By Debra Wilson, SAIS President

Spring is an exciting time in our schools, not the least because of the end of the academic year, the excitement of final productions, graduations, and the final hoopla as we wave our students, family, and staff out the door. However, in the business office, the finance team is revving up their engines to close the books and prepare for the audit. It is a good time of year to take stock of the school’s financial picture. 

As part of the accreditation process, SAIS offers financial health questions to help schools think more deeply about financial wellness. As the school year winds down and you start to look to next year, make financial wellness one of your school’s goals. You do not need to attain wellness overnight, but you should be creating a path to solid financial equilibrium. 

Through this year, I have chaired a task force on independent school health indicators for the International Council Advancing Independent School Accreditation (ICAISA). In this role, I performed a literature review and led the task force in creating a memorandum that will be updated regularly as the independent school financial model continues to evolve. However, some information from that overview may be helpful to your school in identifying wellness goals. The below information is provided in the context of the financial health questions that SAIS asks in the accreditation process with additional questions and exercises identified by the ICAISA task force as helpful to schools interested in gauging their overall health.

Balanced Budget

This seems like the most basic of health checks, but a balanced budget is an important one. Many schools that have been wrestling with enrollment, fundraising, or auxiliary revenue challenges struggle to meet this health indicator. For schools that have balanced their budget over the last two academic years with PPP or other funds that have been provided by the federal government during the pandemic, do check to see if your budget would have balanced without those funds, with or without the extra expenses caused by the pandemic. There is general concern that these funds are masking underlying financial challenges. 

Remember, it is not enough to balance the budget in one year; your school should be looking at a balanced budget for at least three or more years. And, this should be a truly balanced budget, not one that dips into reserves to meet a shortfall or is offset with the funds coming in from the next academic year. If your school does not have a balanced budget, your team should be creating a plan to get there. It is not enough to have a marketing plan that might get you to your enrollment goals; you also need to look at the other key financial levers on your balance sheet: auxiliary revenue, fundraising, and net tuition revenue on the income side, and staffing, benefits, and other overhead on the expense side, making necessary adjustments to meet your reality. Looking forward, schools should be building out multi-year projections that reflect the strategic plan and needs of the school overall so that reserves, endowment, and other goals are recognized, and incremental steps are taken year over year. 

On the budget check, you should also be looking at your reserves. This year we have received many emails and calls about reserve best practices. Schools often have a few different types of reserves, including regular unrestricted reserves that might help the school meet a temporary cash-flow challenge during the year as well as accounts that are designed to specifically address maintenance and emergency plant issues. Schools will have different goals for their reserves depending on their overall circumstances, including size, debt, location, and other factors. These two articles will help with thinking about reserves and endowments, as well as how you might think about investing them. Many nonprofits aim for between 3-6 months of reserves to cover operating funds, but it is not uncommon for schools to think about larger amounts to ensure that the school can finish an academic year if needed. There are also PPRRSM accounts (Provision for Plant Replacement, Renewal, and Special Maintenance, often verbalized as “prism”). According to NBOA, at a minimum, schools should aim for these accounts to be at least one-time annual depreciation.

SAIS Financial Health Questions

    1. Does the school have a balanced budget in current year, without reserves?
    2. Did the school have a balanced budget in the prior year, without reserves?
    3. Does the school anticipate a balanced budget next year, without reserves?
    4. Are any unrestricted assets/accumulated surpluses available for a budget deficit?

Other Questions for Consideration

Operating Reserves

  • What operating reserves does the school have?
  • How are the operating reserves expressed as a percent of operating expenditures?

PPRRSM /Deferred Maintenance

  • Does the school have a plan for plant maintenance?
  • Has a facilities audit been conducted?
  • Is there a policy for budgeting for PPRRSM / deferred maintenance? What is it and is it funded?
  • How much is allocated from the budget for PPRRSM/ deferred maintenance for annual repairs?

Healthy Practices

There are a couple of practices that have been commonly recognized as simple health indicators for schools. The first is whether the school uses tuition payments outside of the designated academic year to cover operating expenses. In other words, if a school received tuition payments or deposits in the spring for the next academic year, are those payments being used for this academic year to pay for things like payroll or other standard expenses? This is a problem because the school essentially lacks the funds to complete the next academic year. Many schools that have closed found they lacked the funds to complete that academic year because the funds were already used in the previous year. This result puts current families and staff in a horrible position because they cannot finish the academic year. It can also create liability for administrators and board members in that closing year because they are unable to meet the terms of the enrollment contract for that year. The balanced budget should be able to stand on its own, with the revenue from tuition, fundraising, endowment, and auxiliary revenue sufficient to meet the expense needs of the school year. 

The other health indicator that has received a lot of attention in the last few years is auxiliary revenue. This revenue includes basics like after school programs, but also summer camps, wedding rentals, adult learning, leasing fees for cell towers, and almost any other potential source of income schools can imagine. This revenue stream has become incredibly diverse over the last few years as schools work hard to limit their reliance on net tuition revenue and find more consistent streams of alternative revenue. While schools differ in what percentage of revenue they aim to provide through auxiliary offerings, it is helpful to set goals and define what healthy looks like for your school in this area.

SAIS Financial Health Questions

    5. Does the school use deferred tuition to pay for current year expenses?
    6. Does the school maximize auxiliary programs for additional revenue?


Other Questions for Consideration

  • What percentage of the total operating budget comes from auxiliary revenue?
  • Does the school use next fall’s tuition deposits (collected in the spring) for current year expenses? What percentage of the deposits are used in the preceding fiscal year?
  • If the school had to close at the end of the school year, does it have sufficient revenue or reserves to meet payroll and other expenses until then?

Fundraising

Creating a culture of philanthropy at a school can be particularly challenging, and it has become more so with generational shifts. According to the NAIS Data Markers of Success, generous giving serves as a proxy for high support and attributed effectiveness, and also measures constituent loyalty. It is important for schools to track their giving trends over time to ensure the support is there, but also to be realistic when it comes to creating advancement goals. Some budgets look balanced at the beginning of the year only because of the outlandish goals placed on the development arm of the institution. 

Beyond yearly giving, schools will want to focus on building an endowment over time. While the amount of endowment will vary, the median endowment draw for our institutions tends to be around 4%. How much this draw helps will vary widely if your school’s endowment does not track with its peer benchmarking schools and if you lack the auxiliary revenue to meet the difference. Finally, bear in mind that the fundraising budget should have long-term projections within the school’s multi-year models and adjustments made in the current year should ultimately be reflected in the longer-term models if the effects causing the fundraising shortfall will remain.

SAIS Financial Health Questions

    7. Is the school able to meet the current year’s annual fund budget?
    8. Has the annual fund budget declined over the last three years?
    9. Does the school have a target endowment per student?

Additional Questions for Consideration

  • Does the school have an endowment? If so, what is its value? What is the endowment per student?
  • What is the current percentage draw on the endowment?
  • Does the school have an investment policy to protect financial resources in the endowment?
  • What are the guiding principles governing investment of the endowment funds?
  • Does the school have an annual fund? Provide a chart showing net income from the annual fund for the last year for which data is available and the previous four years. Compare the budget to actual.

Overall Financial Health

Independent school finances are driven by a number of factors, but the most consistent, largest levers tend to be tuition, salaries and benefits, plant costs, and debt. At least, these are the ones that many schools track most closely. Tuition is almost always the biggest factor in independent school revenue. Net tuition revenue is the actual intake from tuition when you account for reductions for financial aid and similar discounts. Below is a chart showing the data from NAIS’s DASL data on net tuition revenue per student in SAIS schools, with roughly 145-171 schools reporting, depending on the year. As with auxiliary revenue, schools will want to identify how much of their overall revenue is driven by net tuition and use that percentage as a dashboard indicator. Schools vary widely on this front depending on their overall financial model. 

These kinds of datasets with benchmarking for similar schools in similar markets can help schools understand how their net tuition revenue is stacking up against their peers. This wider picture is important as it can help the school understand if their budget goals for net tuition revenue are realistic in the context of the school.

In the greater scheme of the school’s financial health, school leadership teams and boards often look at the overall health of the school through net assets to get a quick view of where the school stands. Debt is important here, particularly those sources easily tapped during the year to meet budget shortfall. Once debt cascades beyond a school’s means, larger financial issues loom. Perhaps the most succinct advice on debt comes from NJAIS’ accreditation materials: “A recommended practice is that a line of credit supports short-term cash needs and is paid in full at least once each fiscal year. A best practice is that credit is accessible, used with discretion, and generally only when endowment revenue and other sources of funds will not fully support strategic needs.”

Healthy schools will think about a few important ratios when looking at net assets and the bigger picture. During accreditation, SAIS asks about the debt-service ratio in the financial health questions. This formula requires the net operating income and the total debt servicing for the school. Net operating income is the school’s revenue minus certain operating expenses (COE), not including taxes and interest payments. It is often considered the equivalent of earnings before interest and tax (EBIT). While the mandates for this ratio may be within school financial policies or debt-related agreements, the higher the ratio, the better indication that the school has the ability to pay off its debt. All schools should aim to keep it around at least one; the ideal ratio from a corporate finance perspective is two or higher and signals that the school is capable of taking on more debt. This ratio helps shine a light on whether the school’s debt service is too much for its regular operations.

The other important ratio many institutions track is the asset-to-liability ratio. While SAIS does not require this measure, many accrediting bodies do. Of those bodies, the vast majority use an asset-to-liability ratio of 1.5:1. This measure helps give a quick view into whether the school is carrying too much debt overall for the institution. In other words, while the debt-service ratio looks at how the school is managing its debt in a given year relative to its income, the asset-to-liability ratio looks at the overall picture of the school’s debt relative to its overall assets. This might also become a part of your school’s health check-up.

SAIS Financial Health Questions
    10. Is the school able to realize the net tuition goals in each of the last three years?
    11. Have the net assets on the audit report increased over that of the prior year?
    12. Is the school able to meet the debt service ratio?
    13. What are the salaries/benefits as a percentage of the operating budget?
    14. What is the tuition as a percentage of the total revenue?

Additional Questions for Consideration

  • For the current year, how does the school’s tuition compare to the mean tuition of the benchmark group of similar schools?
  • Does the school have debt? What is the current indebtedness and how is it financed?
  • What percent of the operating budget is allocated to servicing the debt?
  • What is the asset-to-liability ratio for your school?

Enrollment
Without enrollment, there is no tuition, so understanding the school’s enrollment trends is fundamental to the school’s overall health. Ideally, schools should be looking at the pattern of enrollment related data, including inquiries, applications, acceptances, and yield over at least a five-year period, as a longer window helps identify trends. Schools should be looking at the number of applications per opening, which reflects market demand, as well as the overall trends in these admissions numbers. Softening in some of this data may reflect a greater softening in enrollment, leading to immediate work on marketing, outreach, and an in-depth examination of the market’s ability to meet the cost of tuition, as well as building a potential longer-term plan around right-sizing of staff, number of grade sections, etc. Use of broader industry data alongside your school’s benchmarking group will help you see where similarities between data might indicate an industry trend, and where differences might indicate an issue specific to your school.

SAIS Financial Health Questions
    15. Is application volume consistent year-to-year?
    16. Is the acceptance rate decreasing?
    17. Is the yield rate increasing?

Additional Questions for Consideration

  • Provide a chart of the ratio of students enrolled to full-time equivalent employees for the previous five years.
  • Provide a chart of percentage attrition for the previous five years.
  • Provide a chart showing total completed applications for the previous four years. Is the acceptance rate stable or increasing or decreasing? Compare this data with the school’s yield and overall enrollment data.

Conclusion
It is very likely that your school is seeing great success with some of these financial indicators, as well as some lagging challenges. Financial wellness has become a much bigger issue for our industry, particularly outside of our region as tuitions have continued to skyrocket. If you do not have one, now is the time to create a multi-year plan addressing weaknesses and ensuring that those financial goals are front-and-center as you articulate the school’s institutional goals for next year. Finally, if you are looking for more in-depth sustainability measures, the resources below will help you get deeper into thinking about healthy finances for your school.

Resources