Managing a business in a period of rising inflation

Inflation has hit its highest level in 30 years. For many businesses and those advising them, this is a new experience. As our domestic economy continues to recover from the Pandemic and the economies around the world open up there remains a strong demand for goods and services, demand which is being hampered by severe disruption to the supply chain. In the UK rising energy prices and fuel costs have been the biggest factors in driving up inflation although the price of food and many other everyday essentials have also increased. At its simplest, this is a demand and supply problem that will over time reverse, but with the ongoing conflict in Ukraine it may now last longer than initially thought.

Looking through the lens of an independent school, it is not just individual lines on a budget increasing, these pressures are also affecting the workforce with expectations around their pay to additionally consider. For schools the ability to balance budgets, be able to invest in infrastructure and services for the future sustainability of the business whilst also managing fee affordability is going to require a very steady hand on the tiller.

Managing the budget

The skills developed during the pandemic of managing through uncertainty will be necessary once more. Preparing budgets and forecasts which have trigger points enabling quick decision making are a must. In previous years it has been challenging when setting fee increases to be sensitive towards affordability for parents, providing accessibility for those who cannot otherwise afford the fees whilst also providing funds for future investment in the business. But in periods of inflation the underlying need of making sure the school is covering its key operating costs becomes crucial.

At present it is difficult to plan for when the current inflationary pressure may ease. When it does, the schools in the best position to move forward will be those who were able to operate their business in a manner which allowed them to navigate through and manage these pressures.

Strategies to deliver the budget

In recent years schools have needed to carefully manage their costs and it is reasonable to say for many there are very few costs that can be reduced without making different strategic decisions. We are starting to see schools reviewing their future direction and challenging themselves on the activities and capital developments they are planning. There is greater scrutiny on identifying what the USP is and ensuring this is the focal point for clear messaging with parents, developing the right marketing strategy and strategic site development plans. Too often many schools appear to be trying to be all things to all potential pupils. However, this is hugely expensive, often ineffective and something they cannot afford. Focussing on  understanding the return on investment of any strategy ensures that money is only spent on those capital development plans that have the greatest return for the school.

Fee setting is always a difficult matter to get right as there are so many competing priorities. While it is important that a school remains competitive with its peers, governors and management must also be aware that becoming a school whose fees falls behind others, has if anything, a very short-term gain and makes for difficult challenges ahead. If fee increases are too small in any year the cumulative effect of that decision is carried forward and may ultimately force the Governing Body into fee increases above inflation in the future, a move which can have a greater negative impact overall. Depending on the level of reserves held by a school a fee increase, which does not enable the budget to at least break even may be possible for a short time; it most certainly is not a long term strategy.

Long term financial planning is critical to a school achieving its strategy. Many schools are recognising that just relying on fee income alone is becoming increasingly difficult. There is a need to think differently and identify ways to diversify income streams. Significant sums are invested in school sites and therefore better leverage of these assets is needed. Seeking out potential opportunities to rent out the facilities and accommodation space when they are not being used is a necessity. Utilising the I.P. the school already has to generate new business streams is also a good way to leverage an already established asset to create greater gains. Many schools have established schools overseas using a royalty model and are seeing a good return on their investment but these arrangements are not without their challenges. Other schools are utilising their brand to explore the opportunities of opening a 52 week nursery provision, providing the dual benefit of generating new income to the school and also making available a nursery facility to working parents of current pupils. Diversifying the income streams of the business does however need to be professionalised and supported by investment in staff resources so that these new ventures can be properly run.

To be successful whilst also operating a school as a sustainable business has always been challenging and necessitates at times tough decision making, considering at all times the commercial imperatives for the school. Navigating through the pandemic required governance at schools to be agile. As we face the new challenge of an inflation economy, schools must embrace the learning of agile governance to ensure effective, timely decision making based on relevant critical management information.

If you require any further advice on any of the above, please contact Tina Allison, or your usual Crowe contact.