Break-even Analysis

Independent schools are notoriously coy when it comes to talking about finances. Is this a throwback to the days when it was considered vulgar to discuss money? Or is it because, as this article on Forbes.com suggests, “not talking about money is a privilege of the wealthy.”

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It is odd because the accounts of all the private schools which are also charities are freely available if you know how to search the Charity Commission website. For example, Winchester here (total income £35 million) and Wellington here (total income £53 million!). And the accounts of all independent schools which are private limited companies are freely available if you know how to search the Companies House website. Most of these schools are parts of for-profit chains such as Cognita (revenue £500 million across 78 schools). There should be no need for reticence!

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So in the spirit of openness we thought it would be interesting to run through the sort of break-even analysis we regularly do. This is at a fairly broad level, of course, but it will show the basics for a secondary school with 5 year groups, each with 10-15 students.

 

1. Staffing Costs. Total £440,000 per annum.

   1. If we teach 8 subjects we pretty much need 8 subject teachers. We will assume that most are either full-time or close to full-time. Typical salaries might be around £30,000 so total teaching cost is £240,000.

   2. Then we need Admin and other support. As a minimum we need an Admissions Officer, Administrator, Exams/ Local Authority Officer, Catering Manager, Maintenance Manager, Counsellor. Say 6 roles at £20,000 each. Total Admin cost is £120,000.

   3. Then we need some Senior Management: say 2 roles (Principal and Vice-Principal) at £40,000 each for a total of £80,000.

2. Overheads. Total £240,000 per annum

   As a very rough guide we know that salaries make up around 65% of total costs. This means that total overheads should be around £20,000 per month. This could easily be made up roughly as follows:

   1. Heat, light £5,000

   2. Consumables £5,000

   3. Finance £5,000

   4. Insurance £2,500

   5. Misc £2,500

3. So Total Costs are £680,000.

 

Then there are two ways to proceed. The first is if you know the Annual Fees simply to divide the Total Costs number by the annual fees to produce a figure which shows the number of pupils needed to break even. However this does not take into account bursaries and other discounts. We need to use the actual figure of income per pupil.

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• If annual fees are £12,000 (ie with no discounts) then the number needed is 57.

• If we assume an actual annual figure of £9,000 then the number needed is 75.

• If the actual figure is £7,500 then the number of pupils needed is 90.

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The other way to work it is to assume a roll of 70 pupils  (5 classes of 14 pupils each) and to spread the Total cost between these pupils. Dividing the Total Costs across 70 pupils produces an annual fee requirement of £9,714 (or £3,238 per term).

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Bursaries across the sector

It is clear that the key figure is the percentage of discounts. The rule of thumb I was taught is that mature schools aim to keep this figure down to about 10%, but in the early years of a school it is normally more like 30-40%. But do these figures hold true?

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Newspapers and websites report a wide range of figures, depending on whether they are in favour of independent schools or against. The Good Schools Guide said (in 2021): 

 

"Over the past year, private schools handed out £938m-worth of scholarships and bursaries to 157,000 pupils – that’s about 30% of all children in private schools."

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The Financial Times said (in 2019): 

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"The ISC says that £800m of the £1bn provided in “fee assistance” last year came directly from the schools themselves.  Just over 175,000 ISC students currently benefit from some form of fee reduction, around half of these through means testing. The number of those receiving “free” places — where all fees are paid — is now more than 6,000 pupils, an increase of 5 per cent year-on-year.

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Another website has much lower figures. Best-schools.co.uk claims that "There are estimated to be around 41,000 children being financially assisted by private schools". This must be incorrect but the website is worth looking at because it has a long list of potential sources of fee support and also a good draft means-testing questionnaire.

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The Guardian has a different take (2021):

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"The proportion of pupils helped with financial support has not significantly increased, despite the costs of private schooling rising considerably. By 2018, the average annual basic fee was £14,280 for day schools - a 60% real-terms increase from 2000 and three times the 1980 fees.

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The researchers studied the period since 1997. They found that throughout the period, around 15 out of every 100 pupils received direct financial support. The value of financial support was around £4,900 in 2011–2018, little changed from earlier periods and “thus accounting for a smaller fraction of the fees: 35% compared with 57% in the first period”. The paper concludes: “The data could not conclusively support claims that the private school sector has widened access for students from low-income families through more generous financial support.”

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The best source of objective data is usually taken to be the annual ISC census. Its figures show:

1. Average day school fees are £15,191 per annum or £5,064 per term.

2. A total of 179,768 pupils currently receive help with their fees.

3. There are 532,237 pupils at ISC schools.

4. The ISC suggest that this means that 35% of pupils receive support.

5. The financial value of the support is over £1.1 billion.

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But it is worth taking a closer look at these figures.

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The total number of pupils helped includes all the SEN pupils funded by local authorities and all the private nursery pupils who get Early Years Funding. This seems to be stretching the case, to put it mildly. Independent schools themselves help 157,000 pupils but almost half of those are supported because they are 'eligible', which could mean that they are staff children or siblings of other pupils. The actual number of bursaries and scholarships is more like 100,000 which is closer to 1 in 5 of all ISC pupils, than the 1 in 3 which is widely claimed.

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To calculate the average level of bursaries given by independent schools we still need to do some calculations as the figure does not seem to be in circulation.

 

1. The total fee income of all independent schools must be around £7.5 billion (500,000 pupils times £15,000). In practice it will be higher because the ISC only represent half of all independent schools although the other half tend to be much smaller schools. 

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2. Total financial support is £938 million (counting staff and sibling discounts).

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3. This equates to 12.5%.

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So we can conclude that on average independent schools give away 12.5% of possible fee income in the form of various discounts. Our rule of thumb was 10% which is close enough.

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Equity

It appears to be enough to satisfy the charity commission, but is that enough, morally speaking? This is a complicated question without easy answers, but as a fee-charging school we should at least try.

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The first step is to compare independent school spending with state school spending on each pupil. The IFS did a study in 2021, reported inThe Guardian, which included running costs and capital spending for state schools, and subtracted scholarships and bursaries given to pupils in private schools to fairly compare the two. The average private school fee (not including boarding schools) was found to be £13,700 a year, compared with £7,100 in spending on each state school pupil.

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Note that the £13,700 figure assumes a discount rate of 10% rather than the 12.5% we established earlier. But even so the point is clear: independent schools spend almost exactly twice as much per pupil as state schools.

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Median gross salary in the UK is currently around £31,500 (2021). 

 

This means that the amount spent per state-school pupil by the government equates to 22.5% of median pre-tax salary or approximately 30% of net salary (ie after tax).

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We need to reach again for our Rules of Thumb book. The best known for personal finance is the 50-30-20 budget rule, which goes back to a book called All Your Worth written by Senator Elizabeth Warren in 2005. The Rules for expenditure are:

 

• 50% should be on "Needs": rent or mortgage, groceries, utilities, transport

• 30% should be on "Wants": discretionary spending such as eating out, holidays

• 20% should be on "Savings": either savings and investments or paying off debts.

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Private education clearly falls in the discretionary spending category and so it seems sensible to allow it a maximum 30% of net income. This then lines it up neatly with the amount spent per pupil in state schools.

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But if average private school fees are £13,700 (after discounts), the median net salary at which that figure is 30% is £45,666 or, very approximately, £55,000 pre-tax. According to this calculator from the IFS this would mean that private education is only affordable to the highest 10% of wage earners in the UK. Of course many, perhaps most, households have dual incomes but, equally, many, perhaps most, households have more than one child.

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What Caused this Crazy Fee Inflation?

Fees tripled between 1980 and 2018 - rates of increase far in excess of increases in Inflation and Wages (see The Guardian article quoted above). The Killik & Co Private Education Index (2019) argues that fees went up by five times (ie 400%) between 1990 and 2019. Some observers warned that this meant trouble ahead. Ben Chu wrote in The Independent in 2016:

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"Even the private schools themselves admit the middle classes are now being priced out. “These schools will soon be solely populated by fee-assisted pupils from low-income families and the offspring of the super-rich,” says Ralph Lucas, editor of the Good Schools Guide. 

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“We have allowed the apparently endless queue of wealthy families from across the world knocking on our doors to blind us to a simple truth: we charge too much,” Andrew Halls of King’s College School in Wimbledon admitted three years ago."

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An interesting analysis by Nimblefins also blames parents:

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"The parental strategy of applying to more schools in an effort to lock in the "best" spot results in individual schools experiencing a large increase in applications. A rapid rise in applications creates the illusion of an increase in demand, emboldening schools to raise fees. However, the private school system as a whole does not seem to be facing a supply and demand imbalance, meaning parents are behind this frothy "demand."

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Ben Chu is more critical of the 'facilities arms race' which led to huge capital expenditure on theatres, gyms, recording studios and so on:

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"Why the massive expenditure on these ancillary sports and music facilities in the first place? These are peripheral to any educational purpose. In the 1980s, the Victoria and Albert Museum used to advertise itself with the tongue-in-cheek slogan “an ace caff with quite a nice museum attached”. Some of these schools have become luxury country clubs with quite a nice school attached."

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Fundamentals

This discussion ends up focussing on the fundamentals - why exactly do parents pay so much for private education. The Killik & Co report slips in the figures right at the end: private education outcomes, on the average, generate a wage premium over state schools: 

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"For example, academics estimate a wage premium over those who have attended state school of 7% by six years after graduation. Another study finds the premium to be 20% by age 33; a third finds a premium of 3%. To some parents this may indicate private education outperforming investments in financial assets, which helps to explain why despite the rising fees, many private education seems as popular as ever."

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If we assume the wage premium is 5% by age 20 and lasts for 40 years (the last figure is a guess) then we can calculate whether there is a financial return on private education. The rough calculations are:

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• Cost of private education: £13,700 * 5 years    =  £68,500

• Wage premium: 5% on £35,000 over 40 years  =  £70,000

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The lifetime premium on these figures is only £1,500, which is unlikely to be sufficient motivation (2% return). If the wage premium is 10% then the lifetime premium goes up to £71,500 (or a 4% return). Equally if the cost goes down to £10,000 per annum then the lifetime premium goes up to £20,000 for a 5% annual wage premium (29% return). An earlier estimate (2010) found that the average net rate of return was 13% in 1980.

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These are imprecise calculations as the data are slippery but I think they show that for most parents there would be a reasonable expectation that the costs of private education will be more than repaid over the career of their child. "In effect, private schools provide very good value for money.​" (Green et al, 2010).