You’ve just joined the board of directors of a private school. Or perhaps you’ve been on your school’s board for some time, but want to learn more about your role in the financial oversight of the school.
Most private school board members are familiar with the basic aspects of financial management, such as the importance of tuition and contribution revenue needed to support the school’s day-to-day activities and long-term goals. However, in addition to addressing funding and expenditure challenges, board members have a legal and professional responsibility to protect their school’s assets by overseeing its financial activities and implementing policies and procedures to protect the organization.
Financial statements can be a valuable resource to board members in helping them understand and evaluate the school’s performance.
Here’s a primer on what every private school board member should know about financial statements.
1. Board Members Are Responsible for the School’s Financial Statements
Although it’s the CPA firm that performs the audit, review or compilation of the school’s financial statements, the statements remain the responsibility of management and the board of directors. The only section of the statements that belongs to the CPA is the Independent Auditor’s Report (also called the opinion letter).
Although it is common for the independent CPA firm to assist in the preparation of the financial statements, including the footnotes, in nonpublic company entities such as private schools, the school’s management is responsible for the presentation of the statements and the accompanying footnotes in accordance with generally accepted accounting principles (GAAP). Otherwise, the CPA would encounter a scope limitation and is required to disclose that limitation in his or her report.
Although your school’s management might not include experts in GAAP, they should, at least, be able to review the financial statements and confirm that the information is presented correctly and that there are no misleading statements or material omissions. The board of directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements.
2. The Board Has Say In How Financial Statements Are Presented
Even though there are certain financial statement disclosures required by GAAP, there is often flexibility in how these disclosures are presented.
Usually your school’s management and board can present information in the style and format they prefer. From a practical standpoint, the audit firm typically has a standard way of presenting certain information. However, management has the final say as long as the minimum disclosure requirements are met.
It is also important to remember that management may always disclose more than the required minimum information if they feel that the information presents a clearer picture of the school and its operations.
3. Know the Nuances of Nonprofit Financial Reporting
Often, board members are entrepreneurs and business leaders who are more familiar with for-profit financial statements. But most private schools are nonprofits, and their financial statements differ significantly from commercial entity financial statements, since nonprofits do not present or operate on the concept of net income or profitability.
Let’s look at some of the key differences between nonprofit and for-profit financial reporting.
Contributions
One of the biggest differences lies in how income and contributions are reported. Contributions, or gifts, often come with certain stipulations, which may relate to purpose or time frame. Contributions and net assets should be clearly identified on your school’s financial statements as with or without donor restrictions, depending on their exact specifications.
Pledges Receivable
Another difference relates to pledges receivable.
Pledges are generally considered revenue in the year they are made, even though the funds may not have been received and cannot be spent that year.
This has the tendency to cause large fluctuations in the bottom line compared to a commercial entity that has a more stringent matching principle. This is because a nonprofit organization isn’t really tracking “net revenue” like a commercial entity. Rather, it reports changes in net assets.
Board members should note that if a pledge receivable is made with a condition, that condition must be met before the organization can recognize the gift as revenue. Board members should ask the school’s management whether any pledges with conditions exist, as these will not appear on the financial statements.
4. Financial Statements are a Fantastic Tool for Measuring Your School’s Performance
You can gain a better understanding of your school’s operating efficiencies and performance by analyzing the data presented in the financial statements.
You can watch our free on-demand webinar, What Your Nonprofit's Financial Statements Reveal, to learn the story your financial statements tell about your organization.
There are three basic comparisons a board member should use to assess both revenue and expenditures:
- Year-to-year
- Actual-to-budget
- Peer results
Year-to-Year Comparisons
Year-to-year comparisons reveal changes that occurred from the previous fiscal year to the current year. Management should be able to explain to the board’s satisfaction significant increases or decreases.
Actual-to-Budget Comparisons
Actual-to-budget comparisons look at the actual results from operations next to what was projected by management and the board at the beginning of the fiscal year. These variances determine whether the budget process was accurate, or whether unforeseen circumstances occurred during the year.
Board members should be informed of all budget amendments. It is reasonable to question results that significantly exceed or fall short of the budget.
Peer Analysis
Peer analysis compares your school’s results with those of other similar private schools. It is important to keep in mind differentiating factors such as student population, teaching style, fundraising and the cost of tuition when making comparisons among schools.
5. Key Ratio Analysis Can Reveal A Lot About Your School’s Health
Along with comparison analytics, board members can use ratios to understand their school’s current position.
It’s easy to get overwhelmed by the large number of ratios you can consider, but there are a few simple ones that can provide board members with useful information:
- Student-teacher ratio
- Cost-per-student
- Current ratio
Student-Teacher Ratio
The student-teacher ratio, calculated by dividing the total student population by the total number of teachers, determines the number of students per teacher. By comparing this calculation with those of prior years or expectations, you can determine whether the school is appropriately staffed for its current enrollment.
Cost-per-Student Ratio
Cost-per-student ratio is calculated by taking the total expenses, or a specific group of expenses, such as salaries, divided by the number of students, to determine the average cost per student. This is helpful in evaluating whether your cost of tuition is on target.
Current Ratio
The current ratio (current assets divided by current liabilities) is a liquidity ratio that estimates the school’s ability to meet its short-term obligations. A higher current ratio indicates a more likely ability to repay debts.
What to Do With Your New Knowledge About Financial Statements
As you can see, financial statements are an important tool for understanding a private school’s financial position, performance and direction.
The information and suggestions provided above are just a few of the items that a board member might find useful. Going forward, use the financial statements to prepare yourself to make informed decisions for the school. If possible, management should distribute the school’s financial statements to board members a few days before a scheduled meeting. You and your fellow board members should review them and prepare a list of questions for either management or the outside accountants.
Compare the financial statements to board meeting minutes, conversations with staff and your own knowledge of the organization to see if the information is consistent. If applicable, follow up on any findings or recommendations reported by the external auditors.
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