Comparing Coffee Shops and Schools

Coffee shops and international schools are two very different types of business. However, comparing the way cash moves through each of them helps illustrate something important about school finance. The unusually long and predictable working-capital cycle of a school.

A coffee shop operates on a very short cash cycle. It buys coffee beans, milk, food and other supplies and then sells its products throughout the day. Its income arrives hour by hour and day by day. It does not know precisely how many customers will walk through the door tomorrow, whether yesterday's customers will return, or exactly what each person will buy.

The business therefore has to continually generate enough cash from today's and this week's sales to meet the financial commitments coming towards it. The monthly wages, suppliers, rent, utilities and other operating costs.

An international school operates very differently. In most schools, families commit to the school well before the beginning of the academic year and much of the tuition income may be collected either before the year starts or relatively early in it. That income becomes part of the school's current assets and provides the resources from which the school will meet its obligations throughout the year. The school also has a much more predictable customer base.

By September, the school knows how many students are enrolled. It knows its tuition fees. It knows its staffing structure and therefore most of its salary costs. It knows its building maintenance work, its contracts and the majority of its operating expenditure.

There will always be some variation, but compared with almost any conventional commercial business, there is relatively little uncertainty. That makes the school's working-capital cycle unusual and possibly not as obvious to Finance Committee or Board member coming from the commercial world.

For a coffee shop, a meaningful financial cycle may be measured in days or weeks. For a school, a comparable cycle is effectively the entire academic year. A year for a school can therefore be thought of almost as a month might be for another organisation.

This difference has an important consequence for financial management and, particularly, for financial reporting to the board.

Once enrollment and staffing are established and tuition has been collected, the likely financial outcome for the school year becomes reasonably predictable. By September or October, leadership should already have a strong indication of whether the school is likely to achieve the surplus and therefore the cash generation anticipated in its annual budget.

Of course, management should continue to monitor the finances carefully throughout the year. Forecasts should be updated when circumstances change. Unexpected expenditure needs to be understood and material variances identified. However, this does not necessarily mean that the board needs detailed financial reporting at every meeting.

For many schools, two or three substantive financial reports during the year may be sufficient. The central question for the board is relatively straightforward:

Are we still on course to achieve the financial outcome we budgeted for?

If the answer remains yes, repeatedly reproducing detailed financial statements between September and May may add relatively little to governance. In some schools, it can also consume considerable finance-team time preparing reports which, because of the nature of the school's business model, change surprisingly little from month to month.

This is where boards need to distinguish between monitoring the annual budget and providing meaningful financial oversight. The annual budget remains essential. It tells us what we expect to earn and spend during the coming year and what surplus or deficit we expect to generate. Nevertheless, it is only one part of the school's financial picture.

For a school, the more important questions often sit beyond the current year.

• How much will need to be spent on buildings over the next five or ten years?

• When will roofs, air-conditioning systems, technology infrastructure or major equipment need replacing?

• How much should the school hold in reserves?

• What happens to those reserves if enrollment falls?

• Can salaries continue to increase at the rate currently assumed?

• Will today's tuition levels generate sufficient cash to fund both today's operation and tomorrow's capital needs?

This is where the school needs a genuinely useful long-term financial model. The purpose of that model is not to predict exactly what the school's financial statements will look like seven years from now. That would be impossible. Its purpose is to connect today's decisions with tomorrow's consequences. The annual surplus therefore needs to be viewed in context. Generating a surplus of, say, $1 million sounds positive. But whether it is actually sufficient depends on what that cash needs to fund in future years.

If the school knows that it must invest $8 million in facilities over the next six years, replace major technology infrastructure, maintain an appropriate emergency reserve and continue investing in staff, then today's surplus has to be judged against those future obligations.

This is the point at which the comparison with the coffee shop becomes useful again.

The coffee shop owner needs to ask whether enough cups of coffee are being sold today to generate the cash required to pay staff, suppliers and rent over the coming days and weeks. The school board needs to ask the same underlying question over a much longer period.

Is the school generating enough cash today to meet the commitments it knows are coming tomorrow?

The difference is one of timescale. A coffee shop may concentrate intensely on today's sales, this week's payroll and this month's rent. A school has the unusual advantage of a comparatively stable customer base, a defined product, relatively predictable income and substantial advance payment. That predictability should allow its board to spend less time repeatedly examining the current year and more time looking forward.

For school leaders and boards, this should change the financial conversation.