Financial Diagnostics

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Financial Diagnostics Strategy
email Info_at_StevensStrategy.com phone
603-863-4704
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Unrestricted Net Assets to Liabilities 1997- 2000
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Revenue Net of Gains/Losses to Expenses 1997 -
2000
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Foundation of Financial Strategy

• Know Your Financial Condition
• Understand What Drives Financial Performance
• Establish Goals and Benchmarks
• Constantly Monitor Your Financial Condition

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First Step Simple Measure of Risk

• Compute the difference between net student
  revenue and operational expenses
• Net student revenue net tuition auxiliaries
• Operational expenses expenses auxiliaries
• The balance represents
• The risk inherent in enrollment flows
• The risk inherent in the other sources of revenue

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Second Step Risk Measure Composite Financial
Index

• Purpose Measures financial viability
• Developed by KPMG and the Department of Education
• Based on earlier work by John Minter Assoc. and
  Moodys Investors Services
• Compute CFI for several years to identify the
  trends
• Uses Four Ratios to Measure Viability
• Primary Ratio relates expendable resources to
  expenses
• Net Income Ratio income to revenue
• Return on Net Assets relates change in net
  assets to total assets
• Viability Ratio relates expendable resources to
  debt

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CFI Component Ratio Primary Reserve

• Purpose resources relative to expenses. Positive
  growth for
• resources relative expenses

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CFI Component Ratio Net Income

• Purpose Identify surpluses or deficits

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CFI Component Ratio Return on Net Assets

• Purpose Shows increase in reserves or wealth

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CFI Component Ratio Viability Ratio

• Purpose Shows ability of expendable net assets
  to cover debt

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CFI Weights Strengths
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CFI Scoring Scale
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Work Session Computing CFI

• Source of data Financials
• Step 1 Insert data each ratio
• Step 2 Compute each ratio
• Step 3 Insert ratios in Weights Strength
  Table
• Step 4 Compute weights strengths
• Step 4 Sum last column to produce CFI

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How To Use CFI

• Identify which ratio has the greatest impact on
  the CFI score.
• Decompose the ratio into its component parts to
  determine what has to change.
• Test to see what changes have a positive impact
  on the ratio.

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Do You Use Ratios or Trends?

• Which ratios do you use - Why?
• Were you surprised by any of the ratios or by the
  index score Why?
• Could you use these ratios with the leadership at
  your school?
• Should ABOPS compile these or other ratios?

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Strategic Implications of CFI

• Financial performance is what happens after other
  decisions have been made
• Budgets
• Programs
• Services
• Marketing

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Best Practices Financial Strategy Part One

• Balance revenue and expense growth rates
• Build a coherent net pricing strategy
• Trade gifts for debt  
• Add employees discriminately
• Contain expense growth
• Estimate revenue conservatively and prior to the
  budgeting of expenses       

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Best Practices Financial Strategy Part Two

• Build a contingency fund
• Install budget controls
• Track variances
• What do you do with variances?
• Limit new employees during the fiscal year
• Cash gt 8 of expenses
• Bill and Collect Billings Monthly

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Best Practices Questions

• Do you track best practices if so tell us about
  best practices at other schools or your schools
• How do you get information about best practices?
• What best practices do you plan to use in the
  next twelve months.

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Financial Strategy Turnarounds

• Find financial resources to fund the turnaround
• Diagnose your current financial condition
  decompose ratios
• Eliminate non-productive activities
• Set financial goal using CFI ratios
• Install rigorous budget and financial systems

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Sources of Data

• Sources of Data IPEDS Data
• http//nces.ed.gov/ipeds
• http//www.jma-inc.net
•      Source for IRS Form 990
• http//www.guidestar.org

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Bibliography

• Ronald E. Salluzzo and Philip Tahey, Frederic J.
  Prager, and Christopher J. Cowen. (1999). Ratio
  Analysis in Higher Education. 4th edition. KPMG
  and Prager, McCarthy Sealy, LLC.
• Moodys Investors Service. Moody's Rating
  Approach for Private Colleges and Universities.
  New York.
• Moody's Investor Service. Private Colleges and
  Universities Outlook and Medians. New York.
• Townsley, Michael K. (2002) The Small College
  Guide to Financial Health Beating the Odds.
  Washington, DC, NACUBO.
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