15 April 2019

Financial challenges facing private schools

Schools will have to pay seven per cent more towards teachers’ pensions from this September, and while this will affect all schools, state and independent, it is just one of the financial challenges facing private schools.

Now is the time for governors to take stock, assess the likely additional cost impact and review the school’s financial position when planning budgets for the new academic year.

For some independent schools, the increased contributions may prove to be a breaking point financially, particularly with other social and economic factors which are already putting financial pressures on schools

When facing difficult circumstances, professional advice is always helpful – in most instances a solution can be found to enable the school’s continued viability. But when an insolvency situation is simply unavoidable, governors and trustees must understand their duties and how to limit personal exposure to liability whilst acting in the best interests of stakeholders including students, parents, staff and the school as a whole.

Current trends

There are currently roughly 625,000 children in private education, largely because parents believe that their children will receive a better education through high quality teaching, small class sizes and access to better facilities.

So independent schools have to provide a service above and beyond that provided by state schools in order to justify the fees. This comes at a cost, one which is increasingly unlikely to be met purely from fees paid by parents, particularly at a time when there is additional pressure on independent schools to provide scholarships and bursaries to children who come from families who cannot afford private school fees and the general day to day running costs of schools are increasing.

If pupil numbers decline, and income with them, it can create a vicious cycle for schools; a lack of liquid cash flow can make it near impossible to meet maintenance costs and day-to-day expenses but if the money is not invested in equipment, utilities, facilities and building maintenance this may reflect in the in-take and retention rates. If parents feel that their child does not have access to the best facilities, they will find it difficult to justify paying the school fees and may make the decision to move their child.

School fees have also risen far faster than parents’ income, so if a family is feeling the pinch, they may move their child to a high-achieving academy or state school.

A decrease in pupil numbers needs to be addressed as soon as possible, before the lower income from fees causes further financial difficulties. A school’s budget for each academic year is based on forecast pupil numbers. If, when the new academic year starts, those numbers have fallen, time and money will need to be spent on re-assessing the budget.

One area where lower numbers will have a knock-on effect is staffing – salaries take up around 70% of a school’s annual budget, and 70% of the overall salary budget is used for teachers’ salaries.

If income falls, salary and benefit cuts are one of the most effective, albeit unpopular, ways of cutting costs. There is a balance to strike here – good morale among staff is imperative to deliver the high level of teaching required to deliver the expected results. If a school is overstaffed, it may need to make redundancies or tighten current timetables. This is a delicate balancing act as discontent amongst staff can lead to issues with retention.

Another factor at play in the wider world is the Government’s announcement that it is increasing teachers’ pay in the state sector by 3.5%, putting pressure on independent schools to ensure that the pay they offer their staff is at least on a par with the salaries offered in the state sector.

Brexit is also having its effect – many schools rely on EU national staff (currently anticipated to represent 15% of academic staff across the board in education) both in teaching capacities and supporting roles. The uncertainty of the current political situation could compound existing staffing issues.

If a school is under financial pressure, its bursar and governors will be in closer contact with their relationship managers and need to be mindful of any limits on banking facilities. Exploring options with the existing lender is perhaps the easiest way to address cash flow in the short term, but it cannot be taken for granted as in many cases the cash flow hole will grow without further action. The bank will also probably wish to see wider cost reduction initiatives to safeguard their investment.

If the lender ‘option’ is not open to a school, a more formal rescue process may be required. Seeking early advice from a solicitor or restructuring professional can give a better outcome as more options can be explored, such as the sale of surplus or non-core school assets or exploring a local merger, or even a managed M&A solution with alternative funders or acquirers.

There is no ‘one-size-fits-all’ solution in this market, but the underlying principle that governors and trustees should take advice from specialists in order to ensure that they have taken every step to confront any issues and minimise any losses to creditors is an obvious first step.

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About the Author
Kristine Scott, Partner, Head of Education Sector
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