SPCSA Financial Performance Framework Workbook, Lecture notes of Accounting

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State Public Charter School Authority

Charter School Financial Performance

Framework Workbook

Acknowledgment

This workbook was developed in consortium by the Clark County School District Office of Charter Schools and the State Public Charter School Authority

Core Financial Performance Framework Guidance

The Financial Performance Framework is intended as a starting point for charter school sponsors to adopt and to evaluate a charter schools’ financial performance as part of ongoing monitoring and the renewal decision making process. Charter schools have the autonomy to manage their finances consistent with state and federal law; however, sponsors must ensure that the schools they sponsor are financially stable. In the process of renewing or not renewing a charter school, sponsors must determine whether the school is not only academically and organizationally sound, but also financially viable.

The Financial Performance Framework provides sponsors a tool to identify schools currently in, or trending towards, financial difficulty and to proactively evaluate and address the problem. The guidance aligns with NACSA’s Principles & Standards for Quality Charter School Authorizing (2012), which states that sponsors should, through a Performance Framework, set clear expectations for “financial performance and sustainability.” The Financial Performance Framework was created after a review of model sponsor practices, charter school lender guidance, and expertise in the field. While the framework does not specifically mirror any single source, it was created to provide a clear picture of a school’s past financial performance, current financial health, and potential financial trajectory.

Framework Structure

The Financial Performance Framework gauges both near-term financial health and longer-term financial sustainability. The framework includes indicators, measures and metrics. Targets and ratings are established by the individual sponsors.

Indicators

The Financial Performance Framework includes two indicators, or general categories, used to evaluate a schools’ financial performance.

1. Near-Term

The portion of the framework that tests a school’s near-term financial health is designed to predict the school’s financial position and viability in the upcoming year. Schools meeting the desired standards demonstrate a low risk of financial distress for the coming year. Schools that fail to meet the standards may currently be experiencing financial difficulties and/or are at risk for financial hardship in the near term. These schools may require additional review and immediate corrective action on the part of the sponsor.

2. Sustainability

The framework also includes longer-term financial sustainability measures and is designed to predict a school’s financial position and viability over time. Schools that meet the desired standards demonstrate a low risk of financial distress in the future. Schools that fail to meet the standards may be at risk for financial hardship in the future.

Near Term Measure 1 - Current Ratio

Purpose - The current ratio depicts the relationship between a school’s current assets and current liabilities. In addition, the current ratio is a financial ratio that measures whether or not a school has enough resources to pay its debts over the next 12 months. It compares a school's current assets to its current liabilities.

What is the formula?

𝑻𝒐𝒕𝒂𝒍 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 𝑻𝒐𝒕𝒂𝒍 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐

What is the data source for the formula?

Audited Balance Sheet

ABC Academy Example 𝑇𝑜𝑡𝑎𝑙 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑜𝑡𝑎𝑙 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 =^

$95, 382 =^ 𝟐.^ 𝟎𝟕^ 𝑪𝒖𝒓𝒓𝒆𝒏𝒕^ 𝑹𝒂𝒕𝒊𝒐

Current ratio is 1.1 or greater

 Meets Standard

What is the metric used to determine school status?

Near Term Measure - Current Ratio Current Assets / Current Liabilities Meets Standard :  Current ratio is 1.1 or greater. Or  Current ratio is between 1.0 and 1.1 and one-year trend is positive. Note : For schools in their first or second year of operation, the current ratio must be greater than 1.1. Does Not Meet Standard :  Current ratio is between 0.9 and .99. Or  Current ratio is between 1.0 and 1.1 and one-year trend is negative. Falls Far Below Standard :  Current ratio is less than 0.9.

Near Term Measure 2 - Unrestricted Days Cash-On-Hand Ratio

Purpose - The unrestricted days cash-on-hand indicates how many days a school can pay its operating expenses without an inflow of cash. National standards state 60-120 cash-on-hand is considered a model practice.

What is the formula?

𝑨𝒏𝒏𝒖𝒂𝒍 𝑬𝒙𝒑𝒆𝒏𝒔𝒆 − 𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝟑𝟔𝟓 𝑫𝒂𝒚𝒔 = 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑫𝒂𝒊𝒍𝒚 𝑬𝒙𝒑𝒆𝒏𝒔𝒆

𝑼𝒏𝒓𝒆𝒔𝒕𝒓𝒊𝒄𝒕𝒆𝒅 𝑪𝒂𝒔𝒉 𝒂𝒏𝒅 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑫𝒂𝒊𝒍𝒚 𝑬𝒙𝒑𝒆𝒏𝒔𝒆 = 𝑼𝒏𝒓𝒆𝒔𝒕𝒓𝒊𝒄𝒕𝒆𝒅 𝑫𝒂𝒚𝒔 𝑪𝒂𝒔𝒉 − 𝑶𝒏 − 𝑯𝒂𝒏𝒅

What is the data source for the formula?

Audited Balance Sheet Income Statement and Changes in Net Position

ABC Academy Example Formula used to determine daily expense

$1, 173 , 620 − $10, 000 =

365 𝐷𝑎𝑦𝑠 =^ $𝟑,^ 𝟏𝟖𝟖^ 𝑨𝒗𝒆𝒓𝒂𝒈𝒆^ 𝑫𝒂𝒊𝒍𝒚^ 𝑬𝒙𝒑𝒆𝒏𝒔𝒆

Formula used to determine unrestricted days of cash-on-hand

$245, 528 $3, 188 =^ 𝟕𝟕^ 𝑫𝒂𝒚𝒔

60 days of cash or more  Meets Standard

Near Term Measure 3 - Enrollment Forecast Accuracy

Purpose - Enrollment forecast accuracy tells sponsors whether or not the school is meeting its enrollment projections, thereby generating sufficient revenue to fund ongoing operations.

What is the formula?

𝑨𝒄𝒕𝒖𝒂𝒍 𝑬𝒏𝒓𝒐𝒍𝒍𝒎𝒆𝒏𝒕 𝑷𝒓𝒐𝒋𝒆𝒄𝒕𝒆𝒅 𝑬𝒏𝒓𝒐𝒍𝒍𝒎𝒆𝒏𝒕 = 𝑷𝒆𝒓𝒄𝒆𝒏𝒕 𝒐𝒇 𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕 𝑨𝒄𝒄𝒖𝒓𝒂𝒄𝒚

What is the data source for the formula?

Actual Enrollment = certified count day numbers Projected Enrollment = charter school board-approved budgeted enrollment

ABC Academy Example

𝐴𝑐𝑡𝑢𝑎𝑙 𝐸𝑛𝑟𝑜𝑙𝑙𝑚𝑒𝑛𝑡 𝑃𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑑 𝐸𝑛𝑟𝑜𝑙𝑙𝑚𝑒𝑛𝑡 =^

210 =^ 𝟏𝟎𝟕%^ 𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕^ 𝑨𝒄𝒄𝒖𝒓𝒂𝒄𝒚

Enrollment forecast accuracy equals or exceeds 95% in the most recent year and equals or exceeds 95% each of the last three years  Meets Standard

What is the metric used to determine school status?

Near Term Measure - Enrollment Forecast Accuracy Actual Enrollment / Projected Enrollment Meets Standard :  Enrollment forecast accuracy equals or exceeds 95% in the most recent year and equals or exceeds 95% each of the last three years. Note : For schools in their first or second year of operation, enrollment forecast accuracy must be equal to or exceed 95% for each year of operation. Does Not Meet Standard :  Enrollment forecast accuracy is between 85% and 94% in the most recent year. Or  Enrollment forecast accuracy is 95% or greater in the most recent year but does not equal or exceed 95% or greater each of the last three years. Falls Far Below Standard :  Enrollment forecast accuracy is less than 85% in the most recent year.

Near Term Measure 4 - Debt Default

Purpose - The debt default indicator addresses whether or not a school is meeting its loan obligations and/or is delinquent with its debt service payments. Notes from the audited financial statements are used as the source of data. In most cases this will not be applicable for charter schools that do not have outstanding loan.

What is the indicator?

Sponsors may consider a school in default only when the charter school is not making payments on its debt, or when it is out of compliance with other requirements in its debt covenants.

What is the data source for the indicator?

Notes to the audited financial statements.

ABC Academy Example ABC Academy’s notes to the audited financial statements indicate that the school is not making payments on its debt, or it is out of compliance with other requirements in its debt covenants.  Falls Far Below Standard

What is the metric used to determine school status?

Near Term Measure - Debt Default Notes to the audited financial statements. Meets Standard :  School is not in default of loan covenant(s) and is not delinquent with debt service payments. Or  School does not have an outstanding loan. Does Not Meet Standard :  Not Applicable. Falls Far Below Standard :  School is in default of loan covenant(s) or is delinquent with debt service payments.

Sustainability Measure 1 – Total Margin

Purpose - Total margin measures the deficit or surplus a school yields out of its total revenues, which indicates whether or not the school is operating within its available resources. The measurement looks at the most recent 3 years.

What is the formula?

Total Three Year Revenue - Total Three Year Expenditures = Total Three Year Net Surplus

𝑻𝒐𝒕𝒂𝒍 𝑻𝒉𝒓𝒆𝒆 𝒀𝒆𝒂𝒓 𝑵𝒆𝒕 𝑺𝒖𝒓𝒑𝒍𝒖𝒔 𝑻𝒐𝒕𝒂𝒍 𝑻𝒉𝒓𝒆𝒆 𝒀𝒆𝒂𝒓 𝑹𝒆𝒗𝒆𝒏𝒖𝒆𝒔 = 𝑨𝒈𝒈𝒓𝒆𝒈𝒂𝒕𝒆𝒅 𝑻𝒉𝒓𝒆𝒆 𝒀𝒆𝒂𝒓 𝑻𝒐𝒕𝒂𝒍 𝑴𝒂𝒓𝒈𝒊𝒏

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒀𝒆𝒂𝒓 𝑵𝒆𝒕 𝑺𝒖𝒓𝒑𝒍𝒖𝒔 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒀𝒆𝒂𝒓 𝑻𝒐𝒕𝒂𝒍 𝑹𝒆𝒗𝒆𝒏𝒖𝒆

What is the data source for the formula?

Three years of audited income statements

ABC Academy Example Revenue Year One = $700,000, Year Two = $750,000, Year Three = $775,000 Expenditures Year One = $704,000, Year Two = $746,000, Year Three = $770,

Formula used to determine the total three year net surplus

$700,000 - $704,000 = - 4,000 (-.57%) $750,000 - $746,000 = 4,000 (.53%) $775,000 - $770,000 = 5,000 (.65%)

• $4,000 + $4,000 + $5,000 = $5,000 Three Year Net Surplus

Formula used to determine the total three year revenue

$700,000 + $750,000 + $775,000 = 2,225,000 Three Year Revenue

Formula used to determine the aggregated total margin

$5, 000 $2, 225 , 000 =^.^ 𝟐𝟐𝟓%^ 𝐀𝐠𝐠𝐫𝐞𝐠𝐚𝐭𝐞𝐝^ 𝐓𝐡𝐫𝐞𝐞^ 𝐘𝐞𝐚𝐫^ 𝐓𝐨𝐭𝐚𝐥^ 𝐌𝐚𝐫𝐠𝐢𝐧

Aggregated three-year total margin is greater than - 1.5%, the trend is positive for the last two years, and the most recent year total margin is positive.  Meets Standard

What is the metric used to determine school status?

Sustainability Measure - Total Margin Current Year Total Margin: Current Year Net Surplus / Current Year Total Revenue Aggregated Total Margin: Total Three-Year Net Surplus / Total Three-Year Revenues Meets Standard :  Aggregated three-year total margin is positive and the most recent year total margin is positive. Does Not Meet Standard :  Aggregated three-year total margin is negative or the most recent year total margin is negative. Falls Far Below Standard :  Aggregated three-year total margin is negative and the most recent year total margin is negative. Note : For schools in their first or second year of operation, substitute the “aggregated three- year total margin” with the “aggregate total margin.”

Sustainability Measure 3 – Cash Flow

Purpose - The cash flow measure indicates a school’s change in cash balance from one period to another. This measure includes restricted and unrestricted funds. The measurement looks at the most recent 3 years.

What is the formula?

Year 3 Total Cash - Year 1 Total Cash = Multi-Year Cash Flow

Year 2 Total Cash - Year 1 Total Cash = One Year Cash Flow

What is the data source for the formula?

Three most current years of audited balance sheets (Assets: cash)

ABC Academy Example Year One = $40,000, Year Two = $38,000, Year Three = $42,

$42,000 - $40.000 = $2,000 Multi-Year Cash Flow $38,000 - $40.000 = $-2,000 One Year Cash Flow

Multi-year cumulative cash flow is positive, cash flow is positive in two of three years, and cash flow in the most recent year is positive  Meets Standard

What is the metric used to determine school status?

Sustainability Measure - Cash Flow Multi-Year Cash Flow = Year 3 Total Cash - Year 1 Total Cash One Year Cash Flow = Year 2 Total Cash - Year 1 Total Cash Meets Standard :  Multi-year cumulative cash flow is positive and the most recent year cash flow is positive. Does Not Meet Standard :  Multi-year cumulative cash flow is negative or the most recent year cash flow is negative. Falls Far Below Standard :  Multi-year cumulative cash flow is negative and the most recent year cash flow is negative. Note : For schools in their first or second year of operation, substitute “multi-year cumulative cash flow” with the “cumulative cash flow.”

Sustainability Measure 4 - Debt Service Coverage Ratio

Purpose - The debt service coverage ratio indicates a school’s ability to cover its debt obligations in the current year. In most cases this will not be applicable for charter schools that do not have an outstanding loan. This ratio measures whether or not a school can pay the principal and interest due on its debt based on the current year’s net income. Depreciation expense is added back to the net income because it is a non-cash transaction and does not actually cost the school money. The interest expense is added back to the net income because it is one of the expenses an entity is trying to pay, which is why it is included in the denominator.

What is the formula?

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆 + 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 + 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒙𝒑𝒆𝒏𝒔𝒆 𝑨𝒏𝒏𝒖𝒂𝒍 𝑷𝒓𝒊𝒏𝒄𝒊𝒑𝒂𝒍 + 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑷𝒂𝒚𝒎𝒆𝒏𝒕𝒔 = 𝑫𝒆𝒃𝒕 𝑺𝒆𝒓𝒗𝒊𝒄𝒆 𝑪𝒐𝒗𝒆𝒓𝒂𝒈𝒆 𝑹𝒂𝒕𝒊𝒐

What is the data source for the formula?

Audited income statement Audited cash flow statement Audited cash flow statement and/or income statement Annual principal and interest obligations provided from the school

ABC Academy Example The school obtains a two year loan of $175,000 for facility renovations.

Formula used to determine the ratio indicating if the school can afford the loan.

$100, 000 + $2, 000 + $5, 439 $85, 753 + $5, 439 =^

$91, 192 =^ 𝟏.^ 𝟏𝟖^ 𝐂𝐮𝐫𝐫𝐞𝐧𝐭^ 𝐑𝐚𝐭𝐢𝐨

Debt service coverage ratio is equal to or exceeds 1.10.  Meets Standard

Glossary: Terms Used in the Financial Performance Framework

Annual Expenses: The yearly total of payments of cash or incurrence of a liability for the purpose of acquiring assets, or services or settling losses.

Assets : A probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events. These economic resources can be tangible or intangible. Assets might be financial in nature (like cash and accounts receivable) or nonfinancial (like buildings and equipment).

Audit : A systematic collection of the sufficient, competent evidential matter needed to attest to the fairness of management’s assertions in the financial statements or to evaluate whether management has efficiently and effectively carried out its responsibilities. The auditor obtains this evidential matter through inspection, observation, inquiries, and confirmations with third parties. Refer to Compliance Audit, Corrective Action Plan, Financial Audit, Performance Audit, and Single Audit.

Balance Sheet : A financial statement that discloses the assets, liabilities, and equities of an entity at a specified date in conformity with generally accepted accounting principles (GAAP). Also, referred to as the Statement of Financial Position or Statement of Net Assets.

Basis of Accounting : The methodology and timing of when revenues and expenditures or expenses are recognized in the accounts and reported in the financial statements. Refer to Accrual Basis, Modified Accrual Basis, and Cash Basis.

Cash Basis : A basis for accounting whereby revenues are recorded only when received and expenses are recorded only when paid, without regard to the period in which they were earned or incurred.

Cash Flow : Cash receipts minus cash disbursements from a given operation or fund for a given period of time.

Changes in Net Position : The difference between the net balance from one accounting period to the next.

Consultant : An independent individual or entity contracting with an agency to perform a personal service or render an opinion or recommendation according to the consultant’s

methods and without being subject to the control of the agency except as to the result of the work. The agency monitors progress under the contract and authorizes payment.

Current Assets : Resources that are available, or can readily be made available, to meet the cost of operations or to pay current liabilities.

Current Liabilities : Obligations that are payable within one year from current assets or current resources.

Current Ratio : A financial ratio that measures whether or not an organization has enough resources to pay its debts over the next 12 months. It compares a firm’s current assets to its current liabilities and is expressed as follows: current ratio = current assets divided by current liabilities.

Debt : An obligation resulting from the borrowing of money or from the purchase of goods and services. Debts include bonds, accounts payable, and other liabilities. Refer to Bonds Payable, Accounts Payable, Liabilities, Long-Term Obligations, and General Long-Term Obligations.

Debt Service : The cash that is required for a particular time period to cover the repayment of interest and principal on a debt. Debt service is often calculated on a yearly basis.

Debt Service Coverage Ratio : Also known as “debt coverage ratio,” is the ratio of cash available for debt servicing to interest, principal, and lease payments.

Debt Service Default : Occurs when the borrower has not made a scheduled payment of interest or principal.

Debt to Asset Ratio : A financial ratio that measures the proportion of an organization’s assets that are financed through debt. It compares an organization’s total assets to its total liabilities and is measured by dividing the total liabilities by the total assets. If the ratio is less than one, most of the organization’s assets are financed through equity. If the ratio is greater than one, most of the organization’s assets are financed through debt.

Depreciation : The systematic and rational allocation of the cost of an asset over its useful life.

Financial Audit : An audit made by an independent external auditor for the purpose of issuing an audit opinion on the fair presentation of the financial statements of the school in conformity with Generally Accepted Accounting Principles. Refer to Audit.

Fiscal Period : Any period at the end of which a charter school determines its financial position and the results of its operations. Refer to Accounting Period.