at a crossroads: financial sustainability comes to crossroads academy

7/27/2019 At a Crossroads: Financial Sustainability Comes to Crossroads Academy

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The veteran administrators and sinceretrustees of Crossroads Academy were shockedto learn that their beloved institution haddeveloped all the characteristics of a finan-cially unsustainable school.

How did this happen?Lets step back and take a look

Since its founding 40 years ago, Crossroads Academy hadalways just gotten by but never prospered. It had a modestendowment equal to about one-seventh of its budget, and aworking capital reserve equivalent to about 50 days spendingat current rates. However, in the last dozen years or so, even

with rising enrollment, Crossroads had experienced twoor three flirtations with insolvency. It survived, but barely.In other words, the virus was in the blood.

At a recent board meeting, the senior leadership team satin comfortable chairs, staring at the numbers. They had anuneasy feeling but couldnt put their fingers on exactly whatto do about it. They decided to hire a few consultants to helpout, but in the end their advice was too theoretical and afterthey left, nothing much actually happened.

So the senior leadership team had to face the factsimme-diately. They refilled their coffee cups and prepared for a longnight of difficult conversations.

First, the leaders all agreed that the national and regionaleconomic situation was not, shall we say, rosy. The head ofschool pointed out, however, that the economy always hasits ups and downs, and, besides, one of their jobs was to getthrough tough times and be ready to take advantage of theupturn when it arrived. This directed the discussion back tothings the school could control.

The leaders agreed that the schools cash flow seemed tobe a persistent problem. Sometimes they had to delaypayments to vendors. For years, Crossroads had deferredobviously needed maintenance; this was like an invisible

reverse mortgage on the Academys future. Crossroads hadalso gotten into the habit of dipping into next years advancetuition payments to pay last years operating bills.

The group also discussed the fact that Crossroads had raisedseveral millions dollars in a recent capital campaign, poten-tially draining some of the Academys donor pool. The moneyhad been used, however, to build buildings that were aestheti-cally pleasing, and donor-pleasing, but that did not serve torecognizably improve student achievement, or reduce operat-ing costs, or add to tuition revenues, or reduce liabilities. Sothere had been no financial return on capital investmentsinsofar as improving the schools financial sustainability.

That night, as the discussion grew more honest, it becameclear that the most significant reason for the schoolspredicament was the long-established method of making thedecisions that led to these unsustainable situations.

Fortunately, the schools veteran administrators and sinceretrustees were inspired to take action. They were optimisticthat the looming doom-loop cycle at Crossroads Academy wasreversible by serious and decisive leadership. They knew thatindependent schools are essentially cash flow activities, notdifferent economically from any medium-sized commercialventure, but with a tax exemption.

The experienced head of school knew, of course, that the sit-uation at Crossroads was not all that different from many otherunder-capitalized independent schools. She told the group acouple of success stories about other schools that had gotteninto tight financial spots yet survived and prospered. After all,she reminded them, there are many independent schools thatare highly successful, financially and academically, so obviouslyit could be done. It was a matter of good information, and thewill to use it, that would get them out of this mess.

So the members of the group got down to business. Theyconducted a thorough review, and found that the Academysfinancial situation was hobbled by the following:

Financial sustainability comes toCrossroads Academy

CROSSROADSBY JOHN BARRY, CPA, MBA

At a


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Strategic thinking that was ambivalent,

unrealistic, rigid, and/or incomplete.

The Academys last few strategic plans hadtended to look like laundry lists of vagueideas. Many of the plans features were mu-tually exclusive or unclear. Furthermore, theplans lacked a sense of economic reality. No one wanted to

amend the plans, because they were written by costly out-side consultants. Whats more, the Academy tended to viewits annual budget rigidly, not dynamically, so there was nosystem for making mid-year adjustments.

The Academys five-year forecast was prepared by sim-ply totaling up all the ideal and desired annual costs of opera-tions, dividing each years total by the expected enrollment,and arriving at an annual tuition price increase of seven percentto nine percent in that wonderful way that Excel runs numbersinto the future. This had proven to be unrealistic because themarket did not cooperate.

In addition, the financial planning template that Cross-

roads was using included only revenue and expense data,with no information (much less realistic information) aboutits assets and liabilities. When they really looked at the plantogether, the leadership realized that this was like driving acar on a long trip with a speedometer but no fuel gauge.

Inconsistent accountability. Success is brought about by realpeople. The Academys previous plans tended to list manydesired actions but did not match the actions to actors.They failed to reckon with the human factor in getting thingsdone, which eventually controls everything.

Capital spending without economic return.Capital cam-paigns are powerful tools, for growth or otherwise. If financial

sustainability is the objective, a school has to play by the samefinancially rational rules that govern every other enterprise,tax-exempt or commercial. One of the most rational rulesis the idea of return on investmentROIthat is, that arational organization spends capital funds on things that pro-duce some kind of recognizable economic benefit. For exam-ple, spending $5 million to expand a dormitory to make roomfor 30 additional students now on the waiting list, to generatemore tuition revenue, is an economically rational way to use$5 million in philanthropy. It is also economically sensible tospend capital money to build things that will have a recogniz-ably positive effect on student achievement, thus making theschool more valuable to families and students. It also makesgood economic sense to use major gifts to build an income-pro-ducing endowment, the interest and dividends from which cansupplement the operating budget and make the school finan-cially stronger and its program more valuable. Finally, it makesgood economic sense to use major gifts to eliminate liabilitiesor lower operating costs if the improvements are permanent.

However, it is not rational, speaking strictly from a finan-cial sustainability point of view, to spend the $5 million on

things that are in fact only cosmetic, aesthetic,or convenient. It is the old needs vs. wantssituation. One of the distinguishing character-istics of a school with a bright financial futureis its dedication to spending moneyparticu-larly large capital fundson things that either

recognizably improve student achievement or materially

strengthen the schools real net worth.It wasnt easy to face these facts, but once it was done,

everyone breathed a sigh of relief. Now, they knew whatthey had to do.

First, they took stock of their schools real world assetsand liabilities. Second, they determined whether or not theschools annual core educational activity was operating at a

reasonably positive margin of cash inflows over cash outflows.Third, they set honest and realistic objectives and schedulesfor improvement. Fourth, they committed the school to a seri-ous periodic plan to re-evaluate its strategic plans and goalsevery six months, and make mid-year corrections if neces-

sary. Fifth, they decided to make sure that the schools capitalinvestments were planned with a keen eye to the recognizableand realistic economic benefits as mentioned above. Finally,they agreed that they had to look at their situation as it was,not as they wished it could be.

I am happy to report that the school is no longer at a cross-roadsin fact, theyre on the road to better financial health,and a more realistic understanding of how to make decisionsto stay on the right path.

Does the situation at Crossroads Academy sound familiar?I thought so

An independent school is like a small town; it is more

political than economic by nature, compared to a commercialbusiness, and there are many vocal interests to balance.However, balancing those competing interests can (fatally)slow a schools reaction time when the institution is facedwith hard-to-ignore challenges.

The key to heading things in a financially sustainabledirection is an honest and realistic assessment of your schoolscurrent situation. This will be easier said than done. Be pre-pared to deal with many imaginative reasons for maintainingthe financial status quo. But if making an independent schoolfinancially sustainable were easy, you would not be readingthis article. You, too, can do what Crossroads Academy did.

Good luck. Q

John Barry, CPA, MBA, is the

Chief Financial Ocer at St. Marys

School in Medford, Oregon. He has

worked in independent schools for 16

years as a teacher, coach, and chief

financial ocer. He worked in public

accounting for 18 years, including as

a partner with Coopers & Lybrand

(PricewaterhouseCoopers).

at a crossroads: financial sustainability comes to crossroads academy

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