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Providence Financial












MONTHLY NEWSLETTER:  JUNE 2009 ISSUE

CHARTER SCHOOL FINANCIAL PLANNING
BY RICK VAN ALFEN, CPA
PROVIDENCE FINANCIAL CO., LLC



The importance of good financial practices seems to magnify in a challenging economic environment. I have seen this as an insider in the finance departments at Fortune 100 companies. To illustrate the effect of good financial practices, think of the difference in the impact of the current economy between various automotive companies and also the difference between various financial institutions. Why have some gone bankrupt while others in the same industry seem stable in a common environment? I have also seen the difference in the personal lives of many individuals. Some have lost everything; some are going to be fine. Of course there are various causes and influences, but institutional or individual financial planning is an important aspect of being prepared for contingencies that will invariably arise. Some automotive companies did not plan for high fuel costs. Some banks did not plan for the possibility of real estate values falling. Some individuals did not plan for their variable interest rate on their mortgage to adjust. This principle is equally true for charter schools. Some do a good job of planning; some do not.

One aspect of responsible financial planning is the thoughtful creation and maintenance of realistic financial projections. Relative to this topic I have seen a broad spectrum in the level of financial astuteness and preparation of the financial management of charter schools. Some have been very surprised by the level of funding or expenses they end up with at the end of a year, and they seem oblivious to the budgeting and planning process. Good financial management will invest the time to understand and accurately project revenue and then manage expenses to their established budgets. Following are some points I have learned from those schools that do this well:

Financial projections should be for 3-5 years. This will allow a school to plan long term. For example, a school can plan how quickly its cash balance will grow and how much they should keep on hand for contingencies. Using its best estimates of funding and expense growth, management can develop a salary/benefits strategy for employees. They can understand how much debt a school can comfortably afford. They can develop student enrollment growth strategies. It is difficult to address these issues with only an annual budget.

The Board of Directors should be included in the long-term financial planning process. They should review and approve the multi-year projections along with the annual budget.

Alternative projections should be developed for certain contingencies that are foreseeable. For example, for the 2009-10 school year, it may be wise to construct more than one set of projections for alternative funding scenarios in case state funding is cut. This way, management can plan how it will deal with these contingencies.

Donít forget to include an assumption for revenue and expense increases due to inflation. While most revenue and expense may stay level or decrease during the budget crisis, in more normal times one expects revenue and expenses to increase to keep up with inflation.

The projections should be at a reasonable level of detail. It is difficult to make assumptions about how revenue and expenses will fluctuate if the projection line items are too aggregated. Projections should be made at the level of detail for which the fluctuations are relatively predictable. For example, you would likely want to project the amount of supplies expense separately from teachersí salaries because these will fluctuate differently over time.

Projected revenue should be based on your best estimate. Particularly with the recent budget cuts, revenue is difficult to project.

Depending on the type, some expense line items may increase at the projected level of inflation, may remain flat if a school is locked into a contract, or it may increase with enrollment or increase based on another variable.

As anyone realizes who is involved with charter schools, their management is a venture that includes much more than the core mission of educating students. And unfortunately, if you donít allocate adequate effort to some of these necessary management and support functions, it will detract from the core mission or perhaps jeopardize the future of the school.

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