20th May 2020
This article was last updated on 20 May at 16:15.
COVID-19 has caused significant challenges to all businesses, and independent schools are no exception. There has been a huge amount of work done across the sector over the last few weeks and months to move towards an online method of provision. However, there are still significant unknowns as to what the actual impact on school’s income may be.
These variables mean financial modelling is more important than ever, and the ability to react to changes quickly and model their impact is vital during times of uncertainty. Although there will be some schools who can ride out the impact with relative ease, there will be others who will face an existential crisis. We would encourage thinking of ‘worst case scenarios’ to be able to see the extent of the risks and where key decisions must be made. Cash flow should be the immediate priority, and because the usual rules of business don’t currently apply, you need to consider how your cash flow may come under pressure. Some of the key considerations (and they are by no means exhaustive) when planning for this are as follows:
- Autumn term fees – probably the biggest unknown. This will be very difficult to predict and where a range of outcomes will need to be thought through.
- Parental discontent – we have heard various stories about parents pushing back over full fee charges. Some schools are offering discounted fees for the summer term as well as no or delayed fee increases for 20/21. This should be carefully thought through and modelled before decisions are made.
- International students – there may be significant impact on income from international students, perhaps even a complete halt on income from international students into 2021.
- Debts – we are likely to go into a significant downturn in the economy. Some of those parents who may be able to pay now, might not be able to in six to nine months’ time. What is your increase in debts going to be and the instances of these going bad? This could have a significant impact on cash flow.
- Medium term – don’t just think short term – this is unlikely to be just a 2020 issue once the impact to the economy kicks in. Will your pupil numbers decrease for 20/21?
- Insurance – we have heard some conflicting stories from schools regarding insurance cover for business interruption. We would think it unlikely that schools will be covered in full. From a modelling point of view, you should not rely on this. Even if you are covered later, payments are still likely to be significantly delayed and won’t help cash flow in the short term.
- Cost upsides – the shutdown of facilities will create cost savings. These should be fully considered and built into your modelling. It is also worth reviewing all costs and contracts and talking action to remove any unnecessary expenditure as a matter of urgency.
- Summer capital work – most schools carry cash into the summer months for capital works. Schools should consider all planned capital and maintenance projects and evaluate the urgency of these projects in the current economic climate.
- Time to Pay – the Government has introduced measures to allow businesses more time to pay their PAYE and VAT bills. VAT will have limited benefit in the sector, but it is worth considering obtaining a time to pay exemption from HMRC for PAYE.
- Financing – there maybe schools who may need an element of financing to see them through this period of uncertainty. In most cases schools will be an attractive prospect due to the security offered in the form of property. You should model the amount of funding necessary and approach your bank early. Those who have current finance should consider approaching their lender for repayment holidays as an additional cash boost.
- Job Retention Scheme – the Government has introduced the concept of ‘furlough’. This is effectively pausing certain employees who may have limited or no work to do during the closure phase. The government will pay 80% of costs up to a maximum of £2,500 per month. Schools should consider if some employees should be put on furlough leave in the short term and the impact this may have on the model. The legislation should be considered carefully prior to doing so.