantify strengths and weaknesses, and respond in a timely manner

 

 

 

 

 

John Somerset is a Chartered Accountant. He has extensive knowledge of the independent school sector and is past President of Independent Schools Queensland and a past board member of the Independent Schools Council of Australia.

UPCOMING EVENT: Cole Connect Seminar ‘Effective Reporting in Schools’—John Somerset Masterclass: ADELAIDE (Thursday, 14 November, 2019 / 9:30am—4:30pm) 
A free morning seminar followed by an open round-table Q&A session with panel presenters (9:30am—12:30pm: FREE) for Business Managers and their Teams followed by the John Somerset Masterclass (1:30pm—4:00pm: $150) after an enjoyable lunch. John is hopeful that this masterclass will provide a school-specific action plan to take back to your Board. Bookings essential.

A Synthesis of Parts

A Synthesis of Parts

I enjoy observing and learning from other professionals. A recent trip to the ophthalmologist reinforced the notion of an outcome being greater than the sum of the parts. My ophthalmologist is very effectively practicing in his 70’s with the help of analytical tools and his team. I walked into the surgery earlier this year, someone did the administration, one expert conducted a series of tests and then another expert carried out different tests. The reports were handed to my doctor who, relying on the information and his extensive knowledge, proclaimed all was good and gave some background of his prognosis. I expressed my amazement with the process to which he replied: “I synthesize the information” which perfectly explained what had just occurred.

This is also true in your world as an education professional, and in my world as an analyst of school financial sustainability. The ASBA/Somerset
Non-Government Schools’ Financial Performance Survey (FPS) is like the machines used by the medical experts to turn data into information which facilitates diagnosis and treatment.

Each year about 700 schools log into the FPS at Somerset Education and enter financial, student and staff data and select a sample of similar schools. The report calculates key ratios for that school, compares the results with similar schools, identifies and quantifies strengths and weaknesses, graphs results and inserts explanatory text based on relative performance. This is like the medical analyses where my results are compared with the expected/normal range to inform the doctor about my relative health and suggest best treatments if required.

A key attribute of a financially sustainable school is the ability of the school to respond to changing circumstances. Annual participation in the survey helps to identify changing circumstance to which you can then make informed adaptation. I therefore urge schools to participate every year.

If your school is experiencing changes including in enrolments, capital expenditure and debt levels, you might consider asking us to synthesize the reports and present to the school board. Our most popular method is via video conference and we consistently achieve a satisfaction rating of 9+ out of 10.
So, I recommend:

  1. Your school participates each year in the FPS health check;
  2. Respond to adverse trends in a timely manner to help prevent financial stress; and
  3. Consider asking us to synthesize and present your results.

With the help of the FPS, other analytical tools and my team, I hope to be like my ophthalmologist, still contributing to my profession for many years to come.

 

 

 

 

John Somerset is a Chartered Accountant. He has extensive knowledge of the independent school sector and is past President of Independent Schools Queensland and a past board member of the Independent Schools Council of Australia.
ASBA2019 Conference The Somerset Education team look forward to seeing you at the ASBA2019 Conference in Hobart coming up 01-04 October 2019—Booth 62. Please bring along your Financial Performance Reports and have a chat to John and Helen. John Somerset will be presenting at the New Business Managers Workshop at 1.00pm Tuesday 01 October 2019.

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Financial Performance Survey Reports

The 2019 (2018 school-year) ASBA/Somerset Non-Government Schools’ Financial Performance Survey (FPS) Reports are now available.

Please log into the Somerset Portal by clicking the button below to

Select a sample of similar schools
Generate your reports

If you have requested a powerpoint presentation, we will be forwarding these over the coming weeks because, although enjoyable to prepare, they are quite time consuming.

 

 

Here is a short video with tips for selecting a good comparative report sample

 

Survey Now Open!!

Survey Now Open!!

ASBA/Somerset Non-Government Schools’ Financial Performance Survey 2018 school-year reports available soon.

The ASBA/Somerset Non-Government Schools Financial Performance Survey has been operating for more than 25 years. It includes about 700 schools, has a satisfaction rating of 98%, and 100% of participants recommend it to others. The report compares a school’s performance with similar schools to help assess financial viability and sustainability, identify and quantify strengths and weaknesses and foster continual improvement.

Financial viability/sustainability is an essential enabler of the educational services provided by schools and is a key responsibility of school governors and senior management.

Research indicates that the use of comparative and trend ratios and benchmarks is a crucial attribute of a financially sustainable school. Also important is the ability for the school to adapt to changing circumstances, which an analysis of ratio trends helps to identify.

For more information about the survey click here.

We encourage participation to help maintain and continually improve individual school and sector sustainability.

To date over 360 schools have logged in to complete 2018 school-year data. Although data can be entered at any time, we request that you complete 2018 data entry in July 2019 to allow reporting from August 2019.

Next week we will disable the 2017 School-Year Reports to make way for 2018 School-Year Reports which we plan to have available by 29 July 2019. During this time you are still able to access the 2018 school-year data entry.

Participation in the survey starts from $682 including GST ($341 including GST for schools with less than 200 enrolments).

For new participants, simply email us with your signature block and Lisa (Our office manager) will respond with a 6 digit School ID and password.

If you have any questions in relation to the survey, please email us or call on
1300 781 968.

Kindest regards

John Somerset FCA

John Somerset

John Somerset

John Somerset has practiced in chartered accounting for over 30 years, with the past 25 years dedicated to the financial health of non-government schools. Qualifications include Bachelor of Commerce, University of Queensland and a Masters by research at Queensland University of Technology on his passion — financial sustainability of schools. John has been a governor on school boards since 2000 and a previous President of Independent Schools Queensland and former Director Independent Schools Council Australia ISCA.

Beth Blackwood CEO AHISA

John Somerset would be amongst Australia’s most knowledgeable professionals with regard to independent school finances and sustainability. AHISA has valued his passion, knowledge and experience in delivering financial literacy workshops for aspirant and new heads of schools and, by so doing, supporting their professional understanding and leadership.

Hugh Castledon, Calrossy Anglican College

John has the ability to communicate what many people perceive as complex (accounting and financial business management) in a simple and understandable manner. Our School Board and its Executive Management Group have been enlightened by the Somerset Education report tools via the School’s Business Office over recent years. Add John’s governance training elaboration to our five (5) year data set has been invaluable to generate ongoing, knowledgeable discussions amongst our governing and management teams, about our current and projected financial viability and sustainability.