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Financial Diagnostics & Strategy. email: [email protected] phone: 603-863-4704. Unrestricted Net Assets to Liabilities 1997- 2000. Revenue Net of Gains/Losses to Expenses 1997 - 2000. Foundation of Financial Strategy. Know Your Financial Condition - PowerPoint PPT Presentation
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Financial Diagnostics & Strategy
email: [email protected]: 603-863-4704
Unrestricted Net Assets to Liabilities 1997- 2000
Unrestricted Net Assets to Liabilities 1997-2000
05,000
10,00015,00020,00025,00030,000
198.0% 92.3% 55.3% 51.3%
Ratios
Dol
lars
unrestricted net assets
liabilities
Revenue Net of Gains/Losses to Expenses 1997 - 2000
0
5,000
10,000
15,000
20,000
25,000
95.9% 99.0% 93.0% 87.3%
Ratios
Dol
lars
(00
0)
revenue netgains/lossestotal expenses
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; Net student revenue = net tuition + auxiliaries Operational expenses = expenses + auxiliaries
The balance represents 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:
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 ADD
Temporarily restricted net assets ADD
Net investment in plant SUBTRACT
Long-term debt ADD
Numerator = total expendable assets SUM A
Denominator = total expenses Expense B
Ratio = A/B
CFI Component Ratio – Net Income
Purpose: Identify surpluses or deficits
Unrestricted operating revenue ADD
Unrestricted operating expenses SUBTRACT
Numerator = net operating income SUM A
Denominator =Unrestricted operating revenue
REVENUE B
Ratio = 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 ADD
Temporarily restricted net assets ADD
Net investment in plant SUBTRACT
Long-term debt ADD
Numerator = total expendable assets SUM A
Denominator = long-term debt DEBT B
Ratio = A/B
CFI Weights & Strengths
Ratios Strengths Weights Score
Primary Reserve / .133 *.35
Net Income /.007 .10
Return on Assets /.02 .20
Viability /.417 .36
CFI Score 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 Direct resources toward transformation.
Five 3 to 5
Six 4 to 6 Focus resources to compete in the future.
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.
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 Budgets Programs Services Marketing
Best Practices – Financial Strategy Part One
1. Balance revenue and expense growth rates2. Build a coherent net pricing strategy 3. Trade gifts for debt 4. Add employees discriminately5. Contain expense growth6. 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 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.