Blog

Home > Archive by category "Blog"

Best wishes for a successful 2022

As we head towards the holiday season, it’s time to reflect on another challenging year and look forward to a successful 2022!
Thank you to the schools that participated in this year’s Somerset Education Financial Survey for Schools (FSS). We again had over 600 schools in the survey representing 71% of enrolments in Australian Independent schools.

The data from the survey indicates the Independent Schools sector is sustainably navigating these challenging times with the 2020 school-year data indicating:

  • 1.7% increase in enrolments which is the highest since we started recording this metric five years ago
  • Maintaining a five-year average Net Operating Margin of 13% (relative operating surplus)
  • Debt relatively unchanged at $8,400 Debt per student
  • Stronger Working Capital Ratio of 1.3, and
  • Our new measure indicating an average 2.9 Months Expenditure held in Cash Reserves.

During 2020 schools appeared to look for operating savings and held off on capital investment to wisely conserve resources. I suspect 2021 and beyond will show some catch up.

I encourage schools to carefully manage risk during these uncertain times by:

  • Using the FSS to analyse trends in your school’s key metrics, identify and quantify operational strengths and weakness to inform strategy
  • Modeling strategic scenarios at least five years into the future using the Somerset School Budget Model and Somerset Key Indicator (SKI) Report, and
  • Actively monitor actual to budget performance on a regular basis using our one-page Board Report, responding to adverse variations in a timely manner.

I thank the Somerset Education Team for sharing their skills to provide a professional and personal service to our school clients. I value being able to call a business and talk directly to a real person to assist with a query and trust that has been your experience with us. I sincerely hope we helped your school to govern with confidence.

The office will be closed from 5pm Friday 17 December 2021 and re-opening on Monday 17 January 2022. However if you have queries during this time, please email or call us on 1300 781 968 and we will do our best to respond in a timely manner.

Best wishes for a safe and joyful year-end rest and a successful 2022!

Kindest regards

John and the Team

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 Australia.

UPCOMING EVENTS:
Somerset Education Breakfast Seminar Series 2022Webinar, 2022 dates to be advised (7am-9am).
Australian Conference of Lutheran Education—Conference, 6-8 July 2022, Melbourne, Victoria.

Breakfast Summit Series 2021: A Fresh Look at Strategic Planning

Presented by: Andy Van Schaack, PhD, Associate Professor of the Practice, Vanderbilt University, USA; and John Somerset, FCA, Director, Somerset Education, Australia

Webinar on Wednesday, 29 September 2021, 7:00am—9:00am

The challenge — what economic, technological, and societal forces will shape the environment your school operates within, 5 or even 10 years from now? How can you and your team credibly predict and responsibly plan for the future?

In this workshop, you will learn a systematic, five-step approach to scenario forecasting that will enable you and your team to develop specific, actionable plans for the future — plans that will minimize risk and maximize opportunity for your organization no matter what the future holds.

Reference to forecasting is strategic forecasting, not financial forecasting. This session is best suited to school Governors, Principals, and Business Managers.

In the first hour:
• Attributes of a financially sustainable independent school
• Accounting for non-accountants
• Using the Financial Survey for Schools (FSS) to identify and quantify strengths and weaknesses to inform strategy.

In the second hour:
• Brief introduction to the concept of forecasting
• Detailed description of the five-step scenario forecasting process
• Next steps: Applying the process to your organization.

“Whoever does not know how to take care of the future in the present will depend upon the uncertainties of that very future.”
Seneca, Roman philosopher, 45BC – 65 AD

About the Presenters:
Andy Van Schaack, PhD
Associate Professor of the Practice, Vanderbilt University, USA
Dr Andy Van Schaack is a professor at Vanderbilt University with appointments in the Schools of Education and Engineering. As Chief Scientist of several Silicon Valley-based companies, he earned over a dozen patents. In 2017 he was awarded Vanderbilt University’s Teacher of the Year award. Most recently, he was selected to be a Fulbright Scholar to Austria in 2022.

John Somerset
Director, Somerset Education
John’s passion is financial viability and sustainability of non-government schools. He has 36 years Chartered Accounting experience, with 26 years specialising in schools including past President of Independent Schools Queensland and a past board member of the Independent Schools Australia. John runs the annual Financial Survey for Schools (FSS) which, with up to 700 participants, is the largest in Australia and New Zealand.

Register via Somerset Education Events.
Registration fees:
$90.00 AUD (+gst) per School/Organisation (up to three Registrants.)
Additional Registrants: $45.00 AUD (+gst) per Registrant.
Tax Invoice will be emailed after registration.

For more information about our Breakfast Summit Series, please do not hesitate to contact us via email or call on 1300 781 968.

Kindest regards


  
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 Australia.

UPCOMING EVENTS:
Somerset Education Breakfast Summit SeriesWebinar, Wednesday, 29 September 2021 (7:00am-9:00am).

The 2021 (2020 school-year) Financial Survey for Schools Reports… Now available!

The Financial Survey for Schools (FSS) Reports help identify and quantify your school’s financial risks, strengths and weaknesses — crucial for strategic planning and budgeting.

There are some exciting improvements to the reports this year, but no material changes because feedback from participants is to leave it as is. However I do enjoy continually improving the reports as I learn more about school financial sustainability from my research.

Please log into the Somerset Portal and then:

  1. Select a sample of similar schools
  2. Generate your reports.

To date over 500 schools have logged in to populate the survey. So if you haven’t yet completed it we encourage you to do so as soon as possible.

Don’t forget you can enter/change data and re-generate reports at any time until April 2022.

We sincerely thank schools for participating in the survey, which is the largest of its type in Australia and New Zealand, and trust that the reports help individual school and sector financial sustainability.

For more information about the FSS or our budgeting and reporting tools, please do not hesitate to contact us via email or call on 1300 781 968.

 

Kindest regards
  

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 Australia.

UPCOMING EVENT:
More details—with registration link—to follow:

Somerset Education Breakfast Summit SeriesWebinar, Wednesday, 29 September 2021 (7am-9am).

Outstanding Results from the Financial Survey for Schools

Feedback from last year’s survey indicated schools loved the format and on-line portal requesting it not to change, 93% rate the survey 4 to 5 stars (out of 5 stars), and 100% recommend it to others.

Figure 1: Results of survey conducted by Somerset Education, April 2021. 

Section 1 “Enter Financial data – 2020 School Year” on the Somerset portal  is open to receive your 2020 school-year data and remains open until April next year. We do encourage completion by 31 July to allow adequate samples for when the 2020 school-year reports are available from Monday 2 August (target date).

Please note that sections 2 to 7 of the Somerset portal will be disabled from 15 July to 31 July so we can prepare the portal for the current year’s reporting. So please make sure you have saved last year’s reports before then.

We look forward to seeing your school in the 2021 (2020 school-year) FSS.

For more information about the FSS or our budgeting and reporting tools, please do not hesitate to contact us via email or call on 1300 781 968.

Kindest regards

School financial viability and sustainability: The warning signs

My research indicates that a financially sustainable independent school responds to stakeholder needs by using strengths, managing weaknesses, generating adequate operating surpluses to fund debt, reinvestment and cash reserves, identifies changing circumstances, and adapts in a timely manner.

So how are you responding to changes in your school’s internal and external environments?

In this article I focus on key historical trends to help you imagine future trends and build a strategy to manage and capitalise on these to protect your school and the sector.

The Trends in Key Economic Parameters published by Independent Schools Australia in October 2020 highlighted the following:

Based on the annual Somerset Education Financial Survey for Schools (FSS), Figure 1 shows a compound increase in Income and Expenditure per student of about 4% per annum over the past 10 years which is almost double the growth in general population wages over that time.

 

Figure 1 Change in income and expenditure per student compared to annual wage growth 

The FSS indicates staff wages represent an average 78% of an independent school’s operating expenses in 2019. Figure 2 indicates that the average independent school of 500 enrolments has five more staff in 2019 than it did in 2009 representing about $600,000 per annum in additional wages.

Figure 2 Average staff numbers in an independent school of 500 enrolments

These statistics indicate costs in independent schools are increasing faster than inflation, therefore so too have school fees. But general population wage growth is not keeping pace indicating an eventual affordability problem for the independent schools’ sector.

Logic indicates that expenses and school fees cannot continue to increase faster than inflation without an eventual negative effect on affordability and therefore decreased demand for independent schooling.

Other countries with less government support have in the past, and will likely again, experience school closures and mergers when economic conditions decline. In the USA, Independent schools closely analyse school fee affordability of their enrolment demographic and the sustainability of fee concessions.

Australian Independent Schools have shown an increasing trend in fee concessions over the past 10 years—see Figure 3. This supports my growing concern that parents are finding it increasing difficult to afford independent school education and schools are responding but without addressing expenses.

 

Figure 3 Average discounts and concessions as a percentage of fees

The School Fees Report 2021 published by Edstart indicated an average school fee increase across Australia of 1.05% in 2021, down from 2.83% in 2020. Their sample of over 400 schools indicated many schools kept their fees steady in 2021 to assist families financially impacted by the pandemic with 40% of schools not increasing fees in 2021 compared to 7% in 2020.

Indications are that pressure on school fee affordability is real. With extra school staff plus wages increasing at 3% per annum, fees increasing at 1% per annum and concessions also increasing—depending on changes in grant income—it is probable that operating surpluses will reduce unless the sector responds/pivots.

Figure 4 indicates that for many years, the average independent school has produced a Net Operating Margin of about 13% = $130,000 operating surplus (before interest and depreciation) for every $1 million in gross recurrent income. Without changes to operations, it is probable that the gap between income and expenditure per student in Figure 4 will reduce going forward, resulting in lower operating surpluses.

It is operating surplus that funds asset replacement, debt servicing, cash reserves and financial sustainability.

Figure 4 Trend in recurrent income and expenditure per student, net operating margin (relative surplus) and debt per student

Strategically, I encourage schools to carry out an environmental scan of social, demographic (numbers and affordability), technological, economic, ecological, political, legal, ethical and competition to create scenarios of what your school may look like ten years into the future.

Also participate in the Somerset Education Financial Survey for Schools (FSS) annually to carry out a financial “health check” and identify trends in your key ratios. This trend analysis is especially important to identify and display changing circumstances to the board so they can respond accordingly.

My passion for the FSS was reinforced by a recent analysis of two groups of schools that consistently participated in the FSS over a few years. The first group of 31 schools showed an average increase in Net Operating Margin (operating surplus) of +21%. The second group of 18 schools showed an average increase in Net Operating Margin of +36%, Working Capital +40% and Debt Servicing Cover +35%. I am certainly not guaranteeing improvements, but it supports my research and general observations that consistent participation in the FSS contributes to school financial sustainability. I aim to empirically prove this in my current PhD studies.

Using the environmental scan and the FSS information, build scenarios of the future, work backwards to identify the steps that may have contributed to the most likely future scenario. Then work forwards again to develop strategies and action plans “dollarising” these into a 10-year budget. For more on this see my blog dated 9 March 2021Three steps toward financial sustainability.

We look forward to seeing your school in the 2021 (2020 school-year) FSS which is now receiving 2020 school year data. Feedback from last year indicated schools loved the format and on-line portal requesting it not to change, 93% rate the survey 4 to 5 stars (out of 5 stars), and 100% recommend it to others. We sincerely thank you for your support.

We encourage schools to complete the FSS by 31 July even though you can participate at any time up until April next year. Depending on the rate of participation, we expect to have 2020 school-year reports available from 2nd August 2021. Survey participation starts from $715 including GST ($358 for schools with less than 200 enrolments) making it a very economical financial assurance tool.

For more information about the FSS or our budgeting and reporting tools, please do not hesitate to contact us via email or call on 1300 781 968.

Kindest regards

 

 

The School Financial Survey is Now Open

 

We are proud of our 26 year history of operating the School Financial Survey (SFS) which is now ready to receive your 2020 school-year data.

Here’s a link to the survey: https://somersetedu.com/isfps/survey.asp

Many schools complete the School Financial Survey at the same time as completing the Commonwealth Financial Questionnaire (FQ) which became available on Monday 12 April. The SFS data entry is in line with the FQ so it is easy to complete and a great double check of your FQ submission including a Myschool estimator.

Our research indicates that use of ratios and benchmarks is a crucial attribute of a financially sustainable school. One group of 31 schools that participate annually in the SFS showed an average 21% increase in Net Operating Margin (operating surplus) and another group showed an average 36% increase in Net Operating Margin, 40% increase in working capital and 35% improvement in Debt Servicing Cover. I am not promising a change in performance from use of the SFS but indications are that annual participation contributes to a financially sustainable school.

SFS participant names and data are held confidential by Somerset Education which we know is important to you. Reports are generated in a format that does not allow others to specifically identify your school.

Except for a few days of testing, the SFS is open 24/7 all year for data entry and reporting. However we do encourage schools to complete data entry by July 2021 to allow sufficient data when switching to the new year’s reporting (2020 school-year data) on 2 August 2021.

Participation starts from $715 including GST ($358 for schools with less than 200 enrolments).

If you have any questions in relation to the survey please contact Elizabeth, our survey administrator at survey@somerseteducation.net or telephone 1300 781 968 (from outside Australia +61 7 3263 5300). To assist you with accessing the Portal, here are the step-by-step instructions: 2021 Navigating the Somerset Education Portal.

If I can help in any way with the financial governance of your school, please contact me at john@somerseteducation.net or mobile 0417 618 899.

We look forward to your ongoing support, or if new to the survey, your participation in the FPS.

Kindest regards


  
John Somerset and the Survey team

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 Australia.

Three Steps Toward Financial Sustainability

By John Somerset, 09 March 2021

Last week I attended a virtual conference in Washington DC from the comfort of my office. Yes, at 2.30am for three days I attended plenary and breakout sessions, discussion groups as well as virtual trade stands and even on-line yoga. Professionally I preferred this experience as I could download the slides before each session and make notes as the presenters worked through the material. Then for days after the conference, I could do the same for the sessions that I missed by accessing recordings. I also corresponded directly with the presenters via chat functions during the sessions or emails afterwards. I found myself corresponding with a professor in a USA university and a director of S&P Global Ratings – valued contacts for my current PhD research on independent school financial sustainability and this opportunity would not usually occur in a regular conference environment.

The conference was organised this way in direct response to Covid-19. It was brilliant, although I did miss the social interaction which as you know can be just as important as the professional content. I can see conferencing has changed for good and a hybrid of on-line and in-person will most likely be the future.

My point is two-fold – the pace and acceptance of change in the education sector has accelerated, and how can we apply learnings stimulated from our 2020 Covid year to ensure our schools’ financial sustainability?

I believe there is a three-step process toward school financial sustainability:

  1.  Where are we now financially? Identify and quantify financial and operational strengths and weakness by participating in the annual ASBA/Somerset Non-Government Schools Financial Performance Survey (FPS). This quantitatively informs the school’s strategic plan for example, how does your operating surplus, income, expenditure, staffing, debt, debt servicing and cash reserves compare with others, how is it trending and where does it need to be to be sustainable?
  2. Developing a strategy in uncertain times that is mission-centric to ensure investment of finite resources to best meet the needs of current and future students and that is financially viable.
  3. “Dollarise” the plan into a 10-year Income and Expenditure, Balance Sheet and Cash Flow budget to analyse key metrics, assess risk and decide on whether you can afford the plan. Then stress test that model with various scenarios; for example, decline in enrolments, and increase in capital expenditure, operating and finance costs.

I now briefly discuss these three areas:

1. Where are we now financially?

The ASBA/Somerset Non-Government Schools Financial Performance Survey (FPS) has been operating for over 25 years, is the largest financial database of over 600 non-government schools in Australia and New Zealand and is available for you to use to compare 60 ratios for your school against a combined database of 36,000 ratios. You can participate from $650 plus GST (half price for schools with less than 200 enrolments) and the report will quantify (dollars and staff numbers) differences from the average for your school’s income, discounts, expenses by various categories, staff numbers, debt, operating surplus etc.

This means you will go into a strategic planning session knowing what operating surplus is required to be financially viable and sustainable and where adjustments may be possible.

The FPS is very low cost, but it does rely on sector-wide support. I appreciate the extreme busyness of 2020 and no doubt into the future, but it is an annual priority not to be missed.

2. Developing a strategy in uncertain times

We need to predict and plan for the future and build strategies to move our schools into position to survive from, and capitalise on, what is coming. I appreciate it is very difficult to formulate strategies when we are unable to make comparisons with the past. The 2020 Covid experience has poignantly highlighted this. How can we act in anticipation, how can we “run to where the ball is going rather than where it has been”?

My Washington virtual conference is testament to how things can change and are likely to remain. In my blog of 25th March 2020, I referred to the set-up of a laptop and data projector at home so my wife could still attend yoga sessions during Covid. Well, she does not intend on going back into the yoga studio.

One important barrier for success is diffusion of resources. Schools should evaluate all they do, including curricula, co-curricular and other offerings using the lens of school MissionFinancial contribution, current Competencies and Market demand. We must direct finite resources to areas that will most benefit current and future students. Stop doing things that are low on mission, financial contribution, market demand and competency; redirect resources to areas that are high on mission and market demand; and seize opportunities to invest in competencies for these areas.

For example, student wellbeing is likely to be high on a school’s mission and demanded by parents and requires continual investment in competency to identify and manage. But there may be curricula offerings with dwindling demand, not mission-centric and low student/teacher ratios so expensive to offer. With careful reputation and stakeholder management, can resources be re-directed for the benefit of current and future students and overall school sustainability?

Here are seven questions to help your school strategise in uncertain times:

      1. How do current offerings (curricula, co-curricular) align with the school’s mission?
      2. What didn’t happen in 2020 that doesn’t need to come back?
      3. What new initiatives/investments can be leveraged going forward?
      4. Can you imagine some dramatically different but plausible future education worlds taking into consideration social, demographic, technological, economic, ecological, political, legal, ethical and competition environments?
      5. What situations could cause these worlds to occur
      6. What strategies and actions should we take to prepare for these worlds
      7. Is the 5 – 10 year budget of these scenarios financially viable/sustainable?

3.  Dollarise the plan

To be financially sustainable, your school must generate adequate cash from operations (operating surplus) to sustainably fund debt repayments plus asset reinvestment – simply, money flowing in must equal money flowing out.Your school must also maintain an adequate cash reserve to ensure the school can continue to trade during financial shocks like Covid.  Research indiciates schools should maintain bewtween one to three months-worth of expenses in cash reserves.

Once your strategy is formulated, “dollarise” it into a 5 – 10 year budget to assess key metrics such as operating surplus, cash reserves, debt levels, debt servicing and then stress test that model with various scenarios – such as decline in enrolments, increase in capital expenditure, operating and finance costs.

Somerset Education has developed a fully reconciled Income and Expenditure, Cash Flow and Balance Sheet 10-year budget model that makes financial analysis of your future school easy. It includes an assessment of key ratios against industry averages of similar schools available through participation in the ASBA/Somerset Non-Government Schools Financial Performance Survey (FPS) Australia’s largest financial database of over 600 non-government schools.
For the benefit of individual schools and the sector I encourage participation in the annual FPS. And don’t “re- invent the wheel”, save yourselves considerable e and cost by purchasing the Somerset Education Non-Government School budget mode designed in Australia and which has now been used in Australia and New Zealand by over 150 schools since its launch in 2020.

Kindest regards


  
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 Australia.

UPCOMING EVENTS:
ISNZ School Financial Governance—Webinar, 5 and 12 March 2021.

Well done, keep going, and best wishes for 2021!

By John Somerset, 14 December 2020

It goes without saying that 2020 has been a most challenging year. However, as we teach the students, meeting challenges builds resilience, and resilience is a crucial factor for success, contribution, and contentment.

I recently read a story of a person who at age 31 started a business and went bankrupt, he then tried to enter politics but lost badly. He started another business and went bankrupt. He then met the love of his life, but she died. He suffered a nervous breakdown after which he tried again to enter politics and failed. Started another business with a little success. At ages 46, 48, 55 and 58 he again ran for politics and failed. Finally, at 60 years of age, Abraham Lincoln was elected to his first public office as President of the United State – a shining example of resilience.

The non-government school’s sector has done a wonderful job in adapting to the challenges of 2020 to maintain its high-quality educational service which, I understand, has been rewarded with maintenance of enrolments and containment of financial stress. I suspect more challenges will follow in 2021 as government financial initiatives reduce. So, I encourage schools to stay resilient, look for efficiencies, adapt processes, focus resource allocation to your mission, reflect this into accurate long-term and short-term budgets, report regularly and respond to variations in a timely manner.

The ASBA/Somerset Non-Government Schools’ Financial Performance Survey (FPS) is a crucial industry tool to help identify and quantify strengths and weaknesses in your school’s operations. A number of factors caused delays in schools finishing the FPS this year. Thank you to over 600 schools that have participated so far this year. However, at the date of writing, we still have 80 schools waiting to complete. Timely completion facilitates timely provision of this crucial data to you. From the 2019 school-year FPS, the average independent school earned $129,000 recurrent cash surplus for every $1 million in gross income (12.9% Net Operating Margin), had average Discounts and Concessions as a percentage of Fees of 11.8% and Gross trade Debtors to Fees of 6.7%. I look forward to receiving the 2020 school-year data (from April next year) to see how these ratios have changed.

I also take this opportunity to sincerely thank the Somerset Education team for sharing their skills to help deliver what I hope the approximately 700 schools that we work with across Australia and New Zealand feel is a high quality and valuable service. I am truly privileged to work with this team (see photos above) and to provide this service to the schools’ sector. I am excited about the year ahead including my PhD research regarding school financial sustainability. Best wishes to all for a safe and joyful rest and a successful 2021.

Kindest regards

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 Australia.

OFFICE HOLIDAY CLOSURE:
Our office will be closed from Monday 14 December 2020 and reopening on Monday 18 January 2021. Please accept our apologies for a slower than normal response during this holiday period.

__________________________________

The 2020 (2019 school-year) Reports Now Available

The 2020 (2019 school-year) Reports now available! 
By John Somerset, 04 August 2020

The 2020 (2019 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 and then:

  1. Select a sample of similar schools
  2. Generate your reports.

Here is the link to a short video on how to select samples:

To date almost 500 schools have logged in to populate the survey. This year has seen delays, in part due to the extension to 31 August by the Australian Government to complete the annual Commonwealth Financial Questionnaire. As completions increase over the coming weeks, so too will sample sizes.

We appreciate the extreme circumstances of 2020 and the corresponding pressure placed on school business managers’ time. The FPS is a valuable tool for identifying efficiencies but it relies on timely completion by all participants. You can enter/change data and re-generate reports at any time until April 2021 but we implore schools to complete as soon as possible.

We sincerely thank schools for participating in the survey, which is the largest of its type in Australia and New Zealand, and trust that the reports help individual school and sector financial sustainability.

Kindest regards
  

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 EVENTS:
SEA School Financial Governance—Webinar, 26 August 2020.
ISNZ School Financial Governance—Webinar, 27 August 2020.

ACS School Financial Governance—Webinar, 10 September 2020. 
AISSA School Financial Governance—Webinars, 15 and 21 September 2020. 

Think like a Chameleon

Figure 1 indicates over the 10 years from 2008 to 2018 the average number of staff in an Australian Independent School of 500 enrolments increased by 5.7 FTE (+11%) representing about $630,000 per annum in additional wages. This contributed to a 50% increase in total operating costs over the same period.

 

Figure 1 Average number of full time equivalent (FTE) staff in an Australian independent school of 500 enrolments

My previous blogs included, Is Your School Recession Ready? (October 2019), Accounting for Your Customers including using the ASBA/Somerset Non-Government Schools Financial Performance Survey (FPS) to “Identify and quantify financial strengths and weaknesses” (February 2020), Using Data to Drive Your Decisions (April 2020) and A Financial Crystal Ball – Key to School Sustainability (June 2020).

My blog dated 26 March 2020 referred to the Covid-19 pandemic as presenting an opportunity for change, being grateful for the continued need for education services but acknowledging challenges including reference to the growth in staff and costs as presented in Figure 1. I also called for schools to consider how processes could be re-engineered to improve efficiencies going forward. So, today’s blog offers some practical suggestions.

The ability to adapt to changing circumstances is an important attribute of financially sustainable independent schools. The FPS, a tool which facilitates benchmarking of revenue, expenses, surplus, staffing, debt, working capital and asset reinvestment with similar schools, is a crucial tool to help identify strategies for improving efficiency.

I implore schools to pro-actively consider how they can adapt to what is likely to be difficult economic and financial times ahead, like Chameleons that are infamous for adapting to changing environments!

How did Dutch local Authorities adapt to financial crisis? 
(Steccolini, Saliterer, Singh Jones, & Berman, 2017)

I know what you are thinking, “he’s gone mad, what do Dutch local authorities have to do with Australian Independent schools?”. Well the similarities are striking, and innovative schools engage in “out of the box” thinking. So, bear with me for the discussion.

Similar to schools, public sector organisations have a primary objective to meet service delivery and financial commitments now and into the future without debt rising continuously. Sustainability requires maintenance of service quality and volume while producing operating surpluses sufficient to repay debt and replace/improve assets.

Summarised below is one country’s deficit-reducing responses to adapt to a financial crisis.

Dutch local authorities are structured like Independent schools with a governing Council, Chair, and an Executive to run the organisation and inform the Council on policy and budgetary issues. They receive most of their funds from central government (like federal and state grants in independent schools) and charge for services plus local taxes (like fees in independent schools). Asset reinvestment is funded from operations and reserves.

Since 2010 Dutch City Councils have been coping with serious levels of financial stress due to a decline in central government funding and reduced fees and taxes from an economic downturn and with limited ability to diversify their income. Moreover, the vulnerability was increased by a high level of debt. Respondents to this Dutch study referred to this event as being the largest financial challenge in their careers due to the severity and suddenness of the crisis.

I could not help but draw parallels with the Covid-19 pandemic and its likely adverse effect on the Australian economy and Independent school enrolments resulting in probable reduced income and financial stress.

In spite of the serious issues and consequences from their crisis, Dutch local authorities used it as an opportunity to improve transparency, introduce organisational innovations, reduce organisational slack, and stimulate team spirit and pride. So, what did they do?

Responses included:

  1. Acting immediately once consequences of the crisis were identified
  2. Using reserves to restore the fiscal gap
  3. Participating annually in benchmarking and stress testing programs to generate insights
  4. Initiating organisational reforms and optimizing work processes including
    • introducing shared services to improve efficiencies
    • redesigning jobs
    • merging units
    • introducing online services
    • reducing staff and costs – across the board and targeted
  5. Ending some services
  6. Evaluating capital expenditure to continue, postpone or cancel projects
  7. Preparing multi-year forecasts and budgets
  8. Optimising procedures and risk analysis of new policies and projects
  9. Calculating precise financial consequences of new proposals to advise council/executive
  10. Introducing professional risk management systems including a risk officer
  11. Developing early warning systems
  12. Improving the control, monitoring and transparency of finances
  13. Improving capacity of financial managers and executive
  14. Developing partnerships e.g. tapping additional income sources such as co-sponsoring investments
  15. Changing relationships between community and the Council.

As well as the above measures to restore fiscal deficits, long-term responses included realigning actual operational outputs with strategically desired outputs. Another interesting observation was a realisation that they operated in a broader web of stakeholders “Having a deficit is not a problem of the municipality, it’s a societal problem. The society therefore needs to be involved from the beginning, to solving it.”

Somerset Education offers tools to help facilitate many of the actions listed above including the annual FPSBudgeting and Reporting and Training.

We are in unprecedented times and I encourage schools to act now to consider strategies to navigate the current and looming financial crisis. I hope this brief summary provides useful insight into what others have done to restore fiscal balance when faced with similar circumstances.

Kindest regards

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 EVENTS:
SEA School Financial Governance—Webinar, 26 August 2020.
ISNZ School Financial Governance—Webinar, 27 August 2020.
ACS School Financial Governance—Webinar, 10 September 2020.
AISSA School Financial Governance—Webinars, 15 and 21 September 2020.

Reference:
Steccolini, I., Saliterer, I., Singh Jones, M. D., & Berman, E. (2017). Governmental Financial Resilience : InternationalPerspectives on How Local Governments Face Austerity. Bingley, UNITED KINGDOM: Emerald Publishing Limited.