How to assess financial sustainability, capital ...asba.asn.au/int/asba/uploads/files/Chapter Docs/TAS/2016 Tas Conf... · How to assess financial sustainability, capital expenditure

Govern with Confidence

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.


John Somerset

Qualifications

Master of Business (Research) QUT – current study

Graduate Diploma Company Directors Course

Certificate IV in Workplace Training and Assessment

Graduate Diploma in Applied Finance and Investment

Professional Year Institute of Chartered Accountants

Bachelor of Commerce University of Queensland

Accreditations/Memberships

Graduate - Australian Institute of Company Directors

Fellow - Financial Services Institute of Australasia

Fellow - Institute of Chartered Accountants in Australia and New Zealand

Core Expertise Chartered accounting – 30 years

Accounting, taxation, business advisor

Benchmarking and financial analysis of schools (22 years).

Corporate governance of schools.

Financial viability and sustainability of schools

Budgeting ,board reporting models, on-line tools.

Appointments

Director – Independent Schools Council of Australia (2011 - )

President –Independent Schools Queensland (2011 - )

Treasurer –Independent Schools Queensland (2001 – 2011)

Chair Finance Committee – St Stephen’s College (2004 - )

Director - St Stephen’s College Ltd (2004 - )

Risk Assurance Committee – St Stephen’s College (2006 - )

Chairman - St Paul’s School Foundation (2006 to 2008)

Council and Finance - St Paul’s School (2000 – 2008)


Session Outline



Viability and Sustainability Cycle

Profitability

Fees & GrantsStudent

Numbers

Infrastructure

Cost ManagementAffordability

Borrowing

What Schools worry about

Mitigation and Relationships


Sufficient surplus Oils the Wheels


Don’t Jam the Wheels

Insufficient Surplus

Too much Debt


Helpful Tools


Essence of Financial Viability

Profitability

Sustainability

Solvency

• Net Operating Margin

• Student/Teacher ratios• Interest Cover

• Debt Servicing and amount of debt

• Asset replacement

• Cash Flow Adequacy

• Ability to pay your bills on time


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


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


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


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


National Net Operating Margin - 2014


National Debt per Student - 2014

Total Independent Schools’ bank debt estimated to be $3 billion


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


Somerset Example School Income and Expenditure

2015 2014REVENUETuition 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

EXPENDITURETeaching 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)


Somerset Example School Statement of Financial Position

2015 2014CURRENT ASSETSCash 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 ASSETSProperty 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 LIABILITIESTrade 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 LIABILITIESInterest 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

EQUITYAccumulated Surplus / (Deficit) 28,755,820 29,655,712

Current Surplus / (Deficit (385,489) (899,892)

TOTAL EQUITY 28,370,331 28,755,820



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?


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


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


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


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 our guiding tracks


Use Benchmarks to

1. Assess Financial Health

2. Identify Weaknesses

3. Set Targets

4. Improve Performance

INFORMED decisions

Governor’s and management’s fiduciary duty


ASBA/Somerset Non-Government Schools’ Financial Performance Survey

• Association of School Business Administrators together with Somerset Education

• Self Regulating initiative

• Operating over 20 years

• Generally 600+ schools (including Catholic systemic) – 73% students in Independent schools

• 60 ratios

• Compare performance with similar schools

• 2016 participation fee from $616 (incl. GST) per school

• 10 of out 10 participants recommend it


Disclaimer

This presentation presents financial performance ratios and statistics derived from information supplied by the school as well as respondents to the Independent School’s Financial Performance Survey for the 2015 school year conducted by Somerset Education with the Association of School Business Administrators Limited.

Somerset Education conducted no hypothesis testing on the results. Therefore, if a particular result for a school is below average, Somerset Education has not carried out investigations to determine whether the school’s performance really is below average.

Neither Somerset Education nor the Association of School Business Administrators Limited accepts any responsibility, or admits liability, arising from this survey or the contents of this presentation.

As a member of Chartered Accountants Australia and New Zealand the firm participates in a national liability capping scheme. Accordingly our liability is limited by a scheme approved under professional standards legislation.


Somerset School Portal

• ASBA/Somerset Non-Government Schools’ Financial Performance Survey

• Access via www.somerseteducation.net

http://www.somerseteducation.net/


Once data entered, select a sample


Selecting your Sample of similar schools


Your sample – 2015 School Year

• Sixteen schools in your sample with the following characteristics:– Geographic: NSW (3), Victorian (3), Queensland (10)– Type: Boarding schools– SES: 95 – 105 (Your SES 100)– Students 550 – 1,500– Affiliation: Anglican, Methodist, Presbyterian, Uniting, Lutheran– Curriculum: Prep – Year 12

• If a result is outside the reasonable range it is excluded from the calculation of averages and from graphs.

In Each Benchmarking sample graph

Your School MaroonOther schools Orange

1374

1168

962

757

551


Generate your report


Table 1: Key Performance Indicators

Ratio Your

School

Rating Sample

Average

More/(Less)

than Average

Page

Working Capital * 0.41 ? 0.84 3

Cash Flow Adequacy * 0.66 ? 0.82 4

Reinvestment 135% 131% 5

Interest Cover * 2.9 ? 14.7 6

Debt per Student $8,720

$8,836 ($100,483) 6

Total Recurrent Income per Student $20,332

$20,068 $230,390 7

Discounts & Concessions as % Total Fee

Income

12.3% ? 11.8% 7

Teacher Salaries per Student $9,800 ? $9,727 $63,454 9

Total Expenditure per Student (excluding

Int, Depn, Amort & Boarding)

$18,592 ? $17,592 $871,257 9

Net Operating Margin (EBIDA/Recurrent

Income)

7.6% ? 13.3% ($1,052,112) 11

Primary Student/Teacher 12.0 ? 13.6 3.2 10

Secondary Student/Teacher 10.6 ? 11.7 5.2 10

Snapshot of your school - 2015


Your Enrolments Trends

• Declining trend in enrolments has turned upwards in 2015

981

1020 10271006

908

863 872

750

800

850

900

950

1000

1050

2009 2010 2011 2012 2013 2014 2015

Enrolments

Enrolments



Profitability – Net Operating Margin

Earnings before interest, depreciation, amortisation

Total Revenue

For every dollar in income, how much remains after all cash expenses (excluding interest)

Sample Average 13.3%

National average about 13%


Your 2014 EBIDA

Total comprehensive Income ($ 899,892)

Reduce by Capital grants ($ 190,952)

($1,090,844)

Add back Interest expense $ 510,000

Less Interest subsidies ($ 480)

Add Depreciation & Amortisation $ 1,500,002 $2,009,522

EBIDA $ 918,678

$918,678/$17,602,818*= 5.2% margin* Reduced by interest subsidies of $480


Your 2015 EBIDA

Total comprehensive Income ($ 385,489)

Reduce by Capital grants ($ 190,952)

($ 576,441)

Add back Interest expense $ 483,128

Less Interest subsidies ($ 480)

Add Depreciation & Amortisation $ 1,500,001 $1,982,649

EBIDA $1,406,208

$1,406,209/$18,485,057* = 7.6% margin* Reduced by interest subsidies of $480


Your 2015 Net Operating Margin

• This indicates your operating surplus was $1.1 million less than other schools in the sample with similar turnover.

• National average is about 13%.

Formula: Earnings before interest and depreciation and

amortisation ÷ Gross recurrent income.

Definition: Net Operating Margin indicates your ability to

convert total gross income into a net operating result.

Table X: Operating Efficiency

Ratio Your

School

Rating Sample Average More/(Less)

than Average

Net Operating Margin (EBIDA/Recurrent

Income)

7.6% ? 13.3% ($1,052,112)

Wages as a percentage of Income 68.7% ? 66.8%

23.4%

18.8%

14.2%

9.7%

5.1%


Your Net Operating Margin trend

14.5%

12.1%

9.8%

7.5%

5.1%

2010 2011 2012 2013 2014 2015


Your 2015 Income per student

• Your income is close to average.

• Note income sources – indicates a good sample

• Debtors and collection appear poor – indicating poor systems and possible parent dissatisfaction

Formula: Total Recurrent Income ÷ number of students.

Definition: Indicates your relative level of income

compared to other schools in the sample.

Table VI: Revenue Sources and Collection

Ratio Your

School


than Average

Revenue Sources (Excludes boarding)

Total Recurrent Income per Student $20,332

$20,068 $230,390

Discounts & Concessions as % Total Fee

Income

12.3% ? 11.8%

Fee Income as % Total Income * 55.4% 52.3%

Grant Income as % Total Income * 44.6% 45.5%

Other Income as % Total Income * 0.0% 2.3%

Fee & Other Income as % Total

Expenses

54.7% 56.9%

Outstanding Fees per Student $1,006 ? $647 $312,906

% Trade Debtors to Fees Billed 8.4% ? 4.9%

Bad Debt per Student $16

$43 ($23,078)

$23638

$21604

$19570

$17537

$15503


Table VII: Expenditure

Ratio Your

School

Rating Sample Average *

More/(Less)

than Average

Per Student Costs (Excludes boarding)

Teacher Salaries $9,800 ? $9,727 $63,454

Specialist Support Salaries $119

$506 ($337,466)

Teacher Aides $1,359 ? $969 $340,094

Teaching Resources $1,541 ? $1,357 $160,225

Direct Delivery Cost $12,820 ? $12,371 $391,627

Administration Salaries $1,677 ? $1,637 $34,493

Other Admin Expenses $2,374 ? $1,679 $605,443

Maintenance & Other Salaries $1,006 ? $781 $195,544

Other Maintenance Expenses $716

$1,124 ($355,850)

Total Expenditure per Student (excluding

Int, Depn, Amort & Boarding)

$18,592 ? $17,592 $871,257

As a Percentage of Expenses

Teacher Salaries 52.7%

55.9%

Specialist Support 0.6%

2.6%

Teacher Aides 7.3% ? 5.5%

Administration Salaries 9.0%

9.3%

Maintenance & Other Salaries 5.4% ? 4.4%

Teaching Resources 8.3% ? 7.6%

Other Admin Expenses 12.8% ? 9.3%

Other Maintenance Costs 3.8%

6.5%

Your 2015 Expenditure

• Your expenses are $870,000 more than the average school in the sample with identical enrolment numbers

• Major areas Administration + $600,000, Aides and Resources + $500,000• Efficient in other areas• How does this correlate to staffing?


$25863

$22700

$19537

$16374

$13212

$11877

$10703

$9529

$8354

$7180

Your 2015 Expenditure

• Teaching expenses close to median

• Total expenses relatively high

Formula: Teacher salary (including on-costs) ÷ number of

students.

Definition: The teacher/salaries-per-student ratio provides

a benchmark of your school's teaching salary costs relative

to those of other schools in the sample.

Formula: Total Expenditure per Student (excluding Int &

Depn) ÷ number of students.

Definition: The total expenditure per student ratio

provides a benchmark of your school's expenditure per

student relative to those of other schools in the sample.

Teaching Expenses per student

Total Expenses per student


Student/Teacher ratio

Number of students

Full-Time teacher equivalent

= Average number of students per FTE teacher

Best Practice = Depends on the school


Your 2015 Primary Staff ratios

Formula: Number of primary students ÷ number of FTE

primary teachers

Definition: The student/teacher ratio indicates the

average number of student enrolled for each teacher

employed.

• Compared to the average school in the sample with identical primary student enrolments, you have about four more primary school staff, excluding maintenance staff.

• Note student/teacher ratio is relatively low in sample• I exclude maintenance staff because this is influenced by your choice to employ or

outsource and also the relative size of properties to be maintained.

+4.5

Table VIII: Staffing Ratios - Primary School

Ratio Your

School


than Average

Primary Student/Teacher 12.0 13.6 3.2

Primary Student/Spec Support 318.0 393.3 0.2

Primary Students/ Aides Staff 90.9 89.3 (0.1)

Primary Student/Admin Staff 60.0 78.3 1.2

Primary Student/Maint and other Staff 75.7 115.9 1.5

Primary Academic Staff to Support Staff 1.9 2.1

17.4

15.7

14

12.3

10.6

Primary student/teacher ratio


Your 2015 Secondary Staff ratios


primary teachers



employed.

• Compared to the average school in the sample with identical secondary student enrolments, you have about sixteen more secondary school staff, excluding maintenance staff.

• Note student/teacher ratio is relatively low in sample• I exclude maintenance staff because this is influenced by your choice to employ or outsource

and also the relative size of properties to be maintained.

+16

Table IX: Staffing Ratios - Secondary School

Ratio Your

School


than Average

Secondary Student/Teacher 10.6 11.7 5.2

Secondary Student/Spec Support 277.0 212.8 (0.6)

Secondary Students/ Aides Staff 46.2 84.7 5.5

Secondary Student/Admin Staff 34.8 55.2 5.9

Secondary Student/Maint and other Staff 48.2 100.1 6.0

Secondary Academic Staff to Support Staff 1.3 1.7

Maint/Property Staff/Hectare - Prim & Sec 0.3 0.8

14.6

13.5

12.4

11.3

10.2

Secondary student/teacher ratio


11.1

10.7

10.2

9.8

9.3

2010 2011 2012 2013 2014 2015

Your Staff ratio trends


primary teachers



employed.

• Improving trend – increased students per teacher• Positive effect on Net Operating margin• Possibly more to do

Secondary student/teacher ratio

13

12.5

12

11.5

11

2010 2011 2012 2013 2014 2015

Primary student/teacher ratio



Solvency

• School year end is December

• Lowest point for cash

• January/February cash flow significant and predictable

• Solvency ratios measured at year end can be misleading

• I prefer to see monthly budgeted cash flow

– Ensure monthly cash requirements are well within facility limits and/or

cash reserves


Summary of Cash Flows

2015 2014

CASH FLOWS FROM OPERATING ACTIVITIESReceipts from Fees, Grants and Other Income 18,485,537 17,603,297

Payments to Suppliers and Employees (17,111,535) (16,665,649)

Interest (483,128) (510,000)

Net Cash Provided by Operating Activities 890,874 427,648

CASH FLOWS FROM INVESTING ACTIVITIESPayments (Net of Disposals) for Property, Plant and Equipment (1,500,000) (499,937)

Capital Income 190,952 190,952

Net Cash (Used in) Investing Activities (1,309,048) (308,985)

CASH FLOWS FROM FINANCING ACTIVITIESLoan Repayments (446,690) (351,315)

Net Cash (Used in) / Provided By Financing Activities (446,690) (351,315)

Net (Decrease) in Cash Held (864,864) (232,652)

Cash and Cash Equivalents at Beginning of the Period 1,263,797 1,496,449

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD 398,933 1,263,797

SOMERSET EXAMPLE SCHOOL

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2015


Cash Flow Adequacy Ratio

Net Cash Generated from operations

Cash paid for asset purchases and debt servicing

= For every dollar spent on asset purchases and debt servicing (your primary use of cash in a school), how much was funded from operations.

Rule of thumb = 1 or better over the medium term

eg. Earn a dollar and spend a dollar


Your Cash Flow Adequacy

Somerset Example School 2015 2014

Estimated cash from operations

Operating profit/(loss) -$385,489 -$899,892

Add depreciation 1,500,001$ 1,500,002$

1,114,512$ 600,110$

Asset purchases 1,500,000$ 499,937$

Debt payments including interest

Debt principal repayments 446,690$ 351,315$

Interest 483,128$ 510,000$

929,818$ 861,315$

Estimated cash from operations 1,114,512$ 600,110$

Add interest expnse 483,128$ 510,000$

Adjusted Cash from operations 1,597,640$ 1,110,110$

Asset purchases 1,500,000$ 499,937$

Debt servicing 929,818$ 861,315$

2,429,818$ 1,361,252$

Cash flow Adequacy 0.66 0.82

• More interested in the trend of this ratio

• If consistently < 1.0, how is that being funded?


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


Your Working Capital Ratio

• More interested in the trend of this ratio and if it is > 1.0• Indicates poor and deteriorating ability to pay debts as and when

due

Table II: Liquidity Ratios

Ratio Your

School


than Average

Working Capital * 0.66 ? 0.95



Current Assets 1,574,808$ 2,406,985$

Current Liabilities 3,797,720$ 3,647,726$

Working Capital 0.41 0.66



Depreciation Impact

Depreciation expenditure

Net cash from operations

Indicates % of the operating surplus to be directed to asset replacement.


Reinvestment ratio

Capital expenditure

Net cash from operations

Indicates % of operating surplus actually reinvested into asset replacement.


Your Depreciation and Reinvestment as % Cash Flow

37

%

37

8%

62

% 11

4% 21

6%

25

0%

13

5%

82

%

81

9%

80

%

84

%

75

%

83

% 13

5%

0.0%

200.0%

400.0%

600.0%

800.0%

1000.0%

2009 2010 2011 2012 2013 2014 2015

Somerset Example School

Depreciation Reinvestment

• More interested in the trend in this school’s individual ratio rather than sample averages

• Under invested 2012, 2013, 2014

• Matched depreciation in 2015, but funded from cash reserves

• Not sustainable because depreciation > cash surplus indicating assets are wearing out faster than the school is able to replace them

• Declining profitability is underlying cause


Debt per student

Interest bearing (bank) debt

Student numbers

Sample Average about $8,800 (2015 school year)


Your 2015 Debt Ratios

• Debt is close to average

• Close to the centre point (median)

Formula: Total debt ÷ student numbers.

Definition: A measure of your debt relative to others in

the sample.

Table V: Capital Structure and Debt Protection

Ratio Your

School


than Average

Interest Cover * 2.9 ? 14.7

Debt Servicing Cover * 1.5

10.9

Liabilities to Equity 41.0% 33.2%

Debt Repayment (Years) 6.8 ? 3.9

Debt per Student $8,720

$8,836 ($100,483)

Debt Repayment to Total Income 5.1% 4.6%

$22265

$16699

$11132

$5566

$0

Debt per student


Interest Cover

Earnings before interest, depreciation & amortisation

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)

Generally banks require a 2 times interest cover or higher.

I prefer 3 times or higher


Debt Servicing Cover

Earnings before interest, depreciation, amortisation

Interest expense + Principal repayments

= Number of times the school can meet its principal and interest payments

Rule of thumb > 1.5 times


Your Debt Servicing

• Inadequate debt serviceability in 2014 due to low profitability

• Improved in 2015

• But consider ability to sustainably meet debt servicing and asset replacement?


EBIDA 1,406,208$ 918,678$

Interest Expense 483,128$ 510,000$

Debt principal repayments 446,690$ 351,315$

929,818$ 861,315$

Interest Cover 2.9 1.8

Debt Servicing Cover 1.5 1.1


Rough Estimate of Borrowing Capacity

• EBIDA 2015 = $1,400,000

• Target Interest cover = 3 times

• Target maximum interest expense = $460,000

• Assume interest rate = 6% P.A.

• Corresponding loan = $7.6 million

• Proof $7.6 million at 6% = $460,000 interest expense

• Starting point only

• Need to consider debt servicing cover and ability to replace assets


Summary Indications

• Enrolments trended down but improved in 2015• 2015 operating surplus $870,000 less than average• Income higher than average• Discounts OK• Poor fee collection. Is there discontent in the school community?• 2015 expenses $1.1 million higher than average

– In particular administration, aides and resources

• Over 20 more staff than average• Cash reserves declining and likely to run out in 2016• Question solvency• Assets wearing out faster than ability to replace• Debt about average• Ability to service debt improved in 2015• But not sufficient cash left to also replace assets• Question sustainability of this school



Budgets must reconcile

Income Statement

Statement of Cash Flow

Loan Balances

Statement of Financial Position

Cash at Bank

Must Reconcile with each other


Strategic Budget – 5 to 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 and policies• Consider trends in key ratios


Income Statement


Strategic Financial Projections

1 January 2013 to 31 December 2022 INCOME AND EXPENDITURE STATEMENT

ACTUAL ACTUAL ACTUAL BUDGET BUDGET BUDGET BUDGET BUDGET

2013 2014 2015 2016 2017 2018 2019 2020

Recurrent Income

Tuition Fees 9,204,250 9,155,737 9,648,063 10,610,320 12,411,497 14,270,308 16,201,381 18,136,099

Recurrent Grants 7,426,696 7,408,255 7,793,420 8,534,903 9,296,552 10,049,835 10,722,054 11,273,120

Boarding Income 723,452 722,802 745,456 873,128 957,087 1,047,267 1,144,080 1,247,964

Other Income 289,902 316,504 298,599 307,557 322,935 339,082 356,036 373,838

Ancillary Income - - - - - - - -

TOTAL INCOME 17,644,300 17,603,298 18,485,537 20,325,908 22,988,071 25,706,492 28,423,552 31,031,020

EXPENDITURE

Tuition Costs 11,754,738 11,945,988 11,177,279 11,683,719 12,797,807 13,915,099 15,034,203 16,107,329

Administration Costs 2,157,739 2,155,969 2,413,289 2,944,805 3,469,999 4,041,975 4,664,179 5,328,386

Maintenance Costs 1,497,402 1,463,472 1,501,308 1,843,056 2,160,238 2,504,531 2,877,853 3,277,344

Boarding Costs 837,277 837,651 862,781 996,539 1,048,653 1,103,486 1,161,181 1,219,682

Ancillary Costs 345,617 266,111 1,119,191 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000

Interest 554,807 510,000 483,128 456,323 427,908 997,893 920,440 838,339

Depreciation 1,451,163 1,500,002 1,500,001 1,565,088 1,603,338 1,645,588 1,886,588 1,917,828

Provision for Doubtful Debts 14,879 14,949 5,000 5,000 5,000 5,000 5,000 5,000

TOTAL EXPENSES 18,613,622 18,694,142 19,061,978 20,494,530 22,512,944 25,213,573 27,549,445 29,693,906

OPERATING SURPLUS/(DEFICIT) (969,322) (1,090,844) (576,441) (168,622) 475,128 492,919 874,107 1,337,114

Capital Income 190,952 190,952 190,952 - - 750,000 100,000 -

NET SURPLUS/(DEFICIT) (778,370) (899,892) (385,489) (168,622) 475,128 1,242,919 974,107 1,337,114


Statement of Financial PositionSomerset Example School


1 January 2013 to 31 December 2022 BALANCE SHEET

Actual Actual Actual Budget Budget Budget Budget Budget

2013 2014 2015 2016 2017 2018 2019 2020

ASSETS

1,496,449 1,263,797 398,933 249,887 462,220 530,943 999,740 1,809,456

955,400 953,188 990,875 1,067,891 1,137,114 1,171,227 1,200,000 1,200,000

(95,051) (110,000) (115,000) (120,000) (125,000) (130,000) (135,000) (140,000)

- - - - - - - -

100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000

200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000

12,000,000 12,000,000 12,000,000 12,000,000 12,000,000 12,000,000 12,000,000 12,000,000

30,165,334 30,570,196 31,927,086 32,527,086 33,327,086 44,327,086 44,927,086 45,527,086

(9,028,365) (9,631,672) (10,243,076) (10,881,618) (11,532,159) (12,198,701) (13,085,243) (13,983,785)

17,010,321 17,105,396 17,248,506 17,648,506 18,148,506 18,648,506 19,048,506 19,448,506

(10,712,361) (11,609,056) (12,497,653) (13,424,200) (14,376,996) (15,356,043) (16,356,089) (17,375,375)

TOTAL ASSETS 42,091,727 40,841,849 40,009,671 39,367,553 39,340,771 49,293,018 48,899,000 48,785,888

LIABILITIES

- - - - - - - -

- - - - - - - -

3,297,720 3,297,720 3,297,720 3,297,720 3,297,720 3,297,720 3,297,720 3,297,720

- - - - - - - -

- - - - - - - -

- - - - - - - -

737,495 737,495 737,495 737,495 737,495 737,495 737,495 737,495

8,400,800 8,050,815 7,604,125 7,130,629 6,628,719 15,338,048 13,969,923 12,519,697

12,436,015 12,086,030 11,639,340 11,165,844 10,663,934 19,373,263 18,005,138 16,554,912

NET ASSETS 29,655,712 28,755,819 28,370,331 28,201,709 28,676,836 29,919,755 30,893,862 32,230,976

Other Current Asset 1

Cash

Debtors - Fees

Provision for Doubtful Debts

Debtors - Other

Stock

Buildings

Land

Accumulated Depreciation

Plant & Equipment

Accumulated Depreciation

Bank Overdraft

Fees in Advance

Other Current Liabilities

Provision for LSL

Provision for Holiday Pay

GST Payable

Other Non-Current Liabilities 1

Bank loans

TOTAL LIABILITIES


Statement of Cash FlowsSomerset Example School


1 January 2013 to 31 December 2022 CASH FLOW

Actual Actual Actual Budget Budget Budget Budget Budget

2013 2014 2015 2016 2017 2018 2019 2020

Recurrent Income

Tuition Fees 9,204,250 9,155,737 9,648,063 10,610,320 12,411,497 14,270,308 16,201,381 18,136,099

Recurrent Grants 7,426,696 7,408,255 7,793,420 8,534,903 9,296,552 10,049,835 10,722,054 11,273,120

Boarding Income 723,452 722,802 745,456 873,128 957,087 1,047,267 1,144,080 1,247,964

Other Income 289,902 316,504 298,599 307,557 322,935 339,082 356,036 373,838

Ancillary Income - - - - - - - -

GST Received - - - - - - - -

Input Tax Credits Received - - - - - - - -

Total Recurrent Income 17,644,300 17,603,297 18,485,537 20,325,908 22,988,071 25,706,492 28,423,552 31,031,020

Tuition Costs 11,754,738 11,945,988 11,177,279 11,683,719 12,797,807 13,915,099 15,034,203 16,107,329

Boarding Costs 837,277 837,651 862,781 996,539 1,048,653 1,103,486 1,161,181 1,219,682

Administration Costs 2,157,739 2,155,969 2,413,289 2,944,805 3,469,999 4,041,975 4,664,179 5,328,386

Maintenance Costs 1,497,402 1,463,472 1,501,308 1,843,056 2,160,238 2,504,531 2,877,853 3,277,344

Borrowing Costs - - - - - - - -

Ancillary Costs 345,617 266,111 1,119,191 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000

Interest 554,807 510,000 483,128 456,323 427,908 997,893 920,440 838,339

GST Paid - - - - - - - -

GST paid to ATO - - - - - - - -

Total Recurrent Expenditure 17,147,580 17,179,191 17,556,976 18,924,442 20,904,606 23,562,985 25,657,856 27,771,079

Net Recurrent Cash Flow 496,720 424,106 928,561 1,401,466 2,083,466 2,143,507 2,765,695 3,259,941

Capital Expenditure (499,937) (499,937) (1,500,000) (1,000,000) (1,300,000) (11,500,000) (1,000,000) (1,000,000)

Capital Income 190,952 190,952 190,952 - - 750,000 100,000 -

Asset Disposals (Excl Gain/Loss)) - - - - - - - -

Movement in Current Assets - 2,212 (37,687) (77,016) (69,223) (34,113) (28,773) -

Movement in Current Liabilities - 1,330 - - - - - -

Movements in Non-Current Liabilities - - - - - - - -

Loan Drawdowns - - - - - 10,000,000 - -

Loan Repays (351,315) (351,315) (446,690) (473,496) (501,910) (1,290,672) (1,368,125) (1,450,226)

Capital & Financing (660,300) (656,758) (1,793,425) (1,550,512) (1,871,133) (2,074,785) (2,296,898) (2,450,226)

Net Cash Flow (163,580) (232,652) (864,864) (149,046) 212,333 68,723 468,797 809,715

Opening Balance 1,660,029 1,496,449 1,263,797 398,933 249,887 462,220 530,943 999,740

Net Cash Flow (163,580) (232,652) (864,864) (149,046) 212,333 68,723 468,797 809,715

Closing Balance 1,496,449 1,263,797 398,933 249,887 462,220 530,943 999,740 1,809,456


KPI AnalysisSomerset Example School

Strategic Financial Projections ANALYSIS OF KEY PERFORMANCE INDICATORS

1 January 2013 to 31 December 2022

Actual Actual Actual Budget Budget Budget Budget BudgetUnadjusted

Benchmarks2014

Benchmark 2013 2014 2015 2016 2017 2018 2019 2020

Debt Protection

Interest cover (based on EBITDA) - 1.9 1.8 2.9 4.1 5.9 3.1 4.0 4.9

Debt servicing cover 1.1 1.1 1.5 2.0 2.7 1.4 1.6 1.8

Debt per student 7,358$ 9,252$ 9,329$ 8,720$ 7,802$ 6,919$ 15,540$ 13,928$ 12,457$

Operational

Net operating surplus (before interest and depreciation) 1,036,169$ 918,678$ 1,406,209$ 1,852,309$ 2,505,894$ 3,135,921$ 3,680,635$ 4,092,780$

Net operating margin (before interest and depreciation) (includes boarding) 12.3% 5.9% 5.2% 7.6% 9.1% 10.9% 12.2% 13.0% 13.2%

Non-Boarding (Tuition) 4% 5% 8% 9% 9% 9%

Recurrent Income per student#

19,159 19,159$ 18,622$ 19,547$ 20,331$ 21,270$ 22,985$ 24,972$ 27,186$ 29,623$

Teaching Salaries per student# 9,551 9,551$ 9,960$ 10,870$ 9,804$ 9,562$ 9,667$ 10,095$ 10,604$ 11,178$

Specialist Support Salaries per student# 443 443$ 114$ 120$ 120$ 121$ 122$ 125$ 129$ 136$

Teacher Aides per student# 1,006 1,672$ 1,756$ 1,360$ 1,104$ 1,112$ 1,139$ 1,183$ 1,241$

Teaching Resources perstudent# 1,311 1,200$ 1,097$ 1,535$ 1,996$ 2,459$ 2,740$ 3,073$ 3,473$

Direct Delivery costs per student#

12,051 12,051$ 12,946$ 13,842$ 12,818$ 12,783$ 13,359$ 14,098$ 14,989$ 16,027$

Total Administration Expenses per student#

1,569 1,569$ 1,413$ 1,374$ 2,379$ 2,478$ 2,659$ 2,893$ 3,181$ 3,537$

Administration salaries per student#

1,591 1,591$ 1,360$ 1,449$ 1,677$ 1,843$ 2,011$ 2,220$ 2,471$ 2,764$

Maintenance Expenses per student#

987 987$ 695$ 689$ 716$ 1,004$ 1,235$ 1,493$ 1,784$ 2,123$

Maintenance salaries per student#

742 742$ 954$ 1,007$ 1,006$ 1,013$ 1,020$ 1,045$ 1,085$ 1,138$

Total Operating expenses (Excludes Int, Depn, Boarding) 17,368$ 18,361$ 18,596$ 19,121$ 20,284$ 21,749$ 23,510$ 25,590$

Primary Teacher Ratio 14.5 14.5 11.4 11.1 12.0 13.6 13.8 14.4 14.6 14.5

Secondary Teacher Ratio 11.7 11.7 9.8 9.4 10.6 11.2 11.8 11.7 11.7 11.7

Boarding

Total Boarding Income 723,452$ 722,802$ 745,456$ 873,128$ 957,087$ 1,047,267$ 1,144,080$ 1,247,964$

Total Boarding Expenses 837,277$ 837,651$ 862,781$ 996,539$ 1,048,653$ 1,103,486$ 1,161,181$ 1,219,682$

Boarding Operating Result (113,825)$ (114,849)$ (117,326)$ (123,411)$ (91,566)$ (56,219)$ (17,101)$ 28,282$

Number of Boarders 40 48 50 52 54 56 58 60

Boarding income per boarder#

15605 15,605$ 18,086$ 15,058$ 14,909$ 16,791$ 17,724$ 18,701$ 19,726$ 20,799$

Boarding expenditure per boarder#

15779 15,779$ 20,932$ 17,451$ 17,256$ 19,164$ 19,419$ 19,705$ 20,020$ 20,328$

Loan Summary

Balance Carried Forward 8,752,115$ 8,400,800$ 8,050,815$ 7,604,125$ 7,130,629$ 6,628,719$ 15,338,048$ 13,969,923$

New Loans Capital -$ -$ -$ -$ -$ 10,000,000$ -$ -$

New Loans Bridging -$ -$ -$ -$ -$ -$ -$ -$

Less Loan Principal Capital (351,315)$ (351,315)$ (446,690)$ (473,496)$ (501,910)$ (1,290,672)$ (1,368,125)$ (1,450,226)$

Less Loan Principal Bridging -$ -$ -$ -$ -$ -$ -$ -$

Loan Balance - End of Year 8,400,800$ 8,050,815$ 7,604,125$ 7,130,629$ 6,628,719$ 15,338,048$ 13,969,923$ 12,519,697$

MATCHES TO SURVEY REPORT


Somerset Key Indicator (SKI) Report

1. Learn from the Past

2. Understand the Present

3. Risk assess the Future

Using any budget, enter data into the SKI. It will also extract your data from the latest Benchmarking Report


SKI report


Traffic LightEarly Warning System

Up to Seven years

on one page

Your ratio

Sample av.

Yellow = caution

Green = OK


Conclusions re Example School


Your Net Operating Margin Trend

5.9%5.2%

7.6%

9.1%

10.9%12.2%

12.9% 13.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013 2014 2015 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget


Margin Sample average

• Budgeting to improve profitability


Student/Teacher Ratio Trend

11.6 11.112.0

13.6 13.8 14.4 14.7 14.5

9.9 9.410.6 11.2 11.8 11.7 11.7 11.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0



Primary Secondary

• Student/teacher ratio increased

• Causes teaching salaries per student to be more in line with sample average


Cash Flow Adequacy

0.90.8

0.7

1.0

1.1

0.3

1.21.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4



Cash Flow Adequacy Target

• 2018 shortfall due to major construction project will be debt funded

• By then should know if achieving profit improvement targets

• 2017 and 2020 cash appears adequate, however achieved due to under-investment



2014 2015 2016 2017 2018 2019 2020

Actual Actual Budget Budget Budget Budget Budget

$,000 $,000 $,000 $,000 $,000 $,000 $,001

Cash from operations 619$ 1,082$ 1,396$ 2,078$ 2,889$ 2,861$ 3,255$

Loan principal repayments -$351 -$447 -$473 -$502 -$1,291 -$1,368 -$1,450

Remaining cash surplus 267$ 635$ 923$ 1,577$ 1,598$ 1,493$ 1,805$

Capital expenditure 500$ 1,500$ 1,000$ 1,300$ 11,500$ 1,000$ 1,000$

Depreciation 1,500$ 1,500$ 1,565$ 1,603$ 1,646$ 1,887$ 1,918$

Actual Cash Flows

• What further action can be taken to improve the position?



0.2

0.7

0.4 0.4 0.4 0.4

0.60.7

0.0

0.2

0.4

0.6

0.8

1.0

1.2



Working Capital Target minimum

• Historically low cash reserves but slowly improving


Debt per Student

$9,252 $9,329 $8,720 $7,802 $6,919

$15,540$13,928

$12,457

$0

$5,000

$10,000

$15,000

$20,000



Debt per student Sample average 2015

• Progressive reduction in debt 2014 to 2017

• Increased debt in 2018 for large capital investment

• Budgeted higher profitability in 2018 and 2020 but is it adequate?


Debt Servicing

1.9 1.8

2.9

4.1

5.9

3.14.0

4.9

1.1 1.11.5

2.02.7

1.4 1.6 1.8

0.0

2.0

4.0

6.0

8.0



Interest Cover Debt Service Cover

• Ability to service debt improves as profitability improves

• Significant increase in debt from 2018 results in lower serviceability

• Perhaps adequate ability to service debt

• But consider ability to both service debt and replace assets


Case study – benchmarking works

-5

0

5

10

15

20

25

-5%

0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Inte

rest

Co

ver

Ne

t O

pe

rati

ng

Mar

gin

Started using Ratios & Benchmarks


Summary Indications

• Viability/Sustainability cycle

• Cash flow to assess sustainability– debt servicing

– asset replacement

• Use Survey to identify S.W.O.T

• SKI Report – early warning system

• Set targets/policies– Net Operating margin

– Interest cover, debt servicing cover, debt levels

– Staff ratios (guided by principal)

• Benchmarking works


For further details contact

John Somerset – Director of Somerset Education

Email [email protected]

Internet www.somerseteducation.net

Telephones 1300 781 968 (Australia)+61 7 3263 5300 (International)0417 618 899 (Cell phone)

Address GPO Box 3273Brisbane, QueenslandAustralia 4001

mailto:[email protected]

http://www.somerseteducation.net/

How to assess financial sustainability, capital ...asba.asn.au/int/asba/uploads/files/Chapter Docs/TAS/2016 Tas Conf... · How to assess financial sustainability, capital expenditure

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