Tuesday, 15 April 2014

What you need to know about running the finances of an independent school

Recently I failed to get through to the second round of an interview for a Headship. I'm not going to lie, experiences like this always leave me feeling a little bruised, but on this occasion, I received some really useful feedback - in sharp contrast to the usual platitudes about there 'being a strong field.' 

As an added fillip today, the final interview day, I'm free to blog whilst the remaining 3 candidates are back in school jumping through yet more hoops!

In this case, the interview panel thought my Achilles' heel was my knowledge of school finance. So in view of the fact that the best way of learning something is to teach it, I thought I'd seek to address this weakness by writing a blog post on the topic:

How do you find out what state a school's finances are in?
Independent Schools, as charities, must publish their accounts on the  Charity Commission website. It is fairly easy to see therefore what the turnover of an institution is, what its staff costs are and whether there are any significant debts on the books etc.  Here's how to do it. Once you've looked up a school's financial records and deciphered what's going on a rule of thumb in assessing the financial health of a school is that it should be generating an operating surplus of 7-10%.

How do you find out what the staff:pupil ratio is?
A key indicator of a school's financial health is its staff:pupil ratio. Staff costs are always the biggest slice of the school's financial pie and so need to be watched carefully. The best way I've found of calculating the staff:pupil ratio is to use the  Independent School's Guide, where most schools list the names of their teachers to work out how many teachers there are in the school. This figure can then be used in conjunction with the figures for pupil numbers listed on the  ISC's website to calculate what the pupil:teacher ratio is (bear in mind though that some of the teachers listed in the Independent School's Guide will be part-time, so this is only a rough guide). The average staff:pupil ratio for independent schools in 2013 was 9.4:1, so if your calculated figure is significantly adrift of this something is amiss.

What should you know about discounting, scholarships and bursaries?
Scholarships and bursaries funded from revenue (as they are in most schools) can significantly reduce gross fee income. The  ISBA's rule of thumb is that scholarships and bursaries ought to be capped in the region of 6-7% of GFI. This is definitely something to aim for, though I happen to know that in many schools the figure is significantly higher. If it starts creeping towards the 20% region alarm bells should be ringing though. I think this advice from the ISBA is invaluable on what is one of the trickiest areas of school finance to get right:

While recognising that different circumstances, not least local competition, may dictate a pragmatic approach to fees actually charged, schools that are prepared to negotiate fees on a case by case basis are embarking on a dangerous course of action. The word will soon spread among parents that negotiations are possible and it will become increasingly difficult to hold the line on the full fee. There are occasions when marginal cost arguments may be deployed for a limited number of discounts but a school that is full with few, if any, pupils paying the full fee is simply masking a more deep-seated problem which may ultimately come home to roost.

What should you know about bad debt?
The first thing you should know is that there's a lot more debt around than you might have at first supposed. Much of what goes on in this area is, quite rightly, kept hidden from teachers. My first encounter with it came at Uppingham when I was told by the Bursar - during summer half term no less - that one of the stars of my Upper Sixth wasn't going to be allowed back to sit his final exams. I remember being quite shocked and angry at the time; what I didn't know of course was how much chasing had gone on beforehand. This was the final act in a long-running saga. In the end the tough line worked, money materialized and the boy returned for his last few weeks of school.  A surprising number of parents get themselves into trouble and the sensitivity required in dealing with such problems is huge. However much schools might want to adopt a ruthless be-cruel-to-be-kind approach we are talking about human beings here. Communication is key, as is a clear process of escalation. The golden rule, it seems to me, is to try and nip things in the bud. Nothing good ever comes of letting financial troubles build up. Again, the ISBA advice on the issue is invaluable:

day pupils should be excluded at half term of the term in which fees don't materialize
* boarders should be barred from returning to school in the term following non-payment

How do you find out what senior managers are paid?
All charities must publish the number of higher paid employees and the pay bands in which these employees are paid. Use this technique to find the school's published accounts. Search for the section of the accounts listing the number of high paid employees. Working on the assumption that the Head is the highest paid employee, followed by the Bursar and then the Deputy(ies) it is possible to work out (without having to ask at interview!) what sort of renumeration you could expect in taking up a senior post at the school.

Why is cash-flow important?
Schools are unusual businesses in the sense that there are three big peaks in cash. To teachers at the chalk face, receiving their salaries every month, the implications of this are masked but it is vital to try and communicate an understanding of it to them. Budget holders need to be made aware of how the school's finances work and of the importance of only dipping into their budgets in a phased manner. If there is money sequestered away that can be used to ease cash flow issues and reduce dependence on bank borrowing then this is definitely worth identifying. The key issue here is to be aware of cash-flow as an issue. To many teachers (myself included) the peaks and troughs associated with large influxes and out-fluxes of money are hidden, but to forget about them, or not properly plan for them, can be expensive and embarrassing.

What do you need to know about other revenue streams?
Long gone are the days when school's were quiet in the holidays. With parents' hard-earned money entrusted to them schools have a moral as well as a financial obligation to maximize their revenue streams and make full use of their assets. Added income can be derived from:
1. investment of surplus funds
2. school shop trading
3. entertainment and social events
4. the provision of charged-for services (INSET sessions, training etc.)
5. waste collection and recycling
6. sponsored events and fundraising
7. government sources (e.g. Sport England)
8. letting school premises to outside organizations
9. alumni donations
10. sponsorship by local business

Maximizing such income streams is a full-time job in itself and of course there will be huge local variations between schools in terms of the importance such income has in the context of the overall budget. Even the most entrepreneurial schools seem unable to generate much more than a few % of GFI in this way, but there's always more that could be done...