Inflation, which has risen steadily since early 2021, will be a critical factor in budgeting decisions this year and perhaps beyond; that’s a given. But the corollary is equally important — as we lead our schools, we must not let inflation become an all-consuming distraction nor consider it in isolation from other financial planning factors and priorities.
With seemingly each new day bringing alarming information about inflation trends and recession fears, and with independent schools already feeling its pinch in their expense reports, it is no wonder that rapidly rising costs are top of mind for business officers, other top administrators and boards of trustees as they begin to consider next year’s tuition price. Combine that with the need to hire and retain outstanding employees in a tight job market, and the fact that inflation has not been a significant issue for the last 20 years or more. The result is a perfect storm of conditions in which inflation may become a bugbear, threatening to take over the planning and budgeting process and diverting attention from other important considerations.
All Budgeting Is Local
The acronym VUCA, which has been in the air for some time and stands for volatility, uncertainty, complexity and ambiguity, seems to have met its moment. It feels like we will be working and planning in a VUCA era over the next several years. This will require school leaders to be aware of national and even international conditions and trends. But even more importantly, we should also look closer to home, assessing the local impact of inflation and its relationship to each school’s value proposition.
Most experts anticipate that inflation will stabilize in the near future but will settle at a level higher than that to which we have grown accustomed. Elizabeth Jennings, regional practice leader at Truist, predicts 4-5% yearly increases in compensation costs over the next few years, and health care costs may rise even higher. But the more relevant question, Jennings notes, is: How is inflation playing out in the local community? What are housing prices like where your school is located, and what is the availability of various housing options? How far do teachers and staff commute? How energy efficient are your buildings?
These considerations will provide a baseline and serve as a starting point for your normal budgeting process. It is critical to go through that process carefully and proactively, rather than reacting to the latest headlines or economic numbers.
As schools determine next year’s tuition price, the first consideration — regardless of inflation — should always be the perceived market value that the school is providing students and families and how best to maintain and improve the educational experience. In a recent conversation, Tom Arnold, the chief financial and operating officer at Western Reserve Academy and NBOA Board member, put it clearly: “No matter where we land with our tuition pricing, as we move forward in an inflationary environment, we think it is particularly important that we consider our value proposition and what makes us unique.”
Budgeting conversations too often get bogged down in the minutiae of financial statements, or anecdotes of the tuition rate at another school, and do not address the fact that the majority of independent school parents are mainly concerned about the education that their children are receiving and the ways in which the school is living out its mission. Of course, the cost of tuition is important in families’ decision-making processes. But it’s not always the most important thing and can play an outsized role in the thinking of school leaders. This fact has been demonstrated through research that demand remains strong when value proposition is high, regardless of price increases. This is particularly true right now, according to Jennings, because of the goodwill independent schools generated through their thoughtful and proactive responses to the COVID-19 pandemic.
By shifting the focus away from price and toward value, school leaders will necessarily think less about next year’s tuition price tag and more about the kind of school that they are and want to be in the future. This way of thinking fits perfectly with another key component of sound budgeting practices: developing and sticking to a long-term financial plan.
In the Long Run
What are your school’s goals for the next three to five years, or longer? What type of compensation package — not only wages and benefits, but also things like housing or tuition remission — will be necessary to hire and retain the best possible faculty and staff? Do you want to add new positions? What type of maintenance and capital improvements will be necessary to fully support your programs? Asking these longer-term questions will ensure that your focus remains on mission delivery and will provide a strong signal to your community of the desire to deliver the best possible product.
More and more schools are factoring in an operating margin into their overall planning. Particularly in this VUCA environment, operating surpluses not only provide extra resources, but also give schools time to react to a revenue shortfall or higher-than-anticipated inflation in any given year.
NBOA’s Long-Range Financial Model for Independent Schools provides a framework for organizing your answers to these questions in a systematic way and allows you to assign associated cost projections. It also enables you to see how these levers interact with each other and the relationship among various tuition and enrollment scenarios and these expense variables. Using a strategic multi-year planning tool like this will make the yearly budgeting process more holistic and mission-driven. It will also ensure that inflation is just one factor in the equation and not the driver of the entire process. You can also track your school’s long-term financial health through the Composite Financial Index (CFI) calculator available in NBOA’s BIIS, among other tools available in the data platform.
As part of this longer-term financial strategy, more and more schools are factoring in an operating margin into their overall planning. Particularly in this VUCA environment, operating surpluses not only provide extra resources, but also give schools time to react to a revenue shortfall or higher-than-anticipated inflation in any given year. The size will vary depending on particular circumstances, but many schools are now planning for an operating margin of 3% to 5%.
Perhaps all of this sounds like a significant increase in tuition price for the 2023-2024 academic year is in store, and for many schools that will likely be the case. If so, how should you communicate the increase to your community? Jennings offers this advice: “Stay focused on mission and stay focused on programs — that is what is going to get us across the finish line.” Arnold would agree, stating that Western Reserve Academy has “done the work to understand our tuition price and its comparative standing within our market…and how it relates to the value we are delivering.” For that reason, he feels confident that if the school raises tuition at a higher rate than in the past, it will not alter its competitive position.
Indeed, if your messaging focuses on the delivery of the school’s mission in the most effective and sustainable ways possible, school parents may be even more receptive to a tuition increase than before. They understand, as we all do, that costs are rising, and they desire, as we all do, the best for their children. Those shared desires may result in a thoughtful, well-considered, strategic tuition increase next year. The message is clear: Don’t panic short-term, but rather, plan long-term, and as always, focus on your school’s mission, value, and what your learning community provides better than other educational alternatives to your students and their families.
Follow NBOA President and CEO Jeff Shields @shieldsNBOA.