One of the most important things you can do to understand your school’s financial situation is to implement a Full Cost Equivalent system.
(If you’ve followed GraceWorks for a while, you may have heard us call this “Full Pay Equivalent,” but we’ve updated the language for clarity.)
This is an idea that many schools are not familiar with, so I want to take a moment to explain the what, how, and why behind such a system.
What is FCE?
A Full Cost Equivalent (FCE) is the total cost to educate one student. The Full Cost Equivalent (FCE) system advocated here is a way to measure enrollment that places the emphasis on making your net tuition budget goal. Furthermore, the FCE system considers the percentage, on average, for each student to set more realistic enrollment goals and expense budgets.
Why use FCE?
Why use the Full Cost Equivalent (FCE) system in the first place?
The FCE system answers several essential questions. In priority order, these are:
- How do we know that we will make our net tuition income budget?
- Are we priced right?
- What is the impact of our automatic discounts?
- Are we giving away too much (or little) financial aid?
Before we dive into the details, an observation. The #1 revenue source for a Christian school is tuition income. Ask yourself, how do we manage our #1 source of revenue? Far too often I hear about some invisible guiding hand and the power of prayer. For the more desperate I hear things like “it always works out,” or “miracles.”
We can do better than this.
No question – it is quite hard to manage net tuition income. It takes logic and hard work to know earlier rather than later whether you will make your budget – and do something about it months before the start of a new school. Our systems make that much easier – and save you a great deal of time.
We have two goals.
The first broad goal is to dramatically simplify how we talk about tuition revenue as staff and board.
- The cost to educate one child – an FCE by definition.
- And the number of those FCE units needed to make your tuition income budget.
Essentially, FCE boils your projected tuition income for the coming year into two key numbers:
E.g. A Full Pay Equivalent is $10,800, and we need 97 of these to make our tuition budget.
Boards need clarity and sharpness of mind when it comes time to make important financial decisions. The FCE system helps your Board to grasp the financial picture in just minutes. Really 1 minute. That frees up collective energy, time, and brainpower to work through
what we’re going to do about this mess the best solutions for our current financial situation.
(Consider the alternative, spending 30 to 60 minutes establishing what really is happening financially, and only then making important financial decisions. Before I worked out the FCE system, I sat through far too many board meetings where all the energy was sucked out the room before we even got to the really important decisions.)
The second broad goal is to change your corporate culture. Implementing an FCE system forces everyone — Board and staff alike — to come to grips with the discrepancy between what your maximum tuition is, and what it actually costs to educate a student.
Yep, I am messing with your heads. Why? Because in my observation, most board members have only a vague notion of how much it actually costs to educate a child, and it rarely is considered in tuition pricing decisions. In the FCE system, everyone knows that amount, as they should.
The FCE calculation also forces Christian school leaders to understand the costs of educating one child based on differing enrollment projections. In my experience, this is often a great reality check.
I often hear that “The Full Cost Equivalent dollar amount (the 4 or 5 digit cost to educate a child) is higher than the maximum tuition we charge BECAUSE we are under-enrolled.”
That’s true enough as far as it goes, but unfortunately, that’s usually as far as it goes.
I force my clients to figure out exactly how many students it will take to get the FCE amount in line with their maximum tuition. I once worked with a school where the answer was that a 60% increase in overall enrollment would do the trick. In one year.
Hmmmmmm. Come on, that is not going to happen.
So financial reality becomes: We’re going to have to raise prices. Or get rid of automatic discounts. (Gasp!)
By the way: Raising prices is not as bad as it seems at first – if and only if you have high satisfaction. You can always provide financial aid to the families who need it. What I do is show schools their parent income results from their own parent satisfaction survey. I have seen schools where EVERY single parent, no matter if they are making $100,000, $150,000, $250,000, or more per year – every single one – is paying less than it actually costs to educate their child.
In such a situation, we are left with the advice of the great masters. Confucius say: Reality bites. Yoda says: Face it we must. Oh, and didn’t Jesus say something about counting the costs?
How to Calculate FCE
Question: How do you calculate the Full Cost Equivalent amount?
Answer: Divide total expenses by the number of students.
That was easy, now wasn’t it? Almost. We do have issues with both of these numbers that need to be explored.
The biggest issue with total expenses is in-kind contributions by entities like your sponsoring church. If you have the run of the place for free or reduced lease payments, the actual market value of the space you are using should be included in the cost to educate a child. The same goes for things like utilities, insurance, repairs, and the like. If you are getting a sweetheart deal from somewhere, the amount of that financial favor is included in the calculation for the FCE dollar amount.
There are two issues with the number of students. The first is projecting what the number of students should be for next year. The number of students this year is easy – but who cares? I would advise that you go with a realistic but aggressive growth goal for next year.
The second issue is figuring out the number of FULL-TIME students. In counting noses, it turns out that not all noses are created equal. For example, half-time kiddos in Kindergarten need to be doubled up to get full-time students. 20 half-time students = 10 full-time students. If there are 100 students in the rest of the school (all full-time) then the denominator for the equation for this school is 110, not 120.
That’s easy enough, but what about the Preschool?
There is a way to include your preschool in this calculation, but our general guidance is to calculate the preschool separately. The reason is different cost and price structures, along with the complexity of multiple enrollment options (full-day, half-day, three-quarter days, two-day, three-day…).
Question: Once you know the dollar amount of the full cost equivalent, how do you calculate the number of these FCE’s you need to make the budget?
Answer: That’s easy – just divide your NET TUITION budget by the FCE amount.
Example: After accounting for all the subtractions from revenue, the net tuition we need to have a balanced budget is $400,000. If the FCE amount is $10,000, we need 40 full pay equivalents of these to make our budget. 40 * 10,000 = $400,000.
NOTE: Tuition includes both tuition and mandatory fees, that is, fees that everyone pays. Optional fees (e.g. activity or sports fees) are NOT included in this calculation. They are rather part of an overall revenue goal – and yes, somebody needs to be accountable to see that we make this budget item, too. But it is not part of the FCE calculations.
- None of this matters unless you keep track of it AS YOU GO. That means that what admissions knows needs to be combined with what the financial aid people know, on an ongoing basis. This needs to be updated at least twice a month.
- Second, if you don’t do an FCE system, it is almost inevitable that boards will not correctly see the realities of financial aid. Many will say that we have to cut back financial aid awards, because managing by students, rather than FCE’s, assumes a level of financial aid that is not sustainable. Contrarian board members or business manager types will argue that if we don’t cut back on financial aid, the number of students we currently have does not get us to the correct net tuition income number. But if we cut back financial aid, we will lose students, and the whole thing spirals down to… school closure.
- Every economic trend says to me that we will need to be MORE aggressive, not static and certainly not less, in financial aid. FCE is the best way possible to manage tuition revenues in a market that will require more aggressive financial aid. By being aggressive in financial aid, we can enroll more students. Who cares if it takes 60 students to make 40 FCE’s? The real tuition income problem is small classes with empty seats.
Thinking the FCE way simplifies how we talk about meeting our tuition income budget, and helps Boards (and staff) to understand how needs-based financial aid, carefully done, will increase tuition income, not decrease it. It gives us a way to carefully manage our single largest revenue source, months in advance, and “as we go.” No late summer surprises!
Ultimately, the FCE systems trains board and staff to see how financial aid works – and how automatic discounts usually do not work – to increase our overall net tuition income. That’s a key organizational culture change at your school – for the better!