Long-time business officer, recent interim CFO, and founding member of NBOA Jim Pugh shares wisdom he has collected in his decades of service to independent schools. This is the sixth article in the series. The series thus far includes the following: entry interviews when you start at a new school; trustee orientation in terms of school finance; financial reporting strategies; department budget request forms; and preparing the operating budget for the board.
If there is a single mantra for the CFO, it should be “financial equilibrium.” In a nutshell, this is the concept that a school should maintain and over time enhance the value of all of its assets (financial, plant and people) – while maintaining a balanced operating budget.
The term financial equilibrium was created and developed by Sorrel Paskin, a long-time independent school business officer and school consultant. Here’s a breakdown of the elements that are key to financial equilibrium:
Financial assets. This includes the operating cash, cash reserves and endowment. Debt is sometimes a financial asset if it helps the endowment grow in the long term, or if it helps create or maintain an income stream.
Plant assets. This includes the buildings (AKA plant), property and equipment (PP&E). There are three ways a school maintains its PP&E:
- Annual repairs and maintenance, which are an expense line in the operating budget.
- Major capital replacement, for which most schools have another line in the budget. Some schools expend this in the year it is budgeted. Other schools make a transfer to a plant fund (a reserve) for expenditure in the future as needed.
- A capital campaign often funds a multi-million-dollar project, such as the construction or renovation of a building.
People assets. This is the most complex part of a school. It includes the students, employees, parents, alumni and even members of the local community. Is the school investing enough in faculty compensation, professional development and recruitment to maintain and improve its academic reputation? Is the school investing enough in financial aid to improve the strength and diversity of its student body? Is the school investing enough in communications to its parents, alumni and community for the benefit of enrollment, fundraising, and community relations — e.g., smooth sailing at a zoning hearing? This list of questions could go on for pages.
My first summer workshop on independent school business was in the early 1980s. It was taught by Paskin, a guru of financial accounting and reporting in independent schools for several decades. He drilled “financial equilibrium” into the heads of my classmates and myself.
According to Sorrel, the five attributes of “financial equilibrium” are:
- On an annual basis, revenues equal or exceed expenses.
- Year over year, the rate of growth in revenues equals or exceeds the rate of growth in expenses.
- The value of financial capital is preserved or augmented over time.
- The value and functional efficiency of physical capital is preserved or augmented over time.
- The effectiveness of human capital is preserved or augmented over time.
The trick is to work on all of these five measures. Success in achieving all five of them over time will inevitably result in financial sustainability.
It may not be possible to move ahead on every one of the five measures every year. In one year, there may be smaller spending than usual on PP&E in order to fund an increase in the compensation of teachers and support staff. In another year, there may be a need to draw down part of the quasi-endowment in order to fund a new STEM building, for example.
As well as celebrating your school’s progress in the areas of financial, physical and human capital, it is important to take note of and remember the areas where the school has fallen short. A deficiency in one year should be rectified in a future year.
The next time your school drafts a new Five-Year Plan, be sure to consider it through the lens of “financial equilibrium.”
Presenting the Concept of “Financial Equilibrium” to the Board of Trustees
This PowerPoint file is a sample of the presentation I have made to a number of schools. It uses fictional data. The school color of Fictional Academy, as shown in Slides 1, 9 and 10, is maroon.
This Excel file contains the original work which is used in the PowerPoint slides. I like to prepare the text and graphics in Excel. This is faster and more flexible than creating the work in PowerPoint.
If you wish to make a similar presentation to your school’s trustees or another constituency, you can use these two files as a starting point. I suggest you start with the Excel file. Change the school color in Screens 1, 9 and 10, and change the data in Slide 9. Make other revisions as needed. When you are finished updating the Excel file, make screen scans which you will copy/paste into the PowerPoint slides.