ACCOUNTING FUNDAMENTALS FOR MANAGING
AND SUSTAINING
PROFITABILITY IN CAREER COLLEGES
Presented by: Don Thibert B. Comm.
WHAT WOULD BE AN IMPORTANT PIECE OF INFORMATION TO KNOW EACH DAY IN YOUR COLLEGE?
UNDERSTANDING ACTIVE STUDENT POPULATION AND RUN RATE
A one year program is $12,000.
You earn $12,000/12 months or $1,000/Month.
Or $12,000/52 weeks or $230.77/Week.
Or $230.77/5 days or $46.15/Day.
RUN RATE CAN HELP YOU BETTER UNDERSTAND ACCOUNTING!
Estimating monthly Revenue Budgeting Business Plan
Other examples?
INCOME STATEMENTS Revenue less expenses = Net Income
FIXED VS. VARIABLE EXPENSES
Fixed Expenses: Variable Expenses:
Rent Textbooks
Marketing Student supplies
Payroll Office vs Faculty
Utilities
FIXED VS. VARIABLE COSTS What are your conclusions about
expenses?
HOW CAN WE APPLY RUN RATE TO COSTS? Most of our costs are fixed?
What if variable costs are $100 per month per student.
Our run rate (Revenue) is $1,000 from our previous example.
So variable costs are 10% of Revenue per month.
Contribution towards fixed expenses is therefore 90% of monthly Revenue
FIXED EXPENSES What if fixed expenses are
$30,000/Month.
You would need $30,000/90% in Revenue to cover fixed expenses or $33,333.33
Income Statement: Revenue $33,333.33 Variable Expenses 3,333.33 Contribution $30,000.00 Fixed Expenses $30,000.00 Net Income 0
Break Even = $33,333.33 or 33 students/month
WHAT ARE 5 MORE STUDENTS WORTH Income Statement:
Revenue (38 X 1,000) $38,000.00 Variable Expenses 3,800.00 Contribution $34,200.00 Fixed Expenses $30,000.00 Net Income 4,200.00
Once you have passed Break-even every new student has 90% of revenue flow through to Net Income...NICE!!!!
Unfortunately every student under break even has 90% of the missed Revenue flow through to create Net Losses...OUCH!!!
DRIVING NET INCOME
The Profit ModelStart Up Turning Star Cash Cow Shooting Star
Tution Revenue 100% 100% 100% 100%
Total Wages including benefits 60% 50% 40% 37%
Marketing Costs 15% 15% 15% 15%
Total Overhead Expenses 30% 25% 22% 20%
Net Income Contribution -5% 10% 23% 28%
GENERAL BENCHMARKS Bad Debt 2.5% or less of Revenue Attrition of 3.0% or less of monthly
student population Referrals 40% of started students Employee Turnover should be less than
10% Graduate Employment 80% Student Satisfaction of 90% Schools should strive for a 5%
improvement in Profit Year over year. Schools that achieve a 25% Profit are
generally very well run.
HOW PROFITABILITY DRIVES VALUE What is EBITDA?
Earnings before Interest, Taxes, Depreciation and Amortization
Why is EBITDA Important?
What drives earnings multiples
APPENDIX
ACCOUNTING PRINCIPLES There are multiple principles but I wish
to share a select few:Continuity – keep reporting in the same
mannerConservatism – do not exaggerate Matching (the most important principle for
our sector) – that revenue should match the period they are earned in and expenses that are related to those revenues should be reported in the same period.
Trust me – this is not as simple as it seems!
ACCOUNTING PRINCIPLES (2) Here are a few matching issues I have
seen over the last 10 years in our sector: Recognizing revenue on a cash basis rather
than when it is earned Recognizing 100% of revenue when the
regulatory rules say that it is earned Not matching costs of fees, books, and
instructional supplies to when revenue is recognized
Forgetting that practicum supervision costs are higher at the end of a program
Any of these distort your results and ability to manage your company effectively.
TYPES OF FINANCIAL STATEMENTS Types of external assurances:
Audits – positive assurance but not a guarantee against fraud
Reviewed – substantial diligence involved Notice to Reader – simply compiled
Specialized situations Audits of OSAP in Ontario (and now we have
sources of revenue audits as well) Review of earnings and PCTIA payments in BC
Costs You get what you pay for Huge need to pay attention to what you are
actually purchasing
NOTES TO F/S – OFTEN IGNORED The Notes to the F/S are long and
tedious, after the numbers, and that is why they get ignored
But they are the explanation of “how everything was interpreted”
They include explanation of the assumptions on capitalization and amortization
And this is where the real criminals hide key issues like overvalued derivatives, non productive assets, or write offs of bad decisions
EBITDA – WHY IS IT IMPORTANT? EBITDA is important to:
Bankers InvestorsPurchasers
Therefore it is important to you! The calculation is:
Net RevenuePlus Interest ExpensesPlus TaxesPlus AmortizationPlus Depreciation
RATIOS – A COUPLE OF QUICK ONES Financial Statements should be analyzed
because it helps you understand your business and keeps you out of trouble
A couple of quick ratios to consider Current Ratio
Current Assets / Current Liabilities (short term liquidity test)
Debt to Net Equity Total Debt / Total Equity (how much debt leverage
you have on your business – risk versus reward issue)
Gross Profit Gross Profit / Total Revenue (biggest potential win)
BUDGETS – LOOK AT THE PURPOSE Budgets are often avoided because:
We don’t know what will happen in the futureThey are a huge amount of work (months to do
well)They have been used by management as weapons
But they are really a solid business process when used correctly:They are a planning tool, what do we think will
happenThey demand that you look at key issues like
pricing, growth, and product mixThey provide an opportunity for what if scenariosThey allow for comparisons of “what did happen”
9 THINGS YOU HAVE TO GET RIGHT!
Revenue recognition Direct costs Marketing costs (more ratios) Lease commitments Matching costs to when revenue is earned Accurate and timely reporting with analysis Budgeting – get a plan in place (and review
results) Balance the right tools with the right staff
to get the job done Never forget cash
SOME REFERENCE ACRONYMS ? B/S – Balance Sheet CA – Chartered Accountant CGA- Certified General Accountant CMA – Certified Management Accountant EBITDA – Earnings Before Interest Taxes Depreciation &
Amortization I/S – Income Statement F/S – Financial Statement GAAS –Generally Accepted Auditing Standards GAAP – Generally Accepted Accounting Principles Gross Margin – Gross Profit as a % of Revenue Gross Profit – Revenue minus Direct Costs Loss - Bad Profit – Good Statement of Cash Flows
Top Related