Accounting Fundamentals for Managing and Sustaining Profitability in Career Colleges

1. Accounting Fundamentals for Managing and Sustaining Profitability in Career Colleges Presented by: Don Thibert B. Comm.

2. What would be an important piece of information to know each day in your College?

3. 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.

4. Run Rate CAN help you better understand accounting! • Estimating monthly Revenue • Budgeting • Business Plan • Other examples?

5. Income Statements • Revenue less expenses = Net Income

6. Fixed vs. variable expenses

7. Fixed vs. variable costs • What are your conclusions about expenses?

8. 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

9. 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

10. 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!!!

11. Driving net income

12. 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.

13. How Profitability drives Value • What is EBITDA? • Earnings before Interest, Taxes, Depreciation and Amortization • Why is EBITDA Important? • What drives earnings multiples

14. Appendix

15. Accounting principles • There are multiple principles but I wish to share a select few: • Continuity – keep reporting in the same manner • Conservatism – 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!

16. 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.

17. 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

18. 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

19. EBITDA – Why is it important? • EBITDA is important to: • Bankers • Investors • Purchasers • Therefore it is important to you! • The calculation is: • Net Revenue • Plus Interest Expenses • Plus Taxes • Plus Amortization • Plus Depreciation

20. 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)

21. Budgets – look at the purpose • Budgets are often avoided because: • We don’t know what will happen in the future • They 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 happen • They demand that you look at key issues like pricing, growth, and product mix • They provide an opportunity for what if scenarios • They allow for comparisons of “what did happen”

22. 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

23. 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