How to assess financial sustainability, capital expenditure and - - PowerPoint PPT Presentation

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How to assess financial sustainability, capital expenditure and borrowing capacity for Independent Schools

29 July 2016 ASBA Tasmania State Conference Launceston 11.15am – 1.15pm

As a member of Chartered Accountants Australia and New Zealand Somerset Education participates in a national liability capping scheme. Accordingly our liability is limited by a scheme approved under professional standards legislation.

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John Somerset

Qualifications

 Master of Business (Research) QUT – current study  Graduate Diploma Company Directors Course  Certificate IV in Workplace Training and Assessment  Graduate Diploma in Applied Finance and Investment  Professional Year Institute of Chartered Accountants  Bachelor of Commerce University of Queensland

Accreditations/Memberships

 Graduate - Australian Institute of Company Directors  Fellow - Financial Services Institute of Australasia  Fellow - Institute of Chartered Accountants in Australia and New Zealand

Core Expertise

 Chartered accounting – 30 years  Accounting, taxation, business advisor  Benchmarking and financial analysis of schools (22 years).  Corporate governance of schools.  Financial viability and sustainability of schools  Budgeting ,board reporting models, on-line tools.

Appointments

 Director – Independent Schools Council of Australia (2011 - )  President –Independent Schools Queensland (2011 - )  Treasurer –Independent Schools Queensland (2001 – 2011)  Chair Finance Committee – St Stephen’s College (2004 - )  Director - St Stephen’s College Ltd (2004 - )  Risk Assurance Committee – St Stephen’s College (2006 - )  Chairman - St Paul’s School Foundation (2006 to 2008)  Council and Finance - St Paul’s School (2000 – 2008)

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Session Outline

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Viability and Sustainability Cycle

Profitability Fees & Grants Student Numbers Infrastructure Cost Management Affordability Borrowing What Schools worry about Mitigation and Relationships

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Sufficient surplus Oils the Wheels

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Don’t Jam the Wheels

Insufficient Surplus Too much Debt

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Helpful Tools

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Essence of Financial Viability

Profitability Sustainability Solvency

• Net Operating Margin
• Student/Teacher ratios
• Interest Cover
• Debt Servicing and amount of debt
• Asset replacement
• Cash Flow Adequacy
• Ability to pay your bills on time

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Research re Financial Viability of Not-for-Profits

• Long term objective – maintain services
• Capacity – Guard against excessive debt
• Sustainability – Grow asset base with annual surplus
• Short term objective – Resilience
• Capacity – resilience against economic shock (sufficient cash

reserves/solvency)

• Sustainability – sufficient operating surplus
• Theme – prudent debt, adequate operating surplus and cash reserves

Bowman, W. (2011) Financial capacity and sustainability of ordinary nonprofits

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Queensland University Of Technology John Somerset Masters by Research 2013 - 2016

• Financial Health Assessment framework suspended
• School failures have occurred
• Increased interest by Federal and State
• Pro-active solution required
• Describe the attributes of a financially sustainable independent school in

Australia as generally accepted by major stakeholders

• Interviewing major stakeholders (up to 20 interviews)

– Owners – Government – Banks – Boards, principals, business managers – Parents – Key associations

• Transcribe and code interviews
• Distil to a commonly agreed definition

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Attributes of sustainable schools - preliminary

• Enrolment trends (past and future), a market focus, reasonable projections
• Quality and professionalism of board
• Cash reserves
• Ability to adapt to changed circumstances (board, management, staff)

– School culture that embraces change and innovation

• Quality educational offerings

– Quality staff

• Reliable budgeting based on reasonable assumptions and disciplined reporting
• Facility quality and reinvestment
• Adequate strategic planning
• Quality management with financial literacy skills
• Positive and stable cash flow from operations (adequate net operating margin)
• Trends in benchmarks
• School reputation
• Level of debt and serviceability
• ……..others to be continued

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Top 4 mistakes

1. Inaccurate budgeting with unrealistic assumptions, poor reporting 2. Over borrow and inadequate cash reserves 3. Operating surplus too low to adequately service loans and replace assets 4. Governors/Management not adapting to changed circumstances, in particular trends in enrolments

– Be aware of changing circumstances – internal and external – Monitor actual to budgeted performance on a monthly basis – Investigate large variations and respond in a timely manner

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National Net Operating Margin - 2014

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National Debt per Student - 2014

Total Independent Schools’ bank debt estimated to be $3 billion

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Exercise 1

• Somerset Example School
• 2014 and 2015 accounts
• Strategy to build an $11 million performing arts centre in 2018
• Your task

– Gain understanding of financial S.W.O.T. – Ability to replace assets and service debt – Quantify improvement targets – Tell the school’s financial story – Set a financial plan to enable school’s strategy

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Somerset Example School Income and Expenditure

2015 2014 REVENUE

Tuition Fees 10,996,438 10,483,382 Less Concessions (1,348,375) (1,327,645) Boarding Fees 750,875 727,802 Less Concessions (5,419) (5,000) Government Tuition Grants 7,782,940 7,397,775 Government grants - interest subsidies 480 480 Governtment Boading Grants 10,000 10,000 Other Income 298,599 316,504

TOTAL INCOME 18,485,537 17,603,298

EXPENDITURE

Teaching Wages and On-Costs 8,548,774 9,380,755 Specialist Support Wages and On-Costs 104,216 103,078 Teacher Aide Wages and On-Costs 1,185,645 1,515,085 Administration Wages and On-Costs 1,462,533 1,250,487 Maintenance and Other Wages and On-Costs 877,155 869,041 Boarding Wages and On-Costs 410,271 390,734 Tuition Costs 1,343,644 962,019 Administration Costs 950,757 905,482 Maintenance Costs 624,152 594,431 Boarding Costs 452,511 446,917 Ancillary Costs 1,119,191 266,111 Finance Costs 483,128 510,000 Depreciation 1,500,001 1,500,002

TOTAL EXPENDITURE 19,061,978 18,694,142

CAPITAL INCOME Capital Grants 190,952 190,952 190,952 190,952

TOTAL INCOME FOR THE PERIOD

(385,489) (899,892)

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Somerset Example School Statement of Financial Position

2015 2014 CURRENT ASSETS

Cash and Cash Equivalents 398,933 1,263,797 Trade and Other Receivables 875,875 843,188 Inventory 100,000 100,000 Other Assets 200,000 200,000 TOTAL CURRENT ASSETS 1,574,808 2,406,985

NON-CURRENT ASSETS

Property 12,000,000 12,000,000 Buildings 20,938,524 21,684,010 Plant & Equipment 5,496,340 4,750,853 TOTAL NON-CURRENT ASSETS 38,434,864 38,434,863

TOTAL ASSETS 40,009,672 40,841,848

CURRENT LIABILITIES

Trade and Other Payables Interest Bearing Loan & Borrowings 500,000 350,006 Other Liabilites 3,297,720 3,297,720 TOTAL CURRENT LIABILITIES 3,797,720 3,647,726

NON-CURRENT LIABILITIES

Interest Bearing Loan & Borrowings 7,104,125 7,700,809 Other Liabilities 737,495 737,495 TOTAL NON-CURRENT LIABILITIES 7,841,620 8,438,304

TOTAL LIABILITIES

11,639,340 12,086,030

NET ASSETS

28,370,332 28,755,818

EQUITY

Accumulated Surplus / (Deficit) 28,755,820 29,655,712 Current Surplus / (Deficit (385,489) (899,892)

TOTAL EQUITY

28,370,331 28,755,820

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Important Financial Goals and Questions

1. Make a surplus (profit) with the outside World Question 1 Are we Profitable? 2. Be able to pay debts when due Question 2 Are we solvent 3. Grow asset base and service debt Question 3 Are we sustainable?

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Performance is Relative

• Example school 2015 cash profit before interest

$1.4 million ($920,000 in 2014)

• Good ??
• Absolute numbers are of limited use
• Fundamental principle of performance

measurement

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Ratios assess Relative Performance

• Example School gross turnover $18.5 million
• $1.4 M surplus / $18.5M = 7.6% margin
• Similar schools’ margin = 13.3%
• Similar school surplus for exactly same

turnover = $2.5 million surplus

• Conclusion – Our performance not so great

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Ratios assess Relative Performance

• Established method to assess financial health

– Banks – Credit rating agencies (Moody’s, S&P, Fitch)

• Minimises variables for example

– Size of school – Student numbers

• Compares to a common base for example

– Surplus to turnover – Income per student – Expenditure per student – Students per teacher – Debt per student

• Relative performance and trends are important

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Benchmarks – A Point of Reference

• Make INFORMED decisions
• A reference point or hurdle
• What is a reasonable

– Operating surplus (profit)? – Debt? – Staff number?

• Benchmarks are our guiding tracks

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Use Benchmarks to

• 1. Assess Financial Health
• 2. Identify Weaknesses
• 3. Set Targets
• 4. Improve Performance

INFORMED decisions Governor’s and management’s fiduciary duty

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ASBA/Somerset Non-Government Schools’ Financial Performance Survey

• Association of School Business Administrators together

with Somerset Education

• Self Regulating initiative
• Operating over 20 years
• Generally 600+ schools (including Catholic systemic)

– 73% students in Independent schools

• 60 ratios
• Compare performance with similar schools
• 2016 participation fee from $616 (incl. GST) per school
• 10 of out 10 participants recommend it

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Disclaimer

This presentation presents financial performance ratios and statistics derived from information supplied by the school as well as respondents to the Independent School’s Financial Performance Survey for the 2015 school year conducted by Somerset Education with the Association of School Business Administrators Limited. Somerset Education conducted no hypothesis testing on the results. Therefore, if a particular result for a school is below average, Somerset Education has not carried

• ut investigations to determine whether the school’s performance really is below

average. Neither Somerset Education nor the Association of School Business Administrators Limited accepts any responsibility, or admits liability, arising from this survey or the contents of this presentation. As a member of Chartered Accountants Australia and New Zealand the firm participates in a national liability capping scheme. Accordingly our liability is limited by a scheme approved under professional standards legislation.

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Somerset School Portal

• ASBA/Somerset Non-Government Schools’

Financial Performance Survey

• Access via www.somerseteducation.net

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Once data entered, select a sample

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Selecting your Sample of similar schools

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Your sample – 2015 School Year

• Sixteen schools in your sample with the following characteristics:

– Geographic: NSW (3), Victorian (3), Queensland (10) – Type: Boarding schools – SES: 95 – 105 (Your SES 100) – Students 550 – 1,500 – Affiliation: Anglican, Methodist, Presbyterian, Uniting, Lutheran – Curriculum: Prep – Year 12

• If a result is outside the reasonable range it is excluded from the

calculation of averages and from graphs.

In Each Benchmarking sample graph Your School Maroon Other schools Orange

1374 1168 962 757 551

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Generate your report

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Table 1: Key Performance Indicators Ratio Your School Rating Sample Average More/(Less) than Average Page Working Capital * 0.41 ? 0.84 3 Cash Flow Adequacy * 0.66 ? 0.82 4 Reinvestment 135% 131% 5 Interest Cover * 2.9 ? 14.7 6 Debt per Student $8,720 $8,836 ($100,483) 6 Total Recurrent Income per Student $20,332 $20,068 $230,390 7 Discounts & Concessions as % Total Fee Income 12.3% ? 11.8% 7 Teacher Salaries per Student $9,800 ? $9,727 $63,454 9 Total Expenditure per Student (excluding Int, Depn, Amort & Boarding) $18,592 ? $17,592 $871,257 9 Net Operating Margin (EBIDA/Recurrent Income) 7.6% ? 13.3% ($1,052,112) 11 Primary Student/Teacher 12.0 ? 13.6 3.2 10 Secondary Student/Teacher 10.6 ? 11.7 5.2 10

Snapshot of your school - 2015

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Your Enrolments Trends

• Declining trend in enrolments has turned upwards in 2015

981 1020 1027 1006 908 863 872 750 800 850 900 950 1000 1050 2009 2010 2011 2012 2013 2014 2015

Enrolments

Enrolments

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Profitability – Net Operating Margin

Earnings before interest, depreciation, amortisation Total Revenue For every dollar in income, how much remains after all cash expenses (excluding interest) Sample Average 13.3% National average about 13%

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Your 2014 EBIDA

Total comprehensive Income ($ 899,892) Reduce by Capital grants ($ 190,952) ($1,090,844) Add back Interest expense $ 510,000 Less Interest subsidies ($ 480) Add Depreciation & Amortisation $ 1,500,002 $2,009,522 EBIDA $ 918,678

$918,678/$17,602,818*= 5.2% margin

* Reduced by interest subsidies of $480

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Your 2015 EBIDA

Total comprehensive Income ($ 385,489) Reduce by Capital grants ($ 190,952) ($ 576,441) Add back Interest expense $ 483,128 Less Interest subsidies ($ 480) Add Depreciation & Amortisation $ 1,500,001 $1,982,649 EBIDA $1,406,208 $1,406,209/$18,485,057* = 7.6% margin

* Reduced by interest subsidies of $480

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Your 2015 Net Operating Margin

• This indicates your operating surplus was $1.1 million less than other

schools in the sample with similar turnover.

• National average is about 13%.

Formula: Earnings before interest and depreciation and amortisation ÷ Gross recurrent income. Definition: Net Operating Margin indicates your ability to convert total gross income into a net operating result.

Table X: Operating Efficiency Ratio Your School Rating Sample Average More/(Less) than Average Net Operating Margin (EBIDA/Recurrent Income) 7.6% ? 13.3% ($1,052,112) Wages as a percentage of Income 68.7% ? 66.8%

23.4% 18.8% 14.2% 9.7% 5.1%

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Your Net Operating Margin trend

14.5% 12.1% 9.8% 7.5% 5.1% 2010 2011 2012 2013 2014 2015

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Your 2015 Income per student

• Your income is close to average.
• Note income sources – indicates a good sample
• Debtors and collection appear poor – indicating poor systems and

possible parent dissatisfaction

Formula: Total Recurrent Income ÷ number of students. Definition: Indicates your relative level of income compared to other schools in the sample.

Table VI: Revenue Sources and Collection Ratio Your School Rating Sample Average More/(Less) than Average Revenue Sources (Excludes boarding) Total Recurrent Income per Student $20,332 $20,068 $230,390 Discounts & Concessions as % Total Fee Income 12.3% ? 11.8% Fee Income as % Total Income * 55.4% 52.3% Grant Income as % Total Income * 44.6% 45.5% Other Income as % Total Income * 0.0% 2.3% Fee & Other Income as % Total Expenses 54.7% 56.9% Outstanding Fees per Student $1,006 ? $647 $312,906 % Trade Debtors to Fees Billed 8.4% ? 4.9% Bad Debt per Student $16 $43 ($23,078)

$23638 $21604 $19570 $17537 $15503

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Table VII: Expenditure Ratio Your School Rating Sample Average * More/(Less) than Average Per Student Costs (Excludes boarding) Teacher Salaries $9,800 ? $9,727 $63,454 Specialist Support Salaries $119 $506 ($337,466) Teacher Aides $1,359 ? $969 $340,094 Teaching Resources $1,541 ? $1,357 $160,225 Direct Delivery Cost $12,820 ? $12,371 $391,627 Administration Salaries $1,677 ? $1,637 $34,493 Other Admin Expenses $2,374 ? $1,679 $605,443 Maintenance & Other Salaries $1,006 ? $781 $195,544 Other Maintenance Expenses $716 $1,124 ($355,850) Total Expenditure per Student (excluding Int, Depn, Amort & Boarding) $18,592 ? $17,592 $871,257

Your 2015 Expenditure

• Your expenses are $870,000 more than the average school in the sample with identical

enrolment numbers

• Major areas Administration + $600,000, Aides and Resources + $500,000
• Efficient in other areas
• How does this correlate to staffing?

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$25863 $22700 $19537 $16374 $13212 $11877 $10703 $9529 $8354 $7180

Your 2015 Expenditure

• Teaching expenses close to median
• Total expenses relatively high

Formula: Teacher salary (including on-costs) ÷ number of students. Definition: The teacher/salaries-per-student ratio provides a benchmark of your school's teaching salary costs relative to those of other schools in the sample.

Formula: Total Expenditure per Student (excluding Int & Depn) ÷ number of students. Definition: The total expenditure per student ratio provides a benchmark of your school's expenditure per student relative to those of other schools in the sample.

Teaching Expenses per student Total Expenses per student

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Student/Teacher ratio

Number of students Full-Time teacher equivalent = Average number of students per FTE teacher Best Practice = Depends on the school

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Your 2015 Primary Staff ratios

Formula: Number of primary students ÷ number of FTE primary teachers Definition: The student/teacher ratio indicates the average number of student enrolled for each teacher employed.

• Compared to the average school in the sample with identical primary student enrolments,

you have about four more primary school staff, excluding maintenance staff.

• Note student/teacher ratio is relatively low in sample
• I exclude maintenance staff because this is influenced by your choice to employ or
• utsource and also the relative size of properties to be maintained.

+4.5

Table VIII: Staffing Ratios - Primary School Ratio Your School Rating Sample Average More/(Less) than Average Primary Student/Teacher 12.0 13.6 3.2 Primary Student/Spec Support 318.0 393.3 0.2 Primary Students/ Aides Staff 90.9 89.3 (0.1) Primary Student/Admin Staff 60.0 78.3 1.2 Primary Student/Maint and other Staff 75.7 115.9 1.5 Primary Academic Staff to Support Staff 1.9 2.1

17.4 15.7 14 12.3 10.6

Primary student/teacher ratio

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Your 2015 Secondary Staff ratios

Formula: Number of primary students ÷ number of FTE primary teachers Definition: The student/teacher ratio indicates the average number of student enrolled for each teacher employed.

• Compared to the average school in the sample with identical secondary student enrolments,

you have about sixteen more secondary school staff, excluding maintenance staff.

• Note student/teacher ratio is relatively low in sample
• I exclude maintenance staff because this is influenced by your choice to employ or outsource

and also the relative size of properties to be maintained.

+16

Table IX: Staffing Ratios - Secondary School Ratio Your School Rating Sample Average More/(Less) than Average Secondary Student/Teacher 10.6 11.7 5.2 Secondary Student/Spec Support 277.0 212.8 (0.6) Secondary Students/ Aides Staff 46.2 84.7 5.5 Secondary Student/Admin Staff 34.8 55.2 5.9 Secondary Student/Maint and other Staff 48.2 100.1 6.0 Secondary Academic Staff to Support Staff 1.3 1.7 Maint/Property Staff/Hectare - Prim & Sec 0.3 0.8

14.6 13.5 12.4 11.3 10.2

Secondary student/teacher ratio

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11.1 10.7 10.2 9.8 9.3 2010 2011 2012 2013 2014 2015

Your Staff ratio trends

Formula: Number of primary students ÷ number of FTE primary teachers Definition: The student/teacher ratio indicates the average number of student enrolled for each teacher employed.

• Improving trend – increased students per teacher
• Positive effect on Net Operating margin
• Possibly more to do

Secondary student/teacher ratio

13 12.5 12 11.5 11 2010 2011 2012 2013 2014 2015

Primary student/teacher ratio

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Solvency

• School year end is December
• Lowest point for cash
• January/February cash flow significant and predictable
• Solvency ratios measured at year end can be misleading
• I prefer to see monthly budgeted cash flow

– Ensure monthly cash requirements are well within facility limits and/or cash reserves

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Summary of Cash Flows

2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES

Receipts from Fees, Grants and Other Income 18,485,537 17,603,297 Payments to Suppliers and Employees (17,111,535) (16,665,649) Interest (483,128) (510,000) Net Cash Provided by Operating Activities 890,874 427,648

CASH FLOWS FROM INVESTING ACTIVITIES

Payments (Net of Disposals) for Property, Plant and Equipment (1,500,000) (499,937) Capital Income 190,952 190,952 Net Cash (Used in) Investing Activities (1,309,048) (308,985)

CASH FLOWS FROM FINANCING ACTIVITIES

Loan Repayments (446,690) (351,315) Net Cash (Used in) / Provided By Financing Activities (446,690) (351,315) Net (Decrease) in Cash Held (864,864) (232,652) Cash and Cash Equivalents at Beginning of the Period 1,263,797 1,496,449

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD

398,933 1,263,797

SOMERSET EXAMPLE SCHOOL STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2015

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Cash Flow Adequacy Ratio

Net Cash Generated from operations Cash paid for asset purchases and debt servicing = For every dollar spent on asset purchases and debt servicing (your primary use of cash in a school), how much was funded from operations. Rule of thumb = 1 or better over the medium term

• eg. Earn a dollar and spend a dollar

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Your Cash Flow Adequacy

Somerset Example School 2015 2014 Estimated cash from operations Operating profit/(loss)

• $385,489
• $899,892

Add depreciation 1,500,001 $ 1,500,002 $ 1,114,512 $ 600,110 $ Asset purchases 1,500,000 $ 499,937 $ Debt payments including interest Debt principal repayments 446,690 $ 351,315 $ Interest 483,128 $ 510,000 $ 929,818 $ 861,315 $ Estimated cash from operations 1,114,512 $ 600,110 $ Add interest expnse 483,128 $ 510,000 $ Adjusted Cash from operations 1,597,640 $ 1,110,110 $ Asset purchases 1,500,000 $ 499,937 $ Debt servicing 929,818 $ 861,315 $ 2,429,818 $ 1,361,252 $ Cash flow Adequacy 0.66 0.82

• More interested in the trend of this ratio
• If consistently < 1.0, how is that being funded?

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Working Capital Ratio

= Current assets Current liabilities = For every dollar of debt due in the next 12 months (denominator), how much cash (numerator) was available? Rule of thumb = at least 1 times

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Your Working Capital Ratio

• More interested in the trend of this ratio and if it is > 1.0
• Indicates poor and deteriorating ability to pay debts as and when

due

Ratio Your School Rating Sample Average More/(Less) than Average Working Capital * 0.66 ? 0.95

Somerset Example School 2015 2014 Working Capital Ratio Current Assets 1,574,808 $ 2,406,985 $ Current Liabilities 3,797,720 $ 3,647,726 $ Working Capital 0.41 0.66

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Depreciation Impact

Depreciation expenditure Net cash from operations Indicates % of the operating surplus to be directed to asset replacement.

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Reinvestment ratio

Capital expenditure Net cash from operations Indicates % of operating surplus actually reinvested into asset replacement.

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Your Depreciation and Reinvestment as % Cash Flow

37% 378% 62% 114% 216% 250% 135% 82% 819% 80% 84% 75% 83% 135% 0.0% 200.0% 400.0% 600.0% 800.0% 1000.0% 2009 2010 2011 2012 2013 2014 2015

Somerset Example School

Depreciation Reinvestment

• More interested in the trend in this school’s individual ratio rather than sample averages
• Under invested 2012, 2013, 2014
• Matched depreciation in 2015, but funded from cash reserves
• Not sustainable because depreciation > cash surplus indicating assets are wearing out

faster than the school is able to replace them

• Declining profitability is underlying cause

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Debt per student

Interest bearing (bank) debt Student numbers Sample Average about $8,800 (2015 school year)

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Your 2015 Debt Ratios

• Debt is close to average
• Close to the centre point (median)

Formula: Total debt ÷ student numbers. Definition: A measure of your debt relative to others in the sample. Table V: Capital Structure and Debt Protection Ratio Your

School Rating Sample Average More/(Less) than Average Interest Cover * 2.9 ? 14.7 Debt Servicing Cover * 1.5 10.9 Liabilities to Equity 41.0% 33.2% Debt Repayment (Years) 6.8 ? 3.9 Debt per Student $8,720 $8,836 ($100,483) Debt Repayment to Total Income 5.1% 4.6%

$22265 $16699 $11132 $5566 $0

Debt per student

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Interest Cover

Earnings before interest, depreciation & amortisation Interest expense = Number of times the school can meet its interest expense Rule of thumb 2 to 3 times (refer to you bank’s policies) Generally banks require a 2 times interest cover or higher. I prefer 3 times or higher

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Debt Servicing Cover

Earnings before interest, depreciation, amortisation Interest expense + Principal repayments = Number of times the school can meet its principal and interest payments Rule of thumb > 1.5 times

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Your Debt Servicing

• Inadequate debt serviceability in 2014 due to low profitability
• Improved in 2015
• But consider ability to sustainably meet debt servicing and asset replacement?

Somerset Example School 2015 2014 EBIDA 1,406,208 $ 918,678 $ Interest Expense 483,128 $ 510,000 $ Debt principal repayments 446,690 $ 351,315 $ 929,818 $ 861,315 $ Interest Cover 2.9 1.8 Debt Servicing Cover 1.5 1.1

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Rough Estimate of Borrowing Capacity

• EBIDA 2015

= $1,400,000

• Target Interest cover

= 3 times

• Target maximum interest expense =

$460,000

• Assume interest rate

= 6% P.A.

• Corresponding loan

= $7.6 million

• Proof

$7.6 million at 6% = $460,000 interest expense

• Starting point only
• Need to consider debt servicing cover and ability to replace assets

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Summary Indications

• Enrolments trended down but improved in 2015
• 2015 operating surplus $870,000 less than average
• Income higher than average
• Discounts OK
• Poor fee collection. Is there discontent in the school community?
• 2015 expenses $1.1 million higher than average

– In particular administration, aides and resources

• Over 20 more staff than average
• Cash reserves declining and likely to run out in 2016
• Question solvency
• Assets wearing out faster than ability to replace
• Debt about average
• Ability to service debt improved in 2015
• But not sufficient cash left to also replace assets
• Question sustainability of this school

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Budgets must reconcile

Income Statement Statement of Cash Flow Loan Balances Statement of Financial Position Cash at Bank

Must Reconcile with each other

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Strategic Budget – 5 to 10 years

• “Dollarise” resources

– Student numbers – Staffing numbers – Buildings – Loans

• “3 way” budget

– Financial performance (profit and loss) – Financial Position (balance sheet) – Cash flow

• Compare KPI’s against benchmarks and policies
• Consider trends in key ratios

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Income Statement

Somerset Example School Strategic Financial Projections 1 January 2013 to 31 December 2022

INCOME AND EXPENDITURE STATEMENT

ACTUAL ACTUAL ACTUAL BUDGET BUDGET BUDGET BUDGET BUDGET 2013 2014 2015 2016 2017 2018 2019 2020 Recurrent Income Tuition Fees 9,204,250 9,155,737 9,648,063 10,610,320 12,411,497 14,270,308 16,201,381 18,136,099 Recurrent Grants 7,426,696 7,408,255 7,793,420 8,534,903 9,296,552 10,049,835 10,722,054 11,273,120 Boarding Income 723,452 722,802 745,456 873,128 957,087 1,047,267 1,144,080 1,247,964 Other Income 289,902 316,504 298,599 307,557 322,935 339,082 356,036 373,838 Ancillary Income

• TOTAL INCOME

17,644,300 17,603,298 18,485,537 20,325,908 22,988,071 25,706,492 28,423,552 31,031,020 EXPENDITURE Tuition Costs 11,754,738 11,945,988 11,177,279 11,683,719 12,797,807 13,915,099 15,034,203 16,107,329 Administration Costs 2,157,739 2,155,969 2,413,289 2,944,805 3,469,999 4,041,975 4,664,179 5,328,386 Maintenance Costs 1,497,402 1,463,472 1,501,308 1,843,056 2,160,238 2,504,531 2,877,853 3,277,344 Boarding Costs 837,277 837,651 862,781 996,539 1,048,653 1,103,486 1,161,181 1,219,682 Ancillary Costs 345,617 266,111 1,119,191 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Interest 554,807 510,000 483,128 456,323 427,908 997,893 920,440 838,339 Depreciation 1,451,163 1,500,002 1,500,001 1,565,088 1,603,338 1,645,588 1,886,588 1,917,828 Provision for Doubtful Debts 14,879 14,949 5,000 5,000 5,000 5,000 5,000 5,000 TOTAL EXPENSES 18,613,622 18,694,142 19,061,978 20,494,530 22,512,944 25,213,573 27,549,445 29,693,906 OPERATING SURPLUS/(DEFICIT) (969,322) (1,090,844) (576,441) (168,622) 475,128 492,919 874,107 1,337,114 Capital Income 190,952 190,952 190,952

• 750,000

100,000

• NET SURPLUS/(DEFICIT)

(778,370) (899,892) (385,489) (168,622) 475,128 1,242,919 974,107 1,337,114

Govern with Confidence

Statement of Financial Position

Somerset Example School Strategic Financial Projections 1 January 2013 to 31 December 2022

BALANCE SHEET

Actual Actual Actual Budget Budget Budget Budget Budget 2013 2014 2015 2016 2017 2018 2019 2020 ASSETS 1,496,449 1,263,797 398,933 249,887 462,220 530,943 999,740 1,809,456 955,400 953,188 990,875 1,067,891 1,137,114 1,171,227 1,200,000 1,200,000 (95,051) (110,000) (115,000) (120,000) (125,000) (130,000) (135,000) (140,000)

• 100,000

100,000 100,000 100,000 100,000 100,000 100,000 100,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 12,000,000 12,000,000 12,000,000 12,000,000 12,000,000 12,000,000 12,000,000 12,000,000 30,165,334 30,570,196 31,927,086 32,527,086 33,327,086 44,327,086 44,927,086 45,527,086 (9,028,365) (9,631,672) (10,243,076) (10,881,618) (11,532,159) (12,198,701) (13,085,243) (13,983,785) 17,010,321 17,105,396 17,248,506 17,648,506 18,148,506 18,648,506 19,048,506 19,448,506 (10,712,361) (11,609,056) (12,497,653) (13,424,200) (14,376,996) (15,356,043) (16,356,089) (17,375,375) TOTAL ASSETS 42,091,727 40,841,849 40,009,671 39,367,553 39,340,771 49,293,018 48,899,000 48,785,888 LIABILITIES

• 3,297,720

3,297,720 3,297,720 3,297,720 3,297,720 3,297,720 3,297,720 3,297,720

• 737,495

737,495 737,495 737,495 737,495 737,495 737,495 737,495 8,400,800 8,050,815 7,604,125 7,130,629 6,628,719 15,338,048 13,969,923 12,519,697 12,436,015 12,086,030 11,639,340 11,165,844 10,663,934 19,373,263 18,005,138 16,554,912 NET ASSETS 29,655,712 28,755,819 28,370,331 28,201,709 28,676,836 29,919,755 30,893,862 32,230,976 Other Current Asset 1 Cash Debtors - Fees Provision for Doubtful Debts Debtors - Other Stock Buildings Land Accumulated Depreciation Plant & Equipment Accumulated Depreciation Bank Overdraft Fees in Advance Other Current Liabilities Provision for LSL Provision for Holiday Pay GST Payable Other Non-Current Liabilities 1 Bank loans TOTAL LIABILITIES

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Statement of Cash Flows

Somerset Example School Strategic Financial Projections 1 January 2013 to 31 December 2022

CASH FLOW

Actual Actual Actual Budget Budget Budget Budget Budget

2013 2014 2015 2016 2017 2018 2019 2020

Recurrent Income Tuition Fees 9,204,250 9,155,737 9,648,063 10,610,320 12,411,497 14,270,308 16,201,381 18,136,099 Recurrent Grants 7,426,696 7,408,255 7,793,420 8,534,903 9,296,552 10,049,835 10,722,054 11,273,120 Boarding Income 723,452 722,802 745,456 873,128 957,087 1,047,267 1,144,080 1,247,964 Other Income 289,902 316,504 298,599 307,557 322,935 339,082 356,036 373,838 Ancillary Income

• GST Received
• Input Tax Credits Received
• Total Recurrent Income

17,644,300 17,603,297 18,485,537 20,325,908 22,988,071 25,706,492 28,423,552 31,031,020 Tuition Costs 11,754,738 11,945,988 11,177,279 11,683,719 12,797,807 13,915,099 15,034,203 16,107,329 Boarding Costs 837,277 837,651 862,781 996,539 1,048,653 1,103,486 1,161,181 1,219,682 Administration Costs 2,157,739 2,155,969 2,413,289 2,944,805 3,469,999 4,041,975 4,664,179 5,328,386 Maintenance Costs 1,497,402 1,463,472 1,501,308 1,843,056 2,160,238 2,504,531 2,877,853 3,277,344 Borrowing Costs

• Ancillary Costs

345,617 266,111 1,119,191 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Interest 554,807 510,000 483,128 456,323 427,908 997,893 920,440 838,339 GST Paid

• GST paid to ATO
• Total Recurrent Expenditure

17,147,580 17,179,191 17,556,976 18,924,442 20,904,606 23,562,985 25,657,856 27,771,079 Net Recurrent Cash Flow 496,720 424,106 928,561 1,401,466 2,083,466 2,143,507 2,765,695 3,259,941 Capital Expenditure (499,937) (499,937) (1,500,000) (1,000,000) (1,300,000) (11,500,000) (1,000,000) (1,000,000) Capital Income 190,952 190,952 190,952

• 750,000

100,000

• Asset Disposals (Excl Gain/Loss))
• Movement in Current Assets
• 2,212

(37,687) (77,016) (69,223) (34,113) (28,773)

• Movement in Current Liabilities
• 1,330
• Movements in Non-Current Liabilities
• Loan Drawdowns
• 10,000,000
• Loan Repays

(351,315) (351,315) (446,690) (473,496) (501,910) (1,290,672) (1,368,125) (1,450,226) Capital & Financing (660,300) (656,758) (1,793,425) (1,550,512) (1,871,133) (2,074,785) (2,296,898) (2,450,226) Net Cash Flow (163,580) (232,652) (864,864) (149,046) 212,333 68,723 468,797 809,715 Opening Balance 1,660,029 1,496,449 1,263,797 398,933 249,887 462,220 530,943 999,740 Net Cash Flow (163,580) (232,652) (864,864) (149,046) 212,333 68,723 468,797 809,715 Closing Balance 1,496,449 1,263,797 398,933 249,887 462,220 530,943 999,740 1,809,456

Govern with Confidence

KPI Analysis

Somerset Example School Strategic Financial Projections

ANALYSIS OF KEY PERFORMANCE INDICATORS

1 January 2013 to 31 December 2022 Actual Actual Actual Budget Budget Budget Budget Budget

Unadjusted Benchmarks

2014 Benchmark

2013 2014 2015 2016 2017 2018 2019 2020

Debt Protection Interest cover (based on EBITDA)

• 1.9

1.8 2.9 4.1 5.9 3.1 4.0 4.9 Debt servicing cover 1.1 1.1 1.5 2.0 2.7 1.4 1.6 1.8 Debt per student 7,358 $ 9,252 $ 9,329 $ 8,720 $ 7,802 $ 6,919 $ 15,540 $ 13,928 $ 12,457 $ Operational Net operating surplus (before interest and depreciation) 1,036,169 $ 918,678 $ 1,406,209 $ 1,852,309 $ 2,505,894 $ 3,135,921 $ 3,680,635 $ 4,092,780 $ Net operating margin (before interest and depreciation) (includes boarding 12.3% 5.9% 5.2% 7.6% 9.1% 10.9% 12.2% 13.0% 13.2% Non-Boarding (Tuition) 4% 5% 8% 9% 9% 9% Recurrent Income per student# 19,159 19,159 $ 18,622 $ 19,547 $ 20,331 $ 21,270 $ 22,985 $ 24,972 $ 27,186 $ 29,623 $ Teaching Salaries per student# 9,551 9,551 $ 9,960 $ 10,870 $ 9,804 $ 9,562 $ 9,667 $ 10,095 $ 10,604 $ 11,178 $ Specialist Support Salaries per student# 443 443 $ 114 $ 120 $ 120 $ 121 $ 122 $ 125 $ 129 $ 136 $ Teacher Aides per student# 1,006 1,672 $ 1,756 $ 1,360 $ 1,104 $ 1,112 $ 1,139 $ 1,183 $ 1,241 $ Teaching Resources perstudent# 1,311 1,200 $ 1,097 $ 1,535 $ 1,996 $ 2,459 $ 2,740 $ 3,073 $ 3,473 $ Direct Delivery costs per student# 12,051 12,051 $ 12,946 $ 13,842 $ 12,818 $ 12,783 $ 13,359 $ 14,098 $ 14,989 $ 16,027 $ Total Administration Expenses per student# 1,569 1,569 $ 1,413 $ 1,374 $ 2,379 $ 2,478 $ 2,659 $ 2,893 $ 3,181 $ 3,537 $ Administration salaries per student# 1,591 1,591 $ 1,360 $ 1,449 $ 1,677 $ 1,843 $ 2,011 $ 2,220 $ 2,471 $ 2,764 $ Maintenance Expenses per student# 987 987 $ 695 $ 689 $ 716 $ 1,004 $ 1,235 $ 1,493 $ 1,784 $ 2,123 $ Maintenance salaries per student# 742 742 $ 954 $ 1,007 $ 1,006 $ 1,013 $ 1,020 $ 1,045 $ 1,085 $ 1,138 $ Total Operating expenses (Excludes Int, Depn, Boarding) 17,368 $ 18,361 $ 18,596 $ 19,121 $ 20,284 $ 21,749 $ 23,510 $ 25,590 $ Primary Teacher Ratio 14.5 14.5 11.4 11.1 12.0 13.6 13.8 14.4 14.6 14.5 Secondary Teacher Ratio 11.7 11.7 9.8 9.4 10.6 11.2 11.8 11.7 11.7 11.7 Boarding Total Boarding Income 723,452 $ 722,802 $ 745,456 $ 873,128 $ 957,087 $ 1,047,267 $ 1,144,080 $ 1,247,964 $ Total Boarding Expenses 837,277 $ 837,651 $ 862,781 $ 996,539 $ 1,048,653 $ 1,103,486 $ 1,161,181 $ 1,219,682 $ Boarding Operating Result (113,825) $ (114,849) $ (117,326) $ (123,411) $ (91,566) $ (56,219) $ (17,101) $ 28,282 $ Number of Boarders 40 48 50 52 54 56 58 60 Boarding income per boarder# 15605 15,605 $ 18,086 $ 15,058 $ 14,909 $ 16,791 $ 17,724 $ 18,701 $ 19,726 $ 20,799 $ Boarding expenditure per boarder# 15779 15,779 $ 20,932 $ 17,451 $ 17,256 $ 19,164 $ 19,419 $ 19,705 $ 20,020 $ 20,328 $ Loan Summary Balance Carried Forward 8,752,115 $ 8,400,800 $ 8,050,815 $ 7,604,125 $ 7,130,629 $ 6,628,719 $ 15,338,048 $ 13,969,923 $ New Loans Capital

• $
• $
• $
• $
• $

10,000,000 $

• $
• $

New Loans Bridging

• $
• $
• $
• $
• $
• $
• $
• $

Less Loan Principal Capital (351,315) $ (351,315) $ (446,690) $ (473,496) $ (501,910) $ (1,290,672) $ (1,368,125) $ (1,450,226) $ Less Loan Principal Bridging

• $
• $
• $
• $
• $
• $
• $
• $

Loan Balance - End of Year 8,400,800 $ 8,050,815 $ 7,604,125 $ 7,130,629 $ 6,628,719 $ 15,338,048 $ 13,969,923 $ 12,519,697 $ MATCHES TO SURVEY REPORT

Govern with Confidence

Somerset Key Indicator (SKI) Report

• 1. Learn from the Past
• 2. Understand the Present
• 3. Risk assess the Future

Using any budget, enter data into the SKI. It will also extract your data from the latest Benchmarking Report

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SKI report

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Traffic Light Early Warning System

Up to Seven years

• n one page

Your ratio Sample av. Yellow = caution Green = OK

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Conclusions re Example School

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Your Net Operating Margin Trend

5.9% 5.2% 7.6% 9.1% 10.9% 12.2% 12.9% 13.2% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 2013 2014 2015 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget

Somerset Example School

Margin Sample average

• Budgeting to improve profitability

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Student/Teacher Ratio Trend

11.6 11.1 12.0 13.6 13.8 14.4 14.7 14.5 9.9 9.4 10.6 11.2 11.8 11.7 11.7 11.7 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 2013 2014 2015 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget

Somerset Example School

Primary Secondary

• Student/teacher ratio increased
• Causes teaching salaries per student to be more in line with sample average

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Cash Flow Adequacy

0.9 0.8 0.7 1.0 1.1 0.3 1.2 1.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 2013 2014 2015 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget

Somerset Example School

Cash Flow Adequacy Target

• 2018 shortfall due to major construction project will be debt funded
• By then should know if achieving profit improvement targets
• 2017 and 2020 cash appears adequate, however achieved due to under-investment

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Somerset Example School 2014 2015 2016 2017 2018 2019 2020 Actual Actual Budget Budget Budget Budget Budget $,000 $,000 $,000 $,000 $,000 $,000 $,001 Cash from operations 619 $ 1,082 $ 1,396 $ 2,078 $ 2,889 $ 2,861 $ 3,255 $ Loan principal repayments

• $351
• $447
• $473
• $502
• $1,291
• $1,368
• $1,450

Remaining cash surplus 267 $ 635 $ 923 $ 1,577 $ 1,598 $ 1,493 $ 1,805 $ Capital expenditure 500 $ 1,500 $ 1,000 $ 1,300 $ 11,500 $ 1,000 $ 1,000 $ Depreciation 1,500 $ 1,500 $ 1,565 $ 1,603 $ 1,646 $ 1,887 $ 1,918 $

Actual Cash Flows

• What further action can be taken to improve the position?

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Working Capital Ratio

0.2 0.7 0.4 0.4 0.4 0.4 0.6 0.7 0.0 0.2 0.4 0.6 0.8 1.0 1.2 2013 2014 2015 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget

Somerset Example School

Working Capital Target minimum

• Historically low cash reserves but slowly improving

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Debt per Student

$9,252 $9,329 $8,720 $7,802 $6,919 $15,540 $13,928 $12,457 $0 $5,000 $10,000 $15,000 $20,000 2013 2014 2015 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget

Somerset Example School

Debt per student Sample average 2015

• Progressive reduction in debt 2014 to 2017
• Increased debt in 2018 for large capital investment
• Budgeted higher profitability in 2018 and 2020 but is it adequate?

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Debt Servicing

1.9 1.8 2.9 4.1 5.9 3.1 4.0 4.9 1.1 1.1 1.5 2.0 2.7 1.4 1.6 1.8 0.0 2.0 4.0 6.0 8.0 2013 2014 2015 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget

Somerset Example School

Interest Cover Debt Service Cover

• Ability to service debt improves as profitability improves
• Significant increase in debt from 2018 results in lower serviceability
• Perhaps adequate ability to service debt
• But consider ability to both service debt and replace assets

Govern with Confidence

Case study – benchmarking works

• 5

5 10 15 20 25

• 5%

0% 5% 10% 15% 20% 25%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Interest Cover Net Operating Margin Started using Ratios & Benchmarks

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Summary Indications

• Viability/Sustainability cycle
• Cash flow to assess sustainability

– debt servicing – asset replacement

• Use Survey to identify S.W.O.T
• SKI Report – early warning system
• Set targets/policies

– Net Operating margin – Interest cover, debt servicing cover, debt levels – Staff ratios (guided by principal)

• Benchmarking works

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For further details contact

John Somerset – Director of Somerset Education Email john@somerseteducation.net Internet www.somerseteducation.net Telephones 1300 781 968 (Australia) +61 7 3263 5300 (International) 0417 618 899 (Cell phone) Address GPO Box 3273 Brisbane, Queensland Australia 4001