‘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:
- 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.
- 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.
- 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.