Independent schools

What is going concern and who is responsible for it?

Going concern refers to the fundamental assumption that your school will continue operating for a period of not less than 12 months, without the need for liquidation or significant curtailment of operations.

While auditors will make an independent assessment on going concern as part of the annual audit, it is the Governors who are ultimately responsible for that decision.

In this new world where VAT is charged on fees, National Insurance is rising, and the cost-of-living remains front of mind, there is increased scrutiny on the assessment of going concern. It’s no longer viable to simply consider the next 12 months. Instead, Governors will need to ensure they review the long-term plan for the school, considering management’s assessment of future cash flows, forecasts, risk appetite and scenario plans.

Evaluating management’s assessment

For independent schools cash remains key, and understanding the available working capital is paramount. Assessing money coming in from fees and other income sources vs required investment for the school year, form the basis of your cashflow forecasts.  Governors should consider if the period covered is sufficient and how different scenarios and stressors  may impact the calculations.

When evaluating the data presented by management on the assessment of your school’s financials, we recommend keeping the following front of mind.

• Is the period covered sufficient? Do you need information beyond the next 12 months?
• Are you comfortable with the opening cash balances?
• Is the split between restricted and unrestricted funds clear? 
• Do you have any loans, what are the covenants on these, are they being met and when are they due for repayment or renewal?
• Does your predicted year-end cash position tie in with forecasts?
• Do the forecasts support different future scenarios and are they mapped to your agreed risk appetite?
• Have different presented scenarios been adequately stress-tested? Do these scenarios map back to your risk register?

Current going concern considerations

Broadly, these are made on assumptions around pupil numbers, debt recoverability, infrastructure costs, cash availability and available assets. Challenges may arise when assessing going concern because the current economic environment is changing so quickly. This is enhanced as schools are not able to flex their business reactively, so thorough future planning with detailed scenarios is needed.

Challenges can impact parent behaviour (and subsequent pupil pipeline), as well as that of teachers and staff. Current key challenges include:

• VAT
• cost-of-living
• National Insurance increases
• TPS and recruitment
• impact of inflation on cost such as food
• net-zero targets
• governance and regulation.

Each school’s response to going concern considerations will be unique, allowing you to explore the full potential of the school and its facilities. When building your scenarios take into account the following questions. This will allow you to model different scenarios and build your unique selling point (USP) into future plans.

• What is your USP?
• Why do parents select your school?
• Why do parents select your school at the point that they do: prep, 11+, 13+, 6th form?
• Why to talented teachers and governors select your school?
• What are the school’s greatest assets?
• What are the school’s greatest untapped resources?

Risk management and going concern

Once you’ve established your cash position, and response to current macroeconomic factors, you’ll be able to agree your appetite for risk aligning with the school’s ability to withstand certain scenarios.

The source of the risk may determine the level of control you have over it and what you can do to mitigate the impact. Below are some examples of internal and external risks that may be applicable to your school. As Governors, you should take the time to reassess current and future risk liabilities to ensure the appropriate mitigation is incorporated into your strategic planning.

Strategy and going concern

Understanding cashflows, risk appetite and appropriate responses will help form the basis of your strategy. In these ever-changing times, we’d advise having short, medium and long-term strategic plans that can be flexed based on a range of hypothesis.

The schools’ sector is currently reacting to the impact of VAT and other costs impacting parent behaviour. This will have an immediate impact on the school as parents adapt, for example some parents may no longer buy sixth form education. Future parents will  also face decisions about when and for how long they invest in an independent school education, for example staying in state primary to protect their senior school education. In the short term, considerations will deal with the immediate impact of VAT on school fees, National Insurance, rising inflation and other financial pressures. Medium to long term strategies will need to consider the impact of this scenario on the future shape and size of your school.

The main strategic consideration for schools is: how are you going to manage the risks around affordability?

To ascertain this, we recommend considering the following questions:

• Do you understand the balance of educational income vs. other income generating activities/business or to manage the risk of reliance on educational income?
• If you’re going to become a smaller school (pupil numbers) what is the wider impact of this on other areas e.g. boarding, staffing etc.?
• What are your capital planning and cash requirements for the next 12 months, two, three and five years?
• Do you need to consider a merger whether full or partial (sharing facilities etc.) with another school? We’d recommend always approaching a merger in a position of strength rather than weakness and the earlier conversations are started, the better.

Setting a strategy

When reviewing your strategy, we recommend keeping the following six principles in mind as a starting point for conversations. In changing times, its more important than ever that your strategy is clear and aligned with your core purpose.

1. Start with the core purpose – minimise mission drift and appreciate that you can’t be everything to everyone.
2. Identify quick wins – what can you control?
3. Scenario planning – what options are available to you, and which best align with your values?
4. Review income generation potential.
5. Collaboration.
6. Budgeting and cashflow.

Conclusion

There are immediate impacts as a result of government policy that will change the shape of the independent school sector in the medium to long term. This needs to be considered when Governors  review the going concern assumptions. Quality management information supported by integrated finance models will help Governors make these assessments and plan for the future.

For more information on going concern, contact Guy Biggin or your usual Crowe contact.