Private College Financial Statements - Learn to Read and Analyze

In the face of challenging economic and market pressures, one of the challenges that faculty, staff, students, families, and community leaders face is having the ability to understand the financial health and viability of private colleges. Hi, my name is Gary Stocker. While there is no absolute indicator of failure or success, reading the highlights of a private college's audited financial statements can help you determine if there is an acceptable risk in selecting that college. No one wants to choose a college that does not have the financial resources to provide a quality education, let alone one that is in comparative danger of closing. Warren Buffett is famous for many things. One of them is that he has read thousands of company financial statements. I don't come close to Buffett's standard, but I have read hundreds and hundreds of private college financial statements. I am going to share with you a brief review of the parts of a financial statement that can let you more readily compare one private college to another. The first skill that I want to show you is how to use the Federal Audit Clearinghouse to find audited financial statements for private colleges you're considering. You can see I've gone to the Federal Audit Clearinghouse webpage, and I'll post the web address for you here. First, we're going to select Find Audit Information up here on the top. I'll click here. Then we're going to select Search for Single Audits. And then one more time, we're going to search for Search for Single Audits. We're going to expand the menu option here under the General Information tab and scroll all the way down to where it says Auditee Name. Now for our demo, I'm going to use Iowa Wesleyan University. You type in the name and you can hit Enter or click on Search. You're going to get a qualification screen. Simply acknowledge that I've read it and continue to search results. As you scroll down the page, you'll notice a series of audited financial statements for Iowa Wesleyan University for the fiscal years ending 2020, 2019, 2018, and on and on. Let's take a look at the most recent audited financial statement for Iowa Wesleyan University. And we'll go to the, to the next to last column where it says Audit. And we're going to go ahead and select Audit, click on the Audit link. And then however files are downloaded to your computer, go ahead and access those downloaded files. I'll do that on mine. So first let's look at the balance sheet. It's often called the consolidated statement of financial position. And for Iowa Wesleyan University, it's for the years, their fiscal years ending on May 31st, 2020 and May 31st, 2019. There's just 3 areas I look at to do a quick assessment of a college's financial health. The first is cash and cash equivalents. It essentially references the cash they have available to buy things. The second is investments. The larger the number, the better. And you can see in this case that the investment amount for Iowa Wesleyan has gone down about $2 million— not quite— over one fiscal year to the next. You could ask questions why. A reasonable response, an educated guess on my part, would be that they needed those funds to help keep the lights on. And the last one I look at is the land, buildings, and equipment, commonly known as PP&E, property, plant, and equipment. And I look at that number in relationship to the total assets. And we can see in 2020 that Iowa Synth had about $20 million in land, buildings, and equipment. PP&E, and about $35 million, not quite $36 million, in total assets. All of these numbers added together. What you want to look for is to make sure this number is as small a percentage as possible of this number. In this case, $20 million out of $35 million, or 20 out of 35, is about 60% of all of Iowa Wesleyan's assets are tied up in property, plant, and equipment. The issue with that, the concern with that, is if this organization needed cash, it's not as readily available by selling property, plant, and equipment as it would be, for example, to have cash and cash equivalents or higher numbers in the investments. The second part of the balance sheet, the consolidated statement of financial position, is liabilities. These are things that an organization owes, in this case Iowa Wesleyan. And we look at their debt, in this case notes payable, long-term debt in the vicinity of $27 million and change. And then we look at their net assets, which is also part of the liabilities and net assets report. And this is a really strange case with Iowa Wesleyan. This number is almost always positive. And in Iowa Wesleyan's case, it's a negative $13 million and change for 2020, and suggests, this is educated speculation on my part, that the college borrowed against those assets, those endowments, donor restrictions, just for operations. Not a good scenario. It's one you'd want to ask the folks at Iowa Wesleyan on your own, why is that a negative number? The second part of the financial statement that we're going to look at for Iowa Wesleyan University is called the consolidated statement of revenue and expenses, sometimes called the profit and loss statement, statement of operations, all those synonyms are used. And again, it's the same time period. The way to look at this is to look at tuition and fees. And this first line is tuition and fees at list price. If Iowa Wesleyan had collected all the tuition and fees at their list price of tuition, probably $20-some-odd thousand, they would have collected $14 million and change in tuition revenue. That's not the case. That's kind of a fictional scenario. Because what we have to do is take away what are called the institutional scholarships. Now let's break that down for a second. In large part, these are not funded scholarships. They are almost certainly largely simply discounts that Iowa Wesleyan is offering its students to come there. There's no cash behind them. There's no dollars behind them. It's simply a discount. Many will call them discount coupons as a way to characterize those. So when you look at scholarships, there are the funded scholarships. Which there are many at many organizations. But when you see this line in the financial statement, it's a large percentage that are unfunded discounts. They just call them scholarships. So we look at the net number. So $14 million and change is what Iowa Wesleyan could have had at list price. They actually netted $6 million and change. And $5 million, almost $5.9 million in the previous year. That's the tuition and fees revenue they have to operate from. In terms of cash from operations. And then we'll look at additional revenue sources to get a total revenue number down here. And then we want to look quickly, there's some line items on expenses, but we want to quickly go to total expenses. Total expenses for Ivo Essen for the year ending in May 31st, 2020 were $16.4 million. The total revenues were $11.5 million. Do the math and you find the loss for that year was $4.9 million and the previous year about $2.5 million. That's what you want to look at. It's not a significant issue if it happens on occasion, because it does. It is a significant issue if it happens year after year after year. In the case of iOS Land, I know from reading their previous financial statements they had that issue. They have been unable to generate profits consistently over the past many years. And finally, the last part of an audited financial statement is a statement of cash flows, or cash flow statement. And there's just really one line, but one category that I want to look at, and that is cash flow from operations. Let me briefly explain that. If you and I were running a lemonade stand, the cash we generated from operating that lemonade stand would be our net cash from operations. It wouldn't include gifts from Aunt Mary and Uncle Sam and other sources of revenue. It's just the income that we earn, the cash that we earn from running that lemonade stand. So in the case of an audited financial statement, we want to quickly go to the bottom, the net number for the net cash used by operating activities. You like this to be a positive number. You would like to, every time you run a business, have positive cash at the end of the year. You'd like to report positive cash. And we can see in our example here that Iowa Wesleyan has almost $3.1 million in negative cash in 2020 and about the same number from the previous year. Again, this is not a good pattern, but it's one of the easier ways to look to see if a college was generating net cash from operations. Now, a quick qualifier: there's a lot of other items here that come in to reflect the net cash from operations. They're important, They each have their own definition, each has their own— each has their own reason for being on the financial statement. But if you want to look at a quick number, the net cash from operating activities is the one to look at. There will be private colleges that close. It has happened regularly in the past and it will continue to happen as market and financial pressures become too much to bear for many of these private colleges. This brief overview of a private college's financial statement is intended to provide you with a relatively easy way to look at the financial health of a private college you may be considering. If you have a specific college you would like me to review, drop me a note in the comments section below. If you would like me to present virtually this fall as this year's senior class and their families come together, also drop me a note below and I'll follow up. Like I have shared previously, there is no absolute indicator when a college will close. However, there are many resources available to compare the financial health and viability of private colleges. I'll leave a link below to the College Viability app. You can have access to it for 7 days to compare colleges you may be considering for just $7.