KEY FINANCIAL METRICS & DASHBOARD REPORTING FOR HIGHER EDUCATION INSTITUTIONS January 26, 2016 Jim Creeden Partner jcreeden@bkd.com Adam Smith Director asmith@bkd.com 1
TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & email address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be emailed their CPE certificates within 15 business days of live webinar GOALS FOR TODAY Importance of Financial Metrics & Ratio Analysis Review & Evaluate Key Financial Metrics & Ratios Composite Financial Index (CFI) & Linkage to Strategic Planning Presenting Results in Dashboards 2
FINANCIAL METRIC & RATIO ANALYSIS 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? MOODY S & S&P RATING CONSIDERATIONS Four broad factors in assessing ratings Market profile Operating performance Wealth & liquidity Leverage Self-assessment & benchmarking 3
MOODY S & S&P RATING CONSIDERATIONS 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 4
Resource Sufficiency & Liquidity Ratios RATIO/METRIC Primary reserve ratio Monthly/annual days of cash on hand Monthly/annual liquidity Expendable financial resources Monthly/annual liquidity to demand debt OVERALL OBJECTIVES Sufficient amount of funds to meet current & future operating & capital requirements Ability to achieve & sustain a level of resources sufficient to realize mission Insight about capacity to manage through stress Operating flexibility Primary Reserve Ratio Calculation Compares expendable net assets to total expenses Private Institution Public Institution Snapshot of financial strength & flexibility Indicates how long institution can function using expendable reserves without relying on additional net assets generated by operations Expendable Net Assets Expendable net assets plus FASB CU expendable net assets Assets that could be access quickly to spend to satisfy obligations Helps understand affordability of strategic plans Total Expenses Total expenses plus FASB CU total expenses 5
0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 Primary Reserve 0.70 0.70 0.65 0.56 2012 2013 2014 2015 Represents a sample of 40 Midwest based private institutions Monthly/Annual Days of Cash On Hand 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 Monthly/Annual Liquidity X 365 Total expenses less: Deprecation Other large noncash expenses 6
Days of Cash on Hand 70 60 50 55 64 62 61 40 30 20 10 0 2012 2013 2014 2015 Represents a sample of 40 Midwest based private institutions Monthly/Annual Liquidity Distinguishing between wealth & liquidity Takes into account donor restrictions, accounting rules, investment strategies, etc. Assess how much liquidity to meet large unexpected payments, demand or accelerated payments on debt Funds available within one month (one year) Consists of unrestricted operating accts or Other 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) 7
Expendable Financial Resources Indicates amount of net assets spendable in long run Total unrestricted & temporarily restricted net assets Long-term debt, less net investment in plant 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 Expendable Financial Resources to Direct Debt 1.28 1.32 1.13 1.00 2012 2013 2014 2015 Represents a sample of 40 Midwest-based private institutions 8
Monthly/Annual Liquidity to Demand Debt Liquidity available to cover outstanding demand debt Monthly/Annual Liquidity Measure Demand Debt: All VRDOs Commercial Paper Put Bonds Outstanding Lines of Credit Loans or private placements with put features (Excludes regularly scheduled principal maturities) Operating Metrics RATIO/METRIC Net operating revenues ratio Cash income ratio Net tuition dependency Net tuition per student FTE ratio Deferred maintenance ratio Operating income ratio OVERALL OBJECTIVES Sufficient amount of funds to meet current & future operating & capital requirements Ability to achieve & sustain resources Insight about capacity to manage through stress Operating flexibility 9
Net Operating Revenues Ratio Indicates whether total unrestricted activities resulted in surplus or deficit Private Public 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 Excess (deficiency) of unrestricted operating revenues over unrestricted operating expenses Total unrestricted operating revenue Operating income (Loss) plus net nonoperating revenues (expenses) plus FASB CU change in unrestricted net assets Operating revenues plus non-operating revenues plus FASB CU total unrestricted revenue Cash Income Ratio Good indication of an institution s liquidity A higher ratio provides institution with a greater amount of flexibility in its operations Private Net cash provided by operating activities Public Cash provided from operations plus cash received from appropriations for operating purposes plus gifts & grants for operating purposes plus FASB CU net cash provided by operating activities Total unrestricted income excluding gains or losses Operating revenues plus appropriations revenues for operating purposes plus gifts & grants revenues for operating purposes plus FASB CU total unrestricted income, excluding gains & losses 10
Operating Income Ratio Demonstrates extent to which current-year activities have contributed to overall operations Measures institutional selfsufficiency Highlights variability of this source of income & need to maintain quality & market demand All Operating income (excludes investment income, contributions, net assets released from restrictions) Educational & general expenses Deferred Maintenance Ratio Calculation Increasing ratio is an indicator of growing deferred maintenance & an aging plant A decline in this ratio must be viewed in context of other issues affecting institution, such as large investments in new facilities Private Outstanding maintenance requirements Expendable net assets Public Outstanding maintenance requirements Expendable net assets plus FASB CU expendable net assets 11
Net Tuition Dependency Ratio Dependency on tuition & fees All Shows relative importance of revenue stream An increasing trend or over dependence isn t desirable Net Tuition Total Revenue (Includes investment return) Net Tuition Per Student FTE Ratio Analyzed with view of tuition discounting & aid All Increases show generating more per student Net tuition Full-time equivalent students 12
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 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 Private Change in net assets Total net assets Public Change in net assets plus FASB CU change in net assets Total net assets plus FASB CU total net assets 13
Capitalization Ratio 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 Modified Net Assets Modified Total Assets Composition of Equity Ratio 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 Financial Assets (All assets expect PP&E) Physical assets 14
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 Indicates availability of resources to cover debt Private Public Generally a ratio range of 1.25x to 2.0x indicates a strong creditworthy institution Expendable net assets Plant-related debt Expendable net assets plus FASB CU expendable net assets Plant-related debt plus FASB CU plant-related debt 15
Debt Burden Ratio Calculation Primarily measures likelihood that you can repay your existing loans The higher the debt burden ratio, less of your income is disposable Private Debt service Total expenditures Public Debt service plus FASB CU debt service Total expenditures plus FASB CU total expenditures Debt Service Coverage Ratio 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 Private Adjusted change in unrestricted net assets from operations Debt service Public Net operating income plus nonoperating revenues plus interest expense plus depreciation plus FASB CU adjusted change in net assets Debt service plus CU debt service 16
Age of Facilities Ratio Calculation Provides rough sense of aging of facilities & potential need for future resources to be invested into facilities Private Public Low ratio Generally good Indicates recent investment in plant Intangible asset Accumulated depreciation Accumulated depreciation plus FASB CU accumulated depreciation High ratio Generally not good Indicates deferred reinvestment in plant Will require significant expenditures in future Unrecorded liability Depreciation expense Depreciation expense plus FASB CU depreciation expense 14 13 12 11 10 9 8 7 6 5 Age of Facilities 13 13 13 12 2012 2013 2014 2015 Represents a sample of 40 Midwest-based private institutions 17
Interest Burden Calculation Target range should be no greater than 5% - 6% Private Public Principal is excluded from this ratio Interest expense Interest expense plus FASB CU interest expense More useful in perpetual debt structure Total expenditures Total expenditures plus FASB CU total expenditures COMPOSITE FINANCIAL INDEX 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 18
COMPOSITE FINANCIAL INDEX Four ratios weighted & scored on scale Creates single score of financial health Single score allows weakness in one ratio to be offset by strength in another ratio Ratios computed Converted to strength factor Factors weighted Four numbers totaled CFI THOUGHTS & IMPLICATIONS 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 19
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 0.7% 2% 7% Public 1.3% 4% 13% Return on Net Assets Ratio 2.0% 6% 20% Viability Ratio 0.417% 1.25x 4.17x 20
Weighting Patterns with with Ratio Long-Term Debt No Long-Term Debt Primary Reserve 35% 55% Net Operating Revenues 10% 15% Return on Net Assets 20% 30% Viability Ratio 35% -- Peer Institution Profile Used for Analysis Liberal arts institutions Non-urban setting Enrollment approximately 1,300 21
2013-2015 CFI Scores for Peer Ratio 2013 2014 2015 Primary reserve 2.71 3.19 3.45 Return on net 0.81 0.59 0.28 assets Net operating 1.35 0.70-0.24 revenue ratio Viability 0.94 1.07 0.88 CFI Score 5.81 5.55 4.37 Graphic Financial Profile PRIMARY RESERVE RATIO 10 10 3 RETURN ON NET ASSETS RATIO 10 3 3 10 NET OPERATING REVENUE RATIO 3 10 VIABILITY RATIO 22
2015 Graphic Financial Profile 10 10 3 10 3 10 3 3 10 CFI SCALE 3 year average 2015 2014 2013 23
Linking Mission to Strategic & Other Plans Institutional Mission Strategic Plan (Goals, Strategies, Key Metrics) Institution Risk Management Summary Institution Wide Plans (Academic, Research, Facilities, Operating & Capital Budgets, etc.) Institutional Academic & Administrative Processes INSTITUTION-WIDE STRATEGIC FINANCIAL QUESTIONS 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? 24
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 25
Finance Dashboard Example Advancement 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% Faculty Spending Rate 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 Dashboard Example Strategic Direction 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 26
Moody s 27
QUESTIONS? CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org. The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars. 28
CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please email BKD Learning & Development Department at training@bkd.com THANK YOU! FOR MORE INFORMATION Jim Creeden // jcreeden@bkd.com Adam Smith // asmith@bkd.com 29
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