FINANCIAL RATIO ANALYSIS OF SELECTED SEVENTH-DAY ADVENTIST TERTIARY EDUCATIONAL INSTITUTIONS IN SOUTHEAST ASIA

Narumon Kaewduang and Wayne Hamra

ABSTRACT

This qualitative research study used financial ratio analysis techniques to compare the financial health of selected SDA colleges/universities in Southeast Asia. The goals were to identify financial strengths and weaknesses, and discover best practices by looking for potential benchmarks that could be used by sister institutions. Financial statement data for the 2015-2016 academic year was used from two institutions that were willing to participate in this study.

The results showed that one university had about twice as many students as the other. The smaller institution had relatively high tuition and fees, but experienced a net loss and declining liquidity. The larger university charged relatively low tuition and fees, but experienced a modest net gain and improving liquidity.

These results may help administrators to identify and adopt best practices among peer institutions which may lead to strategies of how financial problems may be resolved and institutional missions may be better carried out. Gathering institutional best practices may also lead to the establishment of future performance benchmarks for SDA higher educational institutions in Southeast Asia and beyond.

Keywords: Financial Ratio Analysis, Seventh-day Adventist Higher Educational Institutions Southern Asia-Pacific Division (SSD) Educational Institutions

Background of Study

Financial Ratio Analysis is a popular financial management tool used by managers or businesses to measure their business performance. Mayer & Shank (2007) state that “financial ratios allow us to get a better view of the firm’s financial health than just looking at the raw financial statements.” There are several analytical tools to evaluate a company’s financial statements, using techniques such as horizontal analysis, vertical analysis, comparative financial statements, trend analysis, and so on, but one of the most valuable is financial ratios. Many managers use ratio analysis to evaluate their strengths and weaknesses, or look for ways to reduce their obligations or avoid problems, or perhaps to establish targets for the financial health of their firms.

Fischel et al., (2015) stated that “ratios can also be used to compare a business with its competitors or in comparison to specific benchmarks within the company to determine how consistent its financial results are.” One of the most popular ways to analyze financial statements is to compute and compare the financial ratios to benchmarks for successful firms in an industrial sector. Some are expressed as percentages that measure the rate of profitability, liquidity, proportion of borrowing and returning, how efficiently funds are utilized, and so on. This is done to find a meaningful relationship between individual items or groups of items on balance sheets and income statements which highlight key performance indicators.

Ross, Westerfield, Jordan, Lim, & Tan (2012) state that “another way of avoiding the problems involved in comparing companies of different sizes is to calculate and compare financial ratios.” Most managers use financial ratios to interpret performance trends year on year and to benchmark against industry averages, predetermined targets, or the performance of individual competitors. Evaluation of past performance or current financial position using ratio analysis is an appropriate process for every business, and this is an important tool that shouldn’t be overlooked.

(SketchBubble, 2017)

Seventh-day Adventist Educational Institutions

The Seventh-day Adventist (SDA) church is a Protestant Christian denomination that believes in Jesus Christ. The church was established in the United States in the mid-19th century. The denomination reports (General Facts, 2017) that membership “has now grown to consist of approximately 19.5 million members living in 209 countries around the world, and has an integrated network of schools, with more than 7,500 schools worldwide enrolling more than 1.8 million students.”

Seventh-day Adventist schools practice holistic principles of spiritual, mental, physical, and social development. As Ellen G. White, a Seventh-day Adventist pioneer wrote:

“True education means more than the pursual of a certain course of study. It means more than a preparation for the life that now is. It has to do with the whole being, and with the whole period of existence possible to man. It is the harmonious development of the physical, the mental, and the spiritual powers. It prepares the students for the joy of service in this world and for the higher joy of wider service in the world to come” (White, 1903).

The goal is not only gaining academic knowledge, but developing students’ minds, establishing a pattern of living, and learning to follow God’s guidance. Therefore, students are taught to serve others rather than to expect to be served in harmony with Adventist education’s mission and holistic objectives.

SDA Colleges and Universities in Southeast Asia

Adventist colleges and universities are nonprofit educational institutions operated under the working policy of General Conference of Seventh-day Adventists. A part of the mission of the church’s Southern Asia-Pacific Division (SSD) is to support the work of Adventist institutions in areas such as children, youth, family, education, and health ministry.

J. Vincente of the SSD Education Department reports that “there are seventeen colleges/universities in SSD. Fifteen of these are in Southeast Asian region, with a total enrollment 17,683 during 2015-2016 academic year.” (J Vincente, Personal communication, March 3, 2017). In the Southeast Asian region, Adventist colleges and universities located in Indonesia, Malaysia, Myanmar, the Philippines, and Thailand, are part of the Southern Asia Pacific Division’s (SSD) education network. Figure 1 shows a map of Southeast Asia region.

Figure 1 Map of Southeast Asian Region, Southern Asia-Pacific Division

Seventh-day Adventist higher educational institutions are part of a network of colleges and universities located in many different countries. Taking advantage of these linkages to compare and analyze financial ratios among peer institutions could be quite useful in exploring the effects of similar or difference management practices on operational performance. This could lead to the discovery of best practices or strengthen the strategies used by Adventist higher educational institutions within the region and beyond. Table 1 lists the Adventist colleges/universities located with the territory of the Southern Asia-Pacific Division.

Table 1 Southern Asia-Pacific Division (SSD) Higher Educational Institutions: 2015-2016

Student Enrollment

No Colleges/Universities Location Website Address Student’

Enrollment

Southeast Asian Region

1 Adventist International Institute of Advanced Studies Cavite, Philippines www.aiias.edu 604

2 Adventist University of the Philippines Cavite, Philippines www.aup.edu.ph 3,942

3 Asia-Pacific International University Saraburi, Thailand www.apiu.edu 1,134

4 Central Philippine Adventist College Negros Occidental, Philippines www.cpac.edu.ph 892

5 Indonesia Adventist University Bandung, Indonesia www.unai.edu 1,929

6 Klabat University Sulawesi Utara, Indonesia www.unklab.ac.id 3,100

7 Manila Adventist Medical Center and Colleges Manila, Philippines www.amcmanila.org 564

8 Mindanao Sanitarium and Hospital College Iligan City, Philippines www.mshcollege.com 1,254

9 Mountain View College Bukidnon, Philippines www.mvc.edu.ph 1,773

10 Myanmar Union Adventist Seminary Myaungmya, Myanmar www.muas.myanmaradventist.org 610

11 Naga View Adventist College Naga City, Philippines 216

12 Northern Luzon Adventist College Pangasinan, Philippines www.nlac.edu.ph 587

13 Penang Adventist College of Nursing Penang, Malaysia www.pah.com.my/acn 191

14 South Philippine Adventist College Davao del Sur, Philippines www.spaconline.org 375

15 Surya Nusantara Adventist College Sumatra Utara, Indonesia 237

South Asian Region

16 Bangladesh Adventist Seminary and College Gazipur, Bangladesh www.bascollege-bd.org 195

17 Pakistan Adventist Seminary Punjab, Pakistan www.pasc.edu.pk 80

Total 17,683

Justification of Proposed Research Topic

Many might think that ratio analysis can be applied only to enterprises, but it is also suitable for colleges and universities as nonprofit organizations. Industry averages or benchmarks haven’t yet appeared for private higher educational institutions, perhaps because most of them are non-profit organizations. So in this situation, a useful way to benchmark financial performance is to compare and analyze the financial statements among sister institutions, in order to discover what financial best practices may be

found by using financial ratio analysis techniques. There are several steps of consideration: (1) measurement of resources, (2) scope or extent of measurement formula, and (3) colleges and universities selected.

First of all, the researcher will look for similar higher education institutions and compare financial performance among them. This will be a helpful first step for institutions to compare and discover valuable practices or success factors that could be emulated by sister institutions and strengthen the overall work of Adventist higher education in the Southeast Asian region. This could also lead to best

practices for Adventist organization in other regions around the world. Seeking to develop benchmark figures may be useful for other institutions in the educational subsector or other fields.

Research Question

1. What financial best practices of Southeast Asian SDA colleges/universities may be found from a study of their financial ratios?

SDA higher educational institutions in Southeast Asia may be able to establish some performance benchmarks by using financial ratio analysis. Institutions can then evaluate their performance by comparing it to that of affiliated institutions in a peer group, exchanging mutually beneficial information, and sharing results within other parties in the benchmarking group. Possible advantages include increasing competitiveness, raising standards, fixing weaknesses, and learning from the example of similar organizations through business networking. The best practices gathered from each institution may also lead to the establishment of future work standards.

Literature Review

The researcher has reviewed the relevant literature and other research studies for information regarding financial ratio analysis techniques that could be used, and also noted some limitations.

Financial Ratio Analysis by Nonprofit Organizations

Chabotar’s (1989) study entitled “Financial Ratio Analysis Comes to Nonprofits” states that “many observers have concluded that financial ratios, which have been used for many years for financial analysis of business, could also help non-profits. This includes private colleges and universities.” Many private or nonprofit colleges/universities may be unfamiliar with or not see the need for financial ratio analysis to assist in assessing operational performance, and so they have not yet been widely used by such organizations. Financial ratio analysis can be used by any business or organization, regardless of whether it is public, private, for profit, or nonprofit. Businesses need to regularly analyze their past performance, as this often helps to predict future financial trends. Financial ratio analysis helps managers to understand financial events, discern strengths and weaknesses, develop effective plans, and control business operations.

Chabotar pointed out that when financial ratios were used to analyze higher education institutions’ work performance, the results were satisfactory. Eight ratios that are specific and appropriate for nonprofit educational businesses were suggested. These ratios help in gaining a clear understanding of the university’s economic condition, with attention paid to receivables and payables turnover rates, and other relevant factors. Because most SDA colleges/universities are dependent on tuition and other service revenues to cover their operating expenses, Five of Chabotar’s ratios were chosen for use in this study. SDA institutions are usually concerned with their cash balances, but as nonprofit organizations, they do not focus too much on return on investment because they have no ownership shares. There ratios are shown below in Table 2.

Table 2 Chabotar Ratios Deemed Suitable for SDA Higher Educational Institutions (Selected)

No. Ratios Used by Chabotar Formulas Selected Ratios for SDA Educational Institutions

1 Current Ratio Unrestricted Current Assets

Unrestricted Current Liabilities

Five ratios are chosen

2 Quick Ratio Unrestricted Current Assets-Inventories

Unrestricted Current Liabilities

3 Debt-equity Ratio Plant Debt

Net Investment in Plant

4 Source of Funds Revenue Received Per Source

Total Expenditures

5 Net Operating Results Net Operating Income

Total Revenues

Table 2 (Cont.) Chabotar Ratios Deemed Suitable for SDA Higher Educational Institutions (Not Selected)

No. Ratios Used by Chabotar Formulas Selected Ratios for SDA Educational Institutions

6 Available Funds Ratio Cash and Short-Term Investments

Unrestricted Current Liabilities

Three ratios are not used 7 Uses of Funds Expenditures by Program or Function

Total Expenditures

8 Debt-service Ratio Debt Service

Operating Revenue

Ratio Analysis in Higher Education

According to a study by the professional business services company KPMG and Prager, McCarthy & Sealy (1999) that was published in their book entitled Ratio Analysis in Higher Education, “ratio analysis can measure success factors against institution-specific objectives and then give the institution the tools to improve its financial profile to carry out its vision and mission.” Identifying key relationships and trends shouldn’t substitute for concern that an institution must fulfill its vision and mission. Many institutions might benchmark or compare their financial performance based on industry averages, but the most effective way of identifying a business’ strengths and weaknesses should be based on its own goals and objectives.

The KPMG study found that several steps are helpful when applying this model’s concepts: a time period of the past three years makes the most sense, with a higher weight given to the most current year, and measurement of strengths and weaknesses should also focus on the mission or objectives of an institution. It provided for the use of a Composite Financial Index (CFI) model for higher educational institutions which is comprised of twenty-five ratios which are shown below in Table 3. This CFI model can encourage managers to use combined financial performance when making decisions. This helps managers focus on the issues, challenges, and evolution of colleges and universities and leads to an accurate assessment of institutional strengths and weaknesses.

Many nonprofit financial officers are concerned with profitability, and view net income as the most significant variable of interest. From the KPMG study, the researcher has chosen four ratios which are suitable for SDA higher educational institutions consisting of (1) Operating Income Ratio, (2) Net Tuition Dependency Ratio, (3) Net Tuition per FTE Student Ratio, and (4) Maintenance Ratio. These ratios focus on inflows from service fees such as tuition, measuring the resources that institutions receive directly from students. One of these ratios allows the institution to see the average amount of actual revenue on a per student basis. The last ratio is concerned with the percentage of educational and general income allocated to plant maintenance.

However, many of the remaining twenty-one ratios may not be suitable for SDA higher educational institutions, because they appear to be designed for use by a wide range of nonprofits, and might not be helpful in strengthening their operating performance. When deciding on the relevance of ratio analysis to organizations, managers should clearly understand its limitations, as well as appreciate its many benefits.

Table 3 KPMG Ratios Deemed Suitable for SDA Higher Educational Institutions (Selected)

No. Ratios Used by KPMG Formulas Selected Ratios for SDA Educational Institutions

1 Operating Income Ratio Operating Income

Operating Expenses

Four ratios are chosen

2 Net Tuition Dependency Ratio Net Tuition and Fees

Operating Income

3 Net Tuition per FTE Student Ratio Net Tuition and Fees

Full-Time Equivalent Students

4 Maintenance Ratio Operations and Maintenance of Plant

Educational and General Income

Table 3 (Cont.) KPMG Ratios Deemed Suitable for SDA Higher Educational Institutions (Not Selected)

No. Ratios Used by KPMG Formulas Selected Ratios for SDA Educational Institutions

5 Primary Reserve Ratio Expendable Net Assets

Total Expenses

Twenty-one ratios are not used

6 Secondary Reserve Ratio Nonexpendable Net Assets

Total Expenses

7 Net Income Ratio – using an operating indicator

Excess (Deficiency) of Unrestricted Operating Revenues Over Unrestricted Operating Expenses Total Unrestricted Operating Income

8 Net Income Ratio – using change in unrestricted net assets

Change in Unrestricted Net Assets Total Unrestricted Income

9 Cash Income Ratio Net Cash Provided by Operating Activities

Total Unrestricted Income, Excluding Gains

10 Net Auxiliary Income Ratio Net Auxiliary Enterprise Revenues

Total Auxiliary Enterprise Revenues

11 Net Hospital Income Ratio Net Hospital Revenues

Total Hospital Revenues

12 Contributed Income Ratio Contributed Income

Educational and General Expenses

13 Educational Core Services Ratio Educational Core Services Expenses

Educational and General Income

14 Educational Support Ratio Educational Support Expenses

Educational and General Income

15 General Support Ratio General Support

Educational and General Income

16 Deferred Maintenance Ratio Outstanding Maintenance Requirements

Expendable Net Assets

17 Return on Net Assets Ratio Chang in Net Assets

Total Net Assets

18 Capitalization Ratio Modified Net Assets

Modified Total Assets

19 Composition of Equity Ratio Financial Assets Physical Assets

20 Return on all Investments Ratio Total Investment Return

Average Modified Invested Assets

21 Viability Ratio Expendable Net Assets

Long-Term Debt

22 Debt Burden Ratio Debt Service

Total Expenditures

23 Debt Coverage Ratio Adjusted Change in Net Assets

Debt Service

24 Leverage Ratio Available Net Assets

Long-Term Debt

25 Age of Facility Ratio Accumulated Depreciation

Depreciation Expense

Ratio Analysis Practices in Adventist Higher Education

The financial statements of one Adventist Higher Educational Institution (2016) point out “managers are required to make estimates and assumptions that affect reported amounts of assets, liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amount of revenues and expenses during the reporting period.” Evidence from the financial statements of several institutions shows that ratio analysis practices appear to differ from one institution to another, with some evaluating many ratios, while others evaluate only a few. It appears that many Adventist colleges and universities in Southeast Asia already practice a limited form of financial ratio analysis, analyzing their required working capital and liquidity. The organizations are concerned about the cash conversion cycle, accounts receivable collection, and how much money is in hand compared to liabilities, monthly payrolls, and other expenses. Because denominational policies discourage borrowing, they have less interest in ratios that measure levels of debt.

SDA colleges/universities are concerned with receivables, especially for students who are responsible for payment of their educational expenses. Institutions tend to encourage needy students to participate in the student work program provided in such institutions so that students can work to support themselves while studying. Five ratios of interest that many be drawn from SDA higher educational institutions’ financial practices include (1) Cash Days Available (in days), (2) Accounts Receivable Turnover, (3) Required Working Capital Ratio, (4) Asset Life-Aging: Buildings (in years), and (5) Return on Assets. These ratios measure organizational capacity to pay operating expenses, approaches to bad

X 100 %

X 100 %

X 100 %

debts estimation, average collection periods for receivables, especially from students, ability to pay current liabilities from current assets, and profitability relative to total assets. The fourth ratio in this list is used to calculate in advance when major maintenance work or rebuilding may be necessary.

Financial ratios used by some Seventh-day Adventist higher education institutions are shown in Table 4; those selected for use in this study are shown below. Ratios that duplicated those already selected from other studies – and those not selected – are shown on the following page.

Table 4 Ratios Used by Some Southeast Asia SDA Higher Educational Institutions

No. Ratios Used by Some

SDA Colleges and Universities Formulas

Selected Ratios from SDA Higher Educational

Institutions

1 Cash Days Available (in days) Total Cash

Total Operating Expense Before Depreciation / 360 Days

Five ratios are chosen

2 Account Receivable Turnover (Students/Workers/SDA Organizations/Others)

Net Credit Revenue Including Deferred Income Average Accounts Receivable

3 Required Working Capital Current Assets - Current Liabilities

Allocated Funds + 20% of Annual Operating Expenses

4 Assets Life-Aging: Building (in years) Building Life Expenctancy (40 yrs) - Accumulated

Depreciation

5 Return on Assets Net Income Before Depreciation

Total Assets

6 Accounts Receivable Percentage (Students/workers/SDA organizations/Others)

Student Accounts Receivable Total Accounts Receivable Worker Accounts Receivable Total Accounts Receivable SDA Organization Accounts Receivable Total Accounts Receivable Other Receivables Total Accounts Receivable

Fourteen ratios are not used

7 Current Ratio Current Assets

Current Liabilities

8 Debt to Equity Ratio Total Liabilities

Net Fund Balances

9 Account Payable Percentage

Student Accounts Payable Total Accounts Payable Worker Accounts Payable Total Accounts Payable SDA Organization Accounts Payable Total Accounts Payable Trust Fund Accounts Payable Total Accounts Payable Other Payables Total Accounts Payable

10 Return on Net Assets Net Income Before Depreciation

Net Fund Balances

11 Return on Revenue Operating Gain (Loss) Before Depreciation

Total Operating Income

12 Operating Expenses per Day (before depreciation)

Total Operating Expense Before Depreciation 360 Days

13 Operating Revenue per Day Total Operating Income

360 Days

14 Operating Gain (Loss) per Day Operating Gain (Loss) Before Depreciation

360 Days

15 Operating Revenue as % of Budget Total Operating Income Total Operating Budget

16 Tuition as % of Revenue Mixed Net Tuition

Total Operating Income

17 Operating Expense as % of Budget (before depreciation)

Total Operating Expense Before Depreciation

Total Operating Budget

18 Payroll as % of Operating Expenses Total Worker Salaries & Benefits

Total Operating Expense Before Depreciation

19 Liquidity Percentage

Net Liquid Assets (Cash and Cash Equivalents + Denominational Receivables + (Investments-Endowment Fund))

Total Commitments (Total Current Liabilities + Allocated Funds + Cash in

Bank Earmarked for Dormitory Construction, Chiller & Water)

An important goal of Adventist higher education is to provide Christian educational services. An increase in the number of students enrolled indicates that usage of these services is expanding. So although

X 100 %

X 100 %

X 100 %

%%

X 100 %

X 100 %

X 100 %

X 100 %

X 100 %

X 100 %

%%

Adventist higher educational institutions may not strive to be highly profitable, there are significant concerns regarding high operating expenses. As Adventist higher education has many different networks of colleges and universities around the world, comparisons of financial statements should be concerned with dollar amounts, percentage changes, and financial statement time periods should measure the same academic year and comparable twelve month performance.

Ratios Analyzed in This Study

The ratios of interest to Seventh-day Adventist tertiary educational institutions are mixed and matched from the three sources mentioned above, consisting of (1) the study of Chabotar (1989), (2) the KPMG book, and (3) Adventist institutional practices within the SSD. They may be divided into three core groups of ratios consisting of Liquidity Ratios, Viability Ratios, and Operating Results Ratios. A brief description of each ratio is offered in the table below, some of which are taken from Williams, Haka, Bettner, & Carcello (2017), while others are formulated by the researcher.

Liquidity Ratios

Liquidity ratios mostly examine the ability to meet institutional obligations, such as payment of bills, payrolls, and other expenses. They evaluate the margin of safety as to whether institutions haves enough money to pay off their liabilities, and the required working capital for SDA institutions that considers whether enough money is on hand to cover allocated funds, along with 20% of annual operating expenses.

Table 5 Selected Liquidity Ratios

Ratios Formulas Description Target From

1. Current Ratio Unrestricted Current Assets

Unrestricted Current Liabilities

A measure of short-term debt-paying ability

R ≥ 2.00 Chabotar

2. Quick Ratio Unrestricted Current Assets-Inventories

Unrestricted Current Liabilities

A measure of short-term debt-paying ability

R ≥ 1.50 Chabotar

3. Cash Days Available (In days)

Total Cash

Total Operating Expense Before Depreciation / 360 Days

Indicates capacity of cash in hand to cover operating expenses in days

R ≥ 30 days SDA Colleges and

Universities

4. Accounts Receivable Turnover (Students)

Net Credit Revenue Including Deferred Income

Average Student Accounts Receivable

Indicates how quickly receivables are collected in days

R ≤ 30 days SDA Colleges and

Universities

5. Required Working Capital

Current Assets - Current Liabilities

Allocated Funds + 20% of Annual Operating Expenses

A measure of fund needed to pay short-term debt and maintain smooth ongoing

operation

R ≥ 75% SDA Colleges and

Universities

Viability Ratios

Viability ratios measure basic determinants of an institution’s capacity to continue providing services. Increases in service expenses should lead to proportionate increases in revenues; it is dangerous if this is not the case. Revenue also should come from many sources, and not depend on one source alone. The Debt-Equity ratio examines the proportion of debt to the net value of buildings and other fixed assets. Debt repayment schedules should not be longer than the useful lives of the assets being financed. This includes designating sufficient operating resources to maintain the physical plant in good condition, and comparing the net income to the total assets employed to generate these results.

Analyze Analyze

Table 6 Selected Viability Ratios

Ratios Formulas Description Targat From

6. Sources of Funds

Revenue Received Per Source (Students)

Operating (Total) Expenditures

Indicates diversity and relative importance of revenue streams in relation to total

expenditures

Not overly dependent

(R ≤ 70%) on single source

Chabotar

7. Debt-Equity Ratio (Non-Profits)

Plant Debt

Net Investment in Plant

Indicates debt as a percentage of net value of physical plant

R ≤ 10% or

R ≤ 20% lower than prior year

Chabotar

8. Building Remaining Useful Lives (In Years)

Building/Fixture Residual Value x 40 Years

Building Original Cost

Indicates remaining useful lives of buildings in years

R ≥ 20 years SDA Colleges and

Universities

9. Maintenance Ratio

Plant and Equipment Maintenance Expenses

Educational and General Income

Indicates operating funds designated for ongoing upkeep of physical plant

Adequate, plant kept in

good condition; 2.5% - 7.5%

KPMG

10. Return on Assets

Net Income Before Depreciation

Total Assets

Indicates institutional profitability relative to total assets

R ≥ 5% SDA Colleges and

Universities

Operating Ratios

Net operating results examine an institution’s operating results to determine whether it is realizing a loss or a gain. An institution cannot survive when it experiences persistent deficits. It’s also good for institutions to have enough reserves prepared for unanticipated emergencies, staff expansion, or other needs.

Table 7 Selected Operating Ratios

Ratios Formulas Description Target From

11. Net Operating Results

Net Operating Income

Operating Income

Indicates organization surplus or deficit as percentage of income

R ≥ 5% Chabotar

12. Net Tuition Dependency Ratio

Net Tuition & Educational Fees

Operating Income

Percentage of operating income derived from tuition and fees

R ≤ 70% decreasing ratio shows income

diversification

KPMG

Ratios Formulas Description Target From

13. Net Tuition per Student Ratio

Net Tuition and Educational Fees

Number of Students Enrolled

Indicates average revenue on per student basis

Increasing trend is positive

KPMG

14. Operating Income Ratio

Operating Income

Operating Expenses

Indicates profitability of self-generated operating income

R ≥ 1.0 a surplus

R < 1.0 a deficit KPMG

15. Self-Support Ratio

Self-Generated Operating Income

Operating Income

Operating income less subsidies as percentage of total income

R ≥ 95% SDA Colleges and

Universities

The study’s conceptual framework is shown below in Figure 2.

Figure 2 Conceptual Framework for Study

Financial Ratio Analysis: University A

- Liquidity Ratios - Viability Ratios - Operating Ratios

Comparing

Financial Ratio Analysis: University A

- Best Practices

Financial Ratio Analysis: University B

- Best Practices

Financial Ratio Analysis: University B

- Liquidity Ratios - Viability Ratios - Operating Ratios

Methods and Data

This project is a qualitative research study using exploratory financial ratio analysis, comparing the financial performance of peer institutions. This to indicate the level of financial health of selected Adventist colleges and universities in Southeast Asia.

Ratio analysis consisted of three groups of ratios, consisting of Liquidity Ratios, Validity Ratios, and Operating Ratios as already described in this paper. Table 8 shows the measurement tools used in this study.

Table 8 Measurement Tools for SDA Colleges/Universities in Southeast Asian Region

Validation of the measurement tool was primarily based on the literature review. However, the researcher also invited two experienced financial administrators and two experienced accounting educators who are familiar with the financial operations of Adventist higher education institutions to critique the instrument. They suggested removing two liquidity ratios in order to keep from over-emphasizing the importance of liquidity. They also suggested adding three additional ratios, namely the Maintenance Ratio, Return on Assets Ratio, and Self-Support Ratio. These ratios help financial managers see if adequate provision is made in maintenance budgets for preserving institutional physical plants, how much net income has been produced from investments in assets, and the level of self-support that has been achieved.

They advised setting targets for each ratio in accordance with the studies of Chabotar and KPMG, with some modifications based on the operating performance of SDA colleges and universities. They also suggested shrinking the five categories of financial ratios originally envisioned (Liquidity, Debt Structure, Sources of Funds, Net Operating Results, and Required Working Capital) into three (Liquidity, Validity, and Operating Ratios), which resulted in switching some ratios from one category to another. Small adjustments were made in terms or components used for the numerator or denominator of some ratios to align them with financial statement data and facilitate a comparative study. For example, Buildings and Fixtures were combined in the financial statement, so both values are part of the ratio measuring Remaining Useful Lives (In Years). The number of Full-Time Equivalent (FTE) Students was not available for one institution, so the Net Tuition ratio reflects the number of students enrolled instead. Calculations for some numerators and denominators were less complex than in the literature since the

Measurement Tools of the Study

Ratios Used by Chabotar

Ratios Used by KPMG Ratios Used by Selected SDA Colleges and Universities

Liquidity Ratios

Current Ratio (Chabotar) Current Ratio Current Ratio Quick Ratio (Chabotar) Quick Ratio Cash Days Available (In Days) (SDA) Cash Income Ratio Cash Days Available (In Days) Account Receivable Turnover

(Students) (SDA)

Account Receivable Turnover (Students)

Required Working Capital Ratio (SDA) Required Working Capital Ratio

Viability Ratios

Source of Funds (Chabotar) Source of Funds Contributed Income Ratio Debt-Equity Ratio (Non-Profit) (Chabotar) Debt-Equity Ratio Composition of Equity Ratio Debt to Equity Ratio

Building Remaining Useful Lives (In Years)

(SDA) Age of Facility Ratio Building Remaining Useful Lives:

Buildings and Fixtures (In Years)

Maintenance Ratio (KPMG) Maintenance Ratio Return on Assets (SDA) Return on Net Assets Ratio Return on Assets

Operating Ratios

Net Operating Results (Chabotar) Net Operating Results Net Auxiliary Income Ratio Return on Revenue Net Tuition Dependency Ratio (KPMG) Net Tuition Dependency Ratio Tuition as % of Revenue Mixed Net Tuition per Student Ratio (KPMG) Net Tuition per FTE Student Ratio Operating Income Ratio (KPMG) Operating Income Ratio Self-Support Ratio (SDA) Educational Support Ratio Self-Support Ratio

institutions studies were quite small. Notes detailing how each calculation was made may be found in Appendix B.

The study used data from the financial statements for the 2015-2016 academic year from two sample institutions referred to as University A and University B. These institutions were selected from among the Adventist colleges and universities in Southeast Asia based on their willingness to participate in this study. The currencies used were converted to US dollars for comparative purposes since the data came from different countries. Foreign exchange rates as of August 31, 2017 were used so that the dollar values would be relatively current at the time of the analysis. Descriptive analysis was used to identify financial strengths and weaknesses, to discover best practices, and to uncover success factors from the participating institutions. Microsoft Excel was used to conduct an analysis of the financial ratios. Descriptive analysis followed general interpretation standards for basic financial ratios, along with additional information provided by the studies of Chabotar (1989) and KPMG (1999).

Study Findings

The findings show that University A has tried to maintain its liquidity at an acceptable level by keeping enough cash to pay off its obligations promptly. This may be seen from its Cash Days Available (45.5 Days), which is higher than the suggested benchmark of 30 days. However, its Quick Ratio (1.30) and Current Ratio (1.48) are slightly below their targets of 1.5 and 2.0 respectively. Its income is based primarily on only a single source (student tuition and fees), and these tuition rates are relatively high, both of which put institutional finances at risk if student enrollment declines. Its employees expenses are relatively high (57% of total expenses), with departmental expenses of 13%, depreciation of 14%, and other expenses of 15%. It is significant that when student enrollment goes down, the university must still carry fixed employment costs. Subsidy support from its parent organization is about 11% of total operating expenses, but during 2016, it still faced a loss of -9.6%.

University B has been more successful in diversifying its income, with only 36.7% coming from tuition fees, and nearly two-third of direct operating income coming from other revenue sources. This shows that institution has established other income generating activities that have broadened its financial base, which is very helpful for a nonprofit organization. It has only a small amount of cash in hand – Cash Days Available (17.7 days), and carries its Student Accounts Receivable for about three months (91.4 days). On the other hand, it charges low tuition fees, has generated other types of income, and has a student enrollment that is nearly twice as large as the previous institution. Its expenses seem quite different from those of University A, with a smaller percentage of employee expenses (47%) and the remainder composed of other expenses (53%). Generally high fixed labor costs are characteristic of service businesses because of employee expenses. This university had limited fixed costs, and was able to generate a 0.9% gain, which is quite commendable. This university’s best practices of interest include a strategy with low tuition fees, higher student enrolment, control of fixed costs, and positive net income. But it risks not having enough cash in hand to meet its operating needs.

Table 9 Measurement Result for SDA Colleges/Universities in Southeast Asian Region

Measurement Ratio University A University B Target

1. Liquidity Ratios

Current Ratio

Quick Ratio

Cash Days Available (In Days)

Account Receivable Turnover (Students)

Required Working Capital

1.48

1.30

45.5 days

25.9 days

25.1%

2.28

2.12

17.7 days

91.4 days

48.1%

R ≥ 2.00

R ≥ 1.50

R ≥ 30 days

R ≤ 30 days

R ≥ 75%

Table 9 (Cont.) Measurement Result for SDA Colleges/Universities in Southeast Asian Region

Measurement Ratio University A University B Target

2. Viability Ratios

Sources of Funds

Revenue Received from Student

Revenue Received from Other Sources

Revenue Received from Appropriations

Debt-Equity Ratio (Non-Profits)

Building Remaining Useful Lives (In Years)

Maintenance Ratio

Return on Assets

71.4%

9.8%

10.0%

3.8%

23.6 years

3.3%

1.7%

66.3%

31.6%

2.1%

12.3%

23.0 years

13.3%

8.1%

Not overly dependent (R ≤ 70%) on single source

R ≥ 10% or R ≥ 20% lower than prior year

R ≥ 20 years

Adequate, plant kept in good condition; 2.5% - 7.5%

R ≥ 5%

3. Operating Ratios

Net Operating Results

Net Tuition Dependency Ratio

Net Tuition per Students Ratio

Operating Income Ratio

Self-Support Ratio

-9.6%

62.0%

$ 2,976

0.91

89.0%

0.9%

36.7%

$ 611

1.01

97.9%

R ≥ 5%

R ≤ 70% decreasing ratio shows income diversification

Increasing trend is positive

R ≥ 1.0 a surplus R < 1.0 a deficit

R ≥ 95%

Liquidity Ratios

Ratios Formulas University A University B Target

1. Current Ratio Unrestricted Current Assets

Unrestricted Current Liabilities

1,274,382

862,293 1.48

572,441

250,710 2.28 R ≥ 2.00

2. Quick Ratio Unrestricted Current Assets - Inventories

Unrestricted Current Liabilities

1,122,498

862,293 1.30

530,862

250,710 2.12 R ≥ 1.50

3. Cash Days Available (In days)

Total Cash

Total Operating Expense Before Depreciation / 360 Days

645,711

14,192 45.5 days

145,657

8,220 17.7 days R ≥ 30 days

4. Account Receivable Turnover (Students)

Net Credit Revenue Including Deferred Income

Average Student Accounts Receivable

360 ÷

(4,259,919 / 306,951)

25.9 days

360 ÷

(1,177,893 / 299,049)

91.4 days R ≤ 30 days

5. Required Working Capital

Current Assets - Current Liabilities

Allocated Funds + 20% of Annual Operating Expenses

412,089

1,644,454 25.1%

321,731

668,600 48.1% R ≥ 75%

University A has enough cash to pay off all its obligations for around 45.5 days; employee costs account for about 2/3 of its expenses. Liquidity is lower than the Current Ratio and Quick Ratio targets, and its Required Working Capital of 25.1% is significantly below the targeted standard of 75%. Inventory is insignificant, but its accounts receivable are considerable, the largest portion of which is represented by student accounts receivable. The student accounts receivable collection period is 25.9 days, which is less than one month and represents good performance.

University B has enough cash to cover its daily obligations for only 17.7 days, and so its cash position is very tight; it risks not having enough funds to get through the month. Its Current Ratio and Quick Ratio are above the targets, except for Required Working Capital (48.1%), which is still less than the target (75%). This university’s current assets are more than twice that of its current liabilities; this is because its accounts receivable represent a considerable total amount. The largest portion consists of Other Accounts Receivable, which seemingly refers to student accounts receivable (83% of total receivables). It is also evidenced in the Student Accounts Receivable Turnover, which shows a collection period of 91.4 days, or about three months, which is longer than the targeted benchmark. This shows that the university has extended credit to students instead of requiring them to pay cash, and may lead to a future cash flow problem.

Viability Ratios

Ratios Formulas University A University B Target

6. Sources of Funds

Revenue Received from Students

Operating (Total) Expenditures

Revenue Received from Other Sources

Operating (Total) Expenditures

Revenue Received from Appropriation

Operating (Total) Expenditures

Operating Loss

Operating (Total) Expenditures

4,259,919

5,969,367

587,079

5,969,367

597,338

5,969,367

525,031

5,969,367

71.4%

9.8%

10.0%

8.8%

2,124,321

3,205,919

1,013,999

3,205,919

67,599

3,205,919

-

66.3%

31.6%

2.1%

-

Not overly dependent

(R ≤ 70%) on single source

7. Debt-Equity Ratio (Non-Profit)

Plant Debt

Net Investment in Plant

581,821

15,278,143 3.8%

289,627

2,350,912 12.3%

R ≥ 10% or

R ≥ 20% lower than pior year

8. Building Remaining Useful Life (In Years)

Building/Fixture Residual Value x 40 Years

Building Original Cost

13,842,121 x 40

8,160,468 23.6 years

2,734,240 x 40

1,573,289 23.0 years R ≥ 20 years

9. Maintenance Ratio

Plant and Equipment Maintenance Expenses

Educational and General Income

161,558

4,846,998 3.3%

416,362

3,138,320 13.3%

Adequate, plant kept in good

condition 2.5% - 7.5%

10. Return on Assets

Net Income Before Depreciation

Total Assets

335,280

19,839,893 1.7%

246,717

3,061,121 8.1% R ≥ 5%

University A is 71.4% dependent on student income, so it faces a dangerous situation when student enrollment declines. Its Debt-Equity Ratio is still in good condition (3.8%), which is lower than the target of 5%, but this is also dangerous when compared with its operating loss of 8.8%. The average remaining useful lives of buildings and fixtures are about 23 years, so it needs to begin thinking about where funds may be found to eventually replace them. It spent 3.3% of its operating income on maintenance, a rate that exceeds the benchmark, while its assets generated a return of 1.7%, which is considerably lower than the required target (5%).

University B depends on students for 66.3% of its revenue, with departmental sales contributing an additional 31.6% of net operating income. This diversification of revenue sources helps to protect the university from over-reliance on a single source of income, strengthening its financial base as a nonprofit organization. Its Debt-Equity Ratio is a bit high at 12%, but most of this debt is long-term in nature (about 1/2 from Other Liabilities, 1/2 from Inter-Funds Loans Payable). The average remaining useful lives of fixed assets is about 23 years. It spent 13.3% of operating income on maintenance, which is 2 – 3 times higher than its target, and very high compared to the other university. It generated an 8.1% return on its assets, which is 3% higher than the target and four times higher than its sister institution.

Operating Ratios

Ratios Formulas University A University B Target

11. Net Operating Results

Net Operating Income

Operating Income

(525,031)

5,444,336 - 9.6%

28,812

3,205,919 0.9% R ≥ 5%

12. Net Tuition Dependency Ratio

Net Tuition & Educational Fees

Operating Income

3,374,679

5,444,336 62.0%

1,177,893

3,205,919 36.7%

R ≤ 70% decreasing ratio shows income

diversification

13. Net Tuition per Students Ratio

Net Tuition and Educational Fees

Number of Students Enrolled

3,374,679

1,134 $ 2,976

1,177,893

1,929 $ 611

Increasing trend is positive

14. Operating Income Ratio

Operating Income

Operating Expenses

5,444,336

5,969,367 0.91

3,205,919

3,177,107 1.01

R ≥ 1.0 a surplus

R < 1.0 a deficit

15. Self-Support Ratio Self-Generated Operating Income

Operating Income

4,846,998

5,444,336 89.0%

3,138,320

3,205,919 97.9% R ≥ 95%

University A experienced a 9.6% loss for the year, which is considerably lower than the targeted amount. It is heavily dependent on student tuition and fees, with little diversification of revenue, and this raises its risk of running an operating deficit. Its Operating Income Ratio is 0.91, which is lower than 1.0, and shows that it is currently running at a deficit. The largest portion of its expenses (57%) are employee expenses, with 14% for depreciation and 13% for departmental expenses. It depends on appropriations from its parent organization for 11% of revenue, but is still running an operating loss. It received an average of US$ 2,976 in net tuition and fees from each student, which is about 4.5 times more than what was received from the other university, which also has about twice as many students.

University B realized a modest gain of 0.9% from its 2015-2016 operations, which was albeit an amount lower than the target. It was more successful in diversifying its income, with 66.3% from student income, 31.6% from departmental sources, and just 2.1% from appropriations. Its Operating Income Ratio is 1.01, which shows a tiny surplus. Its employee expenses accounted for 47% of operating expenses, with 53% allocated to other expenses. This is interesting because service businesses generally spend relatively large amounts on employee expenses. It received a small operating appropriation from its parent organization of 2.1%, which shows that the university can support its own work. It spent 7% on depreciation, and 13.3% on maintenance, which is almost double the benchmark amount. Its net tuition received per Student was US$ 611, which was less than one-fourth the amount received by the other university. However, student enrolment at this university was almost 2 times greater than that at the other institution.

Discussion

Most SDA colleges/universities are dependent on tuition and other service revenues to cover their operating expenses. Institutions are usually concerned with their cash balances, but they do not focus too much on return on investment because they are nonprofit organizations. They avoid debt, financing, and encourage students with accounts receivable to enroll in the institution’s work program. The KPMG study stated that “ratio analysis can measure success factors against institution-specific objectives and then give the institution the tools to improve its financial profile to carry out its vision and mission.” An important goal of Adventist higher education is to provide Christian educational services. An increase in the number of students enrolled indicates that usage of these services is expanding.

The results showed that one university had about twice as many students as the other. The smaller institution had relatively high tuition and fees, but experienced a net loss and declining liquidity. The larger university charged relatively low tuition and fees, but experienced a modest net gain and improving liquidity.

Comparative studies utilizing financial ratio analysis of sister institutions may be beneficial to managers or organizations by helping them to spot the best practices of other institutions from among their peer group, or by benchmarking their performance against other institutions. These best practices may lead to examples of how they can conquer problems or better carry out their mission based on a healthy financial foundation. Identifying institutional strengths and weaknesses in comparison to common standards can be very helpful to administrators, as such a practice may help them to learn valuable lessons without making expensive investments or taking a long time to find out what works by trial and error. It may also help managers to accomplish better budget planning by understanding what is wasteful or what may be improved, and how to reduce operational costs or complex workflows. It may lead to more effective and systematic work processes, and constitute a step of understanding an organization’s own level of competence from the perspective of comparable institutions.

Conclusion

These results may help administrators to identify and adopt best practices among peer institutions which may lead to strategies of how financial problems may be resolved and institutional missions may be better carried out. Gathering institutional best practices may also lead to the establishment of future performance benchmarks for SDA higher educational institutions in Southeast Asia and beyond.

Future research studies should take into consideration the economic environment when trying to adopt suitable practices from one location to another. There are many external factors that lead to differences in the particular financial situation of each institution. For example, rates of compensation are based on the cost of living in each country. But the general ideas from a study, will hopefully be helpful so that managers may find out best practices from other affiliated institutions.

Author: Ms. Narumon Kaewduang, MBA Program Candidate, Asia-Pacific International University

Research Supervisor: Dr. Wayne Hamra, Faculty of Business Administration,

Asia-Pacific International University

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