Financial Diagnostics & Strategy

1. Financial Diagnostics & Strategy email: Info@StevensStrategy.com phone: 603-863-4704

2. Unrestricted Net Assets to Liabilities 1997- 2000

3. Revenue Net of Gains/Losses to Expenses 1997 - 2000

4. Foundation of Financial Strategy • Know Your Financial Condition • Understand What Drives Financial Performance • Establish Goals and Benchmarks • Constantly Monitor Your Financial Condition

5. 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

6. 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

7. CFI Component Ratio – Primary Reserve Purpose: resources relative to expenses. Positive growth for resources relative expenses

8. CFI Component Ratio – Net Income Purpose: Identify surpluses or deficits

9. CFI Component Ratio – Return on Net Assets • Purpose: Shows increase in reserves or wealth

10. CFI Component Ratio – Viability Ratio Purpose: Shows ability of expendable net assets to cover debt

11. CFI Weights & Strengths

12. CFI Scoring Scale

13. 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

14. 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.

15. 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?

16. Strategic Implications of CFI • Financial performance is what happens after other decisions have been made • Budgets • Programs • Services • Marketing

17. Best Practices – Financial Strategy Part One • 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       

18. Best Practices – Financial Strategy Part Two • Build a contingency fund; • Install budget controls • Track variances • What do you do with variances? • Limit new employees during the fiscal year • Cash = > 8% of expenses • Bill and Collect Billings Monthly

19. 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.

20. 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

21. 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

22. 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. ·