The second question is do I know? There are four reasons why board members require and want training in financial analysis.
A UNIQUE PERSPECTIVE
I offer a unique perspective, because I served as a school board member and school business administrator. There are many training opportunities in governance, collective bargaining, and policymaking, but none in financial analysis. This is because finance is technical, complicated and number driven. Fortunately, it can be explained in a non-technical way. This is not different than teaching a student mathematics. The secret lies in the way the teaching is approached.
Deep learning requires focusing on a few fundamental concepts and learning them well. However, be selective on the chosen concepts. A personal trainer, for example, can select just a few exercises to get their clients into shape. The goal would not be to make them Olympic athletes, but to achieve excellent physical condition. The purpose of financial analysis training is not to make board members experts. The training, however, would give them the skills to perform financial analysis independently, effectively and efficiently.
Using relationships that board members are already familiar with can be helpful. A board member has personal financial issues, just like a school district. Board Members pay mortgages, which is just another term for long-term debt. They own homes which are capital assets. Long term debt and capital assets are key components of a school districts’ financial statement. Teachers sometimes will relate sports to help students learn Math. For example, how any shots did a basketball player make in comparison to the amount they attempted? These relationships help students learn. Relating personal financial issues to district finances, improve the learning process.
STEP #1: THE FINANCIAL STATEMENT
Many administrators or principals cannot interpret or read a basic financial statement. They should participate in the training as well. However, board members are the ones elected to protect tax payer dollars. The core part of the training is analyzing the district’s statement of net assets.
“The core part of the training is analyzing the district’s statement of net assets.”
This one-page financial statement captures the district’s financial transactions for the annual school year. The location of the statement of net assets (SNA) is in your district’s comprehensive annual financial report (CAFR). This document is extensively reviewed and audited by a trained auditor. The statement of net assets succinctly reveals your district’s financial condition. It tells board members if their district is improving or declining and why. The SNA reveals actual performance instead of projections. Budget development is nothing more than predicting or guessing. Financial conditions can only be recognized by analyzing final data. The most potent way to analyze finances is over time (3 to 5 years) using actual results. Most districts are only looking at the current year ahead.
“Budgeting development is nothing more than predicting or guessing. Financial Conditions can only be recognized by analyzing final data.”
Preparing a budget is important, but board members need to identify trends. Financial Health or Conditions can only be determined by a multi-year analysis.
STEP #2: DO THE MATH
The second step is to use this data to calculate financial ratios. These ratios give life to the data and make it speak. Due to advances in technology, board members can let the excel spreadsheet perform the calculations. This skill can be learned in a short period of time with a little practice. The ratios look at five major areas. Listed below are brief descriptions:
Liquidity ratios examines short term cash flow. The main components are cash and account receivables. If a board member had a second job the paycheck is considered a receivable. A receivable is a promise to be paid. What would happen if the paycheck was late or did not arrive? These are the same problems districts face. Does your district have enough cash to cover bills as they become due? How much cash is available? Is cash flow improving or declining?
Leverage ratios compare district assets which are financed through long term debt. A school district’s financial situation is comparable to a board members’ circumstance. For example, board members have assets like a home, car and an IRA. They also have personal liabilities such as a mortgage, college loans and credit card debt. Is the debt burden of your district getting better or worse? This ratio will help you find out.
PERCENTAGE CHANGE RATIOS
It is a good idea to compare your district’s financial performance to others in the same town. What if one school district had a $300M budget and another a $30M? If you were trying to use dollars as a basis for comparison, this would not work. Percentages level the playing field allowing the comparison of a small district to a large one.
COMMON SIZE RATIOS
Common size ratios are in direct contrast to one another. This ratio analyzes opposing items for comparison. A capital asset is in direct contrast to long term debt. This is because capital assets are funded with long term debt. Citing another personal relationship, a board members’ mortgage payment (LTD) would be compared to the value of their home (Capital Asset). Assuming the value of the home went up and the mortgage balance is decreasing, we would see the ratio improve. Notice if your districts’ ratio is getting better or worse over time.
ABILITY TO PAY RATIOS
“Property values compared to school district debt determine the town’s financial capacity to support education. If property values decrease at the same time debt is going up, major problems will follow.”
This ratio compares school district debt to property values. This calculation reveals your constituent’s ability to pay for educational services. Property values compared to school district debt determine the town’s financial capacity to support education. If property values decrease at the same time debt is going up, major problems will follow.
THERE IS VALUE IN ANALYZING FINANCES YOURSELF
The ability to perform financial analysis independently will reap rewards and become more valuable over time. There is a small learning curve, but not any different than learning other skills. Excellent ideas come from non-experts, because they have an open mind Remember, I am here to help.