Future-proof finance

Strategic planning for long-term sustainability in the post-pandemic era

David Woodgate has a clear message for all fee-paying schools in the post-pandemic era: plan strategically, follow best practice rigorously and be prepared to make the difficult decisions.

Editor’s note:

This article is taken from the newly published second edition of The State of Independence, edited by Jane Lunnon and Dr. David James.  It is reproduced by kind permission of Routledge.

Financial response to the pandemic

The pandemic has been a catalyst for change in the business models and financial operations of independent schools. Many schools responded to the enforced national lockdown by reducing fees, offering hardship bursaries and taking action to reduce cost bases. In the UK, where they did not have the cushion of large cash balances, reserves or investments, governors sought support from government schemes to remain viable. This minimised (but did not eliminate) the number of redundancies, particularly of support staff, that would have otherwise been inevitable. It also helped keep schools in business, underpinned the fee reductions and sustained schools whose international boarders were unable to return to the United Kingdom.

No going back

The new normal will not entail just turning the clock back to March 2020. There is a growing understanding that the business of independent schools needs to be leaner and fitter. Schools are already facing up to the challenges of the (for many) unaffordable, 43% increase in employer contributions to the teachers’ pension scheme (which has resulted in 317 schools withdrawing from TPS as of mid-February 2022). While actuaries suggest that further employer contribution rises in 2024 are feasible, other reasonably foreseeable financial shocks are also emerging. For instance, given the abolition of charitable business rate relief in Scotland, from 1 April 2022, there is a risk that abolition will follow in England.

The posturing from the political Left has been well rehearsed and, despite headline figures that do not add up, there are real threats to the charitable and tax status of independent schools. This is notwithstanding research undertaken by Baines Cutler demonstrating that the imposition of VAT on school fees would result in a loss of 105,000 pupils. Where are the state school places for these pupils and where are the teachers to teach them? Indeed, where are the schools? The research suggests that rather than a windfall to support the maintained sector, there would be a financial cost to the country of £415 million per annum by year five of such policies. Politicians should be careful what they wish for.

Financial future proofing

Financial future proofing and greater precision in risk management and mitigation will help schools face both reasonably foreseeable financial shocks and those that will require greater political will to introduce. Future proofing is critical, because the affordability of our schools remains central to their operating models. The days when financial shocks could be passed on to parents through above inflation fee increases have gone. It follows that schools must control costs even more tightly. The average day fee in an Independent Schools Council (ISC) school in 2021 was nearly £15,000 pa, compared to a cost per pupil in similar-sized state schools of around £5,000 pa, even though a typical state school may have more disadvantaged or special needs pupils. This suggests there is scope for making independent schools more affordable for their traditional parents.

 

Inflation and operating costs

Apart from the political uncertainties, other external factors such as wage, food and energy price inflation, are pushing up operating costs. Material cost savings flow from challenging sacred cows and thinking the unthinkable. Accepted wisdom is being challenged – for example, with pupil/staff ratios, the curriculum (can ‘minority’ subjects really still be justified?) and challenging levels of scholarships, bursaries, staff fee remission and sibling discounts.

A leading newspaper in the United Kingdom recently suggested that 300 schools might be forced to close because of the pandemic. This has not happened. True, around 50 independent schools have closed in the past couple of years – but these were largely schools in financial difficulties anyway. Closure was not down to Covid; it was often due to insufficient planning and poor governance; with governors failing to undertake the necessary oversight and setting of strategic direction which is part of their role. The Independent Schools’ Bursars Association (ISBA) supports schools in difficulties; it identifies common factors. Financial problems often originate within a school’s leadership.

Sources of weakness and vulnerability

A breakdown in the relationship between the Head, Bursar, Chairs of Governors and the finance committees can be very damaging. A lack of engagement with ISBA, the relevant Head’s Association or the Association of Governing Bodies of Independent Schools (AGBIS) to address weaknesses, is a common factor. There is often also insufficient focus on Key Performance Indicators (KPIs), such as break-even pupil numbers. Dysfunctional governing boards have a short-term focus, considering the narrow outlook for the year, rather than looking three to five years ahead. There is also often a general unwillingness to address the cost base, market the school, overhaul governance and decision-making, fill skills gaps and act commercially. There may be ideological barriers to change. Some single-sex schools will not countenance co- education as an option. Faulty or fixed thinking can cloud rational business decision-making (including in areas such as fee debt collection). Boards cannot remain in denial about the problems they face and must be proactive in facing up to threats.

Forecasting and monitoring

Financial forecasts need to cover the short, medium and long terms – with budgets constantly monitored and updated to reflect performance. Schools under financial pressure may be inclined to sell off the family silver – particularly land – without any long- term plan, which buys a few more years of operation but is not financially sustainable without other robust remedial action. Similarly, ambitious building projects can be pursued blindly; and schools are tempted to ‘buy pupils’ with unaffordable levels of fee remissions.

Cost controls and sustainability

There remains a lax cost control in some schools, exemplified for instance by supplier contracts not being continually reviewed, and a failure to consider counter-intuitive options, such as declining in size (but improving profitability) or reducing fees as a precursor to growth. Support staff growth also needs to be watched – more schools are employing more non-teaching staff, such as sports coaches or compliance managers, which may not be sustainable in the long run. Teachers are allowed generous timetable remissions, and pay may reflect the length of service, rather than their contribution; again these may become unsustainable in increasingly competitive marketplaces.

Short term planning and long-term strategy

Of course, many schools are exemplars of best practice. More are challenging the status quo, by merging or acquiring feeder schools, by specialising (e.g. in elite sports), by joining an established schools’ group, or by attracting investors. The more forward-looking realise that, strategically, it might be better to build a stronger school by coming together with others rather than continuing in splendid isolation – and they lead proactive discussions around mergers from a position of relative strength, rather than when the cash has run out. Two schools of 500 pupils could create a strong future-proofed school of 1000 and sell one site to fund future bursaries and development. They develop new income streams through international expansion or by more proactive marketing to international boarders. Most schools with heritage assets – or modern facilities – ‘sweat’ those assets to generate cash and build foundations.

What strong schools do

The strongest future schools will operate like businesses, with robust short-term operating plans and budgets, underpinning longer-term strategic objectives. They will be far-sighted and, while respecting heritage, will not be hidebound by the past; they will change their business models to reflect operating environments. Critically, they will realise it is possible to run a successful independent school of virtually any size if costs and income are managed within a clear strategic blueprint. The aim should be increasingly for ‘affordable quality’ and every business assumption must be challenged to achieve this.

 

David Woodgate is the Chief Executive of the Independent School Bursars’ Association. He is a fellow of the Royal Society of Arts, a Chartered Banker and is a Governor at the City of London School.

 

 

 

Dr, David James is a Deputy Head of Lady Eleanor Holles School in London. He is an experienced school inspector and a Governor of a London prep school.

 

 

 

Jane Lunnon is the Head of Alleyn’s School in London and was previously the Head of Wimbledon High School and Deputy Head of Wellington College.

 

 

 

This article originaly appeared in Chapter 4 (pp 62 – 64) of The State of Independence, 2nd Edition edited by David James and Jane Lunnon, Copyright 2022 by Routledge, reproduced by permission of Taylor and Francis Group.

 

FEATURE IMAGE: by ar130405 from Pixabay

Support images:  by Josh Couch on Unsplash, Gerd Altmann & Alexander Gresbek from Pixabay and Seema Miah on Unsplash

 

Notes

1  https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/ earningsandworkinghours/timeseries/kac2/emp.