Facing the financial future

It has been a difficult year for most businesses, to say the least, but independent schools are facing some unique financial challenges. Here, experts in the financial field discuss these with Nicky Adams, and explain how schools should innovate to secure a sustainable future

The mettle of independent school leaders has certainly been put to the test over the past 12 months. Along with the obvious operational challenges of providing home learning, then testing pupils and staff, and making sure campuses are Covid secure, the pandemic has brought with it a range of threats to schools’ financial stability.

“Independent school leaders and governors have demonstrated considerable resilience over the past year,” observes Andrew Frame, director of corporate finance at Grant Thornton UK LLP.

“Schools that have unfortunately closed or suffered from financial distress have tended to be those that were already facing financial difficulties before the pandemic.”

Decline in pupil numbers

Many independent schools have seen a decline in pupil numbers, as families face their own uncertain futures, and this has resulted in a fairly sudden loss of revenue.

“There is a delicate balance to be met between investing in staff, improving the facilities available and increasing school fees, while also trying to recruit new students,” continues Frame.

“The government Covid-19 financial support schemes have been a critical lifeline for many organisations over the last year, but as the support slowly starts to taper out, schools that may have drawn on schemes such as furlough to provide some relief during school holidays or lockdown periods of remote operation will need to focus even more acutely on managing their cash flow and cost base in the longer term.”

David Woodgate, chief executive of the Independent Schools’ Bursars Association (ISBA), agrees, saying: “Many schools offered fee discounts during the summer term 2020 and have frozen or limited fee increases for the 2020–2021 academic year.

“This comes at a time when the cost bases of many schools are seeing upward pressures, in part as a result of Brexit. So, ever more rigorous control of costs will feature, with schools needing to ensure they generate sufficient cash to continue to provide bursaries and scholarships and to invest in facilities.”

To compound the issue of schools needing to recoup income lost due to recent leniency, James Leggett, managing director of education business consultancy MTM Consulting, brings the bad news that there is initial evidence of a collapse in the birth rate during the pandemic.

“This means that the market for UK independent schools will undoubtedly be smaller in five years’ time,” he says. “Planning for that will mean schools either competing more effectively to stay the same size – increasing their market share – or accepting that their school will become smaller and planning for it. Researching the market will be crucial to understand the potential.”

Although schools may be tempted to put up fees to fill the hole in their finances, Leggett warns that this could be counterproductive.

“Increasing fees faster in a contracting market is a bold move,” he says. “Also, it appears that the number of aspirational families making a financial sacrifice to send their children to fee-charging schools is growing, but these families have the smallest budgets and can be quickly priced out.”

The last 12 months have seen high pupil withdrawal numbers, directly arising from the Covid-19 pandemic

At debt recovery agency for the independent education sector Redwood Collections, business development manager, Michael Rogers, has witnessed the recent strain on family finances.

“The last 12 months have seen high pupil withdrawal numbers, directly arising from the Covid-19 pandemic,” he says.

“Some parents have been unwilling to pay fees, despite generous school discounts, for remote learning. However, a full school term’s notice must be given before withdrawing a child and this has not been given in many cases, incurring a debt.”

A suggestion put forward by Redwood is to increase the deposit schools require of parents.

“Typically, most schools charge a nominal deposit in comparison to the termly fee,” explains Rogers.

“Overseas pupils often pay several terms up front for this reason. If schools were to change deposit policy to one term’s fees, debt levels would certainly decrease. The deposit would cover the fees due in lieu of notice.”

Planning ahead for potential further periods of closure is another way to mitigate parents’ reluctance to pay the full fees due. “We urge schools to maintain slick and comprehensive remote learning facilities,” adds Rogers.

“Another pandemic or a recurrence of the current one would then be met with an immediate and professional response from the school, impress parents and make them keen to stay as customers. It’s all about value for money, as with any business. This would also help counter any false claims about poor service for those customers who decide to leave regardless.”

The school’s terms and conditions are also paramount, and a template copy from a mainstream solicitor might not be ‘one size fits all’, warns Rogers. Redwood Collections have published specific guidance on the issue.

Teachers’ Pension Scheme

As if the global pandemic had not caused enough of a furore for schools, in the background, controversy over changes to the Teachers’ Pension Scheme have been steadily reaching a crescendo.

“The 43% increase in employer contributions to the Teachers’ Pension Scheme, which came into effect from 1 September 2019, is an additional catalyst,” says Woodgate.

“Three firms of actuaries with which ISBA works are suggesting that, after the next TPS revaluation (currently under way), these contributions could increase again in 2024, with a contribution rate as high as 30% considered plausible.”

The current contribution level is such that 232 schools have already withdrawn from TPS, reports Woodgate.

“Inevitably more schools will have to consider consulting with their common rooms to find alternatives to TPS either over the next two years or after the predicted 2024 contribution levels come in. So, facing up to this challenge as well as the impact of the pandemic, is central to financial planning and strategies in independent schools.”

Innovate to remain sustainable

Of course, businesses of all kinds need to continue to look for ways to innovate – to refine their operations, develop their services and ensure their financial sustainability. Frame recommends that independent schools embrace many of the technological advances that have been adopted in order to adapt to the requirements of the past year in education.

“Technology can offer many benefits, including increasing the quality of education, pupil and parent engagement, school management and regulatory compliance,” he points out, “and these can help to create efficiencies in delivery and cost savings.”

Considering how to maximise income is also worthwhile, Frame says. “Over the last year, out-of-school clubs and holiday camps have been unable to operate, but we have heard how popular holiday camps over Easter this year have been as the nation starts to come out of lockdown, and the demand for offerings such as these is likely to continue. This offers significant opportunities for many schools with extensive facilities.”

There is considerable exploration of how schools can future-proof against any further financial shocks to come

Leggett has worked with a number of independent schools looking to monetise their online learning platforms internationally, as well as others who are joining forces for educational and business reasons.

“Mergers are commonplace currently,” he reports. “Forward-thinking schools are creating more complete educational offerings – senior schools are picking up prep schools as they can present a straightforward integration, often at a reasonable price, while some all-girls schools and all-boys schools are merging on a shared campus. School groups are growing. These new educational environments develop the choice available to parents and can also be cost-effective business solutions.”

There is an awareness among school leaders of the scale of the challenge they face to stay afloat, and many are being proactive in finding the best solutions for their schools. “There is considerable exploration of how schools can future-proof against any further financial shocks to come,” says Woodgate.

“ISBA recommends that schools take a long hard lateral look at their business and operating models, their costs bases, their strategic positioning and how best to offer high-quality education in the new normal when this emerges over the relatively short term.”

Related feature: Fees – under the microscope

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