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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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