Tracey Young stresses the importance of financial forecasting and scenario planning

There are significant challenges ahead for many in the private education sector. Getting to grips with, and implementing, the changes around VAT in such a short period will be tough enough for your finance teams, but coupled with that is the uncertainty over the impact of VAT on pupil numbers from January and in the years ahead.

Traditionally, most schools have been able to predict pupil numbers with reasonable reliability, informed by years of historical information, with established entrance and exit points, demographic and feeder school information, open day numbers, offer-conversion data etc. It has always been a bit of an art and there can be blips (both up and down) but the significant rise in cost for many parents is likely to cause changes in parental behaviour with some forced to withdraw from the sector completely and others changing when they chose to buy. Alongside this, any changes your competitors make as a result of the challenges are also likely to be keenly felt.

Forecasting pupil numbers in the future will be more difficult and less predictable as the market adjusts. This will make financial forecasting less reliable and highlights the importance of considering various scenarios – as unfortunately they may become your school’s reality.

Strategic plans are essential. They form the framework for your scenario planning and inform your financial forecasts. The key questions your management team and governors need to ask yourselves are:

• Where are we now?
• Where do we want to be?
• How are we going to get there?
• What could affect us on the way?

As part of the strategic planning process your school should prepare long-term budgets and cash flow forecasts which enable management and governors to make informed decisions, assess what is feasible and what changes may need to be made to achieve your school’s strategic aims.

Sensitivity analysis is a key part of the financial modelling process where the status quo should be challenged and you consider the various ‘what if’ scenarios, with assumptions fully stress tested, and the impact considered. In light of the current challenges, the key ‘what if’ scenarios are reductions in pupil numbers of varying proportions, but your school may have other vulnerabilities or alternative plans which need to be considered.

An important part of this process is considering what your school would do if each scenario happens. For example, if there was a 10% fall in pupil numbers does this reduction directly impact the surplus (or deficit) or would and could savings be achieved elsewhere? It may be savings cannot be made – what does this mean for the financial health of your school? Your school may have sufficient reserves to manage with lower pupil numbers for one year, but if this continues in the long term it may not be financially viable. It may become clear you have to take action. Exploring and understanding what you would do in each scenario enables you to act quickly, ensuring the financial sustainability of your school.

The financial forecasting and scenario-planning process may indicate that, given the increased uncertainty, change to your school’s operating model is required now to protect it against potential downsides.

Unfortunately, it may also indicate that your strategic plans are likely to be unachievable. This allows your school to revisit and adjust before you embark on a path that is just not realistic.

Financial forecasts help inform and then support effective monitoring of the delivery of your strategic plan. However, with an uncertain future and an ever-changing, highly competitive market, you and your school need to be flexible and react quickly to change. Your school’s strategic plan and financial forecasts will need to be evolving documents, which must be reviewed and updated regularly. At a time when pressure on schools continues to grow, with tough choices to be made by many, long-term financial forecasts and scenario planning are more important than ever.

 Tracey Young is a partner and head of education at accountancy firm haysmacintyre

Tracey Young