This article originally appeared in the fall 2023 issue of the Enrollment Management Association's magazine, The Yield, as part of their series on Exploring the Enrollment Management Spectrum. NBOA and EMA regularly partner in content creation, program presentations and thought leadership to advance business and operational excellence in independent schools throughout the U.S. and the world.
Are you ready to partner in sustaining your school’s long-term financial health? Financial stewardship is a shared responsibility among a school’s leadership, including its board of trustees, head of school, business officer, enrollment leader, and administrative team. This collective group must develop, implement, monitor, and evolve a long-term financial strategy that supports the school’s mission and that values and defends its defining freedoms. It goes without saying that tuition is the biggest revenue driver within a school’s business model, and therefore, enrollment leaders play a key role with regard to the school’s financial strategy and long-term fiscal health.
At the core of EMA’s strategic Enrollment Management Spectrum lies a strong financial strategy, which begins with tuition pricing and net tuition revenue. While each lever within the Spectrum is crucial, intergenerational financial sustainability is paramount to realizing a school’s mission indefinitely. Independent schools derive nearly 80 percent of their operating revenue from tuition dollars, underscoring the importance of an integrated enrollment strategy for fiscal health. The tuition price serves as a signal to the market, communicating the value proposition of the school’s mission. Therefore, structuring the tuition model becomes a collaborative effort between the enrollment and business offices in coordination with the head of school and the board of trustees.
The Independent School Business Model
The business model in traditional independent schools is distinct from that of other industries and is inherently challenged by the fact that many schools intentionally charge tuition prices lower than the cost of educating their students. The independence we have to structure our own financial models provides great freedom and also great responsibility. Being solely supported by private funding in the form of tuition dollars and charitable gifts means that there must be synergy between enrollment management efforts and financial goals. Setting tuition to cover true costs while maintaining a pricing level that is palatable enough to attract families willing and able to pay requires a delicate balance.
Many schools also offer tuition discounts, including need-based financial aid, merit scholarships, and tuition remission benefits, to enhance affordability, accessibility, socioeconomic diversity, and enrollment. However, this practice creates a “gap” between tuition revenue and operating expenses, which schools endeavor to bridge through various means, most notably fundraising. It is crucial to recognize that a widening gap, which recent data suggests is the current industry trend, can lead to financial instability.
Monitoring financial health requires focusing on net tuition revenue (NTR) rather than gross tuition or enrollment headcount. NTR, obtained by deducting tuition discounts from gross tuition, provides a more accurate indicator of the funds received to cover operating costs. Tuition and financial aid are key areas at the intersection of long-term school financial health with accessibility and affordability for the community the mission serves.
Minding the Gap
Almost every school faces a disparity between the stated tuition price and the actual cost of educating each student. Consequently, schools must find ways to fill the gap between tuition revenue and operational expenses. While many schools have operated successfully despite this gap, sustaining it becomes increasingly challenging without substantial endowments, robust annual giving, and/ or alternative revenue sources. School leaders need to acknowledge some fundamental realities:
- Charging less than the cost of education means that every student effectively receives financial aid.
- The true differentiators in quality learning lie in the school’s faculty and programs, not just class sizes. Maintaining small class sizes, a common perception of quality, comes at a higher cost due to personnel expenses. Consider opportunities to carefully shift this structure and the messaging of personalized learning so as not to diminish the appeal to families but to better secure the school’s financial position.
- “Not-for-profit” is simply a tax status and should not mean that the school’s business model is to be “for loss.” Surplus funds can be reinvested in the school’s mission through investments in facilities, programs, capital needs, reserves, and more.
Strategic Financial Planning and Opportunities for Partnership
Addressing a school’s financial challenges necessitates collaborative efforts among the head of school, trustees, and the “golden triangle” of business, enrollment, and advancement leaders. Tapping diverse perspectives when aligning priorities and solving complex financial problems, this collective must work together to develop long-term strategies. Data, including internal trend analyses and benchmarking with peer and aspirational school groups, should inform key discussions, questions, and related decisions among these leaders.
As was the case during the Great Recession of 2008 and the COVID-19 pandemic, we are again in an economic climate that necessitates a long view on financial health, given today’s volatile investment market and high inflation. Making drastic financial decisions in response to acute yet temporary circumstances is never prudent. Instead, as independent schools navigate an increasingly complex future, the current landscape provides an opportunity for leaders to carefully consider and pull financial levers that better reflect their priorities in their annual budgets and long-term projections and secure their fiscal health. Explore opportunities to secure your greatest sources of revenue and grow others while moderating your most significant expenses.
Securing the Future
Independent schools face an increasingly complex future, which demands innovative business strategies and tuition models aligned with their priorities. By employing prudent business practices focused on fiscal health and intergenerational equity, schools ensure the availability of resources to fulfill their missions well into the future. Despite mounting pressures, school leaders have the opportunity to partner and drive positive change.
Embracing collective responsibility, independent schools can build a sustainable financial foundation that supports their mission, enhances the educational experience for students, and strengthens their communities. The pressure is real, but so is the opportunity for school leaders to partner in effecting change. Let us embark on this journey together toward long-term financial health and success.