Three Steps Toward Financial Sustainability

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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.

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