Assessing Your Institution’s Financial Health Using the Your...

download Assessing Your Institution’s Financial Health Using the Your Institution’s Financial Health Using the CFI ... US higher education ratio analysis initially ... Seventh

of 33

  • date post

    06-Apr-2018
  • Category

    Documents

  • view

    219
  • download

    5

Embed Size (px)

Transcript of Assessing Your Institution’s Financial Health Using the Your...

  • Assessing Your Institutions

    Financial Health Using the CFI

    FOCUS

    Virginia Commonwealth University

    November 14, 2014

    Larry Goldstein, President, Campus Strategies, LLC

    November 14, 2014 Campus Strategies, LLC 1

  • BACKGROUND

    November 14, 2014 Campus Strategies, LLC 2

  • Background

    US higher education ratio analysis initially

    relied on data collected through HEGIS

    Higher Education General Information

    Survey (US Department of Education)

    HEGIS began in 1966 and continued until 1987 when it was replaced by IPEDS

    Integrated Postsecondary Education Data

    System

    No utilization of financial statements for

    ratios until 1995

    November 14, 2014 Campus Strategies, LLC 3

  • Background

    Ratio Analysis in Higher Education, fourth

    edition (1999) by KPMG and Prager, McCarthy

    & Sealy, LLCa significant advance

    Introduced

    Strategic Resource Allocation matrix

    Composite Financial Index (CFI)

    Combining selected ratios to produce

    overall score

    Relevant only to private institutions

    November 14, 2014 Campus Strategies, LLC 4

  • Background

    Fifth edition (2002) applied CFI to public

    institutions

    New concepts

    Adaptation of ratios to reflect then-new

    GASB reporting model

    Inclusion of FASB support organizations in

    ratio calculations

    November 14, 2014 Campus Strategies, LLC 5

  • Background

    Seventh edition released summer 2010

    Extends scale for CFI

    Revisions to ratios

    Drops alternative to net operating

    revenues ratio for private institutions

    Requires the establishment of an

    operating measurewhether or not

    reported externally

    November 14, 2014 Campus Strategies, LLC 6

  • Background

    Significant emphasis on liquidity due to impact of Great Recession on higher

    educationintroduces new ratio

    Encourages averaging ratios over multiple years

    Deemphasizes peer comparison in favor of trend analysisassess institution over time,

    not against others

    Encourages projecting ratios for strategic purposes

    November 14, 2014 Campus Strategies, LLC 7

  • CONTEXT

    November 14, 2014 Campus Strategies, LLC 8

  • Context

    Why calculate financial ratios?

    From the sixth edition, We believe the fundamental concept of assessing financial health by using a limited number of ratioshas improved the financial health of colleges and universities. (emphasis added)

    Just as important, it helps non-accountants understand institutions financial health

    November 14, 2014 Campus Strategies, LLC 9

  • Context

    Ratios are valuable for those who do not

    understand how to interpret and analyze

    higher education financial statements

    Trustees, faculty, students, and other

    interested parties can use the ratios to gain

    an understanding of the institutions

    financial health

    Reduces complexity of GAAP-basis financial

    statement analysis

    November 14, 2014 Campus Strategies, LLC 10

  • Context

    Facilitates peer assessment

    Shifts focus to a more global level

    Supports strategic decision making

    Demonstrates financial impacts of key

    decisions

    Assists with performance assessment

    Creditworthiness Relative liquidity, financial viability, and

    leverage of resources

    Financial assets performance

    November 14, 2014 Campus Strategies, LLC 11

  • Context

    Principles

    Use ratios to measure acquisition / use of resources in support of mission

    Focus on summary information to address key questions

    Present a select number of ratios to provide answers

    Additional detail when necessary

    November 14, 2014 Campus Strategies, LLC 12

  • Context

    Focus on trends in ratios

    Some trends are evident from internal

    examination / review

    Other trends arise through comparisons

    with others

    Never make decisions based on

    comparison to other institutions using

    CFIonly underlying ratios

    November 14, 2014 Campus Strategies, LLC 13

  • Questions?

    November 14, 2014 Campus Strategies, LLC 14

  • COMPOSITE FINANCIAL INDEX (CFI)

    November 14, 2014 Campus Strategies, LLC 15

  • CFI

    Combines four principal ratios

    Primary reserve ratio

    Viability ratio

    Return on net assets ratio

    Net operating revenues ratio

    November 14, 2014 Campus Strategies, LLC 16

  • Ratios

    Standard weighting for each ratio, but can be adapted for unique situations

    Weighting should remain fairly static over

    time

    In addition to four principal ratios, seventh

    edition presents 13 secondary ratios

    November 14, 2014 Campus Strategies, LLC 17

  • Ratios

    Primary reserve ratio35 percent

    Indicates the sufficiency of resources and their flexibility

    Expendable net assets / total expenses

    Unless otherwise specified, expendable

    net assets restricted for plant purposes

    are excluded

    November 14, 2014 Campus Strategies, LLC 18

  • Ratios

    Viability ratio35 percent

    Indicates the capacity to repay total debt through reserves

    Expendable net assets / long-term debt

    November 14, 2014 Campus Strategies, LLC 19

  • Ratios

    Return on net assets ratio20 percent

    Indicates whether the institution is better off financially this year than last

    Change in net assets / beginning net

    assets

    November 14, 2014 Campus Strategies, LLC 20

  • Ratios

    Net operating revenues ratio10 percent

    Indicates whether institution is living within available resources

    Operating surplus or deficit / operating

    revenues

    November 14, 2014 Campus Strategies, LLC 21

  • November 14, 2014 Campus Strategies, LLC 22

    10

    10

    10

    103

    33

    3

    PRIMARY RESERVE RATIO

    NET OPERATING REVENUESRATIO

    VIABILITY RATIO

    RETURN ON NET ASSETS RATIO

    GRAPHIC FINANCIAL PROFILE

  • Threshold Values

    Financial health pegged at 3, equating to

    Primary Reserve: 140 days of operations

    Actually more due to depreciation

    Viability: 1.25 times total debt owed

    Return on Net Assets: 6% return on

    combined financial / nonfinancial assets

    Net Operating Revenues: 2% net surplus

    to increase reserves

    November 14, 2014 Campus Strategies, LLC 23

  • Questions?

    November 14, 2014 Campus Strategies, LLC 24

  • OTHER ISSUES

    November 14, 2014 Campus Strategies, LLC 25

  • Other Issues

    What to do about affiliated entities

    Include them! Necessary for a comprehensive picture

    of the institution and its operations

    GASB Statement No. 39 (component units) facilitated this by requiring inclusion of

    significant entities

    What about omitted entitiesdue to

    criteria or significance?...

    November 14, 2014 Campus Strategies, LLC 26

  • Other Issues

    Potential problem with double-counting of some items

    Disbursements from foundation to

    institution is treated as expense by

    foundation and, once expended by

    institution, as expense by institution

    Consolidation would address through

    elimination, but not always available

    November 14, 2014 Campus Strategies, LLC 27

  • Other Issues

    Comparisons between institutions

    Very risky due to inconsistencies

    Especially between public and private

    Helps if institutions have similar mission

    Optimal comparison occurs within affinity groups

    Examples include ACC, VCCS institutions,

    etc

    November 14, 2014 Campus Strategies, LLC 28

  • Other Issues

    Limitations / pitfalls of financial ratio analysis

    It is not a substitute for understanding the financial statements themselves; it shines a

    light on the statements content but cant

    tell the entire story

    It should not be used to mask poor financial performance

    It is but one quantitative measure

    November 14, 2014 Campus Strategies, LLC 29

  • Other Issues

    Appropriate assessmentfinancial or otherwiserequires both quantitative and

    qualitative analysis

    Financial ratios should not be used as a

    substitute for qualitative judgments

    It should be supplemented with other

    factors

    November 14, 2014 Campus Strategies, LLC 30

  • Other Issues

    Peer comparisons without longitudinal analysis can be misleading

    Longitudinal analysis without peer comparisons can be misleading

    Five-year periods seem to work well

    Consistently applied ratio analysis is

    essential

    November 14, 2014 Campus Strategies, LLC 31

  • Resources

    Strategic Financial Analysis for Higher Education,

    seventh edition, by Prager, Sealy & Co., LLC,

    KPMG LLP, and Attain LLC

    Available through KPMG or NACUBO www.nacubo.org

    November 14, 2014 Campus Strategies, LLC 32

  • Using Financial Ratios to Assess

    Institutional Financial Health

    Questions, Comments,

    and Reactions

    Larry.Goldstein@Campus-Strategies.com

    (540) 942-9146

    November 14, 2014 Campus Strategies, LLC 33