Anyone on a private school’s leadership team and board of directors should have knowledge regarding the financial oversight of their school. In addition to addressing funding and expenditure challenges, there is a legal and professional responsibility for a school’s leadership team and board to protect their school’s assets. This includes overseeing the school’s financial activities and implementing policies and procedures to protect the organization.
Financial statements can be a valuable resource in helping understand and evaluate a school’s performance. Here’s what every private school leader and board member should know about financial statements.
Who is Responsible for the School’s Financial Statements?
Although it’s the CPA firm that performs the audit, review or compilation of the school’s financial statements, a school’s financial statements remain the responsibility of the leadership team and board of directors. Although it is common for an independent CPA firm to assist with the preparation of financial statements, including footnotes, the only section of the statements the CPA assumes direct responsibility for is the Independent Auditor’s Report, known as the opinion letter.
In nonpublic company entities, like private schools, the school’s management is responsible for the presentation of the statements and the accompanying footnotes in accordance with generally accepted accounting principles (GAAP). If the school does not assume responsibility for these principles, the CPA would encounter a scope limitation and is required to disclose that limitation in his or her report.
Although your school’s management might not include experts in GAAP, they should at least be able to review the financial statements and confirm that the information is presented correctly and that there are no misleading statements or material omissions. The leadership team and board of directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements.
How Financial Statements Are Presented
Even though there are certain financial statement disclosures required by GAAP, there is often flexibility in how these disclosures are presented. Usually, your school’s management and board can present information in the style and format they prefer. From a practical standpoint, the audit firm typically has a standard way of presenting certain information. However, management has the final say as long as the minimum disclosure requirements are met.
It is also important to note that management may always disclose more than the required minimum information if they feel that the information presents a clearer picture of their school and its operations.
Nuances of Nonprofit Financial Reporting
Most private schools are nonprofits, meaning their financial statements differ significantly from commercial entity financial statements, since nonprofits do not present or operate on the concept of net income or profitability. Some of the key differences between nonprofit and for-profit financial reporting include:
One of the biggest differences between for-profit and nonprofit organizations lies in how income and contributions are reported. With a nonprofit, contributions or gifts often come with certain stipulations, which may relate to a purpose or time frame. Contributions and net assets should be clearly identified on your school’s financial statements as with or without donor restrictions, or permanently restricted, depending on their exact specifications.
Pledges receivable also vary based on an organization’s entity type. Pledges are generally considered revenue in the year they are made, even though the funds may not have received and cannot be spent that year. This has the tendency to cause large fluctuations in the bottom line compared to a commercial entity that has a more stringent matching principle. This is because a nonprofit organization isn’t really tracking “net revenue” like a commercial entity. Rather, it reports changes in net assets.
If a pledge receivable is made with a condition that condition must be met before the organization can recognize the gift as revenue. If pledges with conditions exist, they will not appear on the financial statements.
Measuring Your School’s Performance
You can gain a better understanding of your school’s operating efficiencies and performance by analyzing the data presented in the financial statements. There are three basic comparisons used to assess both revenue and expenditures: year-to-year, actual-to-budget and peer results.
Year-to-year comparisons reveal changes that occurred from the previous fiscal year to the current year. Management should be able to explain to the significant increases or decreases.
Actual-to-budget comparisons look at the actual results from operations next to what was projected by management and the board at the beginning of the fiscal year. These variances determine whether the budget process was accurate or whether unforeseen circumstances occurred during the year.
Board members should be informed of all budget amendments. It is reasonable to question results that significantly exceed or fall short of the budget.
Peer analysis compares your school’s results with those of other similar private schools. However, when making comparisons among schools, it is important to keep differentiating factors in mind, including student population, teaching style, fundraising and the cost of tuition.
Key Ratio Analysis
Along with comparison analytics, you can also use ratios to better understand your school’s current position. It’s easy to get overwhelmed by the large number of ratios you can consider, but there are a few simple ones that can provide useful information: student-teacher, cost-per-student and current ratio. (Interested in learning more about financial ratios? Check out this article on the top three financial ratios and benchmarks that nonprofits should know.)
The student-teacher ratio, calculated by dividing the total student population by the total number of teachers, determines the number of students per teacher. By comparing this calculation with those of prior years or expectations, you can determine whether the school is appropriately staffed for its current enrollment.
Cost-per-student ratio is calculated by taking the total expenses or a specific group of expenses, such as salaries, divided by the number of students, to determine the average cost per student. This is helpful in evaluating whether your cost of tuition is on target.
The current ratio (current assets divided by current liabilities) is a liquidity ratio that estimates the school’s ability to meet its short-term obligations. A higher current ratio indicates a more likely ability to repay debts.
Financial statements are an important tool for understanding your private school’s financial position, performance and direction. Moving ahead, use financial statements to make informed decisions for your school. One way to simplify this process is to distribute your school’s financial statements to the board a few days before a scheduled meeting. That way, board members can review the documents and prepare a list of questions for either management or the outside accountants.
Compare the financial statements to board meeting minutes, conversations with staff and your own knowledge of the organization to see if the information is consistent. If applicable, follow up on any findings or recommendations reported by the external auditors.