Since I received the email cancelling exams in the second week of March from the Principal, – I had been hopeful the management would do a U turn on the planned annual increase in school fees, which was around 15%. My expectation got a little more ambitious as the lock down continued for long and incomes across the middle class and lower middle class (read school fee paying parents) took a never before seen beating. School managements, I thought, ought to give big Covid-19 discounts. Most schools, as on the date of this report, have cancelled fee hikes – however very few have offered discounts. Will come back to the schools a little later.
Two weeks ago, a friend, Pushpa, called to enquire if we knew where to buy or lease a laptop, as her kid, aged 6 years, was about to start her online classes. Pushpa was working as a teacher in a pre-nursery but owing to the birth of her second child she had to quit her job. Her husband who happens to be a small private civil works contractor is the sole bread winner. During the pre-corona days he could make around Rs. 20,000 per month but since March that has dwindled to almost zero. That is a huge impact on low income households. However, aspirations of Pushpa remain unblemished. She wants the best possible education for her kids. During January she got her daughter admitted to a “Good” private school where the fee runs into few months of her husband’s gross earnings. I loved the positivity this lady projected despite falling incomes. “I want a bigger screen for the online classes – my daughter cannot see the power point presentations clearly on a five-inch screen mobile” – she said.
A used laptop would cost her anywhere between Rs. 15,000 – 20,000 and a new one around Rs. 35,000, I told her after enquiring with a couple of known dealers. She chose to go for a new one, but she was in no position to make full payment at once. The cost of the laptop is one and half months to two months her current household income. That is not a small hole to fill. Thousands of parents are under similar financial stress in pursuit of a bigger screen for their kids’ classes. But they are borrowing from relatives, friends, and breaking FDs to fund the purchase of bigger screens. Fortunately, a classmate of mine runs a Computer leasing business in Koramangala. Kiran, a good Samaritan that he is, offered to lend a Dell laptop for two months, free of cost and offered to extend six months credit for the purchase a new laptop. Not everyone is as fortunate as Pushpa, thousands of parents are staring at the gaping hole Covid-19 created.
|Pushpa’s Monthly Cashflow Statement ( ‘000s)||Pre-Covid||Covid|
|Capex – Laptop||35|
|Borrow from relatives||-43|
Conventional wisdom has been that Education sector is one of the most profitable businesses out there – especially for the classes till twelfth, the tuition fee costing more than the traditional bachelor’s degree. So – schools must have enough reserves for the winter which should be used give discounts.
I shared my conventional wisdom with a friend who works as CFO of IB/ICSE curriculum school based out of Bengaluru. The situation is not very cushy out there, I was told. He argues that its hard to maintain top class facilities and continue to pay the staff without fee income rolling in. Schools in the city run on high operating leverage – in simple English at remarkably high fixed costs. Fixed costs could range anywhere between 80% to 90% of the total costs. I said, when you are running online classes there must be huge savings in electricity, maintenance, repairs, staff meals etc. Why don’t you pass on that savings to the students? – the operating surplus can be shared, I insisted. He took a pause and pulled out another excel sheet and quipped “ we have done the analysis” – the savings is not much as we have to maintain our pools, sports grounds, buildings and most importantly we are paying salaries to all our staff. Schools like ours have to keep reinvesting in facilities every four to five years. And there are some segments like pre-nursery where in the question of online classes does not make any sense. Consequently, admissions in this segment have fallen drastically. All in all, there could be savings of around 10%. I could not audit his numbers – but had to take his argument at the face value. His voice showed worries of nightmares of cashflow management.
Government of Karnataka has made it clear that the management cannot insist the payment of school fees. Many schools have sent the fee request to parents – however are not insisting on immediate payment thus complying with the Government norms. Some school managements have asked the parents to provide proof of their financial distress to provide additional time for payments.
His answer was they are not operating at their full capacity hence full fee is a must to sustain. It also means well established schools have enough cash balances to ride out the Covid-19 wave.
Unlike Pushpa none of the schools I contacted were ready to share the numbers. But I did get hold of a few school numbers through grapevine. Table below give out only costs and profits as a percentage of revenue (google Common Size Statements). Schools without the burden of debt and depreciation (read charge for investments in building, computers i.e, Fixed Assets) make around 30% to 50% cash profits. We accountants call it EBITDA. And that ratio is a favourite one among financial analysts, investors in evaluating a business.
|Well Established School’s Cashflow||%|
|Cash Profit/(Loss) – EBITDA||26%|
By the time I completed this article, Karnataka High Court had ruled against Government of Karnataka’s ban on online classes. High court said it is against the spirit of Right to Education. Many parents think the initial ban order was not a well thought out one. Parents feel online school classes are a great way to keep their little ones “gainfully” occupied. A petition on change.org petition was used to push the government to roll back the ban. Online school classes would any day be better than noisy cartoons blasting out of the TV screens – many parents opine.
But many other parents believe online classes are being used as a pretext to collect fees. They blame school managements of being insensitive in the current crisis times.
Cashflow 1 and Cashflow 2 are two different dimensions of the current crisis. Then there are stories of teachers losing jobs. Anitha and Nagaveni (names changed), two Montessori graduates received their job offers in the month of March from an upcoming Montessori school in the suburbs of south Bengaluru. The salary was a decent figure of Rs. 16,000 per month, which solved many of their financial problems. These housewives in their late thirties were super excited to get into a new role after diligently performing their duties as home makers for close to two decades. The year 2020, they thought would give them financial freedom for the first time in their lives. But Covid-19 had different plans. Anitha’s offer has been pulled back as of first week of June. And Nagaveni’s calls to the Montessori school are met with silence. She believes her job offer is no more valid. Much aspired economic independence of these two women must wait for some more time. No one knows how long.