Saturday, October 29, 2011

Financial Literacy

Periodically Christian schools struggle with financial problems.  There are many reasons.  A common symptom is the lack of money.  However, the real reason might be donor engagement or declining enrollment.  Those problems may have arisen a few years ago but this is the first year for a budget deficit.  Some members of the board may assume the deficit is due to overspending rather than a lack of income.

If we think we are spending too much we look for ways to reduce expenses (cut staff, eliminate raises, eliminate staff training, delay maintenance, buy cheaper books, restrict internet access, etc.). It relieves some of the pressure but fails to solve the problem. The donors continue to disengage or enrollment continues to decline. The decline in enrollment may accelerate because the parents see or expect a reduction in quality.

Health Literacy

Often when we pay attention to a symptom the problem goes unattended or worsens.

Most board members rarely look at the financial report. The two primary reasons are; too many numbers and they are unsure how to interpret the information. Since the financial report seldom receives the attention it deserves, the warning signs are missed and the problem is ignored until the symptoms cause a crisis.

How can financial literacy help?

Financial literacy is the ability to read the financial reports and understand the message. There are two parts. The first is having the right information presented in a useful way. Knowing the importance of the numbers is the second part.

For some parochial schools, donor engagement is a very important financial number. One way to measure engagement is by tracking the average gift per donor. However, telling the board that the average gift at the spring festival was is accurate but useless. It is more useful to tell the board that the average gift has been steady at for the past three years. Better still is to remind the board that inflation averages 3% per year so a consistent average of per year implies declining engagement. With that information, the board members realize that donors are disengaging. They are giving a smaller and smaller percentage of their income each year or fewer of them are giving at all. Either way, the board becomes aware of the problem before the budget crisis distracts them. The board has time to look for ways to increase donor engagement.

The best way is to provide a graph. If the graph shows the donor trend and the donor trend adjusted for inflation, the board will see the gap forming. The discussion happens early in the cycle when it is easy to solve and before it affects the budget. In the preceding example, the trend is important.

Many schools have a tuition fund, trust, or foundation. The interest from the fund provides scholarship money for some students. In this case, there is a direct relationship between interest rates, fund balance, and the number of students who will receive scholarships. The critical financial figure here is the ratio between fund balance, students, and interest rates. In this case, the ratio is important. Knowing the ratio each month will help to predict the enrollment or identify an obstacle to enrollment.

An important point is that the balance sheet and income or profit and loss statement are accounting tools. It is important for the board members to receive them so they can audit the bookkeeping. However, they need the financial numbers so they can monitor the economic health of the school. The finance committee can act as the auditors. The entire board needs to act as economic advisors.

Next Step

Identify the 3 - 5 most important financial figures

Find a meaningful way to present them to the board at each meeting (graphic, ratio, tabular form, etc.) with the goal of making the information understandable at a glance

Spend time educating the board about what to look for (For exampe: The trend line should be up, never flat or down. The ratio should always be above 0.53.) and what to do about changes (do more marketing in the northeast neighborhoods, communicate better with the donors, etc.)

Avoid discussing the income or balance sheet except during the annual budget meeting (encourage the finance committee to study the details each month)

Ask the board to set year-end goals for each of the 3 - 5 numbers selected and discuss progress toward those goals at each meeting

Because of the structure, traditions, and community served, different schools will choose different numbers to monitor. Some numbers may be external such as shifts in the local demographics. Problems take time to solve. It takes more time to recognize a problem than it does to solve it. Reacting to symptoms allows the problem more time to grow and keeps one from looking for the underlying problem.

Conversely, having a board that is financial literate prevents or preempts problems. Financial literacy ensures there is more time available for the mission and students. Your school will be more sustainable. The 3 - 5 key financial figures provide a tool for training the board to be proactive analysts and problem solvers.

Financial Literacy

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