...financial challenges are coming thick and fast

a salary strategy which models and forecasts the financial impact of key decisions. The tipping point, which will require restructuring and redundancies, needs to be identified in advance so that it can be managed in a way that will not damage the operation and reputation of the school.

Operating costs

High inflation rates are putting every area of school budgets under immense pressure and will continue to do so. Catering costs are escalating both in terms of the cost of food and labour costs. Cleaning contractors – and other third party providers – are finding it difficult to recruit staff, particularly following BREXIT and the pandemic. COVID has also had an impact on sickness levels, compounding labour shortages. All costs need to be benchmarked and contracts need to be reviewed and renegotiated as necessary.

Schools also need to understand the cost of delivering the curriculum they have chosen. It may be that there needs to be a hard look at the curriculum offered in terms the number of students taking each of the subjects and the associated cost to the school. A reduction in the subject offering may be required.

Schools should also look at the cost of the senior leadership team and consider whether there is a smarter way to operate.

During the pandemic, most schools transitioned to a model of ‘essential spend’, particularly in light of fee rebates. This mindset needs to be reinstated for the next few years.

VAT on school fees

The UK’s departure from the EU means that imposing VAT on school fees is less of a legislative challenge. ISBA (The Independent Schools Bursars’ Association) and other sector specialists have done a lot of work on forecasting and communicating the possible negative impact of such a move but – while the financial arguments against are great – it is probable that a Labour government will look to do this.

Applying VAT on school fees is likely to force a number of schools to close. And although there will be some relief from input VAT on expenditure, passing on even a 12–15% increase in costs via an uplift in fees will have a significant impact in the short and medium term. Schools need to understand their parent body and how they currently pay fees. This will help them to understand how they might respond to fee increases resulting from the imposition of VAT.

Governance and strategy

Many schools will have abandoned their strategic plans agreed before the pandemic and consequently will have been in the middle of their recovery strategy when the energy and cost of living crisis emerged. Schools must therefore revisit their strategy once again. Every plan needs to be underpinned by strong financial governance and should include a three-to-five-year financial strategy underpinned by informed scenario planning and with decision-making points highlighted.

One of the positive learning points from the pandemic was the proven ability of the governing bodies to become more agile and robust in their decision-making. Finance and estates committees need to be strong with members with the right skills, experience and knowledge. Now is the time for strong business leaders to work alongside education teams to ensure that a school can continue to deliver the highest quality of education possible and remain solvent. Under careful financial stewardship, boards will need to push on with capital development programmes, albeit smaller in size; but they will need to think creatively and diligently about funding and financing given the increased cost of borrowing. Coming out of the previous recession, some schools had to borrow for the first time in many years or at all; the costs of servicing these loans will now have an impact on their ability to borrow going forward. Financial modelling will need to show that borrowing can be serviced and bank covenants not breached.

Cash, debt and surpluses

Schools will start to see healthy cash balances depleting as the cost base increases faster than income, pupil numbers fall, remissions increase and parents struggle to pay fees on time. At least monthly, cashflows should be prepared and, for many schools, preparing weekly cashflows could help accelerate any change in culture which may become necessary.

Rigorous debt collection will ensure cashflow is supported and salaries paid; fee collection policies should be reviewed. For monies owed in relation to former students, debt collection should be escalated and referred to professionals where appropriate.

Communicating effectively

Without a doubt, all schools face the challenge of how to communicate effectively with key stakeholders and particularly parents. Financial uncertainty is uncomfortable for parents in their work life, their home life and, most particularly, in relation to the education of their children. Communicating openly, honestly and transparently builds confidence that a school is managing the challenges as best as it can.

Schools often experience issues with confidence amongst the parent body when communication is limited in order to avoid sharing the true financial picture for fear of pupils being withdrawn. Ironically, sharing an honest and open assessment and an achievable action plan is less likely to result in a dramatic fall in pupil numbers than a blizzard of messages on a WhatsApp group triggered by a lack of communication from a school.

The financial challenges are coming thick and fast and it is imperative that school leaders and governors understand the importance of balancing the mission of delivering education with running the school as a business.

ISBA is continually monitoring economic developments and reporting on the perceived impact on independent schools. The Association’s guidelines, briefings and events are designed to help all senior leaders – not just bursars – navigate through the rapidly changing political and economic landscape. Most, if not all, of these challenges are outside the control of a school; however, all present major risks that need to be managed. ●

SAM COUTINHO is a qualified accountant and for 22 years provided internal and external audit and advisory services to independent schools. Since 2019, she has provided risk and governance advice to the independent school sector. She is passionate about building resilience and has never been afraid to positively disrupt and help her clients address some of the uncomfortable challenges they face.