David Woodgate shares some tips for financial sustainability in a turbulent operating environment

Senior business leaders in independent schools are grappling with a quadruple whammy of financial shocks. Teachers’ Pension Scheme (TPS) employer contributions went up to nearly 29% in April last year and VAT on school fees was introduced in the middle of an academic year with little time for parents, schools and, indeed, HMRC to prepare for this fundamental change from the beginning of January. Mandatory Business Rate Relief (MBRR) for charitable schools in England will be abolished from April this year and, in common with most other businesses in the economy, changes in the National Insurance rates and the drop in the threshold will have a material impact in schools (where typically 60-70% of overheads are staff costs). The changes in NI will add around 2.4% to staff costs which are also affected by the increase in the National Minimum Wage (which in turn exerts upward pressure on salary bandings).

Add to this a falling birth rate, and the impact of the lag effect on pupil numbers (and hence on income) resulting from the cost of living crisis and from the general concerns of many parents about the affordability of school fees with VAT added. In the short term, some schools have been able to absorb these costs, but many have had no option other than to pass on some or all of the additional costs to parents, which will inevitably affect parental confidence.

Against this background, bursars and finance directors will inevitably be revisiting their financial forecasts yet again. Of course, scenario planning and sensitivity analyses will have been undertaken over the past couple of years, but these will need to be challenged in view of the haste with which the VAT and MBRR changes have been introduced. Cost bases have been under scrutiny but are now being re-examined. For instance, a medium-sized school reported to the Independent Schools Bursars Association this week that it will have no option other than to consider up to 25 redundancies across all areas of the school in response to financial pressures. Inevitably, schools will be forced to consider closure. Already in just the first couple of weeks of 2025, the demise of five prep schools has been announced.

So the watchword is futureproofing – ensuring that schools are fit for the future financially in a rapidly evolving and turbulent business environment. What tools, tactics and strategies can help hard pressed finance functions in schools face up to these financial challenges and ensure survival?

Which tools to use?

In the past, the independent education sector has generally not been data driven. This is changing rapidly with schools bringing in greater precision in financial planning and forecasting, in monitoring financial performance through all organisation key performance indicators (fewer than 10) and a robust challenge process of monthly management accounts at finance committees, developing ‘what-if’ scenarios to try and measure the possible impact of different financial variables and shocks – and using this to derive strategic and tactical options and generally becoming more business-focused at board level.

However, there remain schools where work can be done to improve financial reporting and planning and enhance financial oversight. This is particularly true of risk management – the identification, assessment, monitoring and mitigation via a robust risk register is strong in many schools but remains a weakness in others. It is an area to which further attention needs to be given as part of a successful futureproofing agenda. In the current climate, risk needs to be a standing item at finance committees and full board meetings to ensure agile responses to external factors.

Ownership of risk is critical at all senior levels of the school – be it the bursar, head and senior leadership team, or the board. The levels of risk need to be clear; there may be strategic threats where schools have less room to manoeuvre, but which will affect the operation and profitability of the school. There are risk at the operational and tactical levels which will be in the full control of the school, and which can also adversely affect the operation of the school and its viability if not properly mitigated. Future government policies and actions remain an unknown quantity, but it’s essential that schools try and model their likely operating environment over the short and medium term.

A five-year forecast, and its underpinning assumptions which are regularly updated, is essential. If the five-year forecast is read along with a 24-month rolling cash flow then a more complete understanding of the school’s financial performance in current terms, and the near and medium future, will be achieved by boards, senior leadership teams and finance staff.

What challenges are reasonably foreseeable?

First, it is likely that there will remain considerable economic uncertainty over the next few years. There is no consensus among forecasters on the likely levels of interest rates and inflation and other factors which will impact directly on schools, while geopolitical uncertainties remain. Growth in the economy is likely to remain subdued – in its October 2024 economic and fiscal outlook, the Office for Budget Responsibility GDP growth forecast was 1.1% in 2024 and 2% in 2025, whereas the Treasury’s December 2024 survey of independent forecasters showed an average forecast of 0.9% for 2024 and 1.3% for 2025.

The impact of government policy such as workplace reforms needs to be assessed; energy costs are another potential area of instability and the need to budget for and implement measures to meet the carbon net zero agenda and greening and sustainability initiatives need to be considered.

The impact of the tax changes may not be felt immediately as parents may continue to make sacrifices to keep their children in independent schools until a key stage, when financial drivers will inevitably mean that they will have to consider withdrawing their children.   Critical dates are March and April this year when it should become clearer how many pupils are likely to be lost at the end of the summer term and, of course, recruitment for September this year is in sharp focus. The recruitment pipeline must be systematically monitored.

Confidence about the economy and the employment market will affect the decision to buy independent education, which is a long-term commitment and one where parents want to be as confident as they can be that the economic prospects of the country support a medium-term financial commitment. As part of futureproofing strategies, schools should be collecting more data on the likely pattern of parental buying behaviour in a changing world: will parents still commit to all-through education or will they become more selective and only buy certain stages of independent education? Will they ‘trade down’ to schools they consider to be more cost effective? Consultants are available to support schools in getting enhanced data down to postcode and even individual street level with schools increasingly using such data to inform planning decisions. Parents are also increasingly likely to seek reassurance that the school will remain financially viable throughout the time their children are in attendance.

For those schools still with staff in the TPS, the actuarial review process starts again in February this year, with 2027 seeing the next change in rates of employer contributions. This could theoretically be downwards but in the light of current economic prospects, it’s reasonable to predict a further increase. TPS contributions are a controllable cost and in a fundamentally changed business environment, schools should at least consider whether they should consult to offer alternative pension arrangements. The TPS annual report and accounts should be monitored to assess realistically the potential risk posed by its funding requirements in 2027 and beyond.

Returning to the VAT issue, schools will be uncomfortably aware that this is a self-assessed tax and that the guidance on which the tax must be assessed has been less than complete in the first stages of imposition. This situation is gradually improving, but it will remain a risk that HMRC may seek to challenge some of the VAT decisions made by schools, and this could have consequences for both school finances and reputations.

Against these uncertainties, how can futureproofing be achieved?

Arguably, futureproofing depends on three factors:

• Having a product that parents want to access so their children can benefit from a broad high-quality education.
• Providing that education at a price parents can afford for the five, seven or ten years that their children are at school, and
• Ensuring that the school is financially stable, with a prudent, pupil-centric set of financial policies and forecasts that will ensure the school’s attractiveness to parents and its continued success as a business.

A balance must be found between the quality and breadth of education that parents demand within the price range they can afford. This means that all aspects of operational costs must be challenged and may, for instance, necessitate changes to class sizes and teacher utilisation, numbers of staff, a scaling back of development plans, or the revision of the curriculum to remove minority subjects based on a cost/benefit analysis.

One of the ways of tackling this issue is to use a technique known as zero-based budgeting. This starts from a blank sheet of paper with every cost centre being challenged objectively and only including, in the resultant budget, spend which is essential for the delivery of high-quality education. This will mean that ‘nice to have’ spending will be removed. There is an obvious danger, however, which is that some of the ‘nice to have’ areas are those which attract parents, so a realistic assessment process is required. This debate on how the cost base should be shaped for the foreseeable future, considering sensible ‘worst case’ assessments of the likely financial changes. will require considerable thought and research-based input from both boards of governors and the senior leadership team. The aim is obvious – the school needs to achieve the minimum spend and the maximum quality outputs for the pupils. While these debates are being progressed within the school there must be no drop in the quality of marketing or communications to current and future parents, staff, alumni and other stakeholders. This links back to the first point where parents must ‘want’ to be part of the school community. To achieve that they must have faith in it, its reputation and its product.  That can only be delivered by regular thoughtful and engaging communication, and effective and targeted marketing.

In this article, it has only been possible to concentrate on the cost side of the profit and loss account. There is room for innovation on the income side and the development of non-fee income where there are many opportunities for commercially minded schools. Suffice it to say, now is probably not the time to be cutting marketing budgets. There is a need for a greater focus on marketing propositions with better differentiation of the offer from each individual school. There are too many ‘copy cat’ marketing strategies where a given school merely mirrors the marketing approach of competitors. A changed approach to marketing, underpinned by robust data, and greater precision in defining what the school stands for is a critical success factor in recruiting and retaining pupils.

A further option is to consider whether now is the time for the school actively to pursue a merger with another charitable institution or, potentially, sale of the school to a for-profit group. This is a growing area of activity and should be considered as part of a futureproofing approach.

Conclusion

Futureproofing is a critical part of developing an efficient and effective business model. As schools face up to the current economic, political, demographic and societal changes, there is real opportunity to look at how things can be done better and to embed a culture of continuous improvement of business processes and challenge of financial planning and reporting. A sector going through rapid evolution provides opportunities for new ways of thinking and creativity in the way in which it manages itself operationally which underpins a futureproofing culture. Bursars, heads and governors will need to take brave, indeed visionary, decisions about how they deliver independent education, but those schools which are able to evolve will no doubt be able to grasp the opportunities which come with such rapid change. 

David Woodgate is chief executive of the Independent Schools’ Bursars Association