Schools generating income: a risky business?
It is becoming increasingly common for schools to crossover into the commercial world of income generation in an attempt to bridge the gap between the funding they receive from government and the cost of high quality education provision for their pupils.
Income generation means creating opportunities, using existing and new resources, to generate additional revenue streams that can be added to traditional funding to further a school’s objectives. For some schools this may be small scale and for others it may make up a more significant proportion of the resources available to them. Many schools have been generating additional income for some time but some may have never even thought about it.
The current financial climate in education means that more and more schools will be looking to additional income generation as a financial management strategy. Where it was once an option for schools to enhance their core funding it is quickly becoming a necessity for some schools as a way of staying financially viable. Many professional organisations encourage this as a strategy for schools but recognise that reviewing financial efficiencies, benchmarking against other schools and ensuring value for money in all areas of spend should be the first priorities to maintain school financial health.
Why is income generation becoming a necessity for some schools?
The National Audit Office Report ‘Financial Sustainability of Schools’, published in December 2016, cited an 8.0% real-terms reduction in per-pupil funding for mainstream schools between 2014-15 and 2019-20 due to cost pressures. The report identified that savings of £3.0bn need to be made by mainstream schools by 2019-20 to counteract these cost pressures. Between 2012/13 and 2014/15, the proportion of secondary academies and maintained schools spending more than their income rose to approximately 60%.
What does income generation look like for schools?
Income generation means different things to different schools depending on their context and their priorities. Here are some generic examples of what it could look like:
- Applications for external funding
Making applications for external funding or bid writing is a well-known way for schools to secure funding for project-based initiatives with a specific objective. The bid submission would usually include a business plan. If successful, the school would need to monitor and evaluate the use of the funding, often reporting back to the funding organisation to ensure accountability for its use.
- School to school support
Originally the remit of teaching schools, all schools are becoming more ‘switched on’ when it comes to charging for school to school support where appropriate. If a school has staff expertise, intellectual capital and training capacity and resources that are sought after by other schools or educational organisations, this can be a valid source of additional income.
- Sharing staff and services
There are many examples of schools working creatively to make financial efficiency savings, in particular with staff working collaboratively to share services such as site, finance and human resource teams. This is inevitably more obvious across multi-academy trusts but can also be seen amongst schools who collaborate less formally.
Where this approach generates additional income for a school is when staff with specialist expertise are provided to schools which need that support but can’t afford a full-time member of staff with those skills.
Schools who have capacity and appropriate equipment have been known to offer printing and design services to local businesses.
- Making the most of premises
Some schools hire out their premises, outside of the school day, to community groups, individuals and local businesses. This could include the hire of the facility and other extras such as car parking, use of IT equipment and catering for meetings and events. Offering timetabled events such as adult education classes and fitness classes outside of school hours is also popular amongst schools.
Some schools have brought catering in-house to provide more flexibility so that they then could offer catering as part of a more attractive ‘lettings package’. This can develop to on-site cafes which generate income from pupils, staff and visitors.
Even if indoor spaces aren’t sought after for hire, schools are being creative with the hire of outdoor facilities too with examples of schools teaming up with a car boot sale organiser who pays the school a percentage from each car’s entry fee or providing car parks as additional parking facilities for nearby events at a cost to the event’s organisers.
If premises are in abundance some schools may be entering lettings arrangements and service level agreements which generate full-time income, in accommodation that is not used by the school for its core purpose.
- Selling items to/charging parents
It seems selling items to parents is becoming increasingly popular amongst schools, with some schools citing the following as examples of selling items which generate a percentage of income for the school:
- Annual school photos
- One-off promotions, such as hooded jumpers with pupil names on the back at the end of the school year or school year books
Other examples of sales to parents include learning resources which enhance curriculum delivery, such as:
- Software licences
- IT equipment
- Securing passive income
Some schools have taken the opportunity to set up revenue streams which continue to be generated without significant further effort. An example of this is income generated from solar panels or other energy initiatives such as wind turbines. Often these examples require some capital investment, but for schools who have embarked on such initiatives at the right time, capital project money may have been available to cover these costs. If not, a business plan would show the length of time it would take for the school’s own capital investment to be paid back and pure ‘profit’ to start to be generated. This is clearly a different type of income generation to that of traditional fundraising activities for a specific purpose.
Usually undertaken by schools to raise funds for charity, fundraising is commonplace in schools and has the bonus of teaching young people about the importance of charity, making a positive contribution to the world and being part of something bigger than themselves. In these instances, this would not represent income generation for schools. However, traditionally school related groups such as a PTA may generate funds to pay for big one-off school items such as a school mini-bus. In the current financial climate, some schools may choose to raise funds for their own purposes or seek sponsorship and support from other local organisations and businesses.
What works well for schools?
There are many examples of schools successfully generating additional income. These range from small scale schemes such as accommodating local car boot sales in the school car park to bigger projects such as a school delivering blended learning courses in social and emotional skills for teenagers attending bilingual schools in China. Some initiatives have the potential to become self-financing over time. It is these initiatives that deliver the best financial results for schools, with greater chance of sustainability and long-term positive impact on the school’s financial position.
What is a self-financing initiative?
A self-financing initiative generates its growth capital from its own income. This is important for schools when looking at their long term financial health to ensure that their entrepreneurial approach to generating additional income does not put their core funding at risk by unintentionally putting pressure on the main school budget.
An example of this would be where an initiative involves additional staff costs. The cost of the contracts in place must not exceed the secured income, otherwise the school is obliged to continue to pay the member of staff until the end of the agreed contract. This would be a cost to the school from the core school budget.
Some self-financing initiatives may require additional investment. Schools will need to consider:
- if this investment is viable
- where it could come from, i.e. revenue or capital budgets or an alternative source;
- the level of risk involved
Is it all too risky?
For many publicly funded schools, income generation is unknown or uncomfortable territory which is better suited to the commercial sector than education. Being accountable for public money is a responsibility that most school leaders take very seriously and some school leaders could be reluctant to be seen to be taking risks with public money.
For those who are prepared to take the leap, a certain degree of risk assessment and risk management is necessary to be effective in strengthening the school’s financial position and impacting positively on the education of the pupils in their care.
What are the risks?
- Distracting from core business
The focus of a school and its leaders should always be the learning and progress of its students, increasing life chances and developing young people to be successful in the world. When a school starts to branch out into commercial aspects there is a risk of detrimental impact to its core purpose. Strategies to generate income which are not aligned with the school’s moral purpose also pose a threat to reputation and the character development of pupils.
- A non-prudent approach
The accounting principle of prudence means that income should not be factored into a financial plan unless it is guaranteed income. If this is not the approach taken there could be a significant negative effect on the school’s finances, which could even send a school into a deficit position.
- Inadequate forward planning
An over-reliance on income into future years is also a risky strategy if that income is not guaranteed beyond the current financial year. If known associated costs are not clearly mapped against income in the forward financial plan this too will lead to financial difficulty.
- ‘Propping up’ the budget
Over-reliance on additional income to prop up the budget represents high risk. If forecasted income is meant for a specific purpose or is time-limited and it is being used to cover the costs of permanent staffing structures, this will cause significant issues when the income ceases or when the purpose for which the income was intended is not realised and the school is held to account. The organisation providing the income may even be in a position to claw back any project based funding if they are not satisfied that it has been used for the intended purpose.
- Moral dilemmas
Earlier we referred to examples of how schools are generating additional income such as sales to parents of ‘nice to have’ items such as year books, leavers’ hoodies and school photos as well as curriculum enhancing items such as textbooks and IT software licences. The moral dilemma occurs if schools are charging parents more than cost price in order to generate income. Schools are publicly funded organisations and are not traditionally in the profit-making business, particularly with parents and carers. If schools are asking parents for donations to school funds for everyday use (i.e. the basic provision of education rather than an additional high cost item like a school trip) this also poses a moral dilemma that schools previously will have not had to face.
- False economies – Best Value
If schools pursue any form of income generation without proper assessment of expected inputs and outputs and the potential impact, there is a risk that the cost of time spent doing so outweighs any financial gain.
How to do it well and minimise risk:
Because income generation is an unavoidable necessity for some schools in the current education funding climate, if schools are going to embark on this as a strategy or if they have already, they will need to make sure they are following some simple guidelines to reduce risks and be effective in their short, medium and long term financial planning. And this really is the key: to plan ahead.
The following four stage process will help schools to ensure that they have a structured and consistent approach so that the most effective and least risky activities and initiatives are followed.
Identify assets and resources
- Ensure there is sufficient capacity on existing teams to dedicate the time needed to income generation. If there isn’t, factor in the cost of additional capacity in the overall plan.
- Assign an individual who has a whole school overview to ensure a joined up overall strategy which is aligned to the school’s objectives.
- Ensure the individual, and other staff involved, have had sufficient and appropriate training in business planning, grant finding, bid writing and risk management.
Assess the opportunities
- Use business planning techniques, including options appraisal, to assess the opportunities that are available, ensuring that those selected are aligned with the school’s objectives and moral purpose. Identification of project teams, lines of accountability, affordability plans and clear action plans (including timelines and risk management plans) is critical at this early stage in the process.
- Clear and effective communication of the business plan to all parties involved is essential to ensure their full understanding and commitment to its success.
- As well as an affordability plan within the business plan, a five-year financial plan for the whole organisation will ensure that there isn’t an over-reliance on additional income in future years and that a prudent approach to income generation is taken. All associated costs must be shown in the five-year plan. Planning for several different scenarios where income may or may not be realised is important here. Consideration should be given to what would happen in each scenario. For example, will additional recruitment be necessary to staff a project? Will there be implications for staff reduction or will fixed term contracts have to end if income is not secured year on year? What is the timescale for confirmation of income and how will this affect staff contracts and overall resource planning?
- It is wise to have an exit strategy in place detailing an outline response to an unexpected reduction or cessation of income.
- If a project involves leasing between the school and another party, ensure a formal lease is in place and that legal advice is sought to ensure that the lease covers all scenarios and does not leave either party subject to a liability that they are not prepared for.
Apply robust policies and procedures
Examples might include:
- Lettings Policy
A copy of this should be issued to any stakeholder who uses the school facilities. It is good practice to have a lettings agreement which is signed by both the school and the user.
- Charging Policy
Be clear in here the different stakeholders you will charge, i.e. parents, other schools, other organisations, what you will charge them for and what mechanisms for payment you have in place.
Monitor, evaluate and ensure ‘Value for Money’
What makes an income generation activity worthwhile will differ from school to school depending on pre-agreed objectives in place, the school context and the financial position. For each activity pursued the school will need to decide how much financial benefit will outweigh the time and effort invested and then monitor each activity against that pre-determined benchmark.
In evaluating each activity, it is important that schools learn from what is working well and what is not achieving the desired impact. This knowledge and data informs future strategic planning for income generation. Schools should not be afraid to change direction if something isn’t working.
The best way to assess each activity is by applying the value for money model shown below, which we often discuss in our publications:
Schools should question what the impact of the activity is on student outcomes. Does the positive impact on student outcomes outweigh the inputs of the activity (time, effort, cost) or could that resource have been better spent in other areas?
Income generation for schools will never be risk-free, but with considered planning and expert management it can be a lifeline for schools in need.