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FINANCIAL SYSTEMS

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Financial Systems

As educators, CE practitioners are often poorly prepared

to manage an operation that has many characteristics that

resemble profit centered businesses. The best advise is to

adopt a business financial model and modify it to the CE

operation, rather than try to adopt an education model and

adapt it to a CE operation. One of the most significant

differences of a CE program from an educational model is

that most CE operations have a variable budget. Other

units of the university tend to have fixed annual budgets.

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Profit

Another significant difference found in an

effective CE model is the “profit” concept.

This may not involve real profit, but it

involves developing programming that covers

the fixed costs, variable costs, and overhead.

It must also generate funds to reinvest in

future programming.

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University Perceptions of CE

Unfortunately, these differences sometimes create difficulties

within the institution when CE staff communicates with other

administrators. They may result in the following perceptions:

* CE has plenty of money and needs no institutional support

* A “profit” goal does not fit the true mission of education

* CE should share their profits and assist the real programs of the university

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Staff Skills

Because programmers and other staff members actually

create, price, hire instructors, market, and implement the

programs, they have the ability to ultimately determine

the financial health of the unit. Therefore, the director

must not only have an in-depth understanding of the

finances, but also must be able to teach finances to the

staff.

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Assumptions for Successful Budgeting

To make good decisions, the staff should reach a consensus

on budgeting. Some of the assumptions may include the

following:

* Successful budgeting involves more than mere mathematical calculations

* The value of a product has more to do with the perceived value by the customer than the actual cost

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Assumptions for Successful Budgeting

Successful Budgeting (continued)

* Profits from programs can be used to build strong programs in the future

* Budgets are program-planning tools and should be introduced in the early stages of the programming process

* Budgets are communications tools to be used with customers and internal staff

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Assumptions for Successful Budgeting

Successful Budgeting (continued)

* Service cuts to meet budget restraints will result in long-term failure

* Time is money

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The Unit Budget

The unit budget includes all of the resources available to

operate the unit. These resources include funds provided by

the institution, revenues from the programs, grants, contracts,

gifts, and other monies. From a conceptual standpoint, it also

should include non-money resources such as contributions of

equipment and facilities. These reduce the amount of money

that is needed to operate the program; therefore, they are

equivalent to money.

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Two Sets of Books

The director must fully understand and monitor the

contribution that each source makes to the overall budget.

Since a CE budget generally differs significantly from the

institution’s budget format, most CE units are forced to keep

two sets of books. One set is arranged to communicate with

the institutional books, and the other is designed to more

effectively manage and monitor the success of the program.

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Tracking Financial Results

Learning Resources Network (LERN) recommends tracking

financial results in seven areas:

1. Income

2. Promotion

3. Production

4. Direct Costs

5. Operating Margin

6. Administration

7. Net

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Tracking Financial Results

Tracking Results (continued)

It is also recommended that these elements be

converted to percent figures for ease of tracking period

to-period changes. Direct costs are defined as the sum of

promotion and production. Operating margin, or profit,

is the difference between income and direct costs. Net

is operating margin minus administrative costs.

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Target Results

Suggested percentages are:Revenue 100% (a given)

Promotion 10%-15%

Production 45%-50%

Total direct cost 60% -

Operating margin 40% +

Administration Varies

Net 5%

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Activity Budget

The principle of most activity budgets is simple--revenues

should be greater than expenses. The two components of the

budget (revenues and expenses) are related but not

necessarily directly related. The expense component

determines the minimum revenue but should not determine

the desired revenue. The minimum total revenue is a factor of

total expenses and number of participants. The minimum cost

per student is based upon the total cost divided by the

anticipated enrollment. The maximum revenue (and cost per

student) should be based upon the customer’s perceived

value.

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Steps to Develop Budgets

There are six basic steps in developing an activity budget:

1. Identify all costs related to the program, including opportunity costs

2. Classify the costs as fixed or variable

3. Establish the break-even point

4. Determine a minimum registration fee

5. Determine a profitable registration fee

6. Prepare the budget

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Fixed Costs

Fixed costs include all costs that are involved that are

independent from the number of students and will not vary in

other ways. Some of these include the following:

* Instruction (except in cases where additional students require additional instructors or there is revenue sharing)

* Fringe benefits

* Marketing

* Facilities

* Administration

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Variable Costs

Variable costs are primarily related to enrollment.

However, there are other instances when costs may vary

such as:

* Food

* Educational materials

* Student lodging

* Instruction (when there is revenue sharing, etc.)

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Opportunity Costs

Opportunity costs are not directly reflected in the

budget but should help determine whether an activity

should be initiated. This cost is determined when one

activity is compared to another using projected

revenue as a point of comparison. The CE manager

and staff can then spend their time working on

profitable programs.

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Opportunity Cost Example

An example of the use of opportunity costs might be the

analysis of a decision to offer a free program to members of

the institution. Normally you might consider that the only

costs are out-of-pocket expenses. However, the true cost of

the activity is the sum of out-of-pocket expenses and the

related opportunity costs. This concept may be effective when

deciding to participate in a government contract activity

that limits cost recovery to direct costs and minimal overhead.

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Operating Margins

Operating margins can be expected to vary widely by

program area. Those programs that serve business, industry,

and other third party “payers” will normally provide 40% to

60% operating margins. In addition, programs that permit the

student to acquire a certification also return excellent

margins. Personal enrichment activities (paid for by the

student) tend to deliver much lower margins ranging from

15% to 40%.

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Profit vs. Service

It is tempting to limit programming to only those

areas that return a very high operating margin.

However, from a service perspective, a broad-based

program helps to lift the entire community to a better

quality of life. Most CE programs supplement some

activities with revenues from the more financially

successful activities. This is another justification for

market pricing versus cost pricing.

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Expenses… Faculty Pay

This is a very complex area of programming because a

wide range of programs require a wide range of faculty

with very different levels of professional qualifications.

In addition, as potential programs vary, so does the

ability to pay. Other problems occur when faculty

members in the same organization compare their levels

of pay. These complexities make it difficult for the CE

unit to develop a comprehensive faculty payment policy.

Yet, some level of consistency is necessary.

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Types of Faculty Pay

The types of payments include:

* Flat rate

* Hourly rate

* Fee per student

* Percentage of gross

* A mix of the above

* Buy equipment or pay travel

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Flat Rate

The flat rate is usually the best system if you are

confident that you can effectively market the program

and obtain the projected enrollment. In this case, CE

does all the work, except for the instruction, and should

benefit from the financial success. Since it is impossible

to establish a single flat rate, most operations establish a

range of rates, with the director approving exceptions.

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Hourly Rate

The hourly rate is similar to the flat rate and has similar

advantages. This type of payment system is used when

the length of the instructional activity might vary for

some reason. An example might be individualized

instruction that might vary by individual such as music.

As with the flat rate, the hourly rate normally varies from

program to program.

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Percentage

The major advantage of the percentage approach to faculty payment is

the sharing of the responsibility for the success of the program and the

financial exposure with the instructor. This is a very good system if

the instructor has the ability to enroll a significant number of

participants or requires an unacceptably high fixed rate for a program

that has a questionable potential. However, many programs use this

approach even when they provide the students through effective

marketing and hard work. The faculty member may get as much as

70% to 80% of the margin with only 25% of the commitment and

exposure. The key to this approach is to determine the relative

investment of the two parties and assign the percentage accordingly.

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Partnerships and Percentages

The percentage issue is also present in many program

partnership arrangements. The same rule should apply:

the percentage is related to investment. If a partner is

willing to underwrite 50% of the up-front costs such as

program development and marketing, they deserve to be

an equal partner. Otherwise, their share of the income

should be reduced to match their level of commitment

and contribution.

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Fee Per Student

The fee per student is basically the same approach as

the percentage payment. However, this approach

must be analyzed carefully. While percentage may

be calculated on the income after expenses, the fee

per student is effectively a percentage of gross

income.

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Instructor Involvement

No matter what system is used, the details should not be shared with the instructor for several good reasons:

* You will have to justify all future rates of pay and will continually be on the defensive

* Faculty members will be able to compare their pay with others

* Faculty members will be able to compare CE’s share with theirs

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Percentage of Gross

Most faculty members feel that the instructionrepresents most, if not all, of the programmingeffort. Therefore, most of the income should bepassed to them. Understandably, they are not aware of the investment in infrastructure, CE staff time,and direct expenses such as marketing that are required to support a successful class.

A desired target rate for faculty pay as a percentageof gross income is in the 30% to 40% range.

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Other Expenses

Careful management of food and facility expenses is

necessary, especially if minimum guaranties are

involved.

A detailed understanding of the various cost factors

involved in marketing will enable the unit to get the

most results for a given investment.

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Sunk Costs

It is important to understand the concept of sunk

costs to optimize program revenues. Sunk costs are

an important factor when deciding to hold or cancel

a program. The costs are incurred before the program

begins and will not be recovered if the program is

canceled.

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Decisions About Sunk Costs

The decision to cancel or not should be based upon costrecovery. If conducting the program will cover all expenses other than sunk costs and contribute to thepartial recovery of the sunk costs, then the best decisionmay be to hold the program. If conducting the programwill not cover the additional expenses and contribute to sunk costs, then it should be canceled. Theserecommendations only take into account the financial motives for canceling a program. Opportunity costs mayalso be a factor.