Assessing Your Institution’s
Financial Health Using the CFI
FOCUS
Virginia Commonwealth University
November 14, 2014
Larry Goldstein, President, Campus Strategies, LLC
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November 14, 2014
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BACKGROUND
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Background


US higher education ratio analysis initially
relied on data collected through HEGIS—
Higher Education General Information
Survey (US Department of Education)
◦ HEGIS began in 1966 and continued until
1987 when it was replaced by IPEDS—
Integrated Postsecondary Education Data
System
No utilization of financial statements for
ratios until 1995…
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Background

Ratio Analysis in Higher Education, fourth
edition (1999) by KPMG and Prager, McCarthy
& Sealy, LLC—a significant advance
◦ Introduced
 Strategic Resource Allocation matrix
 Composite Financial Index (CFI)
 Combining selected ratios to produce
overall score
◦ Relevant only to private institutions…
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Background

Fifth edition (2002) applied CFI to public
institutions
◦ New concepts
 Adaptation of ratios to reflect then-new
GASB reporting model
 Inclusion of FASB support organizations in
ratio calculations…
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Background

Seventh edition released summer 2010
◦ Extends scale for CFI
◦ Revisions to ratios
 Drops alternative to net operating
revenues ratio for private institutions
 Requires the establishment of an
operating measure—whether or not
reported externally…
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Background
◦ Significant emphasis on liquidity due to
impact of Great Recession on higher
education—introduces new ratio
◦ Encourages averaging ratios over multiple
years
◦ Deemphasizes peer comparison in favor of
trend analysis—assess institution over time,
not against others
◦ Encourages projecting ratios for strategic
purposes…
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CONTEXT
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Context

Why calculate financial ratios?
From the sixth edition, “We believe the
fundamental concept of assessing financial
health by using a limited number of ratios
has improved the financial health of
colleges and universities.” (emphasis
added)
Just as important, it helps nonaccountants understand institutions’
financial health…
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Context


Ratios are valuable for those who do not
understand how to interpret and analyze
higher education financial statements
Trustees, faculty, students, and other
interested parties can use the ratios to gain
an understanding of the institution’s
financial health…
Reduces complexity of GAAP-basis financial
statement analysis…
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Context





Facilitates peer assessment
Shifts focus to a more global level
Supports strategic decision making
Demonstrates financial impacts of key
decisions
Assists with performance assessment
◦ Creditworthiness
◦ Relative liquidity, financial viability, and
leverage of resources
◦ Financial assets’ performance…
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Context

Principles
◦ Use ratios to measure acquisition / use of
resources in support of mission
◦ Focus on summary information to address
key questions
◦ Present a select number of ratios to
provide answers
 Additional detail when necessary…
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Context
◦ Focus on trends in ratios
 Some trends are evident from internal
examination / review
 Other trends arise through comparisons
with others
 Never make decisions based on
comparison to other institutions using
CFI—only underlying ratios •
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Questions?
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COMPOSITE FINANCIAL
INDEX (CFI)
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CFI

Combines four principal ratios
Primary reserve ratio
Viability ratio
Return on net assets ratio
Net operating revenues ratio…
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Ratios

◦ Standard weighting for each ratio, but can
be adapted for unique situations
 Weighting should remain fairly static over
time
In addition to four principal ratios, seventh
edition presents 13 secondary ratios…
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Ratios

Primary reserve ratio—35 percent
◦ Indicates the sufficiency of resources and
their flexibility
 Expendable net assets / total expenses
 Unless otherwise specified, expendable
net assets restricted for plant purposes
are excluded…
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Ratios

Viability ratio—35 percent
◦ Indicates the capacity to repay total debt
through reserves
 Expendable net assets / long-term debt…
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Ratios

Return on net assets ratio—20 percent
◦ Indicates whether the institution is better
off financially this year than last
 Change in net assets / beginning net
assets…
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Ratios

Net operating revenues ratio—10 percent
◦ Indicates whether institution is living
within available resources
 Operating surplus or deficit / operating
revenues 
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GRAPHIC FINANCIAL PROFILE
PRIMARY RESERVE RATIO
10
10
3
3
NET OPERATING REVENUES
RATIO
RETURN ON NET ASSETS RATIO
3
3
10
10
VIABILITY RATIO
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Threshold Values

Financial health pegged at 3, equating to
Primary Reserve: 140 days of operations
Actually more due to depreciation
Viability: 1.25 times total debt owed
Return on Net Assets: 6% return on
combined financial / nonfinancial assets
Net Operating Revenues: 2% net surplus
to increase reserves •
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Questions?
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OTHER ISSUES
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Other Issues

What to do about affiliated entities
◦ Include them!
 Necessary for a comprehensive picture
of the institution and its operations
◦ GASB Statement No. 39 (component units)
facilitated this by requiring inclusion of
significant entities
 What about omitted entities—due to
criteria or significance?...
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Other Issues
◦ Potential problem with double-counting of
some items
 Disbursements from foundation to
institution is treated as expense by
foundation and, once expended by
institution, as expense by institution
 Consolidation would address through
elimination, but not always available…
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Other Issues

Comparisons between institutions
◦ Very risky due to inconsistencies
 Especially between public and private
◦ Helps if institutions have similar mission
◦ Optimal comparison occurs within affinity
groups
 Examples include ACC,VCCS institutions,
etc…
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Other Issues

Limitations / pitfalls of financial ratio analysis
◦ It is not a substitute for understanding the
financial statements themselves; it shines a
light on the statements’ content but can’t
tell the entire story
◦ It should not be used to mask poor
financial performance
◦ It is but one quantitative measure…
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Other Issues
◦ Appropriate assessment—financial or
otherwise—requires both quantitative and
qualitative analysis
 Financial ratios should not be used as a
substitute for qualitative judgments
 It should be supplemented with other
factors…
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Other Issues
◦ Peer comparisons without longitudinal
analysis can be misleading
◦ Longitudinal analysis without peer
comparisons can be misleading
 Five-year periods seem to work well
 Consistently applied ratio analysis is
essential •
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Resources

Strategic Financial Analysis for Higher Education,
seventh edition, by Prager, Sealy & Co., LLC,
KPMG LLP, and Attain LLC
◦ Available through KPMG or NACUBO
www.nacubo.org
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Using Financial Ratios to Assess
Institutional Financial Health
Questions, Comments,
and Reactions
[email protected]
(540) 942-9146
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