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

Transcription

1 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.

2 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 ( ) President Independent Schools Queensland ( ) Treasurer Independent Schools Queensland ( ) Chair Finance Committee St Stephen s College ( ) Director - St Stephen s College Ltd ( ) Risk Assurance Committee St Stephen s College ( ) Chairman - St Paul s School Foundation (2006 to 2008) Council and Finance - St Paul s School ( )

3 Session Outline

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

6 Sufficient surplus Oils the Wheels

7 Don t Jam the Wheels Insufficient Surplus Too much Debt

8 Helpful Tools

9 Essence of Financial Viability Solvency Cash Flow Adequacy Profitability Net Operating Margin Student/Teacher ratios Ability to pay your bills on time Sustainability Interest Cover Debt Servicing and amount of debt Asset replacement

10 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

11 Queensland University Of Technology John Somerset Masters by Research 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

12 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

13 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

14 National Net Operating Margin

15 National Debt per Student Total Independent Schools bank debt estimated to be $3 billion

16 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

17 Somerset Example School Income and Expenditure REVENUE Tuition Fees 10,996,438 10,483,382 Less Concessions (1,348,375) (1,327,645) Boarding Fees 750, ,802 Less Concessions (5,419) (5,000) Government Tuition Grants 7,782,940 7,397,775 Government grants - interest subsidies Governtment Boading Grants 10,000 10,000 Other Income 298, ,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, ,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, ,041 Boarding Wages and On-Costs 410, ,734 Tuition Costs 1,343, ,019 Administration Costs 950, ,482 Maintenance Costs 624, ,431 Boarding Costs 452, ,917 Ancillary Costs 1,119, ,111 Finance Costs 483, ,000 Depreciation 1,500,001 1,500,002 TOTAL EXPENDITURE 19,061,978 18,694,142 CAPITAL INCOME Capital Grants 190, , , ,952 TOTAL INCOME FOR THE PERIOD (385,489) (899,892)

18 Somerset Example School Statement of Financial Position CURRENT ASSETS Cash and Cash Equivalents 398,933 1,263,797 Trade and Other Receivables 875, ,188 Inventory 100, ,000 Other Assets 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, ,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 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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20 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?

21 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

22 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

23 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

24 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

25 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

26 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

27 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 out 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.

28 Somerset School Portal ASBA/Somerset Non-Government Schools Financial Performance Survey Access via

29 Once data entered, select a sample

30 Selecting your Sample of similar schools

31 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: (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 551

32 Generate your report

33 Snapshot of your school Ratio Table 1: Key Performance Indicators Your School Rating Sample Average More/(Less) than Average Working Capital * 0.41? Cash Flow Adequacy * 0.66? Reinvestment 135% 131% 5 Interest Cover * 2.9? 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 Page 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) Net Operating Margin (EBIDA/Recurrent Income) $18,592? $17,592 $871, %? 13.3% ($1,052,112) 11 Primary Student/Teacher 12.0? Secondary Student/Teacher 10.6?

34 Your Enrolments Trends Enrolments Enrolments Declining trend in enrolments has turned upwards in 2015

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36 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%

37 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

38 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

39 Your 2015 Net Operating Margin Ratio Net Operating Margin (EBIDA/Recurrent Income) Table X: Operating Efficiency Your School Rating Sample Average More/(Less) than Average 7.6%? 13.3% ($1,052,112) Wages as a percentage of Income 68.7%? 66.8% 23.4% 18.8% 14.2% 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. 9.7% 5.1% This indicates your operating surplus was $1.1 million less than other schools in the sample with similar turnover. National average is about 13%.

40 Your Net Operating Margin trend 14.5% 12.1% 9.8% 7.5% 5.1%

41 Your 2015 Income per student Ratio Revenue Sources (Excludes boarding) Table VI: Revenue Sources and Collection Your School Rating Sample Average More/(Less) than Average 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 Formula: Total Recurrent Income number of students. Definition: Indicates your relative level of income compared to other schools in the sample. $17537 $15503 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

42 Your 2015 Expenditure Ratio Per Student Costs (Excludes boarding) Table VII: Expenditure Your School Rating Sample Average * More/(Less) than Average 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) As a Percentage of Expenses $18,592? $17,592 $871,257 Teacher Your expenses Salaries are $870,000 more than 52.7% the average school 55.9% in the sample with identical Specialist enrolment Support numbers 0.6% 2.6% Teacher Major Aides areas Administration + $600,000, 7.3% Aides and? Resources 5.5% + $500,000 Administration Efficient in Salaries other areas 9.0% 9.3% Maintenance How does & Other this correlate Salaries to staffing? 5.4%? 4.4% Teaching Resources 8.3%? 7.6% Other Admin Expenses 12.8%? 9.3% Other Maintenance Costs 3.8% 6.5%

43 Your 2015 Expenditure $11877 $10703 $9529 Teaching Expenses per student 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. $8354 $7180 $25863 $22700 $19537 $16374 Total Expenses per student 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. $13212 Teaching expenses close to median Total expenses relatively high

44 Student/Teacher ratio Number of students Full-Time teacher equivalent = Average number of students per FTE teacher Best Practice = Depends on the school

45 Your 2015 Primary Staff ratios Ratio Table VIII: Staffing Ratios - Primary School Your School Rating Sample Average More/(Less) than Average Primary Student/Teacher Primary Student/Spec Support Primary Students/ Aides Staff (0.1) Primary Student/Admin Staff Primary Student/Maint and other Staff Primary Academic Staff to Support Staff Primary student/teacher ratio 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 outsource and also the relative size of properties to be maintained.

46 Your 2015 Secondary Staff ratios Ratio Table IX: Staffing Ratios - Secondary School Your School Rating Sample Average More/(Less) than Average Secondary Student/Teacher Secondary Student/Spec Support (0.6) Secondary Students/ Aides Staff Secondary Student/Admin Staff Secondary Student/Maint and other Staff Secondary Academic Staff to Support Staff Maint/Property Staff/Hectare - Prim & Sec Secondary student/teacher ratio 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.

47 Your Staff ratio trends 13 Primary student/teacher ratio Secondary student/teacher ratio 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

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49 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

50 Summary of Cash Flows SOMERSET EXAMPLE SCHOOL STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 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, ,648 CASH FLOWS FROM INVESTING ACTIVITIES Payments (Net of Disposals) for Property, Plant and Equipment (1,500,000) (499,937) Capital Income 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

51 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

52 Your Cash Flow Adequacy Somerset Example School 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 More interested in the trend of this ratio If consistently < 1.0, how is that being funded?

53 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

54 Your Working Capital Ratio Ratio Your School Table II: Liquidity Ratios Working Capital * 0.66? 0.95 Rating Sample Average More/(Less) than Average Somerset Example School Working Capital Ratio Current Assets $ 1,574,808 $ 2,406,985 Current Liabilities $ 3,797,720 $ 3,647,726 Working Capital 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

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

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

58 37% 82% 62% 80% 114% 84% 75% 83% 216% 135% 135% 250% 378% 819% Your Depreciation and Reinvestment as % Cash Flow % 800.0% 600.0% Somerset Example School 400.0% 200.0% 0.0% 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

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

60 Your 2015 Debt Ratios Ratio Table V: Capital Structure and Debt Protection Your School Interest Cover * 2.9? 14.7 Debt Servicing Cover * Liabilities to Equity 41.0% 33.2% Debt Repayment (Years) 6.8? 3.9 Rating Sample Average More/(Less) than Average Debt per Student $8,720 $8,836 ($100,483) Debt Repayment to Total Income 5.1% 4.6% $22265 $16699 $11132 Debt per student Formula: Total debt student numbers. Definition: A measure of your debt relative to others in the sample. $5566 $0 Debt is close to average Close to the centre point (median)

61 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

62 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

63 Your Debt Servicing Somerset Example School 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 Debt Servicing Cover Inadequate debt serviceability in 2014 due to low profitability Improved in 2015 But consider ability to sustainably meet debt servicing and asset replacement?

64 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

65 Summary Indications Enrolments trended down but improved in 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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67 Budgets must reconcile Income Statement Statement of Financial Position Must Reconcile with each other Statement of Cash Flow Loan Balances Cash at Bank

68 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

69 Income Statement Somerset Example School Strategic Financial Projections 1 January 2013 to 31 December 2022 INCOME AND EXPENDITURE STATEMENT Recurrent Income ACTUAL ACTUAL ACTUAL BUDGET BUDGET BUDGET BUDGET BUDGET 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, , , , ,087 1,047,267 1,144,080 1,247,964 Other Income 289, , , , , , , ,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, , , ,539 1,048,653 1,103,486 1,161,181 1,219,682 Ancillary Costs 345, ,111 1,119,191 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Interest 554, , , , , , , ,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, , ,107 1,337,114 Capital Income 190, , , , ,000 - NET SURPLUS/(DEFICIT) (778,370) (899,892) (385,489) (168,622) 475,128 1,242, ,107 1,337,114

70 Statement of Financial Position Somerset Example School Strategic Financial Projections 1 January 2013 to 31 December 2022 BALANCE SHEET ASSETS Cash Debtors - Fees Provision for Doubtful Debts Debtors - Other Stock Other Current Asset 1 Land Buildings Accumulated Depreciation Plant & Equipment Accumulated Depreciation Actual Actual Actual Budget Budget Budget Budget Budget ,496,449 1,263, , , , , ,740 1,809, , , ,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) , , , , , , , , , , , , , , , ,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 Bank Overdraft Fees in Advance Other Current 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 Provision for LSL Provision for Holiday Pay GST Payable Other Non-Current Liabilities 1 737, , , , , , , ,495 Bank loans 8,400,800 8,050,815 7,604,125 7,130,629 6,628,719 15,338,048 13,969,923 12,519,697 TOTAL LIABILITIES 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

71 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 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, , , , ,087 1,047,267 1,144,080 1,247,964 Other Income 289, , , , , , , ,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, , , ,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, ,111 1,119,191 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Interest 554, , , , , , , ,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, , ,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, , , , ,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, Movements in Non-Current Liabilities Loan Drawdowns ,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, , ,715 Opening Balance 1,660,029 1,496,449 1,263, , , , , ,740 Net Cash Flow (163,580) (232,652) (864,864) (149,046) 212,333 68, , ,715 Closing Balance 1,496,449 1,263, , , , , ,740 1,809,456

72 KPI Analysis Somerset Example School Strategic Financial Projections 1 January 2013 to 31 December 2022 ANALYSIS OF KEY PERFORMANCE INDICATORS Unadjusted Benchmarks 2014 Benchmark MATCHES TO SURVEY REPORT Actual Actual Actual Budget Budget Budget Budget Budget Debt Protection Interest cover (based on EBITDA) Debt servicing cover 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 boardin 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 Secondary Teacher Ratio 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 Boarding income per boarder # $ 15,605 $ 18,086 $ 15,058 $ 14,909 $ 16,791 $ 17,724 $ 18,701 $ 19,726 $ 20,799 Boarding expenditure per boarder # $ 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

73 Somerset Key Indicator (SKI) Report 1. Learn from the Past 2. Understand the Present Using any budget, enter data into the SKI. It will also extract your data from the latest Benchmarking Report 3. Risk assess the Future

74 SKI report

75 Traffic Light Early Warning System

76 Up to Seven years on one page Green = OK Your ratio Sample av. Yellow = caution

77 Conclusions re Example School

78 Your Net Operating Margin Trend 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Somerset Example School 12.2% 12.9% 13.2% 10.9% 9.1% 7.6% 5.9% 5.2% Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget Margin Sample average Budgeting to improve profitability

79 Student/Teacher Ratio Trend Somerset Example School Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget Primary Secondary Student/teacher ratio increased Causes teaching salaries per student to be more in line with sample average

80 Cash Flow Adequacy Somerset Example School Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget 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

81 Actual Cash Flows Somerset Example School 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 What further action can be taken to improve the position?

82 Working Capital Ratio Somerset Example School Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget Working Capital Target minimum Historically low cash reserves but slowly improving

83 Debt per Student Somerset Example School $20,000 $15,000 $15,540 $13,928 $12,457 $10,000 $9,252 $9,329 $8,720 $7,802 $6,919 $5,000 $ Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget 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?

84 Debt Servicing 8.0 Somerset Example School Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget 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

85 Net Operating Margin Interest Cover Case study benchmarking works 25% 25 20% 15% Started using Ratios & Benchmarks % 10 5% 5 0% -5%

86 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

87 For further details contact John Somerset Director of Somerset Education Internet Telephones (Australia) (International) (Cell phone) Address GPO Box 3273 Brisbane, Queensland Australia 4001