How to Prepare for a Financial Crisis

Vol. 14 No. 9

trustees eletter Vol14 No9 financial crisis

Considering our fragile national economy, it’s prudent to include a financial contingency plan for your school’s worst-case scenario in your strategic planning documents. While each school’s particular situation determines the plan’s specific details, there are common characteristics each private school should include. As Board President, charge an ad hoc committee to craft your plan. ISM suggests the following example for inclusion in your document.

Our school’s financial contingency plan is automatically triggered by any circumstance in which all five of the following conditions occur at the same time. It may also be triggered if any four are present at the same time.

  1. Cash reserves totaling less than 2% of total operations expenditures.
  2. Total indebtedness—including debt from bonds—exceeding total endowment.
  3. Total indebtedness exceeding 70% of total operations expenditures).
  4. Hard income (revenues that are:

(a) billed—such as tuition/fees, or

(b) transferred internally—such as applying 4.5% of the endowment corpus to operations, totaling less than 92% of the total operations expenditures. This is distinct from solicited revenues (such as those produced by the annual fund drive).

5. FTE enrollment (current enrollment, or enrollment projected for the coming year) down by 8% or more from the previous year’s total.

If our school’s contingency plan is triggered, cut operations expenditures as soon as practicable by reducing payroll and other expenses, as needed. The budget—actual or projected—must be cash-positive (i.e., show a surplus equal to 1%), including the assumption that soft income—solicited funds—will drop by at least 20% from the previous year’s total.

In general, our School Head's payroll-reduction priorities will be as follows:

  1. Elimination of non-instructional positions, including senior administrators, as needed, then filling these positions, where feasible, with volunteers (to include Trustees);
  2. Elimination of noncore instructional positions, as needed; and
  3. Reduction of salaries across the board, 5%–15%, if the previous two steps have yet to bring the budget into alignment.

While our School Head, in dialogue with our Head Support and Evaluation Committee, proposes the payroll cuts and other reductions, this proposal must receive whole-Board, simple-majority support before implementation.

There are, however, two elements that should be excluded from your contingency plan.

  • Tuitions. Your tuition level must continue to increase—always, and under all circumstances—at your projected inflationary gradient or higher. Failure to move tuition levels up hand-in-hand with projected inflation weakens the core of your school, and makes recovery much more difficult.
  • Marketing expenditures. If any area should receive increased funding under contingency-plan circumstances, this is the area. Make sure all your constituencies, current and prospective, understand that you will protect your school’s ability to deliver its core mission. The cherished third-grade teacher will still deliver the mission every day. The revered upper-school English teacher will continue to deliver the mission daily. All parties must understand this.

When the national, regional, local, or school-specific crisis passes, your school can resume delivering its mission at the highest level. The right contingency plan ensures that your school survives and reemerges post crisis, stronger than ever, in business for the long haul.

Increased cash reserves. Higher enrollment levels. Long-term viability. These are the goals at every school. And they are attainable, if you have the right strategic financial plan. This summer, attend ISM's Summer Institute workshop, Strategic Financial Planning: Skills and Implementation, and learn how our proven approach to strategic financial planning will help you experience financial success now, while positioning your school strongly for the future.

Additional ISM resources:
The Source for Trustees Vol. 13 No. 2 Must Tuition Outpace Inflation?
The Source for School Heads Vol. 9 No. 2 Cutting Tuition is Not the Answer—Keep Your School Accessible

Additional ISM resources for Gold Consortium members:
I&P Vol 33 No 14 Hard Economic Times: Do’s and Don’ts for Private-Independent Schools
I&P Vol 34 No 6 Economic Downturns, Stimulus Packages, and Financial Aid

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