Accounting

Hard times

The past year has seen the collapse of the banking sector, declines in the property market and unemployment at its highest level since 1995. Tracey Young reports on how your school can withstand the impacts

We are in the midst of turbulent times. The question is whether this will be a short-lived recession with a swift recovery or long and protracted with a slower recovery. Unfortunately, irrespective of the length of the recession, the independent schools’ sector is likely to suffer for longer, recover later and feel the repercussions for many years to come.

Initially, independent schools reported few effects of the turmoil, with isolated incidences of non-payment of fees and requests for fees assistance. However, it is known from history that the sector experiences a delayed reaction to economic downturns – parents will inevitably cut other non-essential spending to keep their children in private education for as long as possible. Certain schools have seen reductions in intake numbers, with less optimism of filling these places during the year, although in most cases the impact is still limited. The concern within the sector is that more marked effects will be experienced from September 2010. Heads, bursars and governors need to be well prepared to ride out and, in some cases, survive the storm.

Here follow the key areas to consider and actions to take when managing your school.

Monitoring
The availability and monitoring of up-to-date, accurate information is crucial. The cash position, debts, results and pupil numbers (both current and prospective by year group) should be reviewed regularly and budgets and cashflow forecasts updated to reflect the revised position. Consideration of key performance indicators and benchmarking these against trends and similar schools enables the school to identify issues and adjustments that could be made.

Planning
Preparation of realistic and reliable budgets and cashflow forecasts looking three to five years ahead is essential. These should be updated for changes and actual figures during the year so that the school has a clear idea of its outturn.

Actual results should be regularly compared to the budget to identify significant variances so these can be investigated, action taken and the budget adjusted.

Sensitivity analysis
Performing sensitivity analysis on budgets and cashflow forecasts is a useful tool to identify the impact of reduced pupil numbers on results and cash levels. Longer term budgeting illustrates the impact of reductions in intake sizes over a sustained period and the ripple effect this has in the future. Contingency planning for the worst case enables the school to consider what action it would need to take for long-term viability.

Debt collection
Many schools have begun to experience increased instances of bad debts and slower payments. Monitoring and chasing debts promptly is important in the current climate to maintain cashflow. Also, non-payment of fees will be the first indicator that a family is experiencing financial difficulties. Identifying a potential problem swiftly gives time for the school to take appropriate action. Schools have seen improved debt recovery when parents pay by monthly direct debit. Schools should also charge interest when fees are overdue and could consider small discounts for early payment to improve cashflow.

Half a child better than none?
Schools have to make tough decisions when parents experience financial difficulties. Many will have hardship funds available, but these are limited. Where parents are unable to pay full fees, the school needs to consider whether they can fill the place made vacant now or in the future. In some cases, it may be better to support a parent and get a contribution towards fixed costs, with the aim in the long-term that the parent will be able to return to paying full fees.

Understand your customers
Knowledge of who is paying a pupil’s fees and the sources of their income will give the school a better understanding of their vulnerability during a downturn. This will enable the school to plan more effectively and take appropriate action.

Costs
Costs should be reviewed in detail and areas for savings identified and made where necessary. Consideration should be given to applying pay freezes, involvement in teacher exchanges, delaying non-essential repairs, and exiting from unpopular courses.

Where pupil numbers have dropped significantly and replacement is deemed unlikely, it is essential that action is taken quickly to reduce costs. Unfortunately, the situation will only get worse and, the longer the delay, the more the financial position of the school will deteriorate.

Improving cashflow
Consideration should be given to changing the due dates for fee payments, deposit levels and perhaps sending two bills to parents: one for fees and one for extras, so that any queries over extras do not delay payment of the school fee for the coming term.

Currently, sterling is weak; schools with international students should encourage overseas parents to pay fees in advance by offering a small discount. This is attractive as parents benefit from exchange rates and the discount, and it improves cashflow for the school. Delaying payments to creditors can also be used to minimise borrowing levels over the low points (usually August and December).

Non-essential capital expenditure can be delayed to retain cash. Also, consideration should be given to leasing capital items rather than buying outright to preserve cash and provide flexibility, or entering into sale and leaseback agreements.

Loans
Current experience shows that, despite low base rates, schools seeking finance are finding the costs of facilities and interest rates less favourable than in recent years. Also, banks apply covenants on loans, with serious consequences if they are breached. Schools must be aware of their covenants and ensure the position is monitored to ensure they are not. Where a school is unable to keep up loan repayments, they should talk to their bank and negotiate a revised repayment plan. Schools should consider retaining loans where possible to reduce pressure on cash and provide flexibility should they experience a downturn in results.

Commercial activities
Many schools generate income from other sources such as lettings and school shops. This may be an area where additional income can be generated at limited additional cost. However, consideration should be given to the tax implications of such activities and, in some cases, they will need to be operated through a trading subsidiary.

Competition
Despite pressure on spending, schools need to remain competitive, and provide the quality of education and facilities that parents expect. It will be a balancing act between the two.

Many have made the decision to make conservative fee increases for the coming academic year. If pupil numbers decline, bad debts increase and all possible cost savings have been made, it may be necessary to consider larger fee increases.

Collaborations
Unfortunately, for some schools it may not be possible to survive the recession in their current form. In such cases, once the school has considered all possible avenues, it is essential that action is taken promptly to either close or merge. Governors have a duty to protect the assets of their school and must act prudently in administering its financial affairs.

The next few years will inevitably be tough for many schools. Up-to-date and accurate financial and pupil roll information will be essential in ensuring heads, bursars and governors are well informed so they can make the sometimes difficult decisions to secure the future of their school. Finally, we should remember that the sector has experienced tough times before and has come out of them stronger. If management is vigilant in monitoring activities and controls and is willing to act decisively, then there is every reason for schools to do so again.

Tracey Young is a partner at haysmacintyre. Tracey can be contacted on tyoung@haysmacintyre.com.

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