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MONTHLY NEWSLETTER:  JANUARY 2008 ISSUE

DONíT SPEND IT ALL
BY RICK VAN ALFEN, CPA
PROVIDENCE FINANCIAL CO., INC.


Those not in the charter school business probably do not appreciate the differences between running public charter schools versus non-charter public schools. Sharing the purpose of educating children is about where the similarities end. Charter school managers have the added responsibility of running a small business. Beyond educating children, charter school managers have to worry about recruiting students, establishing curriculum, applying for grants, fundraising, finding school facilities, contracting for services and supplies, etcetera, etcetera. These are jobs that districts usually perform for non-charter schools. And charter managers must do all of this with fewer financial resources than non-charter public schools. Any charter school administrator knows that there are many more worthy needs competing for a schoolís budget than there is revenue. Budgeting is a matter of prioritizing a schoolís needs.

Consistent with running a small business, a significant challenge of charter school managers is prudent financial management. While some charter school managers have demonstrated skill and acumen in developing the ďbusiness sideĒ of their schools, others are sorely lacking in basic financial planning knowledge and experience. Iíve seen the two extremes.

An important principal of sound financial management is to plan and work to achieve a cash surplus at the end of each year. Some may argue that a schoolís money sitting in a bank account does not do a schoolís students any good. However, a schoolís cash surplus is a necessary measure of financial security in the event a financial contingency occurs. Who knows when a large, unexpected expense will occur or when expected revenue will be delayed or reduced? The amount of annual cash surplus for which a school should plan depends on various factors such as the size of a schoolís budget, any financial loan covenants to which a school is obligated, any large pending purchases, and the amount of cash a school already has on hand.

Just like a small business, a vital component of a charter schoolís health is sound financial management.

An additional important consideration is whether a school is planning to obtain long-term facility financing in the near future. To qualify for long-term facility financing, a school needs to demonstrate an ability to achieve annual cash surpluses of at least 25 percent of future annual debt payments as if the school already had the financing in place. For example, assume that a school is currently making lease payments of $50,000 per month and anticipated debt service payments would be $40,000 per month if the school financed the amount necessary to purchase facilities. To calculate the minimum amount of annual cash surplus for which a school should plan in order to obtain long-term facility financing, school management should start with the schoolís expected budget surplus and add back the annual lease expense ($600,000) and deduct expected annual debt service payments ($480,000). The minimum annual surplus for which this school should plan would then be $120,000 ($480,000 annual debt service multiplied by 25 percent). School management should then put this money to work earning interest. I often see schools with a substantial amount of money sitting in their checking account earning a nominal amount of interest. There are very safe investment options available through which schools can earn a good rate of return on their cash balances. Some of these options currently yield 4-5 percent. For example, in many states, charter schools are allowed to invest in the state treasurerís fund, which often provides a very good return for very low risk. School managers should call their state treasurerís office and some banks to understand their investment options.

So, donít spend it all. School management should plan and work to achieve a cash surplus at the end of each year. This is just one element of sound financial management for charter schools. Just like a small business, a vital component of a charter schoolís health is sound financial management. A financially healthy charter school facilitates the greater goal of delivering quality education for kids.

For information contact Rick Van Alfen, Providence Financial Co., Inc.
Phone: 801-556-2290
Email: rick@providencefinancialco.com