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Managing The Bottom Line:

The Impact of the Finance Committee, Financial Audits and Marketing the Mission

  1. GOVERNANCE AND FINANCE: THE ROLE OF THE FINANCE COMMITTEE

    When asked the most important committee of the board, many board members will respond “the finance committee”. In reality, it is probably the committee on trustees, and the executive committee (where it exists) that do and should outrank the finance committee. However, finance committees and their chairs are indeed powerful in most of our schools. Sometimes that power is wielded well; other times it is problematic.

    Research from Littleford & Associates world wide demonstrates that a majority of board “air” time is spent listening to financial matters and finance committee reports. Instead, the committee’s report should be mailed out a week or two in advance of the board meeting so that trustees have time to digest it. If properly reviewed and understood, finance committee issues and conversations should not dominate board meetings.

    Board members want (or should want) to feel empowered appropriately without micromanaging. They wish to participate in substantive discussions of strategic issues, not just of a financial nature. It is not that these monthly budget reports, leverage analyses, and long range financial plans are unimportant. However, a well oiled board process will not permit financial discussions to take more than 25% of board time so that adequate discussion of other strategic challenges and/or opportunities is possible.

    Some schools split the role of finance chair from that of the treasurer. That is neither wise nor necessary. Historically, some boards felt that the role required a split for the purpose of checks and balance. In the majority of schools, these roles are filled by the same individual which, and that seems the wiser clearer course. Then there is no confusion for the chief financial officer or head about having two bosses on financial matters.

    For most boards, little attention is given to the audit. Equally important as the audit is the management letter. If there is no management letter, there should be one. If the management letter is not reviewed carefully, the board may be missing important information.

    Periodically, a board should evaluate its accounting firm, consider alternative firms, request competitive bids and seek “name recognition” firms with some degree of regional or national prominence. While Arthur Anderson’s demise put a dent in the myth of the prowess of national accounting firms, large firms may offer greater expertise and more independence than some local firms, which may have close and historic ties to individual trustees.

    One school recently learned that its annual operating deficit was double that which both the business office and the audit reflected. While poor business office oversight was at least partly to blame, the audit was conducted by very inexperienced staff. Recent management reports from the auditing firm had raised no “red flags” and had offered few or no specific recommendations for improving the accounting or reporting or for monitoring the red ink more carefully.

    Every finance chair, board chair and head as well as the business manager should review the school’s 990 form before it is filed each year. In some business offices, a staff accountant, not the business manager, completes the Form. It is a risk not to know the key numbers on the Form, what they represent and their implications. The 990 forms go on the Internet, usually within two years or less. They can expose the school to careful scrutiny of a wide range of financial issues, and not just the pay of the top school officers.

    A. The Composition of the Committee

    In this consultant’s experience, there seem to be two major styles of finance committee chairs, and thus of financial committee discussions and results:

    1. The accountant, CPA, or banker who typically has a more conservative focus. These individuals tend to be quite moderate about managing budgets, setting tuition, taking economic risks or seeking the opportunities in well-run profit centers. Their strength lies in conserving assets. Their weakness may lie in not seeing enough the opportunity offset to prudent risks and to stretch to reach the mission. They may not seek out profit centers as new areas of potential revenue.
    2. The entrepreneur or venture capitalist with the less cautious approach. These individuals may well be the ones who oversee a major, complex municipal bond offering with the offset of a successful endowment campaign and a targeted level of increased enrollment. The positive outcome may be impressive new buildings and the purchase of new land. The weakness inherent in this approach may be an overestimation of giving, an underestimation of the effect of an enrollment shortfall and shortsightedness about long term debt management.

    Recently, a board, through the encouragement of a savvy aggressive finance chair, took on major bond debt to build an expanded plant. Enrollment projections did not materialize. The resulting disappointment and financial stresses led to a pendulum swing: the succeeding finance chair began to question the administration too closely and to micromanage, all with good intentions, but with an intimidating effect on the business office. The Board was trying to make up for what it perceived as an earlier lack of sufficient oversight but in actuality may have been a result of overly optimistic projections.

    Chairs and heads should attend all finance committee meetings, and the partnership of head and finance chair should be almost as close as the CFO/finance chair partnership. However, the CFO should not have, or appear to have more power or influence than the head and to be in effect running the school.

    Planning for the succession of the finance committee members and especially its chair requires almost the same kind of care needed for a review and nomination of candidates to replace the board chair. The chairs of the board, of the committee on trustees, and the of finance committee, represent the most powerful positions on the board. Filling those assignments requires great care and planning.

    Parent representation on finance committees has been suggested in recent years as a way to solicit parent opinion and to “test” prospective trustees through their involvement in finance committee discussions. This can be quite risky as these parents are not screened, chosen, oriented or trained as trustees.

    Yet they can exert substantial influence upon finance committee deliberations and the outcome of the annual discussion about tuition and faculty salary increases. This is an inherent conflict of interest which well-trained board members strictly avoid. It is this consultant’s view that the finance committee is NOT the place to screen prospective parent trustees. The Buildings & Grounds or Investment Committees may be better choices.

  2. FINANCIAL AUDITS: WHEN AND WHY THEY ARE NEEDED

    Periodically, a board will feel uneasy about the “buckets” in which a school is putting its money. The questions may center on program and priorities or how the school compares with other similar schools in its spending habits and in its percentages for each category of budget.

    While some very useful comparative data can be obtained from NAIS for a stated group of schools (shielded by name, for confidentiality), that data may skew a board’s perception because each school’s culture, character, history, and mission tend to be fairly unique. The quality and accuracy of the data may also vary depending on the individual in each school who completes the request for data.

    Furthermore, schools need to compare apples to apples, and that is not always a simple matter when looking at raw comparative data. For example, what some schools list as “administrative” positions, others may include in “faculty” and vice versa. Thus, simple comparisons of percentage of budget that one school spends on “administration,” versus another school, may lead to raised trustee eyebrows.

    It is at these times that an outside financial audit may be very helpful, particularly if the audit is not prompted by inappropriate board intrusion or directed at any office or individual.

    In a recent situation, a school was seeking clarification of whether its tuition needed to continue to rise at the same rate as it had in recent years. Despite board attempts to educate them about the financial management of the school, some parents were beginning to complain more than usual about tuition increases higher than the rate of inflation. In the past such increases were prompted largely by faculty salary needs and the local competition.

    The board commissioned Littleford & Associates to assist them in demonstrating to parents and even more to themselves that management was setting the right priorities and not losing sight of ways to save money. The audit focused on the school’s unique mission, individual needs and peculiar spending patterns that related to the mission, and on some expenditures that seemed out of kilter compared to other regional independent schools.

    In interviews with board and staff, it became apparent that the school was under spending rather substantially in two areas of the administration and over spending considerably in two other areas. While the overall administrative numbers looked similar to other NAIS schools, the “mix” was very different and reflected personalities (some dominant), history, and unusual circumstances. This situation had led to two offices with similar purposes spending more money on personnel than was necessary and to an inefficient division of labor. In contrast, two other offices underperformed due to an inadequate budget and support staff. In the long run, this allocation of resources could have proven harmful to the school’s ability to thrive.

    Each employee was valued. The School was maintaining its competitive position in the local market. Those were not the core issues. In this case, the need was to understand how the unique mission should drive the patterns of expenditures ranging from plant to each area of the administration. For example, it was learned that parent expectations placed a peculiar set of demands on the buildings and ground staff. This raised the plant budget to a level that seemed too high until one uncovered the fact that it resulted from parent expectations, program history and space limitations. While this pattern was probably not a healthy one for the long run, solving space constraints would eventually slow this expenditure trend.

    Thus, the audit needed to do the following: reflect and support the mission, while still offering guidelines as to how to save money and increase revenue from multiple sources; explain more thoroughly to parents how and why the school spends money in certain ways; and provide the head with an outside perspective and the hard data and trend analysis to make some overdue adjustments in internal structures and organization. The School had moved on these ideas.

  3. MARKETING FOR MISSION: ENROLLMENT AS THE “DRIVER” OF MOST REVENUE SOURCES

    In most day schools, the financial model is tuition driven. Salaries and benefits can account for 70-85% of total expenses. Finance committees find few remaining budget categories and variables to manipulate in order to improve the bottom line. Savvy and creative internal and external marketing, however, can boost enrollment thereby alleviating pressures on the budget, at least for some schools.

    Mission is at the core of all great schools, and the marketing for the school’s enrollment must start with mission. The kind and number of students sought relates to the profile and diversity of students each school seeks.

    There are six key areas of focus that play, or should play, an important part in the planning and execution of all admissions and marketing efforts including the age old “process” of how we treat our inquiries.

    1. Internal Marketing

      The sign of a successful school is one where this consultant has observed a short powerful mission statement over the head’s desk. That same mission statement is in turn prominently displayed in most classrooms of the school.

      The power of this mission is captured in five words, and in checking at random with a wide age range of students, faculty and parents, the same were five words were recited consistently in the same order over a visit of three days. The School was clear about its values and mission.

      In addition, many of those questioned could relate a story of a child from the school who characterized one or more of those mission goals. The stories were true, powerful and reflected positively on a school that carried out what it promised its constituents. This mission was not only grounded in the history of the school, but was active in the present and relevant to the future.

      Most corporate cultures and their success are measured by the extent to which first, the employees and then the consumers understand the company’s mission and believe its products reflect that mission. Internal marketing always precedes external marketing. Until a school is clear about its mission to the community it is serving currently, it will never have a clear message to a community it is trying to attract.

    2. Admissions

      The admissions “process”, i.e., tracking admissions from inquiries to acceptances and to enrollment, is well known to all admissions offices. However, the key is PERSONALIZATION.

      First, schools should have a designated admissions phone line that is never answered by voice mail and is always listed separately in all telephone directories.

      Second, process involves recruiting parents to be tour guides (and other similar roles) in and telling the school’s story to prospective parents. Tours should be individual (not group) tours led by positive, enthusiastic and trained current parents from a range of grade levels. Develop a program of volunteer parent ambassadors: select a “leader” who reports to the Admissions Office; motivate and mobilize them to show their pride in their school; and ensure that the head acknowledges their positive contributions to the Admissions effort publicly and appropriately.

      Student guides, who represent their School in the most positive ways, should also be part of the effort.

      Third, the best schools involve newly accepted students and their families into orientation, games, special events and the life of the school long before the start of the school year when the students and parents are formally a part of the school family.

      One family recently related to this consultant that while one school was still struggling to put together the calendar for the following year, another which her child ultimately chose to attend had already met with the family, produced the child’s academic schedule for the upcoming school year, created a buddy system and invited the child to a party and the parents to a “coffee”. This was all accomplished by mid February for the school year beginning in the following September. In certain markets, parents are sophisticated “shoppers” who are impressed and swayed by such individualized attention, organization and follow through.

    3. Retention

      Retention of current good students is more important than admitting new ones. Every child lost, whose departure was not the school’s decision, is negative publicity for the school. Retention strategies are not accidental. They are purposeful.

      One example of a school’s retention strategy is an outdoor and environmental education program that involves every child at the school from grades 4-12 and takes place during the same week in January.

      The 4th graders have the simplest form of outdoor training. That training and those opportunities become more complex, demanding and awe inspiring until they culminate with the senior class rafting trip which is one of the most powerful in the nation. Students whose parents may think of changing schools will often hear the response: “I can’t miss the trip next year!”

      In K-12 schools, eighth graders should visit the high school, and in K-8 schools, lower school students should visit the upper schools. When done well, these events are fun, meaningful and create an impression that is conveyed at home and to peers.

      It is interesting that mothers make the vast majority of educational decisions about independent schools. Schools that advertise on mid day talk shows that draw a mainly male audience are missing their cue. The key radio opportunity is the “drive time” for working and non working moms and the music and NPR stations that draw their attention.

    4. External Marketing

      One of the most intriguing and underutilized forms of external marketing is direct mail, which is about five times more productive for independent schools than for businesses. For $10,000 to $15,000 a year, most schools can rent a targeted mailing list and undertake three mailings a year: a “teaser” piece; a dining room table piece that arrives three months later; and an invitation to an open house. Mailings can be sent to those families within a reasonable commuting distance who have school age children and incomes at or above a certain threshold. After two or three years of mailings in this sequence to this market, almost all schools will see a significant increase in their inquiry pool.

      Evening “coffees”, frequent weekend open houses at which current faculty attend, outreach to churches and business and professional groups, and speaking engagements for the head, are all examples of good marketing. Some of the best marketing efforts designed to attract more minority students to independent schools have come from prodigious efforts by heads to seek speaking engagements in minority churches and to stay afterwards for the coffee and Sunday school gatherings.

    5. Centers of Excellence

      Every school should be able to boast at least two or three centers of excellence. More important, everyone in the community at large should know and be able to relate those centers of excellence fairly quickly when asked about a particular school. If there is no “image” of the School (especially for a day school) or no name recognition in the community then a major effort is needed in establishing centers of excellence.

      One school began a Mandarin language program long before any of the other schools in the community. That program had the effect of “presidential coat tails” in that many families were drawn to the school assuming it must be excellent all around or at least have an outstanding foreign language and international education program. The “coat tails” of the Mandarin program attracted both those who had no interest in studying Mandarin and those who did.

    6. Community and Parent Surveys

      Most schools are familiar with periodic parent opinion surveys, undertaken by an outside firm and aimed at gauging parent opinion of all programmatic aspects of the school. Such surveys should always be done in the fall, and the goal should be a 60% rate of return. A poor response rate tends to result in mainly critical voices.

      A parent opinion survey can encourage the administration to use proactively the good news from the survey as an effective marketing tool and to use the criticism to convey to current parents how the school intends to learn from it.

      Questions about admissions and financial status, if confidentiality is assured, can be interspersed within the questionnaire. Such data is a powerful source of information for setting tuition, financial aid levels and annual fund goals.

      Community image surveys are also a good tool to ascertain if the community even knows about the school, or if they so, whether the information is accurate.

  4. SUMMARY

    When properly organized and focused, the finance committee monitors and forecasts the financial health of the school but should not dominate either the board or the head. Audits allow an independent assessment of current fund allocation and management. And effective internal and external marketing can boost enrollment and thus relieve pressure upon the committee to “find” money in alternative revenues, or through cutting budgets. Such marketing can also lead to increased community visibility, fund raising effectiveness and school pride, thus strengthening the school over the long run.

John Littleford
Senior Partner