By Mike Lewis, Chief Operating Officer, St Albans Education Group

In the ever-evolving landscape of education, school leaders are tasked with balancing the dual responsibilities of delivering exceptional education and ensuring financial sustainability. The “Understanding School Finance” course, presented by Philip Avery and co-created with the St Albans Education Group, offers a comprehensive guide to navigating the complexities of school finance. This article distils key insights from the course, providing school leaders with the tools to make informed financial decisions that align with their educational mission.

The Golden Thread: Activities Drive Financial Outcomes

At the heart of the course lies a fundamental principle: “We control activities, not money.” Financial statements are not the end goal; they are the scorecard reflecting the outcomes of operational decisions. Whether it’s staffing, admissions, fee-setting, or facilities investment, every activity creates financial consequences. By understanding these consequences, school leaders can make better decisions that strengthen their schools.

Building Financial Literacy: The Four Financial Statements

The course introduces leaders to the four essential financial statements:

1. Balance Sheet: A snapshot of what the school owns (assets) and owes (liabilities) at a specific point in time. It reveals the school’s financial position and capacity to invest in future opportunities.
2. Income Statement: A measure of performance over time, showing whether the school’s operations are generating surplus or consuming reserves.
3. Cash Flow Statement: Tracks actual cash movements, ensuring the school can meet obligations as they fall due.
4. Capital Account: Demonstrates how profit or surplus accumulates, linking the balance sheet to the income statement.

These statements are interconnected, providing a holistic view of the school’s financial health. For example, a surplus in the income statement flows into reserves on the balance sheet, strengthening the school’s financial position.

Understanding Cost Behaviour and Breakeven Analysis

Schools operate with predominantly fixed cost structures, meaning most costs – such as teaching staff salaries and building maintenance – remain constant regardless of pupil numbers. This creates both opportunities and vulnerabilities. The course emphasises the importance of understanding contribution and breakeven analysis:

• Contribution per pupil: Fee income minus variable costs per pupil. This amount contributes to covering fixed costs and generating surplus.
• Breakeven point: The number of pupils needed to cover all costs. Small changes in enrolment can have a significant financial impact due to the high proportion of fixed costs.

Relevant Costing: Making Better Decisions

One of the most practical aspects of the course is the concept of relevant costing, which helps leaders focus on costs that actually matter for specific decisions. The framework involves:

1. Ignoring sunk costs: Money already spent is irrelevant to future decisions.
2. Focusing on incremental costs: Costs that change directly because of a decision.
3. Considering opportunity costs: The value of the best alternative foregone.

For instance, when deciding whether to accept a mid-year pupil, leaders should focus on incremental costs like examination fees and catering, rather than the misleading “average cost per pupil.” If the incremental income exceeds the incremental costs, the decision is financially beneficial.

Surplus Improvement Strategies: A Hierarchy of Tactics

The course outlines five tactics for improving financial surplus, ranked by effectiveness:

1. Raising Fee Levels: The most powerful tactic, as every pound of fee increase directly adds to contribution. A 10% fee increase can tolerate up to a 10% enrolment loss and still improve financial position.
2. Reducing Direct Costs: While impactful, this tactic has limited scope as direct costs typically represent only 10-15% of total costs.
3. Optimising Revenue Mix: Shifting the balance between day pupils and boarders can significantly affect contribution margins.
4. Increasing Pupil Numbers: Effective if the school has capacity and market demand.
5. Reducing Fixed Costs: A last resort due to the potential disruption to educational quality and operations.

The Danger of Discounting

Fee discounting, often seen as a quick fix for enrolment challenges, can be financially disastrous. A 10% discount often requires a 12.5% increase in enrolment just to break even. If the school fails to attract enough additional pupils, it risks worsening its financial position and damaging its reputation.

Case Studies: St. Successful vs. Failing Fortunes

The course contrasts two schools that started with identical financial positions but took different paths:

• St. Successful: Focused on modest fee increases, strategic investments, and disciplined cost management. Over five years, it achieved a surplus margin of 11.95%, 211 days of cash reserves, and zero debt.
• Failing Fortunes: Relied on aggressive fee increases, desperate discounting, and reactive crisis management. By Year 5, it faced a 26% operating loss, 73 days of cash reserves, and unpayable debt.

The key takeaway is that financial outcomes are the result of operational decisions. Schools that prioritise strategic growth and disciplined management build resilience and sustainability.

Conclusion: Empowering Educational Leadership

The “Understanding School Finance” course equips school leaders with the tools to make informed financial decisions that align with their educational mission. By understanding financial statements, cost behaviour, relevant costing, and surplus improvement strategies, leaders can confidently engage with financial information and make decisions that strengthen their schools.

Remember, the numbers are just the scorecard. The real game is the activities you control—staffing, admissions, fee-setting, and investments. By mastering financial literacy, school leaders can ensure their institutions thrive, delivering exceptional education while maintaining financial sustainability.

St Albans Education Group runs regular one-day courses designed specifically for Heads, members of senior leadership teams and governors. To register your interest in future events, contact Mike at COO@staeg.org.uk

This article originally appeared in Independent Schools Magazine

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