1 financial systems. 2 financial systems as educators, ce practitioners are often poorly prepared to...
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FINANCIAL SYSTEMS
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Financial Systems
As educators, CE practitioners are often poorly prepared
to manage an operation that has many characteristics that
resemble profit centered businesses. The best advise is to
adopt a business financial model and modify it to the CE
operation, rather than try to adopt an education model and
adapt it to a CE operation. One of the most significant
differences of a CE program from an educational model is
that most CE operations have a variable budget. Other
units of the university tend to have fixed annual budgets.
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Profit
Another significant difference found in an
effective CE model is the “profit” concept.
This may not involve real profit, but it
involves developing programming that covers
the fixed costs, variable costs, and overhead.
It must also generate funds to reinvest in
future programming.
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University Perceptions of CE
Unfortunately, these differences sometimes create difficulties
within the institution when CE staff communicates with other
administrators. They may result in the following perceptions:
* CE has plenty of money and needs no institutional support
* A “profit” goal does not fit the true mission of education
* CE should share their profits and assist the real programs of the university
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Staff Skills
Because programmers and other staff members actually
create, price, hire instructors, market, and implement the
programs, they have the ability to ultimately determine
the financial health of the unit. Therefore, the director
must not only have an in-depth understanding of the
finances, but also must be able to teach finances to the
staff.
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Assumptions for Successful Budgeting
To make good decisions, the staff should reach a consensus
on budgeting. Some of the assumptions may include the
following:
* Successful budgeting involves more than mere mathematical calculations
* The value of a product has more to do with the perceived value by the customer than the actual cost
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Assumptions for Successful Budgeting
Successful Budgeting (continued)
* Profits from programs can be used to build strong programs in the future
* Budgets are program-planning tools and should be introduced in the early stages of the programming process
* Budgets are communications tools to be used with customers and internal staff
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Assumptions for Successful Budgeting
Successful Budgeting (continued)
* Service cuts to meet budget restraints will result in long-term failure
* Time is money
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The Unit Budget
The unit budget includes all of the resources available to
operate the unit. These resources include funds provided by
the institution, revenues from the programs, grants, contracts,
gifts, and other monies. From a conceptual standpoint, it also
should include non-money resources such as contributions of
equipment and facilities. These reduce the amount of money
that is needed to operate the program; therefore, they are
equivalent to money.
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Two Sets of Books
The director must fully understand and monitor the
contribution that each source makes to the overall budget.
Since a CE budget generally differs significantly from the
institution’s budget format, most CE units are forced to keep
two sets of books. One set is arranged to communicate with
the institutional books, and the other is designed to more
effectively manage and monitor the success of the program.
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Tracking Financial Results
Learning Resources Network (LERN) recommends tracking
financial results in seven areas:
1. Income
2. Promotion
3. Production
4. Direct Costs
5. Operating Margin
6. Administration
7. Net
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Tracking Financial Results
Tracking Results (continued)
It is also recommended that these elements be
converted to percent figures for ease of tracking period
to-period changes. Direct costs are defined as the sum of
promotion and production. Operating margin, or profit,
is the difference between income and direct costs. Net
is operating margin minus administrative costs.
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Target Results
Suggested percentages are:Revenue 100% (a given)
Promotion 10%-15%
Production 45%-50%
Total direct cost 60% -
Operating margin 40% +
Administration Varies
Net 5%
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Activity Budget
The principle of most activity budgets is simple--revenues
should be greater than expenses. The two components of the
budget (revenues and expenses) are related but not
necessarily directly related. The expense component
determines the minimum revenue but should not determine
the desired revenue. The minimum total revenue is a factor of
total expenses and number of participants. The minimum cost
per student is based upon the total cost divided by the
anticipated enrollment. The maximum revenue (and cost per
student) should be based upon the customer’s perceived
value.
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Steps to Develop Budgets
There are six basic steps in developing an activity budget:
1. Identify all costs related to the program, including opportunity costs
2. Classify the costs as fixed or variable
3. Establish the break-even point
4. Determine a minimum registration fee
5. Determine a profitable registration fee
6. Prepare the budget
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Fixed Costs
Fixed costs include all costs that are involved that are
independent from the number of students and will not vary in
other ways. Some of these include the following:
* Instruction (except in cases where additional students require additional instructors or there is revenue sharing)
* Fringe benefits
* Marketing
* Facilities
* Administration
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Variable Costs
Variable costs are primarily related to enrollment.
However, there are other instances when costs may vary
such as:
* Food
* Educational materials
* Student lodging
* Instruction (when there is revenue sharing, etc.)
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Opportunity Costs
Opportunity costs are not directly reflected in the
budget but should help determine whether an activity
should be initiated. This cost is determined when one
activity is compared to another using projected
revenue as a point of comparison. The CE manager
and staff can then spend their time working on
profitable programs.
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Opportunity Cost Example
An example of the use of opportunity costs might be the
analysis of a decision to offer a free program to members of
the institution. Normally you might consider that the only
costs are out-of-pocket expenses. However, the true cost of
the activity is the sum of out-of-pocket expenses and the
related opportunity costs. This concept may be effective when
deciding to participate in a government contract activity
that limits cost recovery to direct costs and minimal overhead.
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Operating Margins
Operating margins can be expected to vary widely by
program area. Those programs that serve business, industry,
and other third party “payers” will normally provide 40% to
60% operating margins. In addition, programs that permit the
student to acquire a certification also return excellent
margins. Personal enrichment activities (paid for by the
student) tend to deliver much lower margins ranging from
15% to 40%.
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Profit vs. Service
It is tempting to limit programming to only those
areas that return a very high operating margin.
However, from a service perspective, a broad-based
program helps to lift the entire community to a better
quality of life. Most CE programs supplement some
activities with revenues from the more financially
successful activities. This is another justification for
market pricing versus cost pricing.
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Expenses… Faculty Pay
This is a very complex area of programming because a
wide range of programs require a wide range of faculty
with very different levels of professional qualifications.
In addition, as potential programs vary, so does the
ability to pay. Other problems occur when faculty
members in the same organization compare their levels
of pay. These complexities make it difficult for the CE
unit to develop a comprehensive faculty payment policy.
Yet, some level of consistency is necessary.
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Types of Faculty Pay
The types of payments include:
* Flat rate
* Hourly rate
* Fee per student
* Percentage of gross
* A mix of the above
* Buy equipment or pay travel
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Flat Rate
The flat rate is usually the best system if you are
confident that you can effectively market the program
and obtain the projected enrollment. In this case, CE
does all the work, except for the instruction, and should
benefit from the financial success. Since it is impossible
to establish a single flat rate, most operations establish a
range of rates, with the director approving exceptions.
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Hourly Rate
The hourly rate is similar to the flat rate and has similar
advantages. This type of payment system is used when
the length of the instructional activity might vary for
some reason. An example might be individualized
instruction that might vary by individual such as music.
As with the flat rate, the hourly rate normally varies from
program to program.
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Percentage
The major advantage of the percentage approach to faculty payment is
the sharing of the responsibility for the success of the program and the
financial exposure with the instructor. This is a very good system if
the instructor has the ability to enroll a significant number of
participants or requires an unacceptably high fixed rate for a program
that has a questionable potential. However, many programs use this
approach even when they provide the students through effective
marketing and hard work. The faculty member may get as much as
70% to 80% of the margin with only 25% of the commitment and
exposure. The key to this approach is to determine the relative
investment of the two parties and assign the percentage accordingly.
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Partnerships and Percentages
The percentage issue is also present in many program
partnership arrangements. The same rule should apply:
the percentage is related to investment. If a partner is
willing to underwrite 50% of the up-front costs such as
program development and marketing, they deserve to be
an equal partner. Otherwise, their share of the income
should be reduced to match their level of commitment
and contribution.
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Fee Per Student
The fee per student is basically the same approach as
the percentage payment. However, this approach
must be analyzed carefully. While percentage may
be calculated on the income after expenses, the fee
per student is effectively a percentage of gross
income.
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Instructor Involvement
No matter what system is used, the details should not be shared with the instructor for several good reasons:
* You will have to justify all future rates of pay and will continually be on the defensive
* Faculty members will be able to compare their pay with others
* Faculty members will be able to compare CE’s share with theirs
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Percentage of Gross
Most faculty members feel that the instructionrepresents most, if not all, of the programmingeffort. Therefore, most of the income should bepassed to them. Understandably, they are not aware of the investment in infrastructure, CE staff time,and direct expenses such as marketing that are required to support a successful class.
A desired target rate for faculty pay as a percentageof gross income is in the 30% to 40% range.
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Other Expenses
Careful management of food and facility expenses is
necessary, especially if minimum guaranties are
involved.
A detailed understanding of the various cost factors
involved in marketing will enable the unit to get the
most results for a given investment.
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Sunk Costs
It is important to understand the concept of sunk
costs to optimize program revenues. Sunk costs are
an important factor when deciding to hold or cancel
a program. The costs are incurred before the program
begins and will not be recovered if the program is
canceled.
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Decisions About Sunk Costs
The decision to cancel or not should be based upon costrecovery. If conducting the program will cover all expenses other than sunk costs and contribute to thepartial recovery of the sunk costs, then the best decisionmay be to hold the program. If conducting the programwill not cover the additional expenses and contribute to sunk costs, then it should be canceled. Theserecommendations only take into account the financial motives for canceling a program. Opportunity costs mayalso be a factor.