How To Prepare Your School for a Downturn?
Some thoughts on September's economic indicators and why they matter for your school...
It seems that we've had another strong month of economic activity nationwide!
- We added another 136,000 jobs in September
- Our streak is now at 108 straight months of job creation
- Unemployment has fallen to 3.5%
Still, according to most economists, we've started to observe increasing vulnerability in our economy's growth.
The stock market is in turmoil, the trade war is dragging on, and the global economy is slowing. Plus, it's been ten years since the Great Recession ended, making this officially the longest expansion in American history. So perhaps it's no surprise that forecasters, investors and ordinary people are increasingly asking when the next downturn will arrive.
It's becoming all the more likely that we'll experience some kind of slowdown in the coming 12-15 months...
Have you started preparing your school?
Schools that build flexibility into their budgets will enter the trough of the downturn in much better shape than their peers, with far more cash to weather the storm.
Here are 9 points to consider:
- How will an eventual downturn impact the income of families in your community (for private schools) and state/local funding (for public schools) respectively?
How, in turn, will this impact your school's coffers? Would it hit you immediately and hard or gradually and gently?
- Where are you in terms of utilization? If you are above 85%, an eventual enrollment drop will not impact your ability to cover your expenses and capital needs.
If you are hovering around 70% or below, an enrollment drop may have an outsized impact on your cashflow.
- If you experience a revenue hit, what would be the first budget lines to be 'sacrificed'?
It could be prudent to dedicate a full board meeting to proactively discussing potential budget cuts in the case of a downturn instead of scrambling to align under the pressure of time.
- For our private schools out there, is it worth offering discounts on 2-3 year enrollment commitments from parents?
Also, for private schools in one of the 30 states with voucher programs (including ESA and tax credit scholarships), have you considered looking into whether they'd make sense for your school?
- Is it worth reviewing your board's agenda to address high urgency items (capital campaigns, credit lines & banking relationships, partnerships, renovations) sooner rather than later?
- Now is the time to reach out to businesses in your community to fundraise -cash is plentiful, interest rates are low, and generosity is at its peak. If there is one initiative worth expediting, it is business sponsorships...
You don't want to be reaching out to businesses when they are dealing with declining revenue...
- How strong is your Business Controller?
Ask him/her to prepare a contingency plan that will include a gradual build-up of emergency savings, paying off high-interest debt, extending payables to the maximum, more frequent invoicing to parents and, of course, tighter tracking of their receivables.
- If you own your building, now is the time to refinance.
The rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 1.5% to cover the transaction's expenses and generate some incremental cashflow.
On the flip side, for schools who are leasing their property, now is the worst time to renegotiate. Wait until an eventual slowing of the economy before asking your property's owner for a lease extension under more favorable terms.
- On the positive side, in a downturn, teacher recruitment & retention may become somewhat more affordable, allowing you to shift some of those dollars towards student recruitment or facility maintenance.
In conclusion, your willingness to move early will make you far more likely to endure an eventual economic shock successfully. If there is one takeaway it is this: Start focusing more on your cashflows... including reliance on financing, late payments from parents, prepaying vendors, etc.
Strong cash flow enables not only durability but also anti-fragility.
In this light, a recession may become an opportunity for growth and expansion, not a test of survival.
With prudent cash flow management, you may end up being the only school in the area with the cash to invest in growth when the rest are vulnerable.