KEY FINANCIAL METRICS & DASHBOARD REPORTING FOR HIGHER EDUCATION - - PDF document

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KEY FINANCIAL METRICS & DASHBOARD REPORTING FOR HIGHER EDUCATION INSTITUTIONS

Adam Smith Director asmith@bkd.com Jim Creeden Partner jcreeden@bkd.com January 26, 2016

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Importance of Financial Metrics & Ratio Analysis Review & Evaluate Key Financial Metrics & Ratios Presenting Results in Dashboards Composite Financial Index (CFI) & Linkage to Strategic Planning

GOALS FOR TODAY

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• Why important?
• Recent economic factors & industry pressures
• Transparency
• Accountability
• Identification of financial risks
• Method of communication to stakeholders
• Risk with peer comparisons
• Apples vs. oranges?

FINANCIAL METRIC & RATIO ANALYSIS

• Four broad factors in assessing ratings
• Market profile
• Operating performance
• Wealth & liquidity
• Leverage
• Self-assessment & benchmarking

MOODY’S & S&P RATING CONSIDERATIONS

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• Positive indicators of self-assessment & benchmarking
• Identification of key performance indicators
• Monitoring of key performance indicators
• Examples of leadership actions based on performance relative to key indicators
• Comparison to carefully selected set of peers

MOODY’S & S&P RATING CONSIDERATIONS

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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

• perating & capital

requirements

• Ability to achieve & sustain

a level of resources sufficient to realize mission

• Insight about capacity to

manage through stress

• Operating flexibility

Primary Reserve Ratio Calculation

Private Institution Public Institution

Numerator Expendable Net Assets Expendable net assets plus FASB CU expendable net assets Denominator Total Expenses Total expenses plus FASB CU total expenses

• 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 affordability of

strategic plans

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

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0.56 0.65 0.70 0.70 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 2012 2013 2014 2015

Primary Reserve

Represents a sample of 40 Midwest based private institutions

Monthly/Annual Days of Cash On Hand

Numerator Monthly/Annual Liquidity X 365 Denominator Total expenses less: Deprecation Other large noncash expenses

• Measure number of days an

institution is able to operate from unrestricted liquidity within one month & one year

• Measure of operating flexibility &

cushion

• Highly correlated with Moody’s

ratings

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55 64 62 61 10 20 30 40 50 60 70 2012 2013 2014 2015

Days of Cash on Hand

Represents a sample of 40 Midwest based private institutions

Monthly/Annual Liquidity

Funds available within one month (one year) Consists of unrestricted operating accts or Other non-endowment unrestricted funds Lesser of Funds 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)

• Distinguishing between wealth &

liquidity

• Takes into account donor

restrictions, accounting rules, investment strategies, etc.

• Assess how much liquidity to meet

large unexpected payments, demand

• r accelerated payments on debt

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Expendable Financial Resources

Total unrestricted & temporarily restricted net assets Long-term debt, less net investment in plant

• Indicates amount of net assets

spendable in long run

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

1.00 1.13 1.28 1.32 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 2012 2013 2014 2015

Expendable Financial Resources to Direct Debt

Represents a sample of 40 Midwest-based private institutions

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Monthly/Annual Liquidity to Demand Debt

Numerator Monthly/Annual Liquidity Measure Denominator

Demand Debt: All VRDOs Commercial Paper Put Bonds Outstanding Lines of Credit Loans or private placements with put features (Excludes regularly scheduled principal maturities)

• Liquidity available

to cover

• utstanding

demand debt

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

• perating & capital

requirements

• Ability to achieve & sustain

resources

• Insight about capacity to

manage through stress

• Operating flexibility

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Net Operating Revenues Ratio

Private Institutions Public Institutions

Numerator Excess (deficiency) of unrestricted

• perating

revenues over unrestricted

• perating

expenses

Operating income (Loss) plus net non-

• perating

revenues (expenses) plus FASB CU change in unrestricted net assets

Denominator

Total unrestricted

• perating

revenue Operating revenues plus non-operating revenues plus FASB CU total unrestricted revenue

• Indicates whether total

unrestricted activities resulted in surplus or deficit

• Living within means?
• Positive & higher ratio show

stronger performance as a result of year’s activities

• Pattern of large deficits or

surpluses can be revealing

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

Cash Income Ratio

Private Institutions Public Institutions

Numerator

Net cash provided by operating activities Cash provided from

• perations plus cash received

from appropriations for

• perating purposes plus gifts

& grants for operating purposes plus FASB CU net cash provided by operating activities

Denominator

Total unrestricted income excluding gains or losses Operating revenues plus appropriations revenues for

• perating purposes plus gifts

& grants revenues for

• perating purposes plus FASB

CU total unrestricted income, excluding gains & losses

• Good indication of

an institution’s liquidity

• A higher ratio

provides institution with a greater amount of flexibility in its operations

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

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Operating Income Ratio

All Institutions

Numerator Operating income (excludes investment income, contributions, net assets released from restrictions) Denominator Educational & general expenses

• Demonstrates extent to

which current-year activities have contributed to overall

• perations
• Measures institutional self-

sufficiency

• Highlights variability of this

source of income & need to maintain quality & market demand

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

Deferred Maintenance Ratio Calculation

Private Institutions Public Institutions

Numerator Outstanding maintenance requirements Outstanding maintenance requirements Denominator Expendable net assets Expendable net assets plus FASB CU expendable net assets

• Increasing ratio is an

indicator of growing deferred maintenance & an aging plant

• A decline in this ratio must

be viewed in context of

• ther issues affecting

institution, such as large investments in new facilities

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

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Net Tuition Dependency Ratio

All Institutions

Numerator Net Tuition Denominator Total Revenue (Includes investment return)

• Dependency on tuition & fees
• Shows relative importance of

revenue stream

• An increasing trend or over

dependence isn’t desirable

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

Net Tuition Per Student FTE Ratio

• Analyzed with view of

tuition discounting & aid

• Increases show generating

more per student All Institutions

Numerator Net tuition Denominator Full-time equivalent students

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

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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

Return on Net Assets Ratio

Private Institutions Public Institutions

Numerator Change in net assets Change in net assets plus FASB CU change in net assets Denominator Total net assets Total net assets plus FASB CU total net assets

• Measure of whether or not

institution’s resources are growing

• Decline in this ratio may be

appropriate if it reflects a strategy that will better fulfill institution’s mission

• Improving trend

– Institution is increasing net assets – Can set aside resources to strengthen future financial flexibility

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

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Capitalization Ratio

Numerator Modified Net Assets Denominator Modified Total Assets

• Determines financial

flexibility on an accumulated return basis

• A high capitalization implies

– Financing flexibility – May not be leveraging assets & too much invested in physical assets

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

Composition of Equity Ratio

Numerator Financial Assets (All assets expect PP&E) Denominator Physical assets

• Reveals allocation of equity

among different types of assets – primarily physical & financial

• Stronger institutions typically

have a ratio in excess of 1

• Equilibrium of investment for

institution – tradeoffs between investment for current generation vs. investment for future generation

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

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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

Viability Ratio

Private Institutions Public Institutions

Numerator Expendable net assets Expendable net assets plus FASB CU expendable net assets Denominator Plant-related debt Plant-related debt plus FASB CU plant-related debt

• Indicates availability of

resources to cover debt

• Generally a ratio range of

1.25x to 2.0x indicates a strong creditworthy institution

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

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Debt Burden Ratio Calculation

Private Institutions Public Institutions

Numerator Debt service Debt service plus FASB CU debt service Denominator Total expenditures Total expenditures plus FASB CU total expenditures

• Primarily measures

likelihood that you can repay your existing loans

• The higher the debt

burden ratio, less of your income is disposable

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

Debt Service Coverage Ratio

Private Institutions Public Institutions

Numerator Adjusted change in unrestricted net assets from

• perations

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

• 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 1

means a negative cash flow

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

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Age of Facilities Ratio Calculation

Private Institutions Public Institutions

Numerator Accumulated depreciation Accumulated depreciation plus FASB CU accumulated depreciation Denominator Depreciation expense Depreciation expense plus FASB CU depreciation expense

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

12 13 13 13 5 6 7 8 9 10 11 12 13 14 2012 2013 2014 2015

Age of Facilities

Represents a sample of 40 Midwest-based private institutions

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Interest Burden Calculation

Private Institutions Public Institutions

Numerator Interest expense Interest expense plus FASB CU interest expense Denominator Total expenditures Total expenditures plus FASB CU total expenditures

• Target range should be no

greater than 5% - 6%

• Principal is excluded from

this ratio

• More useful in perpetual

debt structure

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

• Developed by KPMG & Prager McCarthy and Sealy, LLC in late 1990s
• Developed specifically for higher education institutions
• Widely accepted set of ratios & overall measurement of financial health
• Four core ratios
• Primary reserve ratio
• Net operating revenues ratio
• Return on net assets ratio
• Viability ratio

COMPOSITE FINANCIAL INDEX

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• 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

COMPOSITE FINANCIAL INDEX

Ratios computed Converted to strength factor Factors weighted Four numbers totaled

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

CFI THOUGHTS & IMPLICATIONS

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CFI SCALE

Scale for Converting Core Ratios to Strength Factors

SCORING SCALE 1 3 10

Primary Reserve Ratio 0.133x .4x 1.33x Net 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

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Weighting Patterns

Ratio Institutions 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%

• Liberal arts institutions
• Non-urban setting
• Enrollment approximately 1,300

Peer Institution Profile Used for Analysis

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2013 - 2015 CFI Scores for Peer Institutions

Ratio 2013 2014 2015 Primary reserve 2.71 3.19 3.45 Return on net assets 0.81 0.59 0.28 Net operating revenue ratio 1.35 0.70

• 0.24

Viability 0.94 1.07 0.88 CFI Score 5.81 5.55 4.37

Graphic Financial Profile

PRIMARY RESERVE RATIO 10 10 10 NET OPERATING REVENUE RATIO 10 VIABILITY RATIO 10 RETURN ON NET ASSETS RATIO 3 3 3 3

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2015 Graphic Financial Profile

10 10 10 10 10 3 3 3 3

CFI SCALE

2015 2014 2013 3 year average

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Linking Mission to Strategic & Other Plans

Strategic Plan (Goals, Strategies, Key Metrics) Institutional Mission Institution Risk Management Summary Institution Wide Plans (Academic, Research, Facilities, Operating & Capital Budgets, etc.) Institutional Academic & Administrative Processes Source: Strategic Financial Analysis in Higher Education, Seventh Edition (KPMG, Prager Sealy and Co., and Attain, 2010)

• How does institution evaluate & address
• Financial risks
• Operating
• Capital
• What is institution’s liquidity & how does it affect operations?
• Is debt used strategically?
• Are financial resources allocated to support institutional strategies?
• What is institution’s overall financial health?

INSTITUTION-WIDE STRATEGIC FINANCIAL QUESTIONS

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

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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

Dashboard Example

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Endowment Market Value Endowment Market Value 158 10.4 158 8.3 137 in millions 8.3 Change in Endowment Total Gifts and Grants 7.50% 40% 7.50% 37%

• 8.40%

37% Spending Rate

Faculty

5.00% 5.00% Student/Faculty 5.00% 12:1 11.6:1 Donor-Supported Aid 11:1 20.80% 17.60% Alumni Participation 17.60% 93% 89% Annual Operating Margin 89% 2.80% 2.80% 1.30% 0% 4% Return on Net Assets 4% 7.30% 7.30%

• 5.70%

Key: Current Value Direction of change Importance of change Highest value for past 5 years 22% higher blue =better 20% lower red =worse Lowest value for past 5 year 2% no change

Finance Advancement

Dashboard Example

2011-2012 2012-2013 2013-2014 2014-2015 1 yr change 1 yr goal 5 yr trend 5 yr goal FT degree enrollment Down Up Net tuition per FTE Up Up Net tuition dependency Up Up CFI Down Up Days of cash on hand Down Up Debt Burden Ratio Up Up/Up Expendable Financial Resources Up Age of Facilities Down Up Endowment per FTE Down Up Primary Reserve Ratio Up Up Strategic Direction

Dashboard Example

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Moody’s

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FOR MORE INFORMATION Jim Creeden // jcreeden@bkd.com Adam Smith // asmith@bkd.com

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