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Business Intelligence: The Risks in External Revenue

By Net Assets posted 15 days ago

  
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Financial Management |

Independent schools’ reliance on alternative forms of revenue may pose problems as significant as heavy reliance on tuition.

Article by Elizabeth Dabney

From the July/August 2020 Net Assets magazine

Risk management goes beyond buying the right insurance, mitigating misconduct, careful trip planning and other areas we usually consider. Understanding how heavily your school relies on alternate sources of revenue can help manage financial risk. While the largest source of income for most independent schools is tuition and fees, some schools depend on other sources that may become equally unreliable in times of crisis.

Endowment, interest and investment draws need a strong stock market and economy for reliable returns. Financial reserves can quickly run out if they are used for basic plant maintenance and faculty and staff compensation. And cancelled summer programs will mean decreased income from auxiliary activities. An overreliance on any of these alternate income sources can put a school at risk.

An analysis of FY19 BIIS data provided by 408 schools revealed that about two-thirds are more reliant than average on one or more alternate sources of income like reserves, endowment draw, interest and investment, and auxiliary activities. One-third of the 408 schools are more reliant on income from auxiliary activities. And among the 74 schools that are more reliant on endowment draw, they expect nearly 15% of their income to come from this source, more than twice the average.

Not only are endowments at risk of losing significant value, but schools are also looking to the endowment to fill revenue shortfall.

Not only are endowments at risk of losing significant value, but schools are also looking to the endowment to fill revenue shortfall. Revenue challenges include declining tuition dollars, suspended fundraising, increased financial aid, or lost auxiliary funds. Given that many school leaders are considering cost cutting measures while also looking for sources of income to meet projected expenditures, they must carefully weigh current fiscal needs against the future impact of potentially smaller endowment draws. The unknown timeline of the pandemic makes this decision-making especially difficult.

Some schools have created new funding opportunities for donors to support the school and/or school families during the pandemic. Consider reaching out to donors to ask them to help fund the increased need for financial aid or other challenges brought on by the pandemic. Donors may also be willing to lift restrictions from their donations to provide schools with more flexibility in these unprecedented times.

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“More reliant” means that the percentage of a school’s revenue from that income source is more than the average. Data drawn from 408 independent schools that submitted these FY19 data points to Business Intelligence for Independent Schools (BIIS).

Elizabeth Dabney is NBOA’s director, research and data analysis.

Download a PDF of this article.

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