school chair

Schools: Managing in unprecedented times

Tina Allison, Partner, Head of Education
27/04/2020
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This insight, which has been written with input from ISBA, discusses both how to deal with the immediate issues schools are facing due to the COVID-19 pandemic as well as looking at longer-term planning and viability.

It is difficult to remember a time when we have seen such a meteoric strategic and operational shift in direction with such unexpected speed and ferocity. 

At Christmas, with rumours of a new COVID-19 virus in China just starting to surface, who could have predicted that in the UK we would see schools closed for all but a small number of pupils, education being delivered online and no immediate end in sight either in terms of time, or in terms of restrictions on schools. 

The provision of education has been, and always will be, pivotal to a peaceful and prosperous society. Ensuring that our schools not only survive this period but continue to provide world class education throughout these difficult days, weeks and months, and for many years to come, is essential.

Through these difficulties and challenges, could the sector come away stronger from having enforced change to the way it operates? For example, placing dependency on adopting IT solutions on an enormous scale, which was an area sometimes previously greeted with reluctance.

The practicalities of survival for some however will, at the present time, be all consuming. How and what to prioritise, which expenditure to reduce, where to invest. The decisions made in the next few weeks by the Governors and key management personnel will shape the school’s recovery, or not, from this unprecedented challenge.

As with all problems, the first step is to break the situation down into its constituent parts, determining how to deal with each in turn:

1.     the immediate: the summer term

2.     the short-term: the autumn term

3.     the medium-term: financial year 2020/2021

4.     the longer-term: 2021/2022 and beyond.

Decisions at each stage will impact the next, and in making decisions today, it is vital that sight is not lost of the long-term goals and aims of the school.

The journey through these four stages starts with an element of firefighting, leading to the need to manage through a period of significant uncertainty, moving forward strategically in, what is likely to be, a new version of ‘normal’.

Each school will experience these stages in a different way, but for most the path through the next few years will depend on the category the school was in when entering this COVID-19 phase. The four main categories could be defined as:

  • a strong, viable successful school that is opportunity seeking
  • a viable and self-sufficient school
  • a viable school, but already heavily dependent on bank financing
  • a school already at the point of possible business failure.

Which category the school falls in to will play a significant part in determining how to react to the new risks, challenges, and possibly also to the opportunities, presented by COVID-19.

1. The immediate: the summer term

All schools at present, no matter which of those four categories they fall in to, will be using these first few weeks to take stock of the situation, adjust and adapt to the new required ways of living and working and assessing the immediate risks.

Opportunities for support have been well publicised and many schools will be looking at the potential for help from

Coronavirus Job Retention Scheme

HMRC will pay a grant up to 80% of the employment costs up to a maximum of £2,500 for furloughed workers. Claims are made for reimbursement through the HMRC portal in arrears.

Deferring VAT

VAT payments will be deferred for all organisations during the period 20 March 2020 to 30 June 2020. The deferred amounts will need to be paid over by 31 March 2021. Make sure you stop any automated payments you may already have set up with your bank and reinstate them after this period.

The Coronavirus Business Interruption Loan Scheme offering loans through the British  Business Bank

The Coronavirus Business Interruption Loan Scheme (CBILS) supports small and medium-sized businesses, with an annual turnover of up to £45 million, to access loans, overdrafts, invoice finance and asset finance of up to £5 million for up to six years. The government will also make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees. This means smaller businesses will benefit from no upfront costs and lower initial repayments.

The banks are being inundated with the requests for support therefore it is really important that well-articulated business cases are put forward. You must demonstrate that apart from the circumstances created by COVID-19 the school would be a good business to lend to and the school has suffered due to the effects of COVID-19 and can demonstrate the actions already taken by the business to remedy its situation.

In these difficult times it is essential that the pattern of cash and cash flows is immediately understood for the short, medium and longer-term. This understanding must include an assessment of cash held by fund, as restricted and permanent endowment cash cannot be used for unrestricted purposes, without Charity Commission permission/donor permission to release the restrictions. Where the school holds restricted funds for expenditure incurred by the school it is important that these are spent in priority to unrestricted funds as they cannot be used for any other purposes. For example, bursary funds.

The cash position will mean different things to the schools in each of the four categories mentioned earlier:

  • a strong, viable successful school, opportunity seeking: cash presents an investing opportunity
  • a viable and self-sufficient school: cash is necessary to manage the school
  • a viable school, but already heavily leveraged: cash is essential to service debt
  • a school already at the point of possible business failure: cash will be essential for short-term survival until they reach the point where their future is secured or an orderly wind up occurs.

Maximising working capital

In these difficult times it is very important that the working capital of the business is effectively managed. While there needs to be careful management of any discretionary spend this should not be confused with failing to make good investment decisions where this assists the business. Over the next few terms prompt collection of cash from parents is going to be imperative if the working capital is going to be properly maintained. Ensuring that the credit control procedures are robust and appropriate to the current climate is essential. This is an area worthy of investment if the appropriate resources are not in place. While there is a careful balance to be struck between being supportive and robust the simple dynamics are it’s not worth having a pupil on the roll unless they are paying a good proportion of the fees on a timely basis. The parent fee contract is robust on the payment of fees and this should remain the starting point for any discussion.

Managing supplier payment terms more effectively can improve cash management. It is very easy while remotely working for things to be even more task driven which results in payments made more promptly than normal. It is also important to consider whether your expenditure authorisation processes remain appropriate for how your business is currently operating.

It is a good time to take the opportunity to review any external financing arrangements the school has in place.  It is possible in many cases to re-structure these to perhaps have capital repayment holidays or extend the period over which the financing is repaid. While this will result in additional cost it may provide the vital cash flow needed to run the school.

Considering which type of discretionary expenditure to cut can be challenging. There are always budget lines which are first on many lists to be removed, it is important that the full implications of any decision are considered before cuts are made in haste. For example, marketing can seem to some an unnecessary overhead at this point in time however, it has a pivotal role to play in maintaining the September intake and the intake for future years. 

2. The short-term: the autumn term

Most of the modelling that has been performed by schools so far is based on the re-opening of the school no later than September 2020. But business as usual, even at that point, seems unlikely, and schools must prepare now for what is likely to be a ‘new normal’.

It is likely that many parents will be feeling financial pressure and will be seeking to either not return for the autumn term or seeking bursary support for fees. Others may be seeking longer payment terms. It’s important to understand where the pupils come from and in particular how the parents pay fees. Traditionally boarding fees would have been paid from a capital source and day fees, income. However, times have changed and both of these sources are now under pressure. Those paying through income are likely to need greater support sooner than those through capital means. 

The primary function of the bursary scheme up until now has been to provide financial means for a worthy student who would otherwise be unable to attend the school. Going forward it is likely there will be many more applications for bursaries due to financial hardship. While a number of schools have tried to establish a hardship fund by requesting donations from parents it is likely that the demand will greatly outstrip the resources available. Revisiting the terms of the bursary provision may be necessary.

As the working capital was stabilised over the summer term it provides the opportunity now for a closer look at how cash resources/costs can be saved and assets appropriately utilised. It’s a good time to take a holistic look at capital projects and consider:

  • freezing and challenging unnecessary capital expenditure
  • capital spend over the previous 5 to 10 years and the real value they delivered to the school
  • vanity projects and remove them from the wish
  • what really is needed in this new trading environment
  • whether there are separately identifiable assets which are ‘nice to haves’ which could be better turned into cash.
3. The medium-term: financial year 2020/2021

As 2020 comes to a close we can only hope that the COVID-19 pandemic has settled down and the current period we’re going through feels like a distant memory, one that we survived and learnt from. However, in truth, it is likely that we will feel the repercussions of COVID-19 and the corresponding impact on the UK economy for many periods to come.

And as such towards the middle/end of 2020/21 it is likely schools will need to be focusing on:

  • staffing levels, ensuring these have adapted to the new shape of the school
  • technology, ensuring the opportunities for improvement have been embedded into normal practice and all elements of data security, cyber security risk and GDPR are being well managed
  • economies of scale, exploring opportunities to collaborate with others for teaching, grounds maintenance, back-office functions
  • mergers and acquisitions, identifying  and evaluating potential opportunities for those strong, viable schools
  • reduction of site sizes, sale of non-operational assets (or loss making assets)
  • a re-purpose of some assets to higher income generating activities (such as lettings income).
4. The longer-term – 2021/2022 and beyond

At the best of times a longer-term strategy is always something of a gazing into a crystal ball exercise. Now more than ever any attempt to predict the shape of the school in 2021/2022 seems impossible. But it is essential to keep this longer-term picture in mind. Some key considerations will include:

  • if the school is in a different shape post-COVID-19, will marketing investment be necessary to try to back-fill some of the empty pupil places?
  • capital planning will hopefully be back on the table, but will we have learnt something about spending on non-essential projects?
  • will there be investment opportunities to merge or acquire academically strong schools who have been unable to survive the paucity of cash? If not, is there merit in breaking down the barriers to working together, perhaps considering a shared service function.

It will almost certainly be necessary, at this point, to revisit the strategic plan.

Strategy and scenario planning

During periods of uncertainty more rigorous out of box thinking is needed. The extent of uncertainty differs, at one end many of the perceived unknowns are in fact ‘knowable’ and at the other there can be massive almost total uncertainty. In between lies the more common state of uncertainty where there are a number of possible alternatives that can be planned for. Strategy must be able to deal with uncertainty and at a time when predicting the probable is difficult, to say the least, strategies and tactics must be developed on the premise that several different outcomes are possible. 

If there is total uncertainty, which can happen when many issues interact, it becomes virtually impossible to predict or even identify all the possible outcomes. In such cases strategy and planning should recognise that this stage of total uncertainty is often transitory and while firefighting and dealing with the present it is also important to try to identify triggers and trends and be ready to act decisively at the right time to prepare for the future.

As strategies become more dynamic, focused on the short-term, and contain more analysis schools have to be ready to react to outcomes that are different to earlier predictions. This means frequent monitoring and measurement of progress against the response – many schools have had to move to doing this on different time scales. In times of existential threats there is need to review and perhaps adapt plans at very short notice – sometimes daily. However, while the short-term is important it is also important to consider the longer-term and to think hard about indirect as well as direct implications of unfolding events. There is a need to take into account events that are unfolding in real time and also to think beyond the typical planning horizon.

During the uncertainty that accompanied the last economic downturn, scenario planning was seen as one of the most valuable elements in helping organisations cope with the uncertain environment and horizon scanning and factoring in a range of possible outcomes can help. The exercise may require the need to put values and analysis on different scenarios and this does necessitate some out of the box thinking. 

Sometimes it may be necessary to use short cuts as spending time and effort on analysing numbers and values may be a luxury that cannot be afforded when dealing with a crisis that needs an immediate response. It is important to recognise that scenarios often expose the flaws in a single forecast and if done well will allow schools to factor in the outcomes of uncertainty.

Common problems are that scenarios are wrongly treated as forecasts and the range of scenarios is too simplistic – for example optimistic and pessimistic. Some schools are modelling plans on simple optimistic and pessimistic scenarios when they believe that neither of these are likely. However, this doesn’t mean that scenarios should be discarded only because they are deemed to be unlikely. Such scenarios need to be considered while acknowledging their low probability and bearing in mind that a low probability event can still be significant if its impact is large enough.

Another reason why scenario planning is not done in an effective way is the lack of out of the box thinking. We tend to unconsciously bias our thinking to what we know and wrongly think that the future will resemble the past or we extrapolate based on what is happening now. Good scenario planning requires many perspectives, and this involves engaging with a diverse team across multiple functions in the school. It should also include external perspectives to identify threats and opportunities that may have been overlooked. The focus on new scenarios and the immediate issues should not mask important long-term trends or undervalue relevant existing strategies.

There is a need to monitor and track the key indicators that give early warning of the imminence of a particular scenario. These indicators should be seen as signs of potentially significant change and need to be selected and monitored with great care. Each school may well have very different choices of indicators. For example, average pupil numbers may be critical to one and cash collection rates may be critical to another.

Governance may need to be revisited to be able to react swiftly and this may require changes to delegations and to reporting and decision making procedures. In times of crisis it is often not possible to let all the facts emerge and be analysed and sometimes actions need to be taken urgently. However, there is a need to continually update and be ready to change course as new facts emerge.

Organisations have developed action plans for different scenarios by setting and monitoring trigger points along with trend analyses. These make it possible for the school to decide when plan A or plan B needs to be implemented. For example, ‘if income looks like it is going to drop by X we will do Y…’

When the time comes, and we have a moment to catch our breath, we should take time to look back on this whole experience and ensure that the lessons we learnt are fully embedded to strengthen the sector. A threat larger than COVID-19 to the sector is that we fail to change and instead stifle the development of the sector moving forward by saying things are ‘back to normal’.

COVID-19: Managing the impact 
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Tina Allison
Tina Allison
Partner, Head of Education - Non Profits
London