It is getting increasingly more difficult to run a school. Hell, it’s getting increasingly more difficult to run any business. Too often the management team finds themselves in crisis mode, focusing on putting out fires instead of strategically thinking about how to move operations forward, build enrollment, and growth. Without proper systems and processes in place, it is hard not to be reactionary in your approach. The goal is not to work harder, but instead to work smarter to achieve operational efficiencies and organizational goals. By implementing best practices to increase access to meaningful information and provide you with the opportunity to plan and monitor your operations, you will be in a better position to take a more proactive approach to running your school Here are some best practices you should consider:
- Develop and approve annual budgets and monitor your performance against them. Budgets are one of the most important tools you can use. They provide you with a fiscal roadmap for your school. Budgets, if prepared correctly and compared regularly to actual results, can provide you and your Board with the ability to carefully plan, understand operational concerns, and make appropriate and timely course corrections. A properly prepared budget should include:
- Monthly budgets rolling-up to the annual budget, which represent your school’s actual operations by month. Too often organizations create an annual budget and divide it by twelve to calculate their monthly budgets. This defeats the purpose of a budget as it doesn’t really provide the ability to monitor actual operations against the budget. Consider the nuances of your school – lower or no enrollment over the summer, potentially ramping up of enrollment over the school year, seasonality of utilities, fundraising events during specific times, major field trips, etc. If your budget isn’t reflective of the timing of your operations, it is not going to be an effective tool.
- Budget-to-actual reporting with analysis and explanation of fluctuations is essential to understand changes in your business and to help develop strategies for course corrections throughout the year.
- Include programmatic staff in the budget process. Too often we see budgets created by finance without program staff input. The program staff are the ones in the trenches. They understand how your school operates, the make-up of the children you serve, and the resources needed. In many cases, they are the ones initiating the purchasing process. By including the program staff in the budget process, they will better understand the finances of the school, they will have ownership of the process and therefore a better understanding of how they can spend, and your budget will be more reflective of programmatic needs of the school.
- Consider pre-established contingency budgets. Resources are limited, so you need to be nimble and react quickly. Delays in decision-making could cost your school tens of thousands of dollars or more. When you develop your budget, consider what can go wrong – lower than anticipated enrollment, the need to pay higher salaries to attract qualified staff, increased interest rates, high cost of inflation, poor fundraising results, etc., and then develop secondary and tertiary budgets that work off lower revenue numbers and/or higher cost models. Within these budgets you should identify specific cuts that will need to be made to keep the school’s finances on track. This way if there are downturns that require cost containment, such costs have already been pre-identified, and cuts can be made quickly to preserve resources.
- When considering budgets, you also need to consider cash flow. Most schools have some level of seasonality, so it is important to understand when your cash droughts are going to take place and how deep they will be so you can ascertain if you have the appropriate level of resources, or access to those resources through credit lines, to get you through those fiscal valleys.
- It is also critical to consider your capital needs. Too often schools develop appropriate budgets and then an unexpected capital expenditure throws everything off-kilter. It is important to have a five-year rolling capital expenditure plan that considers facilities, technology, and other equipment that your school may need. This may require communication with program staff, your IT department, and your facilities staff or an outside engineer.
- Develop Appropriate Analytics. Information is important, but for it to be meaningful, you need to have a way to timely access and process the information to help in the decision-making process. This can be done using analytics. Each type of business has different analytics that it should track. For a school, some of the key analytics to consider are:
- Days in cash – looks at your cash position with respect to your daily spend rate. This is key as it will help you to better manage cash flow. By looking at days in cash by month and comparing it to historical trends it will help you to better understand if a cash flow problem is on the horizon so that appropriate actions can be taken.
- Liquidity (current ratio and working capital) – This is the bankability of your organization. Banks typically want to see a current ratio of 1.35 to 1 or greater. If you’re seeing your current ratio dip below that level, you could be putting your cash flow financing in jeopardy.
- Enrollment levels – for most schools, this is the primary revenue driver, so it is important to understand enrollment levels compared to budgeted levels. This includes understanding how many students are in the pipeline, the level of scholarship funds available to pull students in, etc.
- Gross profit – What are the available resources available to the school after paying its direct costs to cover the school’s fixed costs? This goes together with the school’s break-even analysis, understanding how many students are needed to achieve break-even operations.
There are many other statistics that schools can and should be tracking. Focus on the five to ten most important, and then determine the actions that you need to take to drive these indices in the right direction.
- Use cost centers and have in place appropriate cost allocation methods. Being able to understand the various programs you are running, tracking costs for grant reporting, and tracking the use of restricted funds requires appropriate accounting by program and appropriate cost allocation methodologies. By establishing your accounting records to produce financial reporting that mirrors reporting requirements, you can streamline the process for external financial reporting. In addition, a lack of proper cost allocations can result in a misunderstanding of operations and could lead to faulty decision-making.
- With the struggle to find quality staff, especially in financial areas, schools need to look for ways to streamline operations. Increasing the use of technology, especially the integration of software so that systems can speak to each other, can help in this area. Schools should look at technology to bridge their payroll system to their general ledger, implementing payable/cash management programs (Bill.com and Expensify), integrate other in-house/outsourced IT to the school’s accounting system, and remote payroll attendance and geo-tracking.
- It is important to understand areas of risk within the organization. Consider establishing a compliance/risk committee to evaluate the various risks and exposures that exist in your school. Subjects to consider include:
- Grant terms and monitoring
- Changing regulations
- Cyber security concerns
- Staffing and HR concerns
- Student safety
- Funding sources/levels
- The economy
- Reputational damage
- Insurance
- It is anticipated that approximately 75% of school leaders plan to leave their current positions in the next five to ten years. As a result, schools need to put in place a succession plan to ensure leadership continuity. If you are considering an internal solution, you may need to retool your leadership team. Many of today’s leaders have learned from the previous leadership team, which were predominantly baby boomers. What worked to motivate and drive baby boomers is quite different from the skills needed to motivate Generation Z, who will make up 27% of the workforce by 2025. If the generational disconnect isn’t bridged, it may be difficult to attract and retain the next generation of workers.
With all the challenges facing the private school industry, it is important for leadership to be looking at best practices to improve operational effectiveness and identify areas where your school can continue to grow and develop.
Kenneth R. Cerini, CPA, CFP, FABFA
Managing Partner
Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.