Financial Statement Analysis for Private Colleges and Universities
Cirtin, Arnold, Lightfoot, Connie, The National Public Accountant
The terms "synthesis" and "analysis" are opposite in meaning, but they are often used incorrectly, sometimes interchangeably, in current English usage. In their simplest definitions, to synthesize is to put things together and to analyze is to take things apart. We are familiar with the terms "qualitative analysis" and "quantitative analysis" employed in chemistry. The former is used to identify the components of a substance, while the latter is designed to determine the amounts or proportions of the substance.
There is an almost complete analogy between scientific analysis and financial analysis. Financial analysis separates financial statements into their component parts in order for those parts to be examined. The end result of this examination is to provide information from which conclusions can be drawn in order to make managerial and financial decisions. The many users of financial statements have specific informational needs, and these needs can only be met through financial statement analysis.
Techniques for analyzing the financial statements of commercial enterprises are well established. This is not the case for non-profit entities such as colleges and universities, charities, hospitals and other non-business organizations. John Minter and Minter Associates have done some excellent work in this area. They created a data base of a national sample of institutions of higher education using audited financial statements. However, something more specialized is needed for private liberal arts colleges and universities. The purpose of this article is to respond to that need.
One reason for this disparity is the different accounting methods employed by commercial companies and academic institutions. A major goal of business entities is to earn a profit and accounting systems are designed to provide information about income earning activities and results. Of course, financial statement analysis is primarily concerned with profit making potential and future cash flows.
Conversely, goals of private colleges and universities do not include earning profits. Their goals are stewardship of the resources committed to them and the accomplishment of educational objectives. Therefore, these institutions utilize fund accounting, which focuses on the source of financial resources and how they have been used to accomplish stated objectives.
Since these entities are not profit seeking, the demand for financial statement analysis has been less pronounced than for profit-making organizations. However, a strong case can be made that private colleges and universities can benefit greatly from financial statement analysis. This article presents the practicality of ratio analysis for this group of non-profit organizations.
The Financial Statements
Private colleges and universities report their financial activities in accordance with Audits of Colleges and Universities published by the American Institute of Certified Public Accountants. The financial statements are a Balance Sheet, a Statement of Changes in Fund Balances and a Statement of Current Funds Revenues, Expenditures and Other Changes. The usefulness of these statements can be greatly enhanced by employing ratio analysis similar to that which is available to commercial companies.
A fair question is, "Why concentrate on private colleges and universities?" Unlike public universities, private institutions are hindered in their efforts to utilize ratio analysis because of differences in their accounting techniques and financial practices. They are not required to conform to particular accounting procedures, such as those required by their respective states or commissions of higher education. For this reason, financial comparisons are often meaningless.
It is often overlooked that financial ratios are completely ineffective unless compared to something, such as the ratios for the previous year or those of similar institutions. …