Archives for category: Best practice standards

“It doesn’t mean a thing, but even so, after twenty-five years; it’s nice to know.”

The words from the song, “Do you Love Me?” are sung by Tevye and his dear wife Golda in “Fiddler on the Roof” as they grapple with yet another generation of would-be husbands and wives, each testing tradition in uncomfortable ways. The idea is that, though Tevye and Golda were introduced on their wedding day a quarter century ago, they have adapted to each other to the point where each “supposes” they love the other.

Some things we just have to adjust to.

Bringing this closer to home, “We can’t seem to budget for depreciation,” is a common refrain we hear in our visits to over fifty institutions.  Rather than cow-tow to the FASB-mandated enterprise form of accounting, some capital spending and principal on debt are inserted into the operating budget, hoping that, by some miracle, the audit will show a positive result.

Twenty-five years ago, we were preparing for the FASB-mandated forced marriage between a new form of accounting and non-profit organizations.  Prior to that, a widely-variable application of fund accounting made comparisons and gauges of health difficult.  Today, we stand at the threshold of of yet another change, albeit evolutionary.  Higher education can be slow to adopt new practices – but twenty-five years? I’m not feelin’ the love.

 

In defense of those who continue to act as if the mid-nineties never occurred, if what is spent on debt principal and capital items exceeds depreciation, it really doesn’t matter. But that tends to be mere coincidence.  Too often, when cuts are needed, capital spending is put on the block, as if it will help in “balancing” the budget.  In those cases, an internal operating budget can show a surplus while the board hears from the auditors that the college had a deficit. You might get away with, “The audit doesn’t matter,” with an unsophisticated board but the DOE and your bank …

Because depreciation expense is the ratable allocation of an asset’s historic cost, it makes sense that the eventual replacement of that asset will be more expensive.  This is particularly true of facilities.  For this reason, the CFO Colleague standard for capital spending and principal on debt stands at 120% of annual depreciation expense.  If you are not spending more than depreciation expense, you are not keeping up. If you are spending less, deferred maintenance will eventually consume you.

Incorporation of depreciation expense is but the beginning, however.  Step two is a contingency of at least two percent so that changes in demand, unanticipated increases in costs or one-time opportunities for investment can be covered. Then, there is the Standard and Poor’s expectation of a three percent surplus.

But wait, there’s more.

What will the DOE financial responsibility ratio be at the end of next year?  What are the required debt service coverage ratios or cash balances by our bond trustee?  Are our revenue-driving activities supportable and owned?  All of this enters into a well-crafted budget that benefits a college for years to come.

We call this the “budget performance matrix.”  Rather than a false sense of security brought on by cash-based plans, a comprehensive approach of this kind ensures that the budget accomplishes the primary expectations of each evaluator/stakeholder.

Our COMP4cast model incorporates each of these measures, generating in real time the projected surplus or deficit, cash position, debt service coverage and DOE ratios. The leadership team interacts with this model while sitting around the table, conversing about various “what-ifs.”

And it’s available for free from our website: cfocolleague.com/free-downloads

After twenty-five years, it’s nice to know.

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See the latest post at: http://www.linkedin.com/pulse/gremlin-pacer-matador-benchmarking-jeff-spear

I posted a blog on LinkedIn about the University of Akron doing a poor job of attempting a turnaround.  My main points deal with the substance of their approach but I will add that their communications and collaboration leave much to be desired.  The link to my posting is found here:

https://www.linkedin.com/pulse/university-akron-gets-wrong-jeff-spear?trk=prof-post

Thanks for reading.

Jeff

In a day of reduced student demand, a number of colleges have turned to their athletic programs to help fill a portion of excess capacity.  The idea is that an additional student paying anything is better than no student at all.

At the outset, let me say that this strategy can be helpful within the context of an overall enrollment enhancement plan (EEP).  If ten or twelve percent of a student body is involved in intercollegiate athletics, it seems reasonable to move that number up two or three percentage points in the quest to fill empty classroom seats.  Athletics can be an important part of the college experience and many have gained leadership and lifelong fitness benefits from their participation. My thesis is that moderation is important.

Consider the following two issues as a plan is put in place.

  1. Marginal Revenue Analysis

First is a needed conversation about marginal revenue as it is practiced by many smaller, private institutions.  The idea here is that the new students provide added revenues and therefore benefit the institution that has excess capacity.

Let’s start with the non-Division III (D3) colleges that attract athletes through scholarships.  I recommend identifying the net tuition revenue (NTR) from scholarship recipients (excluding walk-ons) for each sport.  We’ll assume table tennis has an average institutional scholarship (discount) of 75% off tuition and fees of $28,000.  Each player thus contributes $7,000 on average. The math: ($28,000 X .25) = $7,000 NTR per person.  Ten players generate ten times that amount or $70,000.  The identification of NTR generated by individual sports is step 1.

For D3 schools, the entire roster can be used in terms of net tuition generated.  Some carve out the impact players and only use their revenues but that can be somewhat subjective.

For step 2, the budgeted costs of the sport are identified, including coach salaries.  That amount is then subtracted from the NTR sub-total.  In this case, the spending and salary budget for table tennis is $46,000, including salaries, benefits, travel, lodging, meals, uniforms, equipment, game day costs, etc.  Subtracting that amount from the $70,000 of NTR leaves a step 2 subtotal of $24,000.

Step 3 allocates athletic administration costs to each sport.  I typically use headcount for this exercise, ensuring that smaller programs are not abnormally hit.  Presuming $120,000 of athletic administration costs and 120 scholarship athletes, another $10,000 of cost is assessed against table tennis for its ten players (10 X $1,000.)

In the end, the ten players from table tennis generate $14,000 in NTR or $1,400 per person toward the cost of academic programs.

The final step aggregates all sports by net contribution to arrive at a total amount for the 120 scholarship athletes.  For some analyses, this has resulted in a negligible, even a negative number.  The question to be answered is whether enough is generated from these students to justify putting athletes in the classroom?

2.  Atmosphere

Second is a conversation about the qualitative aspects of athletic recruitment.  Put simply, too many institutions have accomplished increased athletic recruitment numbers in the face of an overall enrollment decline.  Why is this so often the case?

There are likely a number of answers to this question and I recommend drilling down to find what is affecting your institution.  Examples include scholarships being shifted toward athletes, leaving materially less for other students when an overall discount rate is targeted.  Aggressive roster requirements can also detract the attention of the admission team to assisting coaches in their recruitment work.  Other possibilities for non-athletic declines include deficient facilities or not offering the up and coming programs.  Institutional bad news or severe competition in the regional area could be factors in drying up the non-athlete pool as well.

I suggest that another factor is worth investigating.  When students visit, do they perceive yours to be a “jock school?”  Walking through the student union or into the dining room, are there a lot of students dressed for athletic practices?  Are athletes sticking together as they eat or walk around on campus?  If you offer a chapel program, are athletes together during that experience?  Do they sit together in classes?  Do they exceed 20% of your student body? The reality is that many great students who would be wonderful additions to your campus are not athletically inclined.  Oh, they may be reasonably good intramural players and enjoy being spectators for certain sports but their high school experience was primarily with non-athletes and they want something akin to that for college.

3. So what do we do?

Let’s replace our sports offerings with well-positioned chess boards and pipe-smoking, blazer clad sophomores debating each other on the sidewalks.  OK, maybe not. Let me suggest adding a few questions to the survey you give to all of your student visitors (you do survey them, don’t you?)  Ask them to rank what they thought your reputation was before arriving and their impression after visiting.  There could be five or more general descriptions of your atmosphere, including “athletic school, academically serious, socially active (party school)” etc.

In essence, find out how you are being perceived so that recruitment and messaging strategies can be adjusted accordingly.  Do this before embarking on a wholesale addition of sports in the quest for the next fifty students.  If forty students are lost who contribute more NTR, the strategy may backfire.  In too many cases, sixty or more are being lost.

Oh, and in connection with the NTR analyses I introduced (#1 above) it makes sense to work with the athletic programs to target a greater net contribution overall, to be accomplished over a period of years.  While athletic participation can be an important part of the college experience, these programs should bot consume all the resources generated.

A word about room and board.  Some argue that the contribution from auxiliary enterprises should be factored into these kinds of analyses.  My take on room and board is that it is used to support Student Life programs at the college.  This includes counseling, residential life, student activities, discipline etc.  When you match the net contribution from auxiliaries with overall costs of the student life program, there is rarely much remaining.  If anything is left over, investments in capital projects for dorms and dining are not a bad idea.  It isn’t good practice to direct those dollars toward the academic programs of the college.  That is why we charge tuition and fees.

I wish you well in this environment.  Keep trying new things but maintain perspective (and moderation.)  We want a balanced, healthy institution.  Let’s work together to ensure that.

After publishing a list of twenty characteristics that are common to healthy institutions, some conversations have ensued with various clients, asking about other components.  Tuition discounting has been the most popular.  So, here is a list updated to 25 characteristics.  See how you are doing in comparison with these standards:

  1. Annual net tuition per traditional student of at least $14,000
  2. Tuition discount rate of less than 50%
  3. Incoming student discount percentage no more than three percentage points more than returning student discount. (ie new student = 46% and returning student = 43%)
  4. Non-student revenues (primarily donations and investment returns) of at least 12% of operating revenue. (Student revenues include tuition, fees and auxiliary revenues)
  5. A student to faculty ratio for traditional operations of 17 to 1 or greater with no more than 15% of traditional classes having less than ten students in them.
  6. Faculty makeup: <10% Instructors, >40% Asst. Professors, 30% Associate and 20% Full Professors.
  7. No more than five percent of overall faculty load assigned to non-teaching appointments
  8. Non-traditional student revenues equaling or exceeding 40% of overall net tuition
  9. Net contribution from non-traditional operations of at least 40% after facility and overhead costs.
  10. Average non-traditional class size equal to or exceeding 15 students
  11. 85% of non-traditional classes taught as overload or by adjuncts.
  12. GAAP-based change in unrestricted net assets (surplus) = or > 4% of operating revenue
  13. Long-term debt equaling less than 50% of annual operating revenue.
  14. Debt service (principal and interest) not to exceed 5% of operating revenue
  15. Total salary and benefit costs not to exceed 65% of total operating expenses.
  16. Total Salary and benefit costs not to exceed 90% of net tuition revenue
  17. Student receivables not to exceed 1% of annual student revenue at year end.
  18. Matching 403(b) contribution of at least 6%
  19. 80% of health care premiums covered by institution.
  20. Dedication of at least 20% of operating surplus toward a summer bonus payment to on-going employees (end of July payout).
  21. Budget contingency of at least 2% of revenues.
  22. Separate capital budget from operating budget.
  23. Capital spending plus principal payments exceeding 120% of annual depreciation expense.
  24. Formal five-year forecast with pro-forma balance sheet, income statement, cash flows and ratios, supported by solid (defensible and owned) revenue projections.
  25. Budgeting based on the lower end of the range of revenue expectations, with the uncoupling of budgetary assumptions from revenue goals for enrollment, financial aid and advancement (departmental goals exceeding budget)

Keep in mind, these are not hard and fast rules. For instance, your institution may have royalty income that far exceeds the 12% threshold for non-student revenues. That kind of performance can cover a multitude of weaknesses in other categories.

Provided you are able to deliver the above statistics, chances are pretty good you will have a healthy institution that can sustain the hard times that confront us.

Have anything to add to this list?