1. 1 FINANCIAL SYSTEMS

2. 2 Financial Systems As educators, CE practitioners are often poorly prepared to manage an operation that has many characteristics that resemble profit centered businesses. The best advise is to adopt a business financial model and modify it to the CE operation, rather than try to adopt an education model and adapt it to a CE operation. One of the most significant differences of a CE program from an educational model is that most CE operations have a variable budget. Other units of the university tend to have fixed annual budgets.

3. 3 Profit Another significant difference found in an effective CE model is the profit concept. This may not involve real profit, but it involves developing programming that covers the fixed costs, variable costs, and overhead. It must also generate funds to reinvest in future programming.

4. 4 University Perceptions of CE Unfortunately, these differences sometimes create difficulties within the institution when CE staff communicates with other administrators. They may result in the following perceptions: * CE has plenty of money and needs no institutional support * A profit goal does not fit the true mission of education * CE should share their profits and assist the real programs of the university

5. 5 Staff Skills Because programmers and other staff members actually create, price, hire instructors, market, and implement the programs, they have the ability to ultimately determine the financial health of the unit. Therefore, the director must not only have an in-depth understanding of the finances, but also must be able to teach finances to the staff.

6. 6 Assumptions for Successful Budgeting To make good decisions, the staff should reach a consensus on budgeting. Some of the assumptions may include the following: * Successful budgeting involves more than mere mathematical calculations * The value of a product has more to do with the perceived value by the customer than the actual cost

7. 7 Assumptions for Successful Budgeting Successful Budgeting (continued) * Profits from programs can be used to build strong programs in the future * Budgets are program-planning tools and should be introduced in the early stages of the programming process * Budgets are communications tools to be used with customers and internal staff

8. 8 Assumptions for Successful Budgeting Successful Budgeting (continued) * Service cuts to meet budget restraints will result in long- term failure * Time is money

9. 9 The Unit Budget The unit budget includes all of the resources available to operate the unit. These resources include funds provided by the institution, revenues from the programs, grants, contracts, gifts, and other monies. From a conceptual standpoint, it also should include non-money resources such as contributions of equipment and facilities. These reduce the amount of money that is needed to operate the program; therefore, they are equivalent to money.

10. 10 Two Sets of Books The director must fully understand and monitor the contribution that each source makes to the overall budget. Since a CE budget generally differs significantly from the institutions budget format, most CE units are forced to keep two sets of books. One set is arranged to communicate with the institutional books, and the other is designed to more effectively manage and monitor the success of the program.

11. 11 Tracking Financial Results Learning Resources Network (LERN) recommends tracking financial results in seven areas: 1. Income 2. Promotion 3. Production 4. Direct Costs 5. Operating Margin 6. Administration 7. Net

12. 12 Tracking Financial Results Tracking Results (continued) It is also recommended that these elements be converted to percent figures for ease of tracking period to-period changes. Direct costs are defined as the sum of promotion and production. Operating margin, or profit, is the difference between income and direct costs. Net is operating margin minus administrative costs.

13. 13 Target Results Suggested percentages are: Revenue100% (a given) Promotion10%-15% Production45%-50% Total direct cost60% - Operating margin40% + AdministrationVaries Net5%

14. 14 Activity Budget The principle of most activity budgets is simple--revenues should be greater than expenses. The two components of the budget (revenues and expenses) are related but not necessarily directly related. The expense component determines the minimum revenue but should not determine the desired revenue. The minimum total revenue is a factor of total expenses and number of participants. The minimum cost per student is based upon the total cost divided by the anticipated enrollment. The maximum revenue (and cost per student) should be based upon the customers perceived value.

15. 15 Steps to Develop Budgets There are six basic steps in developing an activity budget: 1. Identify all costs related to the program, including opportunity costs 2. Classify the costs as fixed or variable 3. Establish the break-even point 4. Determine a minimum registration fee 5. Determine a profitable registration fee 6. Prepare the budget

16. 16 Fixed Costs Fixed costs include all costs that are involved that are independent from the number of students and will not vary in other ways. Some of these include the following: * Instruction (except in cases where additional students require additional instructors or there is revenue sharing) * Fringe benefits * Marketing * Facilities * Administration

17. 17 Variable Costs Variable costs are primarily related to enrollment. However, there are other instances when costs may vary such as: * Food * Educational materials * Student lodging * Instruction (when there is revenue sharing, etc.)

18. 18 Opportunity Costs Opportunity costs are not directly reflected in the budget but should help determine whether an activity should be initiated. This cost is determined when one activity is compared to another using projected revenue as a point of comparison. The CE manager and staff can then spend their time working on profitable programs.

19. 19 Opportunity Cost Example An example of the use of opportunity costs might be the analysis of a decision to offer a free program to members of the institution. Normally you might consider that the only costs are out-of-pocket expenses. However, the true cost of the activity is the sum of out-of-pocket expenses and the related opportunity costs. This concept may be effective when deciding to participate in a government contract activity that limits cost recovery to direct costs and minimal overhead.

20. 20 Operating Margins Operating margins can be expected to vary widely by program area. Those programs that serve business, industry, and other third party payers will normally provide 40% to 60% operating margins. In addition, programs that permit the student to acquire a certification also return excellent margins. Personal enrichment activities (paid for by the student) tend to deliver much lower margins ranging from 15% to 40%.

21. 21 Profit vs. Service It is tempting to limit programming to only those areas that return a very high operating margin. However, from a service perspective, a broad-based program helps to lift the entire community to a better quality of life. Most CE programs supplement some activities with revenues from the more financially successful activities. This is another justification for market pricing versus cost pricing.

22. 22 Expenses… Faculty Pay This is a very complex area of programming because a wide range of programs require a wide range of faculty with very different levels of professional qualifications. In addition, as potential programs vary, so does the ability to pay. Other problems occur when faculty members in the same organization compare their levels of pay. These complexities make it difficult for the CE unit to develop a comprehensive faculty payment policy. Yet, some level of consistency is necessary.

23. 23 Types of Faculty Pay The types of payments include: * Flat rate * Hourly rate * Fee per student * Percentage of gross * A mix of the above * Buy equipment or pay travel

24. 24 Flat Rate The flat rate is usually the best system if you are confident that you can effectively market the program and obtain the projected enrollment. In this case, CE does all the work, except for the instruction, and should benefit from the financial success. Since it is impossible to establish a single flat rate, most operations establish a range of rates, with the director approving exceptions.

25. 25 Hourly Rate The hourly rate is similar to the flat rate and has similar advantages. This type of payment system is used when the length of the instructional activity might vary for some reason. An example might be individualized instruction that might vary by individual such as music. As with the flat rate, the hourly rate normally varies from program to program.

26. 26 Percentage The major advantage of the percentage approach to faculty payment is the sharing of the responsibility for the success of the program and the financial exposure with the instructor. This is a very good system if the instructor has the ability to enroll a significant number of participants or requires an unacceptably high fixed rate for a program that has a questionable potential. However, many programs use this approach even when they provide the students through effective marketing and hard work. The faculty member may get as much as 70% to 80% of the margin with only 25% of the commitment and exposure. The key to this approach is to determine the relative investment of the two parties and assign the percentage accordingly.

27. 27 Partnerships and Percentages The percentage issue is also present in many program partnership arrangements. The same rule should apply: the percentage is related to investment. If a partner is willing to underwrite 50% of the up-front costs such as program development and marketing, they deserve to be an equal partner. Otherwise, their share of the income should be reduced to match their level of commitment and contribution.

28. 28 Fee Per Student The fee per student is basically the same approach as the percentage payment. However, this approach must be analyzed carefully. While percentage may be calculated on the income after expenses, the fee per student is effectively a percentage of gross income.

29. 29 Instructor Involvement No matter what system is used, the details should not be shared with the instructor for several good reasons: * You will have to justify all future rates of pay and will continually be on the defensive * Faculty members will be able to compare their pay with others * Faculty members will be able to compare CEs share with theirs

30. 30 Percentage of Gross Most faculty members feel that the instruction represents most, if not all, of the programming effort. Therefore, most of the income should be passed to them. Understandably, they are not aware of the investment in infrastructure, CE staff time, and direct expenses such as marketing that are required to support a successful class. A desired target rate for faculty pay as a percentage of gross income is in the 30% to 40% range.

31. 31 Other Expenses Careful management of food and facility expenses is necessary, especially if minimum guaranties are involved. A detailed understanding of the various cost factors involved in marketing will enable the unit to get the most results for a given investment.

32. 32 Sunk Costs It is important to understand the concept of sunk costs to optimize program revenues. Sunk costs are an important factor when deciding to hold or cancel a program. The costs are incurred before the program begins and will not be recovered if the program is canceled.

33. 33 Decisions About Sunk Costs The decision to cancel or not should be based upon cost recovery. If conducting the program will cover all expenses other than sunk costs and contribute to the partial recovery of the sunk costs, then the best decision may be to hold the program. If conducting the program will not cover the additional expenses and contribute to sunk costs, then it should be canceled. These recommendations only take into account the financial motives for canceling a program. Opportunity costs may also be a factor.