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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.
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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)
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Session Outline
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Viability and Sustainability Cycle
Profitability
Fees & GrantsStudent
Numbers
Infrastructure
Cost ManagementAffordability
Borrowing
What Schools worry about
Mitigation and Relationships
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Sufficient surplus Oils the Wheels
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Don’t Jam the Wheels
Insufficient Surplus
Too much Debt
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Helpful Tools
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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
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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
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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
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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
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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
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National Net Operating Margin - 2014
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National Debt per Student - 2014
Total Independent Schools’ bank debt estimated to be $3 billion
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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
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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)
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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
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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?
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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
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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
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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
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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
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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
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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
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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.
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Somerset School Portal
• ASBA/Somerset Non-Government Schools’ Financial Performance Survey
• Access via www.somerseteducation.net
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Once data entered, select a sample
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Selecting your Sample of similar schools
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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
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Generate your report
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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% ($1,052,112) 11
Primary Student/Teacher 12.0 ? 13.6 3.2 10
Secondary Student/Teacher 10.6 ? 11.7 5.2 10
Snapshot of your school - 2015
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Your Enrolments Trends
• Declining trend in enrolments has turned upwards in 2015
981
1020 10271006
908
863 872
750
800
850
900
950
1000
1050
2009 2010 2011 2012 2013 2014 2015
Enrolments
Enrolments
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Profitability – Net Operating Margin
Earnings before interest, depreciation, amortisation
Total Revenue
For every dollar in income, how much remains after all cash expenses (excluding interest)
Sample Average 13.3%
National average about 13%
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Your 2014 EBIDA
Total comprehensive Income ($ 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 $480
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Your 2015 EBIDA
Total comprehensive Income ($ 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
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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%
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Your Net Operating Margin trend
14.5%
12.1%
9.8%
7.5%
5.1%
2010 2011 2012 2013 2014 2015
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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
Rating Sample Average More/(Less)
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
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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?
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$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
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Student/Teacher ratio
Number of students
Full-Time teacher equivalent
= Average number of students per FTE teacher
Best Practice = Depends on the school
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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
Rating Sample Average More/(Less)
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
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Your 2015 Secondary 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 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
Rating Sample Average More/(Less)
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
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11.1
10.7
10.2
9.8
9.3
2010 2011 2012 2013 2014 2015
Your Staff ratio trends
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.
• 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
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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
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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
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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
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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?
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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
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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
Rating Sample Average More/(Less)
than Average
Working Capital * 0.66 ? 0.95
Somerset Example School 2015 2014
Working Capital Ratio
Current Assets 1,574,808$ 2,406,985$
Current Liabilities 3,797,720$ 3,647,726$
Working Capital 0.41 0.66
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Depreciation Impact
Depreciation expenditure
Net cash from operations
Indicates % of the operating surplus to be directed to asset replacement.
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Reinvestment ratio
Capital expenditure
Net cash from operations
Indicates % of operating surplus actually reinvested into asset replacement.
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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
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Debt per student
Interest bearing (bank) debt
Student numbers
Sample Average about $8,800 (2015 school year)
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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
Rating Sample Average More/(Less)
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
$0
Debt per student
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Interest Cover
Earnings before interest, depreciation & amortisation
Interest expense
= Number of times the school can meet its interest expense
Rule of thumb 2 to 3 times (refer to you bank’s policies)
Generally banks require a 2 times interest cover or higher.
I prefer 3 times or higher
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Debt Servicing Cover
Earnings before interest, depreciation, amortisation
Interest expense + Principal repayments
= Number of times the school can meet its principal and interest payments
Rule of thumb > 1.5 times
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Your Debt Servicing
• Inadequate debt serviceability in 2014 due to low profitability
• Improved in 2015
• But consider ability to sustainably meet debt servicing and asset replacement?
Somerset Example School 2015 2014
EBIDA 1,406,208$ 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
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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
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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
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Budgets must reconcile
Income Statement
Statement of Cash Flow
Loan Balances
Statement of Financial Position
Cash at Bank
Must Reconcile with each other
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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
Govern with Confidence
Income Statement
Somerset Example School
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
Govern with Confidence
Statement of Financial PositionSomerset Example School
Strategic Financial Projections
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
Govern with Confidence
Statement of Cash FlowsSomerset Example School
Strategic Financial Projections
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
Govern with Confidence
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
Govern with Confidence
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
Govern with Confidence
SKI report
Govern with Confidence
Traffic LightEarly Warning System
Up to Seven years
on one page
Your ratio
Sample av.
Yellow = caution
Green = OK
Govern with Confidence
Conclusions re Example School
Govern with Confidence
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
Somerset Example School
Margin Sample average
• Budgeting to improve profitability
Govern with Confidence
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
2013 2014 2015 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget
Somerset Example School
Primary Secondary
• Student/teacher ratio increased
• Causes teaching salaries per student to be more in line with sample average
Govern with Confidence
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
2013 2014 2015 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget
Somerset Example School
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
Govern with Confidence
Somerset Example School
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?
Govern with Confidence
Working Capital Ratio
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
2013 2014 2015 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget
Somerset Example School
Working Capital Target minimum
• Historically low cash reserves but slowly improving
Govern with Confidence
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
2013 2014 2015 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget
Somerset Example School
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?
Govern with Confidence
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
2013 2014 2015 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020 Budget
Somerset Example School
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
Govern with Confidence
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
Govern with Confidence
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
Govern with Confidence
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