Archives for the month of: September, 2014

As the higher education industry absorbed the impact of SFAS 93, followed by 115 and 116, many balked at the funding of depreciation expense. Prior to those landmark pronouncements, various “funds” were deployed to capture activity within the capital spending and financing arenas. It was common to call the payment of principal on debt and capital spending “expenditures” and write them off as if they were annual expenses. That was twenty years ago.

I think we all see the value today in an expense called “depreciation”, designed to match the using up of assets over the years they provide service to the institution. We also tend to be believers in the idea of investing for capital purposes within a budget that is separate from operations. And, a reasonable pay-down of debt over time is critical for an institution that is attempting to improve its financial health.

In light of this, I created the Capital Improvement Ratio or “CIR”. The goal is to demonstrate the stewardship of the institution in its renewal efforts. The emphasis is on how much in operating cash is invested on a net basis in capital improvement each year. Here is the breakdown of the CIR:

+ Net Capital Spending (new fixed assets minus retirement and sales of fixed assets)
– (Change in Long-Term Debt)
= Net Capital Improvement (A)

(A) / Depreciation Expense = Capital Improvement Ratio

Ideally, the CIR is 1.2 or greater, recognizing that replacing depreciating assets typically requires current dollar spending in excess of what was spent when the retiring asset was new.

Note that a year when long term debt increases and capital investments are minimal (a refinancing perhaps) can yield a negative CIR. Also, if a bunch is borrowed in anticipation of a capital spend, it can skew the process. In that case, you may want to offset the change in LTD by whatever is in an escrow fund awaiting spending on a project.

Give it a try and tell me how it works (or doesn’t) for you.

If you do not have a degree completion or graduate program for adults, you can skip this edition. For those who have such programs, a common approach is to recruit a group of students as a cohort. Ideally, that cohort remains together throughout the program, encouraging each other to stay with it and accomplish the goal that attracted them to the idea in the first place.

Reality can be a different story. The recruiting team, eager for a cohort start to come off, push for groups of ten or less to begin the journey together. Then, as life’s events unfold, adult students with very busy lives at work and home may be inclined to take a breather, or drop out altogether. Even reasonable starting numbers can whittle down to single digits. I’ve seen some wind up with three students. The quality of experience for student and faculty member alike are impaired in such situations, along with the institution’s bottom line.

Before we throw out the cohort concept, let me share with you that I haven’t seen another approach that delivers similar rates of retention. Offering a smorgasbord of courses with a constantly changing cast of characters in each class has not proven to be successful with the adult learner. Still, it can be hard to recruit the industry standard minimum of fifteen students for a start and it’s hard to make students wait six months or more before another opportunity arises. There has to be a better way.

And, in my experience, there is.

Consider the continuous cohort. Students can start at what has typically been the beginning of the program or at one point in the middle. The first course taken is online and called an “on-ramp,” meaning that it is meant to prepare the student for his or her return to higher education. After that course, the student joins the group physically meeting and takes the prescribed number of courses for his or her program. The last course is called the “off-ramp” and is offered online as well, allowing students who have completed all their other courses to jump off and graduate.

Another way of looking at this reflects the use of on-ramps and off-ramps. Consider the regular coursework to be an interstate highway that loops around a city. There are two entrances/exits at 12:00 and 6:00 where students leave the highway for an off-ramp course and enter after completing the on-ramp course.

Numerically, ten students are what is needed for each entry point into the ongoing program. With normal losses, this guarantees a group of sixteen or more are in the seats for each class. Those who manage this process well wind up with 22 or more consistently.

And, what about pre-requisites? Those who design curriculum for continuous cohorts make sure that pre-requisites and the sequential courses that follow them are contained within either of the half-program segments. It may require some rearranging of curriculum but the benefits are worth the investment.

Fewer actual cohorts. More options to start with smaller groups. Larger classes. Retention of the cohort model benefits. Those who have moved in this direction are seeing immense benefit.

How about you?

Students have moved in, parents are back home, relationships have started … and ended, first exams delivered and disciplinary counsels are full of agenda items. Yup, it’s that time of year. Oh, and the traditional census is underway, with a crowd awaiting the puffs of smoke, signaling the year’s revenue projection has been calculated.

There are other anxious times of the year involving the business office but none rival the mid- September forecast. Will my budget be safe? Are my people at risk of termination? Will the pain be felt with next year’s budget instead? Did we get it right?

With each campus visit, I find fascinating the many ways that revenue is forecast. Some look at the budget for financial aid, calculating what has been awarded in the financial aid sub-system against that budget. Others use FTE calculations to determine how close the revenue should be against the budget. Few have different budgets for fall and spring, even though a spring reduction in headcount is all but guaranteed (and surprisingly predictable.)

I suffer from being a CPA who believes in the role of the general ledger in providing the data needed for forecasting. No matter what financial aid or enrollment systems report, the institution’s financial statements will be based on whatever is posted in the G/L. The FTE number could be skewed by a surge in part-time students who pay a much lower cost per hour than their full-time counterparts. What financial aid believes has been posted to student’s accounts might not account properly for tuition remission, guest students and/or potential changes during the semester. The GL cuts through all of this throughout the semester and forms the basis for full-year financial statements. It is the most reliable predictor of performance.

I take the current year tuition and fee billings, along with institutional aid and compare this year’s actual with two other columns of information. The first comparison is with last year’s fall. How did we fare? What was the differential between fall and spring last year and what happens if that relationship remains the same this year?

The second comparative column is for the budget and I compare it with the extrapolation of the current year (CY). Were we off? By how much? Was it due to fewer students, more financial aid spending or both? What factors drove performance this fall? What kind of information does this provide for next year’s budget?

Those of you who are my clients know that I like to look at the performance of individual classes versus using an overall fall to spring retention ratio. This is because of the improved retention that occurs as one progresses through the classes over their four (or more) years. For instance, if population is up but skewed toward freshmen, the losses will tend to be greater between fall and spring. And, if a low retention program brought in those added numbers (certain sports come to mind) then the losses may well be magnified. Better to prepare for such eventualities than to presume a static relationship.

In the end, all of this constitutes an educated guess and the CFO’s role is to mitigate variability risk. We don’t guarantee our results but are happy to share our methodology in arriving at the conclusions that are drawn.

Having trouble making your predictions work? Send me an email. One of my free models might just be right for you.