First 100 days towards financial sustainability — for school business leaders

Despite unyielding changes in both internal and external environments, it remains crucial for schools to maintain financial sustainability. This requirement is mandated by Australian governments, overseen by school governors, and entrusted to principals and school business leaders for implementation. So, what exactly is financial sustainability in schools and how is it achieved?

To date, no commonly accepted definition of a financially sustainable school exists. However, Somerset Education research provides the following:
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.

Simply, set a target Net Operating Margin (operating surplus) to ensure you can adequately meet debt servicing, asset replacement, and cash reserve needs and if things change, re-forecast, and adapt in a timely manner.

Understanding stakeholder needs 
Whether you’re a new or seasoned school governor, principal, or business leader, the initial step toward achieving financial sustainability involves understanding stakeholder needs from three perspectives.

Financial needs

1. Cash flow: What level of operating surplus is necessary to service debt and replace assets?
2. Cash reserves: What is the minimum level of cash reserves for the school?
3. Debt and debt servicing: How much debt can the school responsibly manage?
4. Ratios and benchmarks: What do the trends in your school’s key ratios tell you and comparing with others what is the target improvement and in which areas?

Non-financial needs

1. Enrolments: What is your enrolment trend, catchment demographic and fee affordability?
2. Culture: How can a positive and innovative culture be enhanced?
3. Service quality: Does the quality of teaching and learning and student wellbeing meet expectations?
4. Facilities: Are facilities being updated and aligned with quality teaching and learning standards?
5. Staff: How can you attract and retain high-quality, engaged, and innovative staff?

Leadership needs

1. Board quality and governance: Does the skills mix, culture, and systems support effective governance?
2. Strategy: Is the strategic plan effective, monitored, and achieving its objectives?
3. Management quality: How can the financial literacy skills of school management be enhanced?
4. Budgeting and reporting: Is it timely, accurate and is re-forecasting done during the year?
5. Stakeholder management: How do you monitor and meet the needs of parents, students, staff, banks others?

3-month action plan
Several actions can be implemented within 100 days to help financial sustainability. It may be wise to gather, listen and understand in the first 100 days rather than act too quickly. Focus on insight.

👀 Month 1 | Understanding the lay of the land

• Gather essential documents such as the board/management calendar including audit and AGM, strategic plan, master building plan, approved budgets (current year and five years), financial policies, compliance/lodgement checklists and feedback from parent, staff and student satisfaction surveys.
• Understand delegations of authority including bank accounts and bank operating procedures.
• Assess financial report working papers, accuracy and timeliness, and the finance team’s skills.
• Assess the Board’s skills to identify gaps in areas such as education, finance, technology, law, governance, commerce, risk management and built environments. You may need to support/manage up.
• Understand what finance reports the Principal and Board receive and consider using the Somerset Education One-page Monthly Finance Report as an easy, economical and fulsome option.
• Consider financial literacy professional development needs to support governors and managers.
• Ensure school management understands the financial implications of major decisions including reference to agreed financial policies and risk thresholds e.g. Net Operating Margin, debt servicing, cash reserves.
• Analyse enrolment trends across the whole school and relevant sub-schools.
• Evaluate financial performance and risk through three key questions:
  • Are we profitable? Review trends in net operating margin compared to your budget and similar schools.
  • Are we solvent? Does working capital ratio exceeds 1.0 and 1-3 month’s expenses in cash reserves.
  • Are we sustainable? Does operating surplus cover asset reinvestment plus debt servicing.

🚧 Month 2 | Averting any impending financial stress and how can we be stronger

• Review or establish governing body handbooks or charters to clarify roles, responsibilities, procedures, and financial risk thresholds for key ratios.
• Collaborate with stakeholders to understand strategy, key performance indicators (KPIs) for financial and non-financial areas and use these to set and monitor policies and performance.
• Use the Somerset Education Comparative Financial Report (benchmarking) to identify and quantify financial strengths and weaknesses to help target operational improvements.
• Review short-term budgets and year-end forecasts to ensure the production of reliable and relevant management reports and timely decisions to avert unwanted financial “surprises” at year end.
• Develop an action plan to address immediate concerns identified.

⭐️ Month 3 | Setting a plan

• Discuss the strategy and long-term budget with key stakeholders to ensure progress towards KPI’s is reported on a regular basis to remedy any shortfalls.
• Conduct scenario planning to anticipate and manage changes in enrolments, income, expenditure, staffing, capital expenditure, or borrowings to maintain financial sustainability.
• Develop or revise a long-term budget that supports strategic and operational plans whilst maintaining KPI’s related to profitability, solvency, and sustainability.

The bottom line
After 100 days you should have a good understanding of the strategy and its alignment with the school budget, financial risks, and current performance including how financial risk can be mitigated.

At Somerset Education, our mission is to enable leaders to achieve the school’s vision by offering simple, intuitive financial tools and advice to help make financial decisions with confidence. Our tools include: the Financial Survey for Schools (FSS), Staff Estimator, 10-year school budget, Somerset Key Indicator (SKI) Report, and SKI Scenario Builder™. Additionally, our practical and interactive Board and Management Presentation financial governance, literacy, decision making, and therefore financial sustainability. Please contact us for more information.