Commercial Activities

Survival of the fittest

The administration of the Bolitho School and the closure of Brantwood Independent School for Girls serve as sharp reminders of the problems the sector can encounter in the current climate. Ian Oakley-Smith reports

Various charities over the last decade or so have found themselves in financial difficulty for all sorts of reasons. This has been true even in the relatively benign environment in which charities have been operating over that time. The current economic difficulties have increased the number of charities encountering financial difficulties and independent schools are no exception to this.

In the last recession in the early 1990s, pupil numbers within the sector fell by more than 1.5 per cent in a year, with a significant lag between the recession itself and the consequent drop in pupil numbers. A number of schools have already reported difficulties in maintaining pupil numbers for the current year and are anticipating further difficulties in the coming years.

Negatives
In addition to continuing upwards pressure on teachers’ salaries, typically high building maintenance costs and ongoing IT expenditure requirements, the negative impact of the current recession is likely to be exacerbated by the consequences of the Charities Act to demonstrate public benefit.

After failing two of five independent schools for not demonstrating sufficient provision for public benefit, the October 2009 Charity Commission announcement suggested that charities would be given time to adapt to demonstrate public benefit. However, the reality is that a proportion of schools are likely to be forced to increase their expenditure on bursaries just as fee income is falling and certain costs are increasing.

The recession also represents an opportunity for some schools to explore options for collaboration and entering new markets. The impact is already being felt as, in the 18 months to May 2009, 31 independent schools had already closed, merged or become academies.

The external environment has the potential to affect all independent schools, so why is it that some will survive and prosper where others will fail? At one level, of course, a charity’s operating model, coupled with its attitude to risk and its reserves levels, will determine the extent to which it can absorb setbacks. The following chart illustrates this point.

Effective financial management
Schools should have in place a long-term strategy to meet their charitable objects. This should cover finance, operations and governance. During a downturn, it is imperative that the school remains strategic in its focus.

Consideration of all options should be made; governors should not avoid the difficult questions. A recent survey of some of the leading independent schools in the south of England has shown that 68 per cent of respondents believe that the market will consolidate. Activities may need to be prioritised and even basic questions such as “Should we survive as a stand-alone entity?” or “Are we able to generate funds cost-effectively?” should be addressed.

Next stage
Once clear on the school’s basic strategy, budgets, including income and expenditure, cashflow and balance sheet forecasts, should be drawn up at a level of detail to allow governors to understand the impact of the downturn and other risks to the strategy. Such detailed scenario planning should cover all realistic contingencies, such as “What if our fee income declines by 10 per cent?”.

The same survey showed that 85 per cent of schools are actively making contingency plans for reduced income in the next few years. This will enable the school to understand what it should do in the event of those contingencies materialising. This is key: it is about being prepared to take action if the need arises. It often takes some time for governors to agree on difficult decisions, so contingency planning should be an ongoing process.

In reserve
The school’s reserves policy should be reviewed in the light of this planning scenario. If a school has a risk-based policy already, then this should make life easier; if not, then now is the time to put one in place. The extent to which reserves are used to smooth over the effect of the downturn will be a key decision, as will the extent to which activities, such as enhancing facilities, should be reduced yet further, if finances are insufficient to build up a reserve.

More than ever, detailed and appropriate management information will be vital to a school’s understanding of the extent to which the downturn is affecting its performance. The better the information, the earlier the school will be aware of any issues and the longer it will have to implement an appropriate response.

Clearly, there will be winners and losers during this recession as with any other. Winners will have considered all material scenarios and implemented detailed contingency plans, including asking difficult questions. They will be prepared if things take a turn for the worse. Now is the time for strong, strategic management.

Ian Oakley-Smith is a director in business recovery services at PricewaterhouseCoopers LLP. 

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