Key Financial Metrics & Dashboard Reporting for Higher ... · PDF file4/17/2013 1 Key...

4/17/2013

1

Key Financial Metrics & Dashboard Reporting for Higher Education Institutions

Jim CreedenSenior [email protected]

April 17, 2013

Adam [email protected]

Goals for Today

• Importance of Financial Metrics & Ratio Analysis• Review and Evaluate Key Financial Metrics & Ratios• Composite Financial Index (CFI) & Linkage to

Strategic Planning• Presenting Results in Dashboards

4

4/17/2013

2

Financial Metric & Ratio Analysis

• Why important?o Recent economic factorso Transparencyo Accountability

• Identification of financial risks• Method of communication to stakeholders• Risk with peer comparisons

o Apples vs. oranges?

5

Moody’s & S&P Rating Considerations

• Five broad factors in assessing ratingso Market Positiono Operating Performanceo Balance Sheet & Capital Investmento Governance & Managemento Legal Security & Debt Structure

• Self-assessment & benchmarking

6

4/17/2013

3

Moody’s & S&P Rating Considerations

• Positive indicators of self-assessment & benchmarking

o Identification of key performance indicatorso Monitoring of key performance indicatorso Examples of leadership actions based on performance

relative to key indicatorso Comparison to carefully selected set of peers

7

Resource Sufficiency &

LiquidityOperating Metrics

Asset Performance Debt Management & Capital

Institution

9

4/17/2013

4

Resource Sufficiency & Liquidity Ratios

Ratio/Metric• Primary Reserve Ratio• Monthly/Annual days of

cash on hand• Monthly/Annual liquidity• Expendable financial

resources• Monthly/Annual liquidity to

demand debt

Overall Objectives• Sufficient amount of funds

to meet current & future operating & capital requirements

• Ability to achieve & sustain level of resources sufficient to realize mission

• Insight about capacity to manage through stress

• Operating flexibility10

Primary Reserve Ratio Calculation

• Compares expendable net assets to total expenses

• Snapshot of financial strength & flexibility

• Indicates how long institution can function using expendable reserves without relying on additional net assets generated by operations

• Assets that could be access quickly to spend to satisfy obligations

• Helps understand the affordability of strategic plans

Private Institution

Public Institution

Numerator Expendable Net Assets

Expendable Net Assets plus FASB CU Expendable

Net Assets

Denominator Total ExpensesTotal Expenses plus FASB CU

Total Expenses

11

Source: Strategic Financial Analysis in Higher Education, Seventh Edition (KPMG, Prager Sealy and Co., and Attain, 2010)

4/17/2013

5

12

(8 months)

Represents a sample of 40 Midwest-based institutions (90% private; 10% public)

Monthly/Annual Days of Cash On Hand

• Measure number of days institution is able to operate from unrestricted liquidity within one month & one year

• Measure of operating flexibility & cushion

• Highly correlated with Moody’s ratings

Numerator Monthly/AnnualLiquidity X 365

Denominator

Total Expenses Less Deprecation

Other Large Noncash Expenses

13

4/17/2013

6

Monthly/Annual Liquidity

• Distinguishing between wealth & liquidity

• Takes into account donor restrictions, accounting rules, investment strategies, etc.

• Assess how much liquidity to meet large unexpected payments, demand or accelerated payments on debt

Funds available within one month (one year)Consists of unrestricted operating accts or Other nonendowment unrestricted funds

Lesser ofFunds available within one month (one year) in endowment or other long-term funds or

Unrestricted Board Designated Endowment as presented in footnotes or self-reported

(public institutions)

14

Expendable Financial Resources

15

• Indicates amount of net assets spendable in the long run

Total unrestricted & temporarily restricted net assets

Long-term debt, less net investment in plant


4/17/2013

7

Represents sample of 40 Midwest-based institutions (90% private; 10% public)

16

Monthly/Annual Liquidity to Demand Debt

17

• Liquidity available to cover outstanding demand debt

Numerator Monthly/Annual Liquidity Measure

Denominator

Demand DebtAll VRDOs

Commercial PaperPut Bonds

Outstanding Lines of CreditLoans or Private Placements

with Put Features(Excludes regularly scheduled

principal maturities)

4/17/2013

8

Operating Metrics

Ratio/Metric• Net operating revenues

ratio• Cash income ratio• Net tuition dependency• Net tuition per student FTE

ratio• Deferred maintenance ratio• Operating income ratio

Overall Objectives• Sufficient amount of funds

to meet current & future operating and capital requirements

• Ability to achieve and sustain resources

• Insight about capacity to manage through stress

• Operating flexibility

18

Net Operating Revenues Ratio• Indicates whether total

unrestricted activities resulted in surplus or deficit

• Living within means?

• Positive & higher ratio show stronger performance as result of year’s activities

• Pattern of large deficits or surpluses can be revealing

PrivateInstitutions

PublicInstitutions

Numerator

Excess(deficiency) of unrestricted

operating revenues over unrestricted

operating expenses

Operating income (loss) plus net nonoperating

revenues (expenses) plus

FASB CU change in unrestricted net

assets

DenominatorTotal Unrestricted

Operating Revenue

OperatingRevenues plus Nonoperating Revenues plus FASB CU Total Unrestricted

Revenue

19


4/17/2013

9

Cash Income Ratio

20


• Good indication of institution’s liquidity

• Higher ratio provides institution with greater amount of flexibility in its operations

Private Institutions

Public Institutions

Numerator Net cash provided by operating activities

Cash provided from operations plus cash received from

appropriations for operating purposes plus gifts & grants for operating purposes plus FASB

CU net cash provided by operating activities

DenominatorTotal Unrestricted Income Excluding Gains or Losses

Operating Revenues plus Appropriations Revenues for Operating Purposes plus Gifts

& Grants Revenues for Operating Purposes plus FASB CU Total Unrestricted Income,

Excluding Gains & Losses

Operating Income Ratio

• Demonstrates extent to which current year activities have contributed to overall operations

• Measures institutional self-sufficiency

• Highlights variability of this source of income & need to maintain quality & market demand

All Institutions

Numerator

Operating income(excludes investment

income, contributions, net assets released from

restrictions)

Denominator Educational & general expenses

21


4/17/2013

10

Deferred Maintenance Ratio Calculation

22


• Increasing ratio is indicator of growing deferred maintenance & aging plant

• Decline in this ratio must be viewed in context of other issues affecting institution, such as large investments in new facilities


Public Institutions

NumeratorOutstandingmaintenance requirements

Outstandingmaintenance requirements

Denominator Expendable Net Assets


Net Assets

Net Tuition Dependency Ratio

23


• Dependency on tuition & fees

• Shows relative importance of revenue stream

• Increasing trend or over dependence isn’t desirable

All Institutions

Numerator Net Tuition

DenominatorTotal Revenue

(Includes investment return)

4/17/2013

11

Net Tuition Per Student FTE Ratio

24


• Analyzed with view of tuition discounting & aid

• Increases show generating more per student

All Institutions

Numerator Net Tuition

Denominator Full-Time Equivalent Students

Asset Performance

Ratio/Metric• Return on net assets• Capitalization ratio• Composition of equity ratio

Overall Objectives• Is net asset growth

sufficient?• Capitalization provide

flexibility?• Right type of net asset

growth to achieve objectives

• Sufficiently invested in financial assets

25

4/17/2013

12

Return on Net Assets Ratio

26

• Measure of whether or not institution’s resources are growing

• Decline in this ratio may be appropriate if it reflects strategy that will better fulfill institution’s mission

• Improving trend– Institution is

increasing net assets– Can set aside

resources to strengthen future financial flexibility


Public Institutions

Numerator Change in Net Assets

Change in Net Assets plus

FASB CU Change in Net

Assets

Denominator Total Net AssetsTotal Net Assets

plus FASB CUTotal Net Assets


Capitalization Ratio

27


• Determines financial flexibility on accumulated return basis

• A high capitalization implies– Financing flexibility– May not be leveraging

assets & too much invested in physical assets

Numerator Modified Net Assets

Denominator Modified Total Assets

4/17/2013

13

Composition of Equity Ratio

28


• Reveals allocation of equity among different types of assets—primarily physical & financial

• Stronger institutions typically have ratio in excess of one

• Equilibrium of investment for institution—tradeoffs between investment for current generation vs. investment for future generation

Numerator

Financial Assets(All assets expect

PP&E)

Denominator Physical Assets

Debt Management & Capital

Ratio/Metric• Viability Ratio• Debt Burden Ratio• Debt Service Coverage Ratio• Age of Facility• Interest Burden

Overall Objectives• Managing debt

strategically?• How much debt can be

afforded?• Methods for accessing

additional resources to support mission & objectives

29

4/17/2013

14

Viability Ratio

30


• Indicates availability of resources to cover debt

• Generally ratio range of 1.25x to 2.0x indicates strong creditworthy institution


Public Institutions

Numerator Expendable Net Assets


Net Assets

Denominator Plant-Related Debt

Plant-Related Debt plus FASB

CU Plant-RelatedDebt

31

Represents a sample of 40 Midwest-based institutions (90% private; 10% public)

4/17/2013

15

Debt Burden Ratio Calculation

32


• Primarily measures likelihood that you can repay your existing loans

• Higher the debt burden ratio, less of your income is disposable


Public Institutions

Numerator Debt ServiceDebt Service plus FASB CU Debt Service

Denominator Total Expenditures

Total Expenditures plus FASB CU

Total Expenditures

Debt Service Coverage Ratio

33


• Amount of cash flow available to meet annual interest & payments on debt

• Comfort level that institution has income to cover debt burden

• DSR of less than one means negative cash flow


Public Institutions

Numerator

Adjusted Change in Unrestricted Net

Assets from Operations

Net Operating Income plus

Nonoperating Revenues plus

Interest Expense plus Depreciation

plus FASB CU Adjusted Change in

Net Assets

Denominator Debt Service Debt Service plus CU Debt Service

4/17/2013

16

Age of Facilities Ratio Calculation

34


• Provides rough sense of aging of facilities & potential need for future resources to be invested into facilities

• Low Ratio– Generally good– Indicates recent investment in

plant– “Intangible asset”

• High Ratio– Generally not good– Indicates deferred reinvestment

in plant– Will require significant

expenditures in future– “Unrecorded liability”


Public Institutions

Numerator Accumulated Depreciation

AccumulatedDepreciation plus

FASB CU Accumulated Depreciation

Denominator Depreciation Expense

Depreciation Expense plus FASB CU Depreciation

Expense

Interest Burden Calculation

35


• Target range should be no greater than 5% - 6%

• Principal is excluded from this ratio

• More useful in perpetual debt structure


Public Institutions

Numerator Interest Expense

Interest Expense plus FASB CU

Interest Expense

Denominator Total Expenditures

Total Expenditures plus FASB CU Total

Expenditures

4/17/2013

17

Composite Financial Index

• Developed by KPMG & Prager McCarthy & Sealy, LLC in late 1990s

• Developed specifically for higher education institutions• Widely accepted set of ratios & overall measurement of

financial health• Four core ratios

o Primary reserve ratioo Net operating revenues ratioo Return on net assets ratioo Viability ratio

37

Composite Financial Index

• Four ratios weighted & scored on scale• Creates single score of financial health• Single score allows weakness in one ratio to be offset

by strength in another ratio

38

Ratios computed

Converted to strength factor

Factors weighted

Four numbers totaled

4/17/2013

18

CFI Thoughts & Implications

• Scores do not have precision• Indicators of ranges of financial health• Best served calculated over time period• Does not include “deferred maintenance” factor• Provides opportunity for constant assessment of

institutional performance• Stated graphically

39

CFI Scale

40

4/17/2013

19

Scale for Converting Core Ratios to Strength Factors

41

SCORING SCALE 1 3 10

Primary Reserve Ratio 0.133x .4x 1.33xNet Operating Revenues Ratio

Private Institutions 0.7% 2% 7%Public Institutions 1.3% 4% 13%

Return on Net Assets Ratio 2.0% 6% 20%Viability Ratio 0.417% 1.25x 4.17x

Weighting Patterns

42

RatioInstitutions with Long-Term Debt

Institutions with No Long-Term Debt

Primary Reserve 35% 55%

Net Operating Revenues 10% 15%

Return on Net Assets 20% 30%

Viability Ratio 35% --

4/17/2013

20

Private Peer Institutions Profile Used for Analysis

• 11 private institutions• All liberal arts institutions• Primarily nonurban settings• Enrollment ranges approximately 1,000 - 4,000

43

2010 - 2012 CFI Scores for Private Peer Institutions

44

Ratio 2010 2011 2012Primary Reserve 1.59 1.70 1.12

Net Operating Revenue Ratio

0.37 1.00 0.28

Return on Net Assets

0.86 1.56 0.17

Viability 0.73 1.02 0.61

CFI Score 3.54 5.27 2.17

4/17/2013

21

Graphic Financial Profile

45

10 10

10

10

10

3

3

3

3

PRIMARY RESERVE RATIO

NET OPERATING REVENUE RATIO

RETURN ON NETASSETS RATIO

VIABILITY RATIO

2012 Graphic Financial Profile

46

4/17/2013

22

CFI Scale

47

Linking Mission to Strategic & Other Plans

48


4/17/2013

23

Institution-Wide Strategic Financial Questions

• How does the institution evaluate & addresso Financial risks o Operatingo Capital

• What is the institution’s liquidity & how does it affect operations?

• Is debt used strategically?• Are financial resources allocated to support

institutional strategies?• What is the institution’s overall financial health?

49


Benefits of Dashboard Reporting

• Dashboard popularity continues to rise• Provides efficiency in analysis vs. spreadsheets &

reports• Identify trends more easily & efficiently • Simple way to line up goals/strategies to

performance

51

4/17/2013

24

Dashboard Example

52

Dashboard Example

53

Endowment Market Value Endowment Market Value158 10.4

158 8.3137 in mill ions 8.3

Change in Endowment Total Gifts & Grants7.50% 40%

7.50% 37%-8.40% 37%

Spending Rate Faculty5.00%

5.00% Alumni Participation5.00% 12:1

11.6:1Donor-Supported Aid 11:1

20.80%17.60% Student/Faculty

17.60% 93%89%

Annual Operating Margin 89%2.80%

2.80% Full-Time Faculty1.30% 0%

4%Return on Net Assets 4%

7.30%7.30%

-5.70%

Key: Current Value Direction of change Importance of changeHighest value for past 5 years 22% higher blue =better

20% lower red =worseLowest value for past 5 year 2% no change

Finance Advancement

4/17/2013

25

Dashboard Example

54

2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 1 yr change 1 yr goal 5 yr trend 5 yr goalFT Degree Enrollment Down UpNet Tuition per FTE Up UpNet Tuition Dependency Up UpCFI Down UpDays of Cash on Hand Up UpDebt Burden Ratio Dwn/Up Up/Up

Expendable Financial Resources Up UpAge of Facil ities Down UpEndowment per FTE Up UpPrimary Reserve Ratio Up Up

Strategic Direction

Dashboard Example

55

NET OPERATING REVENUES RATIO (%) BY COMPARISON GROUP (N=12)

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

75th percentile 21.5 20.4 19.8 23.7 15.0 -1.0

Group 1 Median 11.1 17.3 12.6 17.6 8.6 -6.6

25th percentile 6.7 14.3 8.7 10.4 1.7 -26.7

Group 2 Median 4.3 8.0 5.2 10.7 2.3 -17.9

National 6.8 5.1 6.2 9.7 0.5 -9.4

Institution -1.9 4.5 1.0 5.6 -0.3 -29.7

4/17/2013

26

56

Expendable Financial Resources to Direct Debt

57

4/17/2013

27

Jim Creeden | Senior Manager | 513.621.8300 | [email protected]

Adam Smith | Manager | 260.460.4000 | [email protected]

6060

Continuing Professional Education (CPE) Credits

BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org.

The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars.

4/17/2013

28

6161

CPE Credit

• Up to one CPE credit will be awarded upon verification of participant attendance; however, credits may vary depending on state guidelines

• For questions, concerns or comments regarding CPE credit, please email BKD Learning & Development Department at [email protected]

Date post:	14-Feb-2018
Category:	Documents
Upload:	buikiet
View:	221 times
Download:	1 times

Key Financial Metrics & Dashboard Reporting for Higher ... · PDF file4/17/2013 1 Key...

Documents