How to assess financial sustainability, capital expenditure and - PowerPoint PPT Presentation

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. Govern with Confidence

John Somerset Qualifications Core Expertise  Chartered accounting – 30 years  Master of Business (Research) QUT – current study  Accounting, taxation, business advisor  Graduate Diploma Company Directors Course  Benchmarking and financial analysis of schools (22 years).  Certificate IV in Workplace Training and Assessment  Corporate governance of schools.  Financial viability and sustainability of schools  Graduate Diploma in Applied Finance and Investment  Budgeting ,board reporting models, on-line tools.  Professional Year Institute of Chartered Accountants Appointments  Bachelor of Commerce University of Queensland  Director – Independent Schools Council of Australia (2011 - ) Accreditations/Memberships  President – Independent Schools Queensland (2011 - )  Graduate - Australian Institute of Company Directors  Treasurer – Independent Schools Queensland (2001 – 2011)  Chair Finance Committee – St Stephen’s College (2004 - )  Fellow - Financial Services Institute of Australasia  Director - St Stephen’s College Ltd (2004 - )  Fellow - Institute of Chartered Accountants in  Risk Assurance Committee – St Stephen’s College (2006 - ) Australia and New Zealand  Chairman - St Paul’s School Foundation (2006 to 2008)  Council and Finance - St Paul’s School (2000 – 2008) Govern with Confidence

Session Outline Govern with Confidence

Govern with Confidence

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

Sufficient surplus Oils the Wheels Govern with Confidence

Don’t Jam the Wheels Insufficient Surplus Too much Debt Govern with Confidence

Helpful Tools Govern with Confidence

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

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 Govern with Confidence

Queensland University Of Technology John Somerset Masters by Research 2013 - 2016 • 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 Govern with Confidence

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 Govern with Confidence

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 Govern with Confidence

National Net Operating Margin - 2014 Govern with Confidence

National Debt per Student - 2014 Total Independent Schools’ bank debt estimated to be $3 billion Govern with Confidence

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 Govern with Confidence

Somerset Example School Income and Expenditure 2015 2014 REVENUE Tuition Fees 10,996,438 10,483,382 Less Concessions (1,348,375) (1,327,645) Boarding Fees 750,875 727,802 Less Concessions (5,419) (5,000) Government Tuition Grants 7,782,940 7,397,775 Government grants - interest subsidies 480 480 Governtment Boading Grants 10,000 10,000 Other Income 298,599 316,504 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 104,216 103,078 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 877,155 869,041 Boarding Wages and On-Costs 410,271 390,734 Tuition Costs 1,343,644 962,019 Administration Costs 950,757 905,482 Maintenance Costs 624,152 594,431 Boarding Costs 452,511 446,917 Ancillary Costs 1,119,191 266,111 Finance Costs 483,128 510,000 Depreciation 1,500,001 1,500,002 TOTAL EXPENDITURE 19,061,978 18,694,142 CAPITAL INCOME Capital Grants 190,952 190,952 190,952 190,952 TOTAL INCOME FOR THE PERIOD (385,489) (899,892) Govern with Confidence

Somerset Example School Statement of Financial Position 2015 2014 CURRENT ASSETS Cash and Cash Equivalents 398,933 1,263,797 Trade and Other Receivables 875,875 843,188 Inventory 100,000 100,000 Other Assets 200,000 200,000 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 500,000 350,006 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 737,495 737,495 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 Govern with Confidence

Govern with Confidence

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? Govern with Confidence

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 Govern with Confidence

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 Govern with Confidence

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 Govern with Confidence