Finance
Why Your School's Profit Figure Is Probably Wrong
Ask a school owner whether last month was profitable and most will do the same sum: add up the fees collected, subtract the bills that were paid, and look at what is left. It feels like arithmetic nobody could get wrong. It is wrong in most months, and the reason has nothing to do with arithmetic. The sum mixes two different kinds of number: money that moved, and money that was earned or owed. Once you see the difference, the figure you have been using stops making sense.
Every fee has two dates
A fee has the month it is for, and the day the parent actually pays it. If every parent paid on time, those would fall in the same month and the difference would not matter. In a real school they rarely do. Some parents pay late, some pay two months at once, and some pay ahead.
Costs have two dates too: the month the electricity was used, and the day the bill was paid. Salaries are earned in one month and sometimes paid in the next.
Counting by the day money moved is the cash basis. Counting by the month the fee was for, or the cost was incurred, is the accrual basis. Both are legitimate. They answer different questions.
A worked example
Take an example school that bills PKR 2,000,000 in fees every month and incurs PKR 1,800,000 in costs every month. It makes PKR 200,000 a month, every month, without fail. Now watch what "fees collected minus bills paid" says about four ordinary months.
In October the electricity bill arrives late, so PKR 150,000 of October's costs are paid in November. In November only 70% of fees are paid on time; the remaining PKR 600,000 arrives in January. December is normal.
- October: collected minus paid says PKR 350,000 profit. The school earned PKR 200,000
- November: it says a loss of PKR 550,000. The school earned PKR 200,000
- December: it says PKR 200,000. For once, it is right
- January: it says PKR 800,000 profit. The school earned PKR 200,000
Over the four months, both agree
Add the four cash figures and you get PKR 800,000, the same as four months at PKR 200,000. Over a long enough period the two bases meet. It is the individual months that mislead, and months are exactly what owners look at: November reads as a crisis and January as a triumph, and neither happened.
The mixed version is worse than either
Many schools do not use a pure cash figure either. They count fees billed against bills paid, or fees collected against salaries owed. Each side is measured on a different basis, so the gap between them is not profit. It is profit plus or minus whatever timing happened to fall in that month, and there is no way to tell which part is which.
Cash still matters, just not as profit
None of this makes cash unimportant. Cash decides whether salaries are paid on the first of the month. But whether you have money and whether you are making money are different questions, and a school needs an answer to both, clearly labelled.
- Did we make money? Count fees in the month they are for and costs in the month they are incurred
- Do we have money? Count cash in and cash out, and how many months of spending the balance covers
- Who owes us? Keep fees owed as their own figure, with how old each debt is
How to fix it
- Decide which question each number answers before you calculate it
- Never subtract a cash figure from an earned one
- Judge profit month by month on the accrual basis
- Keep a cash figure beside it, with months of cash at your recent rate of spending
- Watch fees owed separately, so late payments are visible rather than hidden inside profit
Where Edflo fits
Edflo posts every fee, salary and expense to a double-entry ledger as it happens, so the profit and loss is available on either basis from the same books: cash, for what moved, and accrual, for what was earned. The owner's dashboard puts net profit beside cash on hand, months of runway and outstanding fees, so each of the three questions has its own answer, and none of them is mixed into another.
Key takeaways
- Fees collected minus bills paid mixes money that moved with money that was earned, and is wrong in most months.
- The cash basis counts when money moves; the accrual basis counts the month a fee is for or a cost is incurred.
- Over a long period the two agree. Month by month, they can differ wildly.
- Judge profit on the accrual basis, and keep cash and fees owed as separate figures beside it.
- Never subtract a cash number from an earned one.
Frequently asked questions
What is the difference between cash and accrual accounting for a school?
The cash basis records fees when parents pay and costs when bills are paid. The accrual basis records fees in the month they are for and costs in the month they are incurred, whether or not money has moved. Over a long period they agree; month by month they can differ a great deal.
Which basis should a school use to measure profit?
For judging whether the school is making money month by month, the accrual basis, because it matches each month's fees with that month's costs. Keep a cash view beside it for paying the bills. Your accountant may prefer a particular basis for statutory purposes.
Why does our school's profit swing so much from month to month?
Usually because the figure mixes cash with amounts earned or owed. Late fee payments, bills paid a month late, and fees paid in advance all move money between months without changing what the school actually earned.
Is fees collected minus expenses paid a valid profit figure?
Over a full year it comes close, because timing differences mostly cancel out. For any single month it is unreliable, and it should not be used to judge how the school is doing.