Financial Diagnostics & Strategy

email: Info@StevensStrategy.comphone: 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.