Where Will Your Organization be in Five Years? Lessons Learned from Charter School Finance

AMS Consultant Bill Manburg has worked with the finance and accounting teams for several Massachusetts charter schools over the last  decade, and talks about the lessons that finance executives in any industry can learn from these schools.

Charter schools are independent public schools designed to encourage innovative educational practices. The schools are funded by tuition charges assessed against the school districts where the students reside and the state provides partial tuition reimbursement. Charter schools are an important part of education reform, especially as under-performing schools are coming under more intense scrutiny. In 2010, Massachusetts was one of 12 winning states in the national Race to the Top competition to promote reform in four areas: standards and assessments, great teachers and leaders, school turnaround and data systems. Various grants were available to participating schools in the bottom 5 percent of all schools through this program.

“Charter schools are tasked with being innovative,” says Manburg. “It is their mission to try new things but they are facing some of the same issues as public schools, or, for that matter, any organization.  Financial resources have decreased. Yearly income [tuition reimbursement] increases are uncertain, while healthcare, operating , and staff related costs continue to rise.  Healthcare and other staff-related costs are increasing at a rate greater than income increases.”

The Five Year Forecast

In addition to good and timely access to standard financial information, monthly board-level reporting, and experienced audit preparation, Manburg often recommends his clients review a five year rolling forecast. This kind of forecast can help the organization understand the future impact of even small changes. This practice could be adopted in other industries, especially with regard to staffing and the impact of big ticket capital investments like new buildings.

 “Over the past several years, there has been a trend, while still focusing on MCAS (Massachusetts Comprehensive Assessment System), to significantly increase the level of student support, sometimes all the way through college,” Manburg notes. “We’re seeing the addition of many new staff members, including social workers and therapists.”

While a charter school’s current budget may have room for additional staff, salary raises and increased healthcare costs can change that very quickly. Even if other expenses are tightly controlled, a focus on retaining experienced staff leads naturally to a more expensive staff, as administrators and teachers receive annual increases. While it is good policy to keep excellent staff, there comes a point when that staff may become too expensive.

Changing budgets and reimbursements can have an impact on the monies available to pay for that staff. Meanwhile, potential donors are tighter with their donations and the reins on spending are looser, an often overlooked result of long periods of cost-cutting.

Charter schools aren’t the only ones impacted by these sea changes. Private schools, while not subject to the changing attitudes of local voters, are not guaranteed their tuition. As family fortunes change, private schools often see an increased demand for scholarships, especially when a family has more than one child in a school.

Large initiatives, such as those faced by charter schools when they look to set up a permanent location, are good reasons to review a five year forecast. Charter schools face a host of issues related to their facilities, beyond the construction or renovation costs. They can lose key staff if they are forced to move. Finding a building that can be cost-effectively maintained is difficult. Operating expenses may be unusually high, as older buildings, even if they are well-maintained and are in a usable configuration, can be inefficient to heat and cool.  This can have a significant impact on a charter school’s everyday budget. And, while it is difficult to raise money for a new school building, it is even harder to raise money for operating expenses.

“No one wants to donate for the equivalent of pens and paper,” says Manburg. “Fundraising is more successful for extras like field trips or special programs.”

Forecasting five years out can provide a strategic roadmap for the decision-making process at charter schools, helping to ensure survivability. Using the same methodology in any business or nonprofit can help in making important and effective decisions too.

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