S Venkat and Abhiram Kandoor explain why education businesses need good CFOs
While the education sector has seen explosive growth in recent times, investments by PE funds and emergence of organised corporates, the sector is also faced with challenges due to government intervention, rules and regulations covering partnerships, capacity building and even pricing and requirements of large upfront capital investments. Whether it is pre-primary, K12, higher education skills or online assessment businesses, navigating choppy business waters without a good CFO at the helm can be daunting for management.
Let us highlight areas where a professional CFO can combine his/ her functional skill sets, with an understanding of sectoral nuances and 'intrapreneurial' spirit to help businesses in education acheive sustainable and scalable growth.
360 Degree Measurement: Using financial and non financial metrics to drive financial results
Unlike traditional manufacturing businesses, the value (benefit) from a customer standpoint may often not be easy to quantify. Most educational institutions have a limited ability to measure and communicate value add to customers (students or parents) at different stages during the course. Apart from initial high capex costs, Institutions add to their service portfolio to differentiate themselves from competition – day care with play group, international curriculum with an Indian syllabus, management courses with core degree courses, leading to increased product mix complexity. Most institutions in higher education have a poor understanding of costing/pricing by course and lack clear visibility of which courses in their porfolio are making money. Decisions to expand in new geographic locations are not always scientific, leading to sub-optimal allocation of capital and management resources in unprofitable locations. In pre-primary, franchising is a favoured route, but the franchisor does not always have robust measurement tools to help franchisees acheive and maintain positive cashflows quickly, resulting in frachisee turnover and business disruptions.
The CFO can provide valuable input by identifying, measuring and comparing some key financial and non-financial metrics which could provide the management with an insight on the direction they should steer.
A good CFO should take the lead in measuring all metrics as follows: Product, site level profitability, inquiry to student conversion ratio, drop out ratio, break even calculations in capex intensive projects, pricing trends for courses over years, placement percentages, faculty rating, infrastructure rating, marketing spends to students converted ratios, sales/ profit mix by site/ franchisee and average salary after course completion. While a CFO may not be responsible to improve each of these metrics by himself, he does play a key role in holding up a mirror to management and business units, to help them view their own performance objectively. A good CFO understands that better control over metrics helps ultimately in delivering good financial results.
Getting the business model right: Getting better return for cash deployed
All institutions need to grow and keep up with times, which is sometimes difficult given the high cash outlay. To counter these difficulties the CFO should take the initiative by recommending and implementing alternative cash efficient growth paths. We have seen multitudes of examples of the franchising model being very successful in pre-schools (TreeHouse, KidZEE, EuroKids, Bachpan) and K – 12 segments. This model allows companies to leverage their brand without having to invest their own capital in scaling up businesses.
Another important way to expand, especially applicable to higher education, is the use of the digital delivery platform to provide online programmes (Symbiosis, Edukart, Coursera+IIT). Other opportunities include the provision of result oriented services like testing and assessments for placements (Meritrac, Career Launcher). Higher education institutes could also use their biggest asset like its faculty to run management and executive development programmes and also partner with corporates to offer consulting and research expertise in specific areas (ICICI Manipal Academy).
A good CFO is always on the lookout for better ways to leverage – not just capital, but also brand, platforms, faculty and infrastructure. Getting more 'juice out of the lemon' is the CFO's job.
Good investor relations
Potential investors in education are concerned about changing rules and regulations, complex trust structures and lack of visibility in monitoring cashflows. The CFO needs to monitor evolving rules and constantly assess their impact on the business, in terms of possible partnerships or capacity build up or product expansions. A CFO plays a key role in design and managing structures in a compliant manner, while retaining operational nimbleness. The CFO plays a key role in maintaining a balance between the acedamicians, management and investors. A capable CFO will be able to translate the different, sometimes discordant, language that different stakeholders understand, to a uniform tongue that talks about commercially and fundamentally effective education.
Having a CFO who is closely involved in the growth of the institution is a strong indication of the management committment towards a robust expansion plan with risk assessment and management measures in place, attracting investors to such institutions.
A CFO who is able to gain business intelligence through the ruthless analysis of data by business, location and course will be able to have a critical view of the expansion plans that are mooted by the business. He or she will be able to prepare a robust payback calculation, be able to think through the financing structures carefully and avoid overleverage of debt. Further, in courses where capacity is controlled by regulation, he or she will try and keep the model asset light, all of which is in the best interest of promoters and investors in the long term. Therefore, it is important for managements to empower CFOs to be able to say 'no' to investment decisions that are fraught with incomplete understanding of ground realities and improper planning. On the CFO's part, it is key for him or her to engage as a true business partner and not be a 'naysayer' everytime!