1. How to Improve Your Strategic Financial Condition Michael K. Townsley, Ph.D. Ph. 302 593-2221 Email: mtown@dca.netmtown@dca.net

2. Improving Your Financial Condition Financial condition depends on student demand, efficient production of educational services, and a tightly disciplined financial system. Focus here is on that part of the financial system, which encompasses – analysis and monitoring of performance.

3. Basic Conditions Know Your Financial Condition. Understand the Impact of Marginal Changes in Performance. Identify Financial Drivers that Shape Performance. Deconstruct Performance to Identify Where Changes Should Occur to Improve Your Institutions Financial Condition.

4. Know Your Financial Condition Keys to understanding the financial condition of your institution are: Tracking marginal changes in revenue, expenses, net income, assets, liabilities, and net income. Using trend analysis and growth rates. Using ratios to identify relative changes in performance. Identifying key relationships or factors that need to be modified to strengthen your institution.

5. Marginal Changes Marginal change refers to the scale of change between years or over several years. Marginal changes take place because of: Planned and unplanned changes in the budget. Unbalanced changes between revenue and expenses. Changes in the marketplace. Increased costs of financing capital. Analyzing marginal change can help target problems or opportunities.

6. Tracking Marginal Changes Two levels of tracking marginal changes: Trend analysis over multiple years. Comparisons between one and multiple year growth rates (compound rate of change). Incremental changes from one year to next for critical factors – Tuition, financial aid, net tuition, significant contributors to revenue and total expenses, total revenue, total expenses, and net income.

7. Sample Marginal Analysis Table Yr 1Yr 4Yr 51 year5 years Enrollment1,1001,1251,128.3%.6% F/A1,2501,5001,70013%8% Net Tuition2,7782,7502,650-4%-1% Change Enrollment253 Change F/A250200 Change Net Tuition-28-100

8. Tracking Ratios Ratios compare critical financial components to measure if the financial structure provides a stable platform for building wealth. Typically, ratios measure the following: Operational viability, Cash requirements, Debt Capacity. Wealth

9. Operational Viability Ratios Net Tuition / Total Tuition. Net Income / Total Revenue. Auxiliary Net Income / Auxiliary Revenue. Revenue Categories / Total Revenue. Expense Categories / Total Expenses. Total Revenue / Total Expenses.

10. Cash & Debt Capacity Ratios Cash: Operating Cash / Total Revenue minus Unrealized Income. Receivables / Tuition. Uncollectables / Receivables. Cash & Short-Term Investments / Liabilities. Debt Capacity – Viability Ratio: Unrestricted Net & Temporarily Restricted Net Assets Minus Net Plant Plus Debt / Long Term Debt.

11. Wealth Ratios Capital Structure: Financial Assets / Property Assets. Return on Net Assets: Change in Net Assets / Total Assets. Primary Reserve Ratio: Unrestricted & Temporarily Restricted Net Assets Minus Net Plant Plus Debt / Total Expenses.

12. Sample: Operating Ratios and Trend Table Benchmark Yr 1Yr 5 Net Tuition/Total tuitionGoal Net Income/Total Revenue3% Total Revenue/Total ExpensesGoal Operating Cash/Revenue Minus Unrealized Income Positive & Increasing Debt Leverage2 to 1 Financial Assets/Net Property> 1 Unrestrd Net Assets/Net Assets44%

13. Other Critical Measures Competitive condition: Market share, Net price, Cost/student. Financial Performance and Enrollment by Program: Net income with depreciation & plant. New and total students.

14. Why Use Benchmarks & Types of Benchmarks Why Use Benchmarks – provides an external reference to performance. Is performance for your institution significantly different from benchmark? Types of Benchmarks Peer institutions, or Competitors, or Institutions with common characteristics - Assets, Revenues, Enrollment. Standardized data sources.

15. How to Find Benchmarks Data Sources: Guidestar.org. nces.ed.gov/ipedspas/ jma-inc.net Professional Organizations. State Regulatory Agencies. Affiliation Group for a Set of Colleges

16. Several Guidelines for Finance Fund net price discounts or grow net price. Generate positive operating margins (with depreciation). Balance revenue and expense growth rates Build financial and cash reserves. Track uncollectable receivables closely. Minimize debt. Generate positive net income from auxiliaries (after depreciation). Find alternative uses for fixed assets to generate additional revenue.

17. Issue Simple Reports Monthly Variance Summaries – for enrollment, class size, budget, cash, and project expenditures. Annual Reports - Trend Analysis Ratios Growth Rates Revenue Center Analysis Expense Center Analysis Asset, Liability, and Net Asset Analysis. CFI Benchmark Performance. Include in Annual Report – strengths, weaknesses, and proposal. Update Five Year Forecasts for the Budget

18. Strategic Planning – Keep in Mind…. Do the data – it provides insight. Establish financial goals for: Growth rates for revenue, expense, assets, liabilities, net, assets, and cash. Financial ratios. CFI. Monitor Progress. Support the plan with policies & procedures.