Financial Ratios Guide for Non Government Schools

Registration Board Visit

To ensure the long term financial success of any school, it must have
sufficient income to cover all expenses and loan commitments and do so
consistently.
Financial ratios are a tool the Non-Government Schools Registration
Board use to highlight financial strengths and weaknesses in the operation
of schools based on the recent audited financial reports of the school.
Under the provisions of the as defined in Part V of the Education Act, the
ongoing registration of a Non-Government School is contingent upon the
Non-Government Schools Registration Board being satisfied that the
school continues to meet the requirements for registration outlined in the
Act :

• the nature and content of instruction offered is satisfactory;

• the school provides adequate protection for the safety, health and
welfare of students; and
• the school has sufficient financial resources to enable it to comply
with the above in the future.

The registration of each Non-Government School is to be reviewed at

least once every five years however, a review of registration may occur at
less than a five-yearly interval. This is at the discretion of the Board if
conditions have been placed on the registration of the school.

Interpretations of Ratios
The mere calculation of a ratio is meaningless. It is often difficult to know
whether the calculated amount of a single ratio is good or bad. It is the
interpretation and presentation of significant results and trends indicated
by those ratios that is of greater value.
Ratios often bear some relationship to other ratios and understanding this,
helps identify strengths and weaknesses.
Limitation of Ratio Analysis
Ratios are useful tools of analysis but judgement and caution must be
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exercised as by themselves, ratios are not the complete answer to
questions about the performance of the school. The following points
should be considered:
• Ratios use accounting reports which contain historical information
and do not provide information on:
o Future cashflows
o Cycle of school (e.g. variations in student numbers)
o Planned capital expenditure (e.g. major building works to be
undertaken)
• It is difficult to find a benchmark that will indicate whether a result is
good or bad. The fact a school is not operating near industry norms
is not a certain indication that something is wrong or there could be
an issue. Further investigation should follow such as trends, cycle
of the school etc. and the results should be viewed in the context of
the other ratios.
• Analysis of accounting information identifies only symptoms, not
causes, and thus it’s use in identifying the potential that problems

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 may exist, without necessarily providing explanations as to what
the issue may be or how/why it arose.

A template has been prepared to calculate the financial ratios required by

the Non Government Schools Registration Board and can be accessed via
the following link on CESA Online:
CESA Services Finance Financial Ratios

Below is further explanation that will assist you in understanding the

calculations and the results of the ratios for the Non Government Schools
Registration Board.

School Liquidity
The school’s liquidity is measured by the current ratio (sometimes referred
to as working capital) and shows the ability to pay current debts (e.g.
creditors) from current cash reserves – it is an indicator of the school’s
ability to repay its short term debts. This ratio does not take into account
asset quality but it does assume that current assets are converted into
cash reserves within twelve months to finance the current liabilities if
needed.
Current Assets
Current Liabilities

Measurement: Minimum = 1.00

If current liabilities exceed current assets (e.g. the current ratio is below 1),
then this may indicate that the school may have problems meeting its
short-term obligations.

If the current ratio is too high, it may indicate the school may not be
efficiently utilising its current assets to their full potential. However, it
should be noted that many schools identify their loan liabilities entirely as

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non-current liabilities, rather than distinguishing a portion of the liability as
current (i.e. due for payment in the coming financial year) and non current
(i.e. due for payment in future years). This can distort the calculation of the
current asset ratio.

Cashflow Management
Cashflow adequacy is the school’s measurement for cashflow
management & ideally, every dollar of new assets purchased and debt
repayment made is coming from the current years surplus.

This ratio shows the schools ability to meet its capital expenditure needs
from the cash generated by its recurrent activities (e.g. tuition fees,
composite fees etc) rather using financing activities (e.g. loans, leasing
arrangements).

Net Cash from Operations (before interest)

Cash Payments for: Property plant and equipment and
for long term liabilities, including interest

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 Benchmark = 1
At Risk = 0.5

If the ratio is 1.0 or greater, it shows that debt financing should not be
necessary for any capital expenditures.

Asset Sustainability
The school’s asset sustainability is measured by the reinvestment ratio
which reports if the school re-invests its cashflow surplus to acquire new
assets.

Cash Payments for Property, plant and equipment

Net Cash from Operations

Results from this ratio will range from 50% to 180% depending on
phase/age of the school based on the current cashflow audited
statements.

Capital Structure and Debt Protection

There are two ratios to consider to measure these:

Current Liabilities to Total Liabilities

This ratio measures the percentage of current liabilities to total liabilities
and is a useful measurement when reviewing a schools debt structure.
Current Liabilities
Total Liabilities
It is more favourable the lower the ratio, as current liabilities have to be
met from the schools current assets, with the benchmark being 25%. A
school will have a mix of short-term (e.g. creditors) and long-term debt
(e.g. CDF loans) depending on how the school have financed their overall
operations and different sources of funding.

A school with a higher level of short-term debt may be at greater risk of

future cashflow problems due to the short term nature of the debt and the
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requirement for quicker repayment of this type of debt. However, please
note the comments above re the recording of all loans as non-current
liabilities.
Liability to Equity Ratio
This ratio compares current liabilities and long term debt to total equity and
can indicate long term sustainability of a school by measuring the extent to
which it is financed by debt. Results of this ratio can be from 50% to
200%.

Total Liabilities
Total Equity
This ratio can be used to assess a schools options for future borrowings
however the higher the ratio, the higher the school’s risk, so this needs to
be taken into consideration.

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Operating Efficiency
The operating efficiency ratio shows the income needed by the school to
manage it’s debts and sustain its operations.

Net Operating Result (before interest and depreciation)

Gross Income
Benchmark = 14%
At risk = under 10%
This ratio can be used as a regular measurement using the revenue and
expenditure statement to show how efficiently the school is operating over
time. The higher the margin achieved, the more favourable the result.

Cash Surplus
The cash surplus ratio indicates the schools ability to convert total gross
income into a net operating result (surplus).

Cash Surplus (before depreciation)

Gross Income

Benchmark = Minimum 5%
There are many reasons why a school may have a lower result than the
minimum benchmark requirement. The overall financial efficiency may
relate to a higher level of outstanding debtors, a higher level of expenses
or debt commitment, or a near breakeven result for revenue and
expenditure in the cashflow report.

If you have any queries regarding the ratios, please contact your finance
officer.

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