Making Your Numbers Count: Budgeting and Communicating Excellent Financial Stewardship to Internal and External Stakeholders

For 20 years Christian Education Ministries has been working with Christian schools and School Boards to improve their financial sustainability and resilience. In an earlier article we talked about the numbers that count - those financial metrics that Christian school leaders need to focus on. Here we are turning our minds to making your numbers count - how should Christian school leaders develop their budgets and, more importantly, use them to paint a picture of financial stewardship for both internal and external stakeholders?

Building your school’s budget

You would think this would be such an easy thing that it hardly bears mentioning, but often when we start working with Christian schools it is the budget that forms the centrepiece for identifying where performance improvement is possible, and provides the focus on improvement initiatives in the early, critical years of achieving sustainability.

All these factors work together, so in no particular order the annual budget must be built upon:

1. Enrolments: Establish the year’s enrolments by year level, give thought to typical entry points, and where your school may be challenged in maintaining its enrolments (the exit points). Be realistic but include some achievable stretch where appropriate - clearly enrolment growth is important but time and again we see that the risk of over-optimistic enrolment growth is that schools inevitably build and fix their cost base before growth comes. Within reason, “resource the achievable” and add cost as growth comes. Build flexibility where you can.
2. Recurrent revenues: Continuing this theme, build your recurrent revenue budget based on your best estimate of recurrent Federal and State recurrent grants, tuition fees (net of discounts), and other known income sources. Don't fall into the trap of becoming overly-reliant on targeted grant funding or NCCD adjustments. While some of these elements need to be built into your budget, err on the side of conservative and build flexibility into your resourcing of these quickly changing revenue sources. And budget for camps and similar activities to be at least cost-neutral - to do otherwise confers broad discounts when some within your school community will be quite able to pay (it’s better to support those who can’t specifically).
3. Staffing: Build your staff budget based on individuals (ground-up), using expected FTE load per person, and separating your teachers, classroom support staff, and administrative/operational staff. Build in expected salary increases, changes in staff classifications, and employment on-costs like superannuation, workers’ compensation premiums, annual leave (where appropriate) and long service leave entitlements. Build in allowances for incoming staff required to meet school growth or short-term initiatives (with flexibility), but sense-check the outcomes against your recurrent revenues. While school growth, particularly in secondary schools, requires some staff investment in advance of growth, if your total employment cost as a percentage of recurrent revenues is in the range of 65%-70% of recurrent revenues, you must ask yourself whether you are leaving sufficient margin for other educational and operational expenditures, and sufficient profitability to enable the school to service its investment and debt-service requirements. More on this later.
4. Educational expenses:? Budget an allowance per student for teaching resources and other direct educational expenses. There are great metrics available to you from a range of sources so do your homework - what do similar schools, with similar demographics, spend on a per-student basis (and don’t look down the road to the next school - find an appropriately deep data set to normalise out “bad practices”).
5. Operational expenses:? Similarly, budget for the costs of opening your school facilities and administration functions based on known contracts and expenditures, but sense-check it to broad data sets. They are available.
6. Depreciation, amortisation and interest expense: Why budget for accounting concepts like depreciation and amortisation you say - we have already spent the money on the assets? Great question…it is critical because while capital expenditures are not typically funded from recurrent grant incomes but private sources, depreciation and amortisation of previous capital expenditures are allowable against recurrent grant funding. If you don’t budget for this you will be missing the opportunity to provision cash for future replacement or refurbishment of capital assets. Said another way, you will be unduly reducing the ability of your private revenue sources to fund future capital assets. And the same goes for interest expenses - these need to be budgeted because they are a cost of acquiring the infrastructure needed to educate your students. As importantly, your bankers will be keenly interested in seeing interest expense within your annual and future financial planning.
7. Net profit or Net Surplus: Don’t fall into the trap of thinking that not-for-profit means that you can’t return a net profit or surplus for the year. Without a profit your school will not be able to invest in assets, or service the debt required to acquire or build assets, and this means you won’t grow. Profits enable investment in human resources and teaching capacity, and the infrastructure within which education occurs.

And as important as your annual budget is…?

…painting a picture, communicating a vision, inspiring stakeholders with great financial stewardship…of course.

What do I mean? We often see schools fall into the “annual budget myopia” - focusing on the short-term annual budget and missing the opportunity to plan for the medium to long-term. Why is this so important? Whether it be Principals, senior leaders, teachers, general staff, parents, bankers, regulators or other school stakeholders, setting a medium to long-term vision for the school is enabled through a medium to long-term financial forecast.

And it is critical to forecast using a three-way budget:

• Profit and loss - built off next year’s budget, and applying enrolment, staff or other appropriate drivers to reasonably forecast a 5-10 year horizon.
• Cash flows - built off the profit and loss forecasts, cash flows are easily derived by allowing for the relatively minor timing differences that occur between revenue and expense recognition and receiving or paying cash (e.g. receipt of tuition fees, payment of employment provisions, etc…), removing your non-cash or financing expenses, and introducing the school’s plans to invest in capital assets in the years to come (assigned to the year you estimate they will occur). And introduce your best estimate of how you plan to fund those capital investments. It will likely involve support from your bank, and it is easy to forecast the debt becoming available and the annual repayments (principal and interest) required to service that debt.
• Balance sheet - this will give you many things, yet two critical things: (1) a view of your current and future debt to enable a sense-check of the school’s financial capacity to service it over the horizon; and (2) a sense of whether your profit and loss and cash flow forecasts have integrity. Like any good accountant, you know that where the balance sheet does not balance something is amiss! And don’t think it doesn’t happen - all too often I see well built profit and loss budgets which communicate growth and success (and seeming “sustainability”), only to find when you build those assumptions into a cash flow and balance sheet you end up $15M short (or with a $15M imbalance in the balance sheet) over a reasonably short horizon.

The only certain thing about your forecast is that it will prove to be wrong - but don’t let that be a barrier to doing it. Investing some time in building these tools creates insight, creates the ability to predict and manage forward (think: “planning with the benefit of predictable outcomes in order to create management options”), and allows you to communicate a well-founded story of financial stewardship to all your stakeholders. They all play a role in your school’s sustainability, and painting a credible financial narrative that aligns with the vision is critical.

Above all, your bank will thank you through the time-honoured formula…better management = increased predictability = lower risk = lower interest rates.

Matthew Gray works with Christian Education Ministries in the financial management of the 13 schools overseen by CEM. He joined CEM after retiring from the KPMG Australia Partnership in 2019, where he provided financial accounting, taxation, consulting and audit services to a diverse range of private clients across Australia and internationally for around three decades.? Matthew has previously served as the Chairman of the Board of Elders of Gateway Baptist Church in Brisbane. He has been married to Lucinda for over 27 years, and together they have three adult children to their credit.