Transcript More Than Dollars & Cents

Financial Diagnostics &
Strategy
email: [email protected]
phone: 603-863-4704
Unrestricted Net Assets to
Liabilities 1997- 2000
Dollars
Unrestricted Net Assets to Liabilities
1997-2000
30,000
25,000
20,000
15,000
10,000
5,000
0
198.0%
92.3%
55.3%
Ratios
51.3%
unrestricted net assets
liabilities
Revenue Net of Gains/Losses
to Expenses 1997 - 2000
25,000
Dollars (000)
20,000
15,000
10,000
revenue net
gains/losses
total expenses
5,000
0
95.9%
99.0%
93.0%
Ratios
87.3%
Foundation of Financial
Strategy
 Know Your Financial Condition
 Understand What Drives Financial
Performance
 Establish Goals and Benchmarks
 Constantly Monitor Your Financial Condition
First Step – Simple Measure of
Risk
 Compute the difference between net student
revenue and operational expenses;
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
Net student revenue = net tuition + auxiliaries
Operational expenses = expenses + auxiliaries
 The balance represents
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
The risk inherent in enrollment flows
The risk inherent in the other sources of revenue
Second Step – Risk Measure –
Composite Financial Index
 Purpose: Measures financial viability
 Developed by KPMG and the Department of Education
 Based on earlier work by John Minter & Assoc. and Moody’s
Investors Services
 Compute CFI for several years to identify the trends
 Uses Four Ratio’s to Measure Viability:
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Primary Ratio – relates expendable resources to expenses
Net Income Ratio – income to revenue
Return on Net Assets – relates change in net assets to total assets
Viability Ratio – relates expendable resources to debt
CFI Component Ratio –
Primary Reserve
Purpose: resources relative to expenses. Positive growth for
resources relative expenses
Unrestricted net assets
Temporarily restricted net assets
Net investment in plant
Long-term debt
Numerator = total expendable assets
Denominator = total expenses
Ratio =
ADD
ADD
SUBTRACT
ADD
SUM
Expense
A/B
A
B
CFI Component Ratio – Net
Income
Purpose: Identify surpluses or deficits
Unrestricted operating revenue
ADD
Unrestricted operating expenses
SUBTRACT
Numerator = net operating income
Denominator =Unrestricted operating
revenue
Ratio =
SUM
A
REVENUE
B
A/B
CFI Component Ratio – Return
on Net Assets
 Purpose: Shows increase in reserves or wealth
Numerator = Change in net assets
A
Denominator = Total Net Assets
(beginning of year)
B
Ratio =
A/B
CFI Component Ratio –
Viability Ratio
Purpose: Shows ability of expendable net assets to cover debt
Unrestricted net assets
Temporarily restricted net assets
Net investment in plant
Long-term debt
Numerator = total expendable assets
Denominator = long-term debt
Ratio =
ADD
ADD
SUBTRACT
ADD
SUM
DEBT
A/B
A
B
CFI Weights & Strengths
Ratios
Primary Reserve
Net Income
Return on Assets
Viability
CFI Score
Strengths
/ .133
/.007
/.02
/.417
Weights
Score
*.35
.10
.20
.36
Sum
CFI Scoring Scale
Scale
Level
CFI Scoring
Range
ACTION
One
-1 to 1
Assess viability – Can the school survive?
Two
0 to 2
Reengineer the institution.
Three
1 to 3
Four
2 to 4
Five
3 to 5
Six
4 to 6
Seven
5 to 7
Eight
6 to 8
Experiment with new initiatives.
Nine
7 to 9
Experiment with initiatives. Design a robust mission.
Ten
>9
Deploy resources to achieve a robust mission.
Direct resources toward transformation.
Focus resources to compete in the future.
Work Session – Computing CFI
 Source of data – Financials
 Step #1: Insert data each ratio
 Step #2: Compute each ratio
 Step #3: Insert ratios in Weights & Strength
Table
 Step #4: Compute weights & strengths
 Step #4: Sum last column to produce CFI
How To Use CFI
 Identify which ratio has the greatest impact
on the CFI score.
 Decompose the ratio into its component parts
to determine what has to change.
 Test to see what changes have a positive
impact on the ratio.
Do You Use Ratios or Trends?
 Which ratios do you use - Why?
 Were you surprised by any of the ratios or by
the index score – Why?
 Could you use these ratios with the
leadership at your school?
 Should ABOPS compile these or other
ratios?
Strategic Implications of CFI
 Financial performance is what happens after
other decisions have been made
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Budgets
Programs
Services
Marketing
Best Practices – Financial
Strategy Part One
1.
2.
3.
4.
5.
6.
Balance revenue and expense growth rates
Build a coherent net pricing strategy
Trade gifts for debt
Add employees discriminately
Contain expense growth
Estimate revenue conservatively and prior
to the budgeting of expenses
Best Practices – Financial
Strategy Part Two
7. Build a contingency fund;
8. Install budget controls
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Track variances
What do you do with variances?
Limit new employees during the fiscal year
9. Cash = > 8% of expenses
10. Bill and Collect Billings Monthly
Best Practices Questions
 Do you track best practices – if so tell us
about best practices at other schools or your
schools
 How do you get information about best
practices?
 What best practices do you plan to use in the
next twelve months.
Financial Strategy –
Turnarounds
 Find financial resources to fund the turnaround
 Diagnose your current financial condition –
decompose ratios
 Eliminate non-productive activities
 Set financial goal using CFI ratios
 Install rigorous budget and financial systems
Sources of Data
Sources of Data: IPEDS Data:
§ http://nces.ed.gov/ipeds
§ http://www.jma-inc.net
Source for IRS Form 990:
§ http://www.guidestar.org
Bibliography
 Ronald E. Salluzzo and Philip Tahey, Frederic J. Prager, and Christopher J.
Cowen. (1999). Ratio Analysis in Higher Education. 4th edition. KPMG and
Prager, McCarthy & Sealy, LLC.
 Moody’s Investors Service. Moody's Rating Approach for Private Colleges and
Universities. New York.
 Moody's Investor Service. Private Colleges and Universities: Outlook and
Medians. New York.
 Townsley, Michael K. (2002) The Small College Guide to Financial Health:
Beating the Odds. Washington, DC, NACUBO.
