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