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AN INTRODUCTORY LOOK AT THE 1990-1995 FISCAL YEARS
Prepared for the Goddard Community by For Goddard College to operate effectively as a participative, hopefully democratic, organization it is essential that all members of the community have Some understanding of the College's finances. The purpose of this report from the "Business and Democracy at Goddard College" Group Study is to try to provide a "user friendly" introduction to the College's finances for the years 1990-1995. This report describes how the College organizes and presents its financial information, presents a Summary of key areas of the College's finances over this five year period, and finally discusses the picture these data provide of the financial health of the College. And it does all this, hopefully, in a way that takes Some of the mystery out of the accountant's normal mumbo jumbo.
Finance and Financial Goals Finance is about how an organization raises and spends money, and how it can do it better. Most organizations try to manage their finances to be sure they • raise more money than they spend, in a reliable fashion, • have enough cash on hand whenever bills come due, • don't go too far out on a limb with debt or other obligations they can't pay if they come upon bad times, • can pay their workers a reasonable and fair wage and not charge their cuotomers too much, • have some money left over each year to invest in their facilities or equipment, or to put away for a rainy day, • try to be efficient in its use of all resources, and • provide understandable and accessible financial records and reports. Goddard College no different than other organizations. It has to worry about raising enough money to cover all of the costs it faces in operating the College and in providing a variety of educational programs. It seeks financial stability, it struggles to pay its employees reasonably and not to increase its tuition unreasonably, it tries to avoid too much debt, it strives to use its resources efficiently, and it wants to be able to improve its physical plant and have some funds left over every year. And it, too, needs to provide understandable reports to its board, staff, faculty, students and others so they can be informed about the College's financial progress and condition.
Fund Accounting To record and control financial transactions and to provide information to help measure progress towards these financial goals, nonprofit organizations, like Goddard College, generally use a system called fund accounting. Although Somewhat mysterious, it is important to understand fund accounting to interpret the financial statements that Goddard puts out every year. "Funds" keep track of money Goddard receives and uses for different purposes. Each fund is set up for a Specific purpose, and transactions related to that purpose go into or come out of that particular fund. This kind of system originated as a way of being Sure that monies going to a non profit organization that were intended to be used for a Specific purpose, such as new buildings or loans to employees, were in fact put to that use and not to some other. Goddard College uses a fund accounting system that currently consists of six "funds" to keep track of its finances. Monies coming into or owed to the College are put into or assigned to one of these funds; monies Spent by the college or which are owed to others by the College come from or are assigned to one of these funds. These funds are: Current, Unrestricted Fund which receives all monies that can be used without restriction for the College's current operations and educational programs. This is the largest fund of the College, receiving monies from tuition, fees and moot contributions, and spending money on instruction, scholarships, student support, academic support, and plant maintenance to enable the college to operate each year.
Current, Restricted Fund which receives monies designated for specific uses, such as federal aid for work study or grants for a particular research project, and which can only spend those restricted monies in the current year for that designated use. Plant Fund which receives and spends monies solely for new or substantial improvements in land, facilities, and equipment, for investment in library books and other resources, and to pay off the college's longterm debts. This fund is concerned with buying things that last more than a year, that are "investments" for the college, as distinguished from "current" spending on wages, supplies, telephone, etc. Loan, Endowment and Agency Funds are the three other college funds used to handle money related to student loans, its endowment, and to the student bank. At Goddard, unfortunately, these funds are not as large as the three funds described above. This introduction to Goddard finances will focus most of its attention on the current unrestricted fund since it is the largest fund and receives and spends about 90% of all the monies flowing to the college. Financial Transactions Once these funds are set up, the College keeps track of all the monies flowing into and out of each of these funds over time and of the levels in the funds at any particular point in time. What's in a fund at any point in time is related to what flows in and what flows out over time. Here's how that works.
The organization specifies a fiscal year that usually is a time period that fits closely with the operations of the organization - Goddard's fiscal year is July 1 to June 30, so its 1995 fiscal year is July 1,1994 to June 30, 1995. The organization then records levels in each fund at the start of the fiscal year, all the financial resources going into or out of each fund during the fiscal year, and the levels at the end of the fiscal year. In this way the organization can see where each fund gets its money and how much it gets from different sources, where the money is spent and how much is spent for each purpose, and how much its cash balance rises or falls as a result. Now what are these financial flows in and out of a fund? Like our personal checking accounts, organizations usually keep track of cash coming in and going out of a fund, and what they have for cash at any point in time. Cash coming in is called receipts; cash going out is called disbursements; these cash flows in and out change the cash balance in the fund. This system records all cash flows regardless of their source or destination - borrowing, tuition payments, salaries, mortgage payments, cash from selling equipment - and keeps track of their impact on cash balances. Such a system of keeping records is called cash accounting and it is very helpful to an organization in assessing whether or not it has enough cash to pay its bills or if it has too much cash and needs to invest it rather than keep it idle. This syste also clarifies the various sources of cash to the organization and the uses to which this cash is put. 1 Besides cash flows, most nonprofit organizations keep track of what they earn (regardless of whether they receive cash at that time or not) and what
resources they spend (regardless of whether they pay out cash then or not). This is a form of accrual accounting.2 What they earn is called revenues; what they spend is called expenditures; these transactions to and from a fund change the fund balance (we'll discuss fund balances further later in this report). By recording revenues and expenditures over the fiscal year, the organization can get a better idea of whether it is actually earning more than it is spending, regardless of whether it has more cash coming in than is going out. The differences between cash and accrual accounting can be seen more clearly if we compare an organization receiving tuition and borrowing money. Under a cash accounting system, cash from both tuition and the loan would flow in and the cash balance would go up. Under an accrual system, the tuition would be recorded as a revenue since it is earned; borrowing money, however, is not earned since it has to be paid back. Consequently the accrual system does not record money borrowed as a revenue. It will, as we will see, keep track elsewhere of the increase in both cash and debt that accompanies the borrowing. The point of accrual accounting is to distinguish between those transactions that make the organization "richer or poorer" like tuition payments, and those that don't (in spite of how we feel at the time, borrowing money doesn't make us "richer or poorer" since we have to pay it back). One more transaction to understand before we look at Goddard's actual finances is the movement of monies between funds. One fund may transfer monies to another fund as long as the use of those monies is consistent with any restrictions imposed by the original funding source. Thus the current, unrestricted fund might transfer monies to the plant fund to be used for facilities improvements or to pay off the mortgage. These are called inter fund transfers. Some transfers, like those to the plant fund to pay off the College's debts or to the current restricted fund to match federal work Study grants, are mandatory transfers; non-mandated or required transfers are called voluntary transfers. If a fund's revenues and transfers in from other funds are greater than its expenditures and transfers out to other funds, that fund has generated a surplus for that fiscal year; if it's the other way around, the fund has generated a loss. As we will see, a surplus increases the fund balance at the end of the fiscal year; a loss decreases the fund balance. Revenue and Expenditure Statements We are now in a position to look at one of the moot important financial statements that Goddard puts together for every fiscal year, its "statement of Revenue, Expenditures and Other Changes." This is a Statement of all the revenues to and the expenditures made by each fund during the fiscal year. Table 1 shows revenues and expenditures for its current; unrestricted fund for the fiscal years of 1991 through 1995. 3 Table 1 also shows interfund transfers to and from that fund.4 We have chosen the current unrestricted fund because it is the largest and by far the moot important fund of the College. Notice in Table 1 all of the sources of revenues and how they have changed over time. Student fees is by far the largest, with gifts and private grants and income from auxiliary enterprises (daycare, rentals, etc.) the principal other sources of revenues. 5 Expenditures from the unrestricted fund include instruction (faculty wages, expenses), academic Support (library, etc.), Student services (admissions, student life expenses, etc.), institutional support (senior administration, etc.), physical plant (operations and maintenance, etc.), scholarships and fellowships, and public services (contributions, etc.).
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Transfers out of the current unrestricted funds Shown in Table 1 are principally to the plant fund which can uses these monies for capital improvements and other investments, and for interest and principal payments on the College's mortgages. Other transfers shown in Table 1 are principally to and from the current restricted fund. Table 1 shows both operating surpluses (revenues less expenditures) and fund surpluses (operating surplus less transfers). Operating surpluses (or losses) indicate to what extent the college is able to generate operating revenues in excess of all of the costs it incurs to produce those revenues. It is essential to generate an operating surplus each year that is high enough to cover all mandated transfers (like paying off the debt), contribute substantially to needed new facilities and other investments, and if possible have something left over for the proverbial "rainy day." The fund surplus (or loss) depends on the level of the operating surplus and the amounts of monies transferred into or out of the fund. Notice that in 1994 all of the operating surplus, $321,054 was transferred out, so the fund surplus was zero. At the bottom of the table are the "fund balances" at the end of each fiscal year. This balance, which is a measure of the fund's net worth or the net value of resources left in the fund, increases each year by the amount of the fund surplus. It declines if the fund runs a loos. It stayed the same from 6/30/93 to 6/30/94 because the fund surplus was zero. We return to fund balances below.
Balance Sheets The Balance sheet is a financial Statement that provides a Summary at a particular point in time (usually the end of the fiscal year) of the financial resources owned by or owed to a particular fund (its Assets), what the fund owes to others (its Liabilities), and the difference betweem assets and liabilities, its Fund Balance. For example, a fund might have cash, investments, and inventories, and tuition receivable (tuition owed to the college but not yet paid) as assets totalling $100,000; accounts payable (money owed by the college to its suppliers which have not been paid yet), taxes payable, and loans outstanding as liabilities of $80,000; and the difference between the two of $20,000 as its fund balance. The fund balance measures the net worth of the fund - what would be left over if all of the assets were converted to cash at their "book values" (the values Shown in the balance sheet) and this cash was used to pay off all of the liabilities at their book values. Table 2 shows the June 30, 1990 - 1995 balance sheets for all of Goddard's funds added together. This represents a snapshot of the financial value of all that Goddard owns and owes, and its total fund balance or net worth as defined from balance sheet book values. Accountants record the value of assets and liabilities at their original coot with Some adjustments (like depreciation) over time. Since the market values of these items can change dramatically, and the accounting adjustments are very approximate and not comprehesive, the figures in Table 2 only approximate the value of many of Goddard's assets and liabilities and of its net worth.
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Financial Performance What does the information in Tables 1 and 2 convey about Goddard College's financial performance between 1990 and 1995? Recognizing that a complete analysis requires examination of the full financial reports, a look at the other funds in detail, and a review of the more detailed information behind the figures in the College's annual financial audit, we can Still reach come tentative conclusions about the College's finances from the revenue, expenditure and balance sheet data presented in these tables. What does the information in Tables 1 and 2 convey about Goddard College's financial performance between 1990 and 1995? Recognizing that a complete analysis requires a review of the more detailed information behind the figures in the College's annual financial audit, we can still reach some tentative conclusions about the College's finances from the data presented in these tables. First, the College, after virtually no growth from 1991-92, experienced considerable financial growth over the 1992-1995 period with total revenues growing by 40% and total expenditures by 35% (see Table 1). Within these totals, Student fees, scholarships and fellowships, and instructional expenditures grew rapidly; Student services, institutional Support and physical plant operations and maintenance grew more modestly; and gifts and private grants and academic Support remained Stable or declined. Second, the College's growth in revenues, however, slowed down every year from 1992-1995. Revenues from Student fees (the College's principal Source of revenues) grew 19% from 1992-93,14% from 1993-94, and 11% from 1994-95.
(With this slowing growth rate, the College's 15% projection of student fees for 1996 seems hard to justify). Third, this growth was accompanied by operating surpluses in every year, with these surpluses recovering substantially after a drop between 1991 and 1992 to a very healthy level by the end of fiscal year 1995 (see Table 1). These surpluses contributed to a total increase in combined fund balances of over 50% over this period (see Table 2). Fourth, the capacity of the College to meet demands for cash improved substantially over this period, although there has been some weakening since the end of 1993. Cash balances rose fairly consistently over this period, with extra cash available for short term investments by 1993 (Table 2). Furthermore, the relationship between the College's current assets (all those assets that are cash or are likely to be converted to cash within a year, like accounts receivable, inventories, pre-paid expenses) and current liabilities (all of the College's accounts payable and other liabilities that are likely to come due within a year) improved substantially. At the end of fiscal year 1990, current assets were only 38% of current liabilities with the high accounts payable suggesting bills weren't being paid on time (Table 2). 5y the end of 1993, however, the ratio of current assets to current liabilities had jumped to 285%, a very healthy level. Since then this ratio has slipped (187% at the end of fiscal 1994;175% at the end of fiscal 1995) but is still substantially better than in 1990. Fifth, the College's financial risk from carrying debt decreased steadily over this period, as the College retired about $80,000 of its mortgage principal. When debt levels are compared to the college's combined fund balances (which
represent a rough measure of the capacity to carry debt), this ratio fell from 28% to 16% from 1990 to 1995. Furthermore, the College's operating surplus, which has to be large enough to cover required payments of interest and principal (debt service), went from 1.36 times the level of debt service in 1992 to over 5 times in 1995, a much more comfortable margin of safety for the College. Sixth, the College's investment in its physical facilities and other longterm uses of its funds grew substantially after a drop in 1992 with almost a quarter of million dollars in both fiscal year 1994 and 1995 transferred to the plant fund for capital improvements (Table 1). The College was clearly back on its feet financially by June 1994, allowing it to begin to make substantial physical improvements, and this financial Strength continued through fiscal 1995. Finally, without additional information it is hard to assess how well the College performed in providing reasonable wages and charging reasonable tuition and fees, and how efficiently it used its resources. However, from the information in Tables 1 and 2, we can make a reasonable case that the College made substantial and steady progress towards meeting many of its financial goals over the 1991-1995 period, by the end of fiscal year 1994 it was reliably raising more money than it spent, had enough cash on hand (and short term investments to draw on if needed) to cover its bills when they came due, was not going too far out on a limb with debt it couldn't pay if it came upon hard times, and had some money left over each year to invest in its facilities or equipment, or to put away for a rainy day. This financial strength was maintained throughout fiscal 1995.
Endnotes 1. One of the financial statements developed annually by nonprofit organizations i5 a "statement of Cash Flows" or "sources and Uses of Cash Statement." This statement presents the cash balance of the organization at the Start and end of the fiscal year and details all of the sources and uses of cash that occurred during that fiscal year.
2. To be totally precise, accrual accounting records revenues when resources are earned and expenses when resources are actually used. The System used by Goddard and most nonprofits is modified accrual accounting recording revenues when resources are earned and expenditures when resources are spent or expended.
3. All of the financial information reported here is drawn from the Goddard College Corporation's audited financial statements, in which a public accounting firm has certified that Goddard used generally accepted accounting principles in preparation of these statements. These audit reports provide considerably more detail than we draw on for our overview of Goddard'o finances in this report.
4. We have lumped some of the smaller transfers into a category "other transfers" and not distinguished between voluntary and mandated transfers ("transfer to plant - principal & interest" is the major mandated transfer for Goddard) to make Table 1 somewhat simpler to read.
5. Most federal aid received by the College, like work study grants, goes into the college current restricted fund. Research grants would also be shown as revenues to the current restricted fund.
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