Assessing Your Institution’s
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
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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…
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Background
Ratio Analysis in Higher Education, fourth
edition (1999) by KPMG and Prager, McCarthy
& Sealy, LLC—a significant advance
◦ Introduced
Strategic Resource Allocation matrix
Composite Financial Index (CFI)
Combining selected ratios to produce
overall score
◦ Relevant only to private institutions…
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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…
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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 measure—whether or not
reported externally…
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Background
◦ Significant emphasis on liquidity due to
impact of Great Recession on higher
education—introduces new ratio
◦ Encourages averaging ratios over multiple
years
◦ Deemphasizes peer comparison in favor of
trend analysis—assess institution over time,
not against others
◦ Encourages projecting ratios for strategic
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CONTEXT
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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…
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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 institution’s
financial health…
Reduces complexity of GAAP-basis financial
statement analysis…
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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…
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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…
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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
CFI—only underlying ratios •
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Questions?
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COMPOSITE FINANCIAL INDEX (CFI)
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CFI
Combines four principal ratios
Primary reserve ratio
Viability ratio
Return on net assets ratio
Net operating revenues ratio…
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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…
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Ratios
Primary reserve ratio—35 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…
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Ratios
Viability ratio—35 percent
◦ Indicates the capacity to repay total debt
through reserves
Expendable net assets / long-term debt…
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Ratios
Return on net assets ratio—20 percent
◦ Indicates whether the institution is better
off financially this year than last
Change in net assets / beginning net
assets…
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Ratios
Net operating revenues ratio—10 percent
◦ Indicates whether institution is living
within available resources
Operating surplus or deficit / operating
revenues
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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 •
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Questions?
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OTHER ISSUES
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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 entities—due to
criteria or significance?...
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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…
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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…
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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 can’t
tell the entire story
◦ It should not be used to mask poor
financial performance
◦ It is but one quantitative measure…
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Other Issues
◦ Appropriate assessment—financial or
otherwise—requires both quantitative and
qualitative analysis
Financial ratios should not be used as a
substitute for qualitative judgments
It should be supplemented with other
factors…
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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 •
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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
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Using Financial Ratios to Assess
Institutional Financial Health
Questions, Comments,
and Reactions
(540) 942-9146
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