Govern with Confidence - Association of Independent Schools of SA

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Effective Financial Management For Schools
AISSA Leadership Program
Immanuel College
32 Morphett Road Adelaide – 8 June 2011
Govern with Confidence
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John Somerset
Core Expertise
Qualifications

Graduate Diploma Company Directors Course

Chartered accounting – 25 years

Ex Price Waterhouse Coopers, Hall Chadwick/William Buck

Certificate IV in Workplace Training and Assessment

Broad accounting, taxation, business advisor

Graduate Diploma in Applied Finance and Investment

Benchmarking and financial analysis of schools (16 years).

Professional Year Institute of Chartered Accountants

Corporate governance of schools.

Financial risk management and performance improvement

Bachelor of Commerce University of Queensland

Budgeting ,board reporting models, on-line tools.
Accreditations/Memberships
Appointments

Graduate - Australian Institute of Company Directors

Council and Finance - St Paul’s School (2000 – 2008)

Fellow - Financial Services Institute of Australasia

Chairman - St Paul’s School Foundation (2006 to 2008)

Director - St Stephen’s College Ltd (2004 - )

Member - Institute of Chartered Accountants in
Australia

Chair Finance Committee – St Stephen’s College

Risk Assurance Committee – St Stephen’s College
Member - Performance Measurement Association
(UK)

Treasurer –Independent Schools Queensland (2001 – 2011)

President –Independent Schools Queensland (2011 - )

Director – Independent Schools Council of Australia

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Course Outline
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Govern with Confidence
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The language of Money
• Story of financial information – told in dollars
• Same for 500 years (Luca Pacioli)
• A representation of the story – not necessarily the actual
story
• Different ways to tell the story (don’t be fooled)
– Cost -v- Market value
– Cash -v- Accrual
• Summarises raw data into a logical format
Data
Information
Fiduciary
Responsibility
Informed Decisions
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Communicating Financial Information
• Accounting information is essential for control of operations
and decision making.
• Most common reports are called “Financial Statements” and
include
– Balance sheet
– Operating Statement or Income & Expenditure Statement or
Profit & Loss (same thing!)
– Cash Flow Statement
• Users of this information
–
–
–
–
–
–
School management
School board
School owners
Your bank
Government
Insurers
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The Players on the Field
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Balance Sheet - Your World
A “picture” at a point in time.
What you
Less
What you
Equals
What you are
Own
Owe
Worth
Assets
Liabilities (debts)
=
Equity (Retained Earnings)
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Balance Sheet – A “picture” at a point in time
• Current Assets
=
• Non-Current Assets
=
• Current Liabilities
=
• Non-Current Liabilities =
Cash or things convertible
to cash within 12 months
Other things you own that
will take longer than 12
months to convert to cash
Debts due within 12 months
Debts with longer than 12
months to pay
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Balance Sheet - Your World
A “picture” at a point in time.
What you
Less
What you
Equals
What you are
Own
Owe
Worth
Assets
Liabilities (debts)
=
Equity (Retained Earnings)
An explanation of what happened over time
Income
Inflow of economic benefits (Fees, grants, other)
Less
Expenses
Costs incurred in operating the school
Equals
Net Operating surplus
(Profit)
Net inflow or outflow of wealth
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Recurrent -V- Capital Income and Expenses
Two classifications
1. Recurrent (short lived)
– Income – received during the year to be spent during
the year eg.
• Tuition fees and grants
• Bookshop sales
Inflow of wealth
– Operating Expenses – expenditure for which there is no
enduring (long-term) benefit. Can’t see and touch the
outcome eg.
• Staff salaries
• Telephone
• Maintenance
Outflow of wealth
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Recurrent -V- Capital Income and Expenses
Two classifications (continued)
2. Capital (long lived)
– Income – received during the year to be spent after
year-end or on assets that will be used up over a
number of years eg.
• BER grant to build a building
Inflow of wealth
• Donation to Foundation Scholarship Fund
• Other income which you don’t expect to receive each year
– Capital Expenses – expenditure for which there is an
enduring (long-term) benefit. Can see and touch the
outcome eg.
• Building a new science block
• Purchase computers
Outflow of cash
Get something
tangible in
Return
Inflow of an asset
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The “Aim” of the Game
1. Earn more than you spend
2. Own more than you owe
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The “Aim” of the Game
Balance Sheet
Your School
Entity
(Internal World)
Profit & Loss
Income $1,000
Adds to Equity
The Outside World
Expenses $900
Take away equity
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The value of the entity grows by $100
Balance Sheet
Profit & Loss
Income $1,000
Adds to Equity
Extra $100 Cash
Internal World Grows
The Outside World
Expenses $900
Take away equity
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Reinvest $100 on a building
Balance Sheet
Extra $100 Cash
Just a flow of cash. No
change in wealth. Just A
reallocation of assets from
cash to building
Building supplied
The Outside World
Building worth $100
(Entity did not grow)
Builder paid $100
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How are the Balance Sheet and Income
Statement Related?
• The profit (surplus) or loss (deficit) incurred for the
year is added to or subtracted from your Equity
(what you are worth).
• What you are worth (your equity), is affected by
the profit you make, or loss incurred, by trading
with the rest of the World.
• Your “World” is affected by the skill of your
transactions
Have you brought wealth in or have you lost it?
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Example
Personal Balance Sheet – Your World
ASSETS
Cash at bank
Car
House cost
What you own
Less LIABILITIES
Visa card
Bank loan on house
What you owe
Net Worth 1 January
January
$ 10,000
$ 50,000
$ 700,000
$ 760,000
December
Current asset
Non-Current asset
Non-Current asset
Total assets
($ 5,000)
($300,000)
($305,000)
$ 455,000
Current liability
Non-current liability
Total liabilities
Equity, Net Worth, Sell up
and go sit on the beach with
Income and Expenditure Statement – transacting with rest of the World
Wages January to December
Taxation
Loan payments (interest only)
Living costs
Surplus, Profit
$100,000
($ 27,000)
($ 20,000)
($ 50,000)
$ 3,000
Income
Expense
Expense
Expense
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Example
Personal Balance Sheet – Your World
ASSETS
Cash at bank
Car
House Cost
What you own
Less LIABILITIES
Visa card
Bank loan on house
What you owe
Net Worth 31 December
and
January
$ 10,000
$ 50,000
$ 700,000
$ 760,000
December
$ 13,000
$ 50,000
$ 700,000
$ 763,000
($ 5,000)
($300,000)
($305,000)
$ 455,000
($ 5,000)
($300,000)
($305,000)
$ 458,000
Current asset
Non-Current asset
Non-Current asset
Total assets
Current liability
Non-current liability
Total liabilities
Equity, Net Worth, Sell up
go sit on the beach with
Income and Expenditure Statement – transacting with rest of the World
Wages January to December
Taxation
Loan payments (interest only)
Living costs
Surplus, Profit
$100,000
($ 27,000)
($ 20,000)
($ 50,000)
$ 3,000
Income
Expense
Expense
Expense
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Moral of the Story
1. Must be able to pay your debts when due
Question 1 Are we solvent (can we pay our debts
when due)?
2. You must make a surplus (profit) with the outside
World
Question 2 Are we Profitable?
3. Continue to reinvest in new assets
Question 3 Are we sustainable?
How much debt is prudent?
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Lets play– Happily United Grammar School (HUGS)
• Primary school of about 200 students
• Starting a secondary campus in 2008
• Profitable for many years
• Bank loan facility of $900,000
• Encountered trading difficulties in 2008
• Identified the extent of the problem in late 2008.
• Bank would not extend more credit
• Insolvent by December 2008
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Balance Sheet - Your World
Current Assets
Non-Current Assets
Total Assets
Current Liabilities
Non-Current Liabilities
Total Liabilities
Members funds (Equity)
Fees
Grants
Other income
Total Income
Expenses
Provisions
Depreciation
Total expenses
Operating profit/(loss)
Capital Income
Net Profit/(loss)
2007 ($000)
$ 109
$3,541
$3,650
$ 451
$ 662
$1,112
$2,538
$ 549
$1,016
$ 79
$1,645
$1,757
$ 16
$ 125
$1,898
($ 253)
$ 22
($ 231)
2008 ($000)
Inflow of wealth
Net
Outflow
of
wealth
Outflow of wealth
Inflow of wealth
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Balance Sheet - Your World
Current Assets
Non-Current Assets
Total Assets
Current Liabilities
Non-Current Liabilities
Total Liabilities
Members funds (Equity)
2007 ($000)
$ 109
$3,541
$3,650
$ 451
$ 662
$1,112
$2,538
Fees
Grants
Other income
Total Income
Expenses
Provisions
Depreciation
Total expenses
Operating profit/(loss)
Capital Income
Net Profit/(loss)
$ 549
$1,016
$ 79
$1,645
$1,757
$ 16
$ 125
$1,898
($ 253)
$ 22
($ 231)
2008 ($000)
$ 108
$3,611
$3,719
$ 856
$ 556
$1,412
$2,307
Net
Outflow
of
wealth
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Matching Principle
• About creating an accurate “story” for your Income and
Expenditure Statement
• Income = what you are entitled to keep
• Expenses = what you are obliged to pay
• Balancing adjustments are made through the balance sheet
– Fees in advance (shown as a debt possibly to be repaid)
– Creditors, accruals, provisions (shown as debts to pay)
– Debtors (shown as assets/money due to be received)
• So by 31January
– Income earned is 1/12th of the annual amount
– Expenses incurred are 1/12th of annual expenses
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Cash Basis accounting – An Example
• Recognise income when banked and expenses
when paid
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Cash Basis – HUGS
Next years Fees
paid in advance
Year to Date Results $000
Jan
Fees
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Auditor
adjust
Dec
100
200
300
350
400
500
540
552
552
552
666
508
508
508
508
508
508
763
763
1017
1017
1017
1017
1017
7
13
20
26
33
40
46
53
60
66
73
79
79
Total Income
515
622
728
835
891
948
1309
1355
1629
1635
1642
1762
(117)
1645
Expenses
144
289
433
578
722
866
1011
1155
1300
1444
1588
1733
24
1757
16
16
125
125
165
1898
Grants
Other
Provisions
Depreciation
(117)
Total
549
Total Exps
144
289
433
578
722
866
1011
1155
1300
1444
1588
1733
Operating
Profit
371
333
295
257
169
82
298
200
329
191
54
30
(253)
22
22
22
22
22
22
22
22
22
192
104
320
222
351
214
76
52
Capital
Income
Net
Profit/(loss)
371
333
295
257
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(282)
(231)
Board became aware
of problem about here
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Accrual Basis
• Matching
– Income to the period when it is earned and
– Expenses to the period when it is incurred.
• Irrespective of what has been received or paid.
• If we have received income in advance of providing the services, then if
we stop trading, we would need to return it.
• So we don’t treat it as income until it is EARNED
• If we incur an expense, even if it is “on account” then we will
eventually have to pay for it so we recognise it when INCURRED.
• Outcome is a clearer more timely picture on how we are trading and
how the year will most likely unfold.
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Accrual Basis – HUGS
Year to Date Results $000
Jan
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
Auditor
adjust
Total
Fees
46
Grants
85
Other
7
79
Total Income
137
1645
Expenses
146
1757
1
16
10
125
Total Exps
158
1898
Operating
Profit
(21)
(253)
0
22
(21)
(231)
Provisions
Depreciation
Capital
Income
Net
Profit/(loss)
We have earned it even though we have not yet been paid
We were paid much more than we earned. So we only record the earned amount
Problem evident here
549
1017
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Accrual Basis – HUGS
Year to Date Results $000
Jan
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Auditor
adjust
Dec
Total
Fees
46
92
137
183
229
275
320
366
412
458
503
549
549
Grants
85
169
254
339
424
508
593
678
763
847
932
1017
1017
Other
7
13
20
26
33
40
46
53
60
66
73
79
79
Total Income
137
274
411
548
686
823
960
1097
1234
1371
1508
1645
1645
Expenses
146
293
439
586
732
879
1025
1171
1318
1464
1611
1757
1757
1
3
4
5
7
8
9
10
12
13
14
16
16
10
21
31
42
52
63
73
83
94
104
115
125
125
Total Exps
158
316
475
633
791
949
1107
1265
1424
1582
1740
1898
1898
Operating
Profit
(21)
(42)
(63)
(84)
(105)
(126)
(147)
(169)
(190)
(211)
(232)
(253)
(253)
0
0
0
0
22
22
22
22
22
22
22
22
22
(21)
(42)
(63)
(84)
(83)
(104)
(125)
(146)
(167)
(189)
(210)
(231)
(231)
Provisions
Depreciation
Capital
Income
Net
Profit/(loss)
Problem evident here
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The Third Dimension – Cash Flow Statement
1. We know how to record Income and Expenditure
(an accurate prediction of wealth to come and go)
2. We understand the Balance Sheet
(what we own and owe at a point in time)
3. We must also understand
1. Current cash balance
2. Future affects on cash (debtors received, creditors
paid etc)
3. Transactions for which there has been a cash
exchange
4. Are we heading for a cash crisis “brick wall”?
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Going Concern Principal
• School must be able to buy and sell its services
and plant & equipment in the normal course of
trading.
• There must be no pressure to dispose of assets.
• School has adequate cash to pay its debts as and
when due.
• If it can’t, then it is most likely insolvent and
should cease trading
• Must understand what cash is already committed
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Cash Flow – HUGS
Year to Date Results $000
Jan
Feb
Mar
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
Opening cash
20
389
329
289
229
162
22
236
87
213
19
(22)
Cash received
from
operations
371
(38)
(38)
(38)
(88)
(87)
216
(98)
129
(138)
(138)
(140)
(2)
(2)
Capital income
22
Asset
purchases
Loan
repayments
(20)
(2)
(2)
(20)
(2)
(2)
(50)
(2)
(2)
(50)
(2)
(2)
(55)
(2)
(2)
Loan drawn
Closing cash
99
389
329
289
229
162
22
236
87
213
19
(22)
(165)
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Rules of Risk Management
1.
Understand the risks
2.
Quantify the risks
3.
Mitigate the risks
“Chance favours only a prepared mind”
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Agenda
1. Why schools fail
2. Preventing financial distress
3. Meeting your fiduciary responsibilities
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6 School Failures
• The sample
2 receiverships
1 insolvent trading
3 required major support from parent
• Causes of financial distress
Structural
• Poor understanding of risks
• Inadequate early warning system
• Information was poor quality and too late
Behavioural
• Ignoring/unaware of early warning systems
• Lack of discipline and focus
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In Short
Didn’t know what they didn’t know
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Solution
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Secret to success
1. Learn from mistakes
2. Preparation
(knowledge of relative performance – past, present, future)
3. Hard work/Discipline
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Essence of Financial Viability
Solvency
• Cash Flow Adequacy
• Ability to pay your bills on time
Profitability
• Net Operating Margin
• Student/Teacher ratios
Sustainability
• Interest Cover
• Debt Servicing and amount of debt
• Asset replacement
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Measuring Performance
• Financial statements provide absolute quantities - $
• Convert quantities to ratios (eg. cost per student)
• Simple and meaningful comparisons of key information to other
schools, or yourself over time (total kms -v- lt/km)
Ratio Analysis
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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 your guiding tracks
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Use Benchmarks to
1. Assess Financial Health
– Viability (viability ratios)
– Operations (operational ratios)
2. Identify Weaknesses
3. Set Targets
4. Improve Performance
INFORMED
decisions
Your fiduciary
duty
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Report Sample
Ratio
Your
School
Rating
Your reporting
category ALL
ALL (all
categories)
Average
Average
Page
Number
Working Capital
0.13


0.77
1.13
3
Cash Flow Adequacy
-0.11


0.81
0.95
4
Reinvestment
-185%
54%
127%
5
Interest Cover
-0.73
4.22
9.50
7
Total Debt per Student
$6,227
$6,274
$5,722
7
Recurrent Income per Student
$10,033
$11,072
$13,391
8
Discounts & Concessions % Fees
9.8%
8.0%
9.1%
8
Teacher Salaries per Student
$6,242
$6,479
$6,987
9
Direct Delivery Cost per Student
$7,909
$7,893
$8,735
9
Total Expenditure per Student
$10,363
$11,055
$11,884
9
Net Operating Margin (Adj.)
-3.29%
7.14%
10.63%
13
Primary Student Teacher Ratio
11.5
15.4
15.3
11
Secondary Student Teacher Ratio
3.8
9.1
11.6
12





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Report sample
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How to use the Benchmarking Survey
Characteristics of a Benchmarking Sample
The schools selected for this comparison have the
following characteristics:
Geographic:
Day or Boarding:
SES:
Enrolments:
Affiliation:
Gender Mix:
Curriculum:
National
Day Schools
90 to 104
100 to 300
All
All
P-12
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Sample
Student Enrolments
350
300
250
Average: 208
200
150
100
50
114
HUGS
164
181
199
221
228
262
295
0
Source: ASBA/Somerset Education Non-Government Schools Financial Performance Survey for 2008 School Year
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Answering the Key Questions – Key Ratios
• Are we Solvent?
– Cash flow adequacy
– Working capital ? – better to predict cash at bank
• Are we Profitable?
– Net operating margin
– Income per student
– Expenses per student
• Staffing ratios
• Are we Sustainable?
– Depreciation
– Reinvestment
– Debt per student
– Interest cover
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Answering the Key Questions – Key Ratios
• Are we Solvent?
– Cash flow adequacy
– Working capital ? – better to predict cash at bank
• Are we Profitable?
– Net operating margin
– Income per student
– Expenses per student
• Staffing ratios
• Are we Sustainable?
– Depreciation
– Reinvestment
– Debt per student
– Interest cover
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Cash Flow Management
Cash Flow Adequacy = Net cash from operations*
Capital and debt expenditure
= For every dollar spent on debt servicing and asset purchases,
(denominator) how much was funded from operations (numerator)
* Includes capital grants and donations
Rule of thumb = 1.0 times
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HUGS
Cash Flow Adequacy
1.50
1.00
Average: 0.81
0.50
0.14
0.81
1.14
1.17
0.00
-0.31
HUGS
-0.11
-0.50
-1.00
Source: ASBA/Somerset Education Non-Government Schools Financial Performance Survey for the 2008 School Year
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Cash Flow Adequacy
3.50
3.00
2.50
2.00
Average = 0.96
(Excluding catholic Systemic schools)
1.50
1.00
0.50
Source : ASBA/Somerset Education Non-Governmant Schools' Financial Performance Survey 2009 School Year
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Liquidity Ratios
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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HUGS
Working Capital Ratio
3.00
2.50
2.00
1.50
1.00
Average: 0.77
0.50
0.11
HUGS
0.13
0.28
0.36
0.50
0.95
1.24
2.61
0.00
Source: ASBA/Somerset Education Non-Government Schools Financial Performance Survey for the 2008 School Year
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Answering the Key Questions – Key Ratios
• Are we Solvent?
– Cash flow adequacy
– Working capital ? – better to predict cash at bank
• Are we Profitable?
– Net operating margin
– Income per student
– Expenses per student
• Staffing ratios
• Are we Sustainable?
– Depreciation
– Reinvestment
– Debt per student
– Interest cover
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Profitability – Key Performance Indicator
Net Operating margin (Adj.) = Operating Result*
Total Revenue
* Before interest, depreciation and amortisation
For every dollar in income, how much
remains after all expenses
2009 Industry Average 10.9%
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HUGS
Net Operating Margin (before interest and depreciation)
25.0%
20.0%
15.0%
10.0%
Average: 7.1%
5.0%
6.4%
6.5%
8.1%
18.5%
20.3%
0.0%
-6.0%
HUGS
-3.3%
-5.0%
-10.0%
Source: ASBA/Somerset Education Non-Government Schools Financial Performance Survey for the 2008 School Year
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Profit Trends
14%
12%
10%
8%
6%
4%
2%
0%
2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
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HUGS
Total Income per Student
$16,000
$14,000
Average:
$11,072
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$9,410
HUGS
$10,033
$10,059
$10,153
$10,884
$11,386
$12,752
$13,914
$0
Source: ASBA/Somerset Education Non-Government Schools Financial Performance Survey for the 2008 School Year
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HUGS Income per Student 2005 - 2008
$12,000
$10,000
$10,033
$8,569
$8,000
$8,116
$8,214
$6,000
$4,000
$2,000
$0
2008
2007
2006
2005
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HUGS
Total Expenses per Student
(Excluding interest and depreciation)
$18,000
$16,000
$14,000
Average:
$11,055
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$8,801
$9,283
$9,330
HUGS
$10,363
$10,667
$11,086
$11,934
$16,938
$0
Source: ASBA/Somerset Education Non-Governmant Schools Financial Performance Survey for the 2008 School Year
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HUGS Expenses per Student 2005 - 2008
$12,000
$10,363
$10,000
$7,914
$8,000
$7,315
$7,008
$6,000
$4,000
$2,000
$0
2008
2007
2006
2005
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HUGS
Teacher Salaries per Student
$8,000
$7,000
Average: $6,479
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$5,513
$5,606
HUGS
$6,242
$6,406
$6,449
$7,114
$7,133
$7,365
$Source: ASBA/Somerset Education Non-Governmant Schools Financial Performance Survey for the 2008 School Year
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HUGS Teaching Salaries per Student 2005 - 2008
$7,000
$6,242
$6,000
$4,810
$5,000
$4,537
$4,225
$4,000
$3,000
$2,000
$1,000
$0
2008
2007
2006
2005
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Staffing
Student/Teacher ratio = Number of students
Full-Time teacher equivalent
= Average number of students per EFT teacher
Best Practice = Depends on the school
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HUGS
Primary Student-to-Teacher Ratio
18.0
16.0
Average: 15.4
14.0
12.0
10.0
8.0
6.0
4.0
2.0
HUGS
11.5
14.0
14.8
15.1
16.5
16.9
17.0
17.1
0.0
Source: ASBA/Somerset Education Non-Government Schools Financial Performance Survey for the 2008 School Year
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HUGS Primary student/teacher ratio 2005 - 2008
16.00
15.00
14.60
14.00
14.70
13.70
13.00
12.00
11.50
11.00
10.00
9.00
8.00
7.00
2008
2007
2006
2005
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Primary Student/Teacher ratio – Survey Trend
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HUGS
Secondary Student-to-Teacher Ratio
12.0
10.0
Average: 9.1
8.0
6.0
4.0
2.0
HUGS
3.8
7.5
8.0
8.2
9.4
9.5
10.2
11.2
0.0
Source: ASBA/Somerset Education Non-Government Schools Financial Performance Survey for the 2008 School Year
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Secondary Student/Teacher Ratio
35.0
30.0
Average = 11.2 (Excluding Catholic Systemic schools)
25.0
20.0
15.0
10.0
5.0
Source : ASBA/Somerset Education Non-Government Schools' Financial Performance Survey 2009School Year
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Secondary Student/Teacher ratio – Survey Trend
13
12.5
12
11.5
11
10.5
10
2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998
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Answering the Key Questions – Key Ratios
• Are we Solvent?
– Cash flow adequacy
– Working capital ? – better to predict cash at bank
• Are we Profitable?
– Net operating margin
– Income per student
– Expenses per student
• Staffing ratios
• Are we Sustainable?
– Depreciation
– Reinvestment
– Debt per student
– Interest cover
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Asset Position and Sustainability
Depreciation Impact
= Depreciation expenditure
Net cash from operations
= Extent to which assets wear out relative to the cash you
are generating from operations.
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HUGS
Depreciation/Amortisation Impact Ratio
200%
150%
100%
50%
Average: 61.6%
34%
50%
75%
88%
0%
HUGS
-119%
-76%
-52%
-9%
-50%
-100%
Excluded from
average
-150%
Source: ASBA/Somerset Education Non-Government Schools Financial Performance Survey for the 2008 School Year
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Depreciation Impact Ratio
350%
300%
250%
200%
150%
Average = 42% (Excluding Catholic Systemic schools)
100%
50%
0%
Source : ASBA/Somerset Education Non-Governmant Schools' Financial Performance Survey 2009 school Year
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Asset Position and Sustainability
Reinvestment
= Capital expenditure
Net cash from operations
= Extent to which you are reinvesting in new equipment
relative to the cash you are generating from operations.
Best Practice = 60% to 65%
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HUGS
Reinvestment Ratio
200%
150%
100%
50%
Average: 53.7%
9%
16%
21%
124%
0%
-196%
HUGS
-185%
-20%
-17%
-50%
-100%
Excluded
from average
-150%
-200%
Source: ASBA/Somerset Education Non-Government Schools Financial Performance Survey for the 2008 School Year
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Reinvestment Ratio
600%
500%
400%
300%
Average = 123% (Excludes Catholic Systemic schools)
200%
100%
0%
Source : ASBA/Somerset Education Non-Government Schools' Financial Performance Survey 2009 School Year
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Reinvestment – Survey Trend
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
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Sustainability – Key Performance Indicator
Financial Debt per student = Interest bearing (bank) debt
Student numbers
= Average debt per student
2009 Industry Average = $6,900
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HUGS
Debt per Student
$14,000
$12,000
$10,000
$8,000
$6,000
Average: $6,274
$4,000
$2,000
$292
$4,083
$5,430
HUGS
$6,227
$8,748
$13,117
$0
Source: ASBA/Somerset Education Non-Government Schools Financial Performance Survey for the 2008 School Year
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Page 85
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Debt per Student National average
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
2009
2008
2007
2006
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2005
2004
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Sustainability – Interest Cover
Earnings before interest and depreciation
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)
Page 88
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HUGS
Interest Cover
12.0
10.0
8.0
6.0
4.0
Average: 4.2
2.0
0.3
1.0
1.2
5.2
9.5
0.0
HUGS
(0.7)
-2.0
(0.4)
Not included in average
Source: ASBA/Somerset Education Non-Government Schools Financial Performance Survey for the 2008 School Year
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Page 90
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Quantify Variations
Key Performance Indicator
Sample
Average
HUGS
7.1%
(3.3%)
Total Income per Student
$11,072
$10,033
Operating Expense per
Student
$11,055
$10,363
Debt per student
$6,274
$6,227
Primary Student/teacher
ratio
15.4
11.5
Secondary Student/Teacher
Ratio
9.1
3.8
Net Operating Margin (Adj)
Effect
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Quantify Variations
Key Performance Indicator
Net Operating Margin (Adj)
Total Income per Student
Sample
Average
HUGS
Effect
7.1%
(3.3%)
($170,000)
$11,072
$10,033
($180,000)
Less income
Operating Expense per
Student
$11,055
$10,363
More efficient
Debt per student
$6,274
$6,227
Same
Primary Student/teacher
ratio
15.4
11.5
+ 3.5 more staff
Secondary Student/Teacher
Ratio
9.1
3.8
N/A
new secondary
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Limitations of Benchmarks
• Different participants at different stages of
development and with different ranges of
services.
• Consistency in accounting.
• Ratios only as good as data (Garbage In
Garbage Out)
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Case Study
10
8
15%
Started using
Ratios &
Benchmarks
10%
6
4
5%
2
0%
2005
2006
2007
2008
2009
2010
-5%
Interest Cover
Net Operating Margin
20%
0
-2
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Conclusions
Page 95
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Governance –v- Management
Tricker’s Model - International Corporate Governance
Compliance Role
Performance Role
External
Role
Provide accountability
Strategy formulation
Internal
Role
Monitoring and supervision
Policy making
Management
Past and present orientated
Board
Future orientated
How much time should you spend in each quadrant?
Where are you now?
What alters your priority?
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Student numbers
• Consider
–
–
–
–
–
–
–
–
–
Demographics
Trend in student numbers
Satisfaction
Target school size
Competitors
Adverse publicity
Communication with constituents
Academic success
Level of discounting
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Strategic Budget – 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
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12 Month Operating Budget
• Estimate students and staffing (main drivers)
• Estimate cash flow and bank balance on monthly rests
– Consider debt obligations
– Consider capital expenditure
• Consider board policy regarding
– staffing ratios
– fee levels
– Other strategic initiatives
• Align with 10 year budget (agreed KPIs).
• Board approval process is crucial (use SKI Report)
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Governance Dashboards
• Distill information on crucial
– Outcomes (operating margins, student/teacher ratios,
interest cover)
– Drivers (student and staff numbers)
• Report in a format which is easily understood by all.
• Assess past, present and future performance
– Somerset Key Indicator (SKI) report
– Preventative, pro-active decision making
• Focus on matters of importance - CAUSE and effect
– Interest cover
– Debt levels
– Operating margins
– Staffing ratios
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Financial scorecard for the month of December 2009
Developed by
Current Month
Happily United Grammar
School
Actual
Budget
Year-to-Date
Variance
Enrolments
Income
Tuition & Other Fees
Grants
47,785
79,635
(31,850)
140,451
100,699
39,752
Other Income
(84)
Ancillary Income
692
0.00
2,797
3,063
83
-
Year-End Forecast
Actual
Budget
Variance
Forecast
Budget
Variance
213
207
6
216
207
9
932,003
917,280
1,283,867
1,229,575
10,789
36,750
(25,962)
(1,382)
1,000
2,797
4,507
-
(3,146)
609
14,723
915,405
917,280
(1,875)
54,292
1,202,758
1,229,575
(26,817)
21,000
36,750
(15,750)
(2,382)
1,000
1,000
-
4,507
-
-
-
TOTAL INCOME
191,642
183,480
8,162
2,229,784
2,184,605
45,179
2,140,163
2,184,605
(44,442)
Total Tuition Wages
143,461
98,326
(45,135)
1,173,319
1,144,065
(29,254)
1,146,870
1,144,065
(2,805)
7,034
4,156
(2,878)
66,635
49,927
(16,708)
65,730
49,927
(15,803)
10,544
16,187
5,643
132,685
194,277
61,592
145,905
194,277
48,372
-
27,017
27,017
260,226
312,039
51,813
321,025
312,039
(8,986)
Maint & Cleaning
7,495
15,304
7,809
136,561
183,113
46,552
177,975
183,113
5,138
General Overheads
21,078
-
(21,078)
31,509
-
(31,509)
-
-
-
Interest
41,511
8,359
(33,152)
77,728
87,454
9,727
52,416
87,454
35,038
3,481
-
(3,481)
3,481
-
(3,481)
-
-
-
Camp Costs
Tuition Costs Other
Administration
Other expenses
Provisions
-
(7,818)
(7,818)
126,872
19,795
(107,077)
20,152
19,795
12,284
16,193
3,909
140,131
157,688
17,557
138,183
157,688
19,505
Total Expenditure
246,887
177,724
(69,163)
2,149,146
2,148,358
2,068,256
2,148,358
80,102
Operating Profit/(Loss)
(55,246)
5,756
(61,001)
80,638
36,247
44,391
71,907
36,247
35,660
(1,451)
30,308
(31,759)
298,496
281,389
17,107
262,506
281,389
(18,883)
-0.8%
16.5%
-17.3%
13.4%
12.9%
0.5%
12.3%
12.9%
-0.6%
Depreciation
Operating Profit Before Interest &
Deprec
EBIDA %
(788)
(357)
Page 102
Page 103
Early Warning Systems
1. Learn from the Past – Participate in the Survey
2. Understand the Present – Board Reporting
3. Risk assess the Future – SKI Report
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Somerset Key Indicator (SKI ™)Report
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Summary
1. Assess Financial Health (current and future)
 Solvency
 Profitability
 Sustainability
2. Set targets/Policies
 Net Operating Margin
 Interest Cover and debt levels
 Student/teacher ratios (guided by Principal)
3. Disciplined monitoring (early warning system)
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For further details contact
John Somerset – Director of Somerset Education
Email
Internet
[email protected]
www.somerseteducation.net
Video
Telephones
http://vimeo.com/24409169
1300 781 968
(Australia)
+61 7 3263 5300 (International)
0417 618 899
(Cell phone)
Address
GPO Box 3273
Brisbane, Queensland
Australia 4001
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