Using Financial Metrics to Assess Financial Health and Inform Data- Driven Decision Making Christina Day, Budget Manager Portland Community College February 2016

 Share tools for strategic financial analysis  Discuss use of financial ratios for analysis  Identify possible strategies for improved financial management

Are we appropriately funding the activities that we have currently undertaken? How do we compare financially with our peer institutions - are we in a position to compete effectively? Where do we need to invest to meet our strategic goals, and do we have the funds available? If we are to pursue a growth strategy, how much resource do we have available today as a baseline to fund an expansion?

The alignment of strategic financial goals with actions and risk assessment will improve strategic decision making and chances of institutional success. The mission, as articulated in the strategic plan, is the institutional driver; financial capacity and affordability measure the feasibility of the institution’s aspirations.” Prager, Sealy & Co. (2010) In other words – Are we financially healthy enough to take actions and risks to meet our mission?

 Gauge the financial health of your institution to meet its mission  Another lens for analysis – quantifiable measures  Benchmark with other institutions  Identify areas for investment to improve performance and align to strategic goals  Informs data-driven decisions  Uses GAAP-adjusted CAFR data

 Liquidity - Are resources sufficient and flexible enough to support the mission?  Debt Management - Are debt resources managed strategically to advance the mission?  Asset Performance - Does asset performance and management support the strategic direction?  Operating Results - Do operating results indicate the institution is living within available resources?

Primary Reserve Ratio Are resources sufficient and flexible enough to support the mission? This ratio measures the period that expenses could be covered without generating additional resources. Benchmark =.40 (40% of 12 mos ~ 5mos.)

 Viability (Equity) Ratio  Debt Burden Ratio  Debt Service Coverage Ratio Are debt resources being managed strategically to advance the mission?

Viability (Equity) Ratio Are debt resources being managed strategically to advance the mission? This ratio assesses ability to respond to adverse conditions and fund initiatives with internal resources. Benchmark = 1.0 (1:1 Ratio)

Debt Burden Ratio Are debt resources being managed strategically to advance the mission? This ratio indicates the demand on resources to repay debt. Higher ratios may indicate higher prioritization of needed capital improvements. Benchmark = 7%

Debt Coverage Ratio Are debt resources being managed strategically to advance the mission? This ratio reflects the net revenue stream available to meet debt burden in changing economic conditions. The higher ratio the better! Benchmark = 1.2x

Does Asset Performance and Management Support the Strategic Direction?  Return on Net Assets Ratio  Physical Asset Reinvestment Ratio  Facilities Burden Ratio

Return on Net Assets This ratio reflects total economic returns on all equity, including operating & non-op revenues & expenses. Benchmark = 3-4% Does Asset Performance and Management Support the Strategic Direction?

Physical Asset Reinvestment Ratio This ratio calculates the extent to which capital renewal is occurring compared to physical asset usage. Benchmark = 1 (1:1 ratio) Does Asset Performance and Management Support the Strategic Direction?

Facilities Burden Ratio This ratio calculates the comprehensive impact(inc op and maint) of facilities investments on the budget. Benchmark = none Does Asset Performance and Management Support the Strategic Direction?

Net Operating Revenue Is the institution living within available resources? This ratio explains how the surplus from operations (if any) affects the other core ratios. Benchmark = 2-4%

 Combines the 4 core ratios into a single score  Primary reserve ratio  Viability ratio  Return on net assets ratio  Net operating revenues ratio  Attempts to quantify the overall financial well being of the institution

4 steps:  Compute value of 4 core ratios  Convert to strength factors along a common scale for comparability (-4 to 10)  Multiply strength factors by weight factors  Total the 4 resulting numbers for single CFI score  Score is an estimate only  Most useful if historically trended Threshold value of financial health = 3

5 year average = 2.28

Strategic Analysis and Decision-making – focus in on priorities  Compare to Strategic Plan and Goals Priority of student success – how is that reflected in the ratios? Physical Asset Reinvestment ratio shows excellent facilities – but too much? Need to adjust reinvestment? Priority of financial sustainability – is that reflected in the Primary Reserve ratio?  Review trends

 Look at components of each ratio to determine areas of potential change/focus  Strategize actions that would impact the ratios

What would change an institution’s liquidity and improve the Primary Reserve ratio? Increase cash generated from operations Reduce unfunded liabilities (pension, retiree health) How can we make assets perform better? Improve utilization of existing buildings Optimize mix of owned/leased facilities Maintain adequate investment in deferred maintenance (increase or decrease current investment?) How can we impact operating results? Target adverse revenue and expense trends for improvement (i.e. margin enrollment) Improve operational productivity Develop and grow new revenue sources

 Better manage financial health with a larger variety of tools  Make data-driven decisions (i.e. Facilities)  Align resource allocation with strategic goals  Support responses to Board, senior leaders and stakeholders  Quantify results of strategic changes

 Prager, Sealy & Co. / KPMG. (2010). Strategic Financial Analysis for Higher Education (Vol. 7th Edition). USA: KPMG.  Salluzzo, R. (2014). Partner - Attain, LLC. "Do you know the financial health of your institution?". Charlotte, NC.  Thinking Strategically About UCLA's Resources - Senate Budget Seminar #4. (2013, December 6). Retrieved January 2016, from presentation pdf

Questions? Thoughts?