1. Ron Salluzzo Phil Tahey
Answering Key Financial Questions for Board and Management through Effective Internal Financial Reporting
Ron Salluzzo
Phil Tahey

2. Outline and Outcome Session Outline Session Outcome
Role of Internal Financial Reporting
Concepts to Consider in Developing an Internal Reporting Program
Financial health measurements
Internal reporting concepts
Management Discussion and Analysis
Questions
Session Outcome
Learn a different approach to internal reporting by focusing on key information, risks and metrics

3. Audience Questions Are you from a...
Public Institution?
Private Institution?
Do you think your Board members understand higher education industry finances?
Your Institution’s financial issues?
Your Institution's key financial risks?
When was the last time you revised your internal reporting or reports?
Does your internal reporting consist primarily of budget –actual statement of activities and explanation of variances?

4. Role of Internal Financial Reporting…
Internal financial reporting provides methods and tools to evaluate financial risks, condition and operations, and communicate information effectively to institutional stewards at various levels
Several financial questions* that institutions should address are:
How has the Institution responded to its strategic financial risks?
What is the institution's liquidity and how does it affect operations?
Is debt used strategically?
What are the financial operating risks and how are they managed?
What are the financial capital risks and how are they managed?
Are financial resources allocated to support strategies?
What is the institution's overall financial health?
*From Strategic Financial Analysis for Higher Education, Seventh Edition
DRAFT

5. …As Opposed to External Financial Reporting Objectives
FASB Concepts Statement No. 4, “Objectives of Financial Reporting by Non-business Organizations” issued in 1980 stated that information should be provided to present and potential resource providers and other users about:
Allocation of resources
Assessing the services provided and the ability to continue to provide those services
How managers discharged their stewardship responsibilities and their performance
Economic resources, obligations and net resources, and the changes therein
Performance of the organization for the period
GASB Concepts Statements No.1 “Objectives of Financial Reporting” issued in 1987 stated that financial reporting should assist users in:
Assessing the unit’s public accountability
Evaluating operating results
Assessing the level of services provided and the unit’s ability to meet obligations as
they become due

6. Internal Reporting as part of Strategic Plan Monitoring – Mission to Processes

7. Linkage of Strategic Financial Risks to Internal Reporting
Identify and Assess Strategic Financial Risks
Implement Monitoring and Mitigating Activities
Establish Internal Financial Reporting Objectives to Communicate those Activities
Develop & Communicate Financial & Non-financial information to meet the Objectives
DRAFT

8. Primary Objectives of Internal Financial Reporting
Internal reporting is focused on reporting information related to strategic financial risks and key information in order to answer the high level questions
Primary objectives of internal reporting are:
Report Stewardship over Sources and Uses of Funds
Financial Performance
Liquidity – Balances, sources, uses, needs
Capital Asset Acquisition and Financing
Financial Capital Structure, Leverage and Capital Availability
Objectives are broad and cover diverse aspects of an institution
DRAFT

9. Reporting Information to Meet Objectives
Existence of restrictions on use of a significant portion of funds and revenues adds a layer of complexity not in for-profit companies
Government grants and funds for research, tuition or clinical care
Endowments and related pay-out
Current or plant contributions
Due to diverse objectives and presence of restrictions, one basis of reporting cannot meet all objectives effectively
As a result, three bases or perspectives are needed
Funds - GAAP - Cash
DRAFT

10. Reporting Information, cont.
Each basis of reporting is more effective at meeting certain objectives
Funds Basis
Stewardship over Funds received
Capital Asset Acquisition and Financing
GAAP Basis
Financial Performance
Capital Structure
Capital Availability
Cash Basis
Liquidity sources, uses, needs
DRAFT

11. Levels of Financial Information
Different levels of users of financial Reports
Trustees
Senior central management
Divisional senior management
Departmental management
Faculty members
Middle central management
Although one set of reports cannot meet needs at all levels, basic information will be the same
Difference is in level of detail and grouping of information
DRAFT

12. Levels of Financial Information Pyramid
DRAFT

13. Putting It All Together
In order to meet the Reporting Objectives, significant changes are needed
At the Trustee Level:
More use of metrics and discussion of risks and results of activities
Presentation of key financial drivers instead of detailed financial information
Use of summarized financial reports
Discussion of liquidity, capital asset acquisitions and financing, and capital needs
Changes at the senior central management level:
More use of metrics of risks’ monitoring and mitigating activities
Divisional results highlighted instead of detailed
Use of Divisional scorecard and metrics
More discussion of liquidity, capital structure
More discussion of capital asset costs and financing
DRAFT

14. Putting It All Together, cont.
Changes at the divisional management level:
Use of GAAP to reflect Financial Performance, Capital Structure and Liquidity on a divisional basis
Revised Funds Basis Statement of Activities to show controllable costs vs. allocations, and to show support separate from revenues
Other Changes
Using Natural Class of Expenditures for Funds Reports (or a matrix of natural class and function)
Presenting Fund Balances / Net Assets as well as significant restrictions
Presenting Capital Asset Acquisitions and Sources of Financing
Reporting Central Bank (if one) Liquidity and Needs
DRAFT

15. Specific Topical Discussions
Budgets
All Funds Reporting / Net Asset Categories
Financial Operations Reporting
Management Discussion and Analysis

16. A Word About Budgets
Budgets are a control process and tool to manage financial affairs
Trustees are interested in:
Ensuring that proper financial controls are in place
Overseeing monitoring and mitigating processes
What happened vs. planned
Whether reserves are sufficient and flexible to cover contingencies
Significant variances occur for a number of reasons
Poor planning – either good or bad
Unanticipated linkages (or not) between events
Inadequate controls
Reporting to Trustees needs to focus on why a significant variance occurred and if internal action is needed to correct process, and less on the variance itself
DRAFT

17. All Funds Reporting
Issue is that the board is responsible for all of the funds, throughout the year, not just at the annual audit
Most internal reports are driven by the operating budget, may include a capital budget, and likely has something about cash flow (post 2008)
Financial Statement presentation of net asset categories is not detailed enough to ensure the board and senior non-financial leadership understand their stewardship responsibilities

18. Public Institution Net Asset Categories
Composition of the reporting entity is critical
Institution
Component Units
Net Assets in a GASB set of financial statements:
Invested in capital assets, net of related debt
Restricted:
Non-expendable
Expendable
Unrestricted

19. Public Institution Net Asset Categories
Sub-categories of Net Assets in a GASB set of financial statements:
Net investment in plant
Restricted –non-expendable by purpose of restriction. Includes
Endowment
Loan permanent funds
Restricted –Expendable by purpose
Current
Loans
Unexpended Plant
Debt Service
Unspent payout
Unrestricted
Designated for plant

20. Private Institution Net Asset Categories
Unrestricted Net Assets
Temporarily Restricted Net Assets
Permanently Restricted Net Assets
Translates into these categories……

21. Private Institution Net Asset Categories
Unrestricted Net Assets
Current Unrestricted Funds
Loan Funds
Quasi – endowment, unrestricted
Unrestricted unexpended plant funds
Renewals and replacements for plant funds
Retirement of indebtedness funds
Net invested in plant funds
Temporarily Restricted Net Assets
Current Restricted Funds (including sponsor funds, donor funds and unspent gains from total return program)
Quasi – endowment, restricted
Term endowment
Restricted unexpended plant funds
Contractual renewals and replacement funds
Permanently Restricted Net Assets
Endowment Funds
Loan Funds - Revolving

22. Financial Operations College has a “balanced budget”
Uses its external financial statement format to also report internally
Uses an operating indicator that is fairly industry consistent
High endowment payout rate
Also uses operating gifts to fund current operations
Does the College have a structural deficit?
Structural deficit is when recurring revenues are less than recurring operating expenses
Financial Statement format may be key communication tool
Need to highlight differences between revenues and support
Board members often do not understand differences and nature of support since they do not exist in for-profit organizations
Need to communicate dependency on operating contributions and endowment payout

23. Operating Performance Normal Format
2006
2010
REVENUES AND SUPPORT:
TUITION & FEES, NET
25,200
31,400
AUXILIARY ENTERPRISES
10,900
13,000
CONTRIBUTIONS
4,000
2,200
ENDOWMENT PAYOUT
8,500
7,500
OTHER
4,200
4,600
TOTAL REVENUES & SUPPORT
52,800
58,700
EXPENSES
INSTRUCTION
24,200
28,000
STUDENT SERVICES
5,500
5,800
12,000
13,500
LIBRARY
2,000
2,600
ADMINISTRATION
9,000
11,400
TOTAL EXPENSES
52,700
61,300
NET OPERATING SURPLUS (DEFICIT)
100
(2,600)

24. Revised Format to Segregate Support from Revenues

25. MD&A: A Treatise on Risk
Public Company Topics (as examples)
Qualitative and quantitative risks to the Business and changes to those risks
Revenue recognition and estimates required
Discussion and highlight of major balance sheet and operating metrics – usually a 5 year schedule with discussion of year over year changes in the past 3.
Significant factors effecting performance
Liquidity and Capital Resources
Working Capital
Debt
GASB Reporting Organization Topics
To provides an objective and easily readable analysis of the unit’s financial activities
Should include:
Comparison of current year to prior year
Analysis of overall financial position and results of operations
Analysis if significant changes in funds and budget variances
Describe capital asset and long-term debt activity
Description of currently known facts, decisions or conditions that are expected to have a significant effect on financial position or operating results

26. MD&A - Liquidity Liquidity Ratio
Sources of Liquidity/Uses of Liquidity
Two time frames –
Short-term – generally 30 days
Intermediate measure – generally days
Longer time frames are not that relevant
Sources
Same day or next day assets
Need to address endowment investments and whether to count these
Others as described in policy (SFAHE chapter 4)
Uses
Operation, debt service, capital
Importance of establishing policy/criteria to calculate Ratio and rationale of what is in or out

27. MD&A - Financial Health
Composite Financial Index
Measures Overall Financial Health using 4 component ratios and a scoring /weighting system
Four Component Ratios
Primary Reserve - Expendable Net Assets /Total Expenses
Viability Ratio - Expendable Net Assets /Total Debt
Net Operating Revenues – Net Revenues from Operations /Total Unrestricted Operating Revenues
Return on Net Assets – Change in Total Net Assets/Total Assets

28. Institutional Composite Financial Index

29. Institutional Graphic Financial Profile

30. Financial Health Reserves
What are the levels of our financial reserves? How restrictive?
Levels and Sources
Degree of Flexibility
Institution – President’s discretion
School – Dean’s discretion
Department – Chair’s discretion
Faculty
Financial Aid – how restrictive?

31. Financial Health Reserves

32. MD& A – Example Financial Drivers
Some Key Financial Drivers
Student Headcount
Acceptance & Matriculation rates
Faculty & Staff headcount
Tuition discount rate
Capital expenditures
Endowment Investment balances and overall return
Auxiliary services net margin %
Levels of State support
Present drivers over an extended time frame
5 year historical
Project into future using budget projections and financial statement modeling

33. MD&A – Facilities
Age of Facilities Ratio –accumulated depreciation/depreciation expense
Deferred Maintenance Ratio – Outstanding maintenance requirements /expendable net assets
Risk in funding capital projects & variability in $ and timing of gifts

34. MD&A – Tuition Dependency and Discount Rate
Some ratios that portray risk and drivers
Tuition Dependency Ratio
Net tuition & fees divided by operating income
Net Tuition & Fees Contribution Ratio
Net tuition & fees divided by total expenses
Total student revenues can be used too
Net Tuition & Auxiliary Enterprises revenues
Tuition Discount Rate
Need to define discount and what are sources of funding the discount
Just reduction in gross rate or does it also include financial aid awards? Which type of awards?

35. Follow up to any topics presented today
Wrap–Up and Questions
Follow up to any topics presented today