The practice of benchmarking key performance indicators (KPIs) is not new, yet it is one of the most under-utilised management tools.
Benchmarking provides management and the board essential comparative information on their organisation’s performance compared to others in the same industry. Research has determined that organisations whose best practice performance measures rank in the top quartile of their industry are 10 times more profitable than those that rank in the bottom quartile.
While independent schools do not consider profit as their first and foremost priority, there are good reasons to benchmark financial KPIs to remain an effective and sustainable school in the long run. A good school manages the fine balance between achieving good financial and academic results as well as maintaining their facilities in state of the art condition. Benchmarking against those who have achieved this fine balance can go a long way to determining areas of improvement.
Accru Melbourne annual benchmarking study
Every year, in March, we gather data during our audits of independent schools in Victoria and present it to their respective boards, so that they can see how their school compares to others. Regardless of the size of the school, meaningful comparisons can be made and valuable information can be shared with the boards on what they are doing well and what can be improved.
What does this year’s data tell us?
Employee cost per student
Employee costs per student were up for all schools from 2014 to 2015 with most schools being up by 10%. One school’s costs went up by 20% and the lowest increase was just under 5%. Many of the schools are putting more focus on the education of current students and so either limited new student enrollments, increased the number of teachers as a result of creating new roles within the school or reduced class sizes.
EBIT and EBITDA
EBIT (Earnings Before Interest and Tax) and EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) saw an average of 16% and 11% respectively for 2015 with individual schools varying from 6% to 28% for EBITDA. Schools with a high EBITDA (27%-28%) included both larger and smaller schools proving that number of students and level of revenue are not the only factors in determining the bottom line. These schools were typically more financially focussed, but also had other means of deriving income i.e. rental of facilities, donations, investment income. 2015’s EBITDA and EBIT slightly decreased from 2014 which is a reflection of the higher employee costs as described above.
Working Capital Ratio
The Working Capital Ratio for a School is worked out by comparing their current assets and current liabilities. Normally a commercial organisation strives to obtain a working capital ratio of at least 1, meaning that they can pay all of their current liabilities out with their current assets. The 2015 average for the schools was 0.90 with a range of 0.08 up to 2.46. Low working capital ratios are quite common for schools as any surplus cash usually goes straight into buildings projects in order to maintain high standard of educational, recreational and technological facilities. Generally, a school’s working capital ratio is a result of where they are in their building cycle i.e. if they are about to commence the next project then the ratio might be quite high as they have built up the cash required.
Debtors as a % of tuition fees
Whilst debtors are generally not a high number for a school, it is still an area of focus for collectability and Schools vary in the way that a term’s fees will be billed and collected. Some schools bill in advance and allow parents a bit more flexibility with payment, whereas others prefer to bill monthly to parents’ credit cards. The average for this ratio for 2015 was 2.09% with schools in the range of 1.03% and 5.16%. Most schools had a slight reduction in this ratio, meaning that their collection results were better than in 2014.
If you are the Business Manager of a school or are involved in its finances in some way, are you currently looking at your school’s financial KPIs and comparing it to the industry benchmarks?
Are you aware of what other schools are doing to improve their financial results?
If you would like to know how your school compares or discuss areas of your school’s business, please don’t hesitate to contact Accru.