Business Operations

The New Emphasis on Liquidity

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Most independent schools across the country have the goal of achieving sustainability. Diversifying revenue sources is a key concept associated with sustainability, but it is equally important to focus on how operating liquidity affects a school’s ability to achieve long-term sustainability.

Operating cash and surpluses are key components to a strong balance sheet. No longer can an educational institution consider only its level of debt or endowment when planning for long-term success.

It has become increasingly common and crucial for a school to consider how much unrestricted liquidity it needs to support its operation effectively. A school should have a strategic conversation with its Board to determine targeted levels for liquidity and to make certain the right tools are in place to reach and sustain those targets. Adjustments must be made as an institution’s needs change.

The emphasis on liquidity

Having unrestricted liquidity among its assets enhances the operating ability of an institution, as explained by Rob Eby, CPA with Aronson LLC. “Liquidity allows schools to be more flexible to opportunities that come up,” he explains. “For example, if a school has more liquid funds, they may have more money available for student assistance or additional opportunities for faculty resources. Liquidity also presents the option to improve physical space, as well as pay employees week in and week out.”

But liquid assets also introduce the ongoing need for diligent management. Different than investment-based assets, liquidity requires more focused attention to detail, as noted by Deborah Anderson, Business Officer for Foxcroft School in Middleburg, Virginia.

“You really need to understand the rhythm of your school, because you aren’t taking in cash at the same rate you’re spending it on a monthly basis. Schools have a seasonal business model,” Anderson explains. “Managing when we are cash heavy versus not is extremely important because you don’t want to get the school into a situation where you have spent all of your cash with many more months to go.”

Liquidity requires a plan

Jill Fields, a Senior Vice President in SunTrust Bank’s Education Specialty Practice, echoes the importance of having a plan for your cash on hand.

“I encourage schools to have a liquidity policy statement,” Fields says. “It is more typical in higher education, where schools have significant endowments and lots of different buckets for tracking cash on hand outside of the endowment. Some of your operating reserves might be investment-based and some might be cash on hand. Whether you are managing your cash flows and forecasting because you have cash flow problems, or whether it is because you want to maximize your investment return, it is important as a discipline for all nonprofits and can benefit organizations of all sizes.”

This plan not only supports day-to-day operating costs for the school, but also shows stakeholders that these dollars have been carefully considered and put to use. And a big step has taken place that calls on schools to report these cash assets in a much more complete way.

The new reporting standard

The Financial Accounting Standard Board (FASB) issued a statement in 2016, entitled “Presentations of Financial Statements of Nonprofit Entities,” which requires a new emphasis on liquidity and financial reporting. Or, as Eby notes, “It allows schools to better tell their story.”

“Schools do a fair amount of fundraising,” Eby explains. “In addition to tuition, they try to make money through contributions, whether that’s through family members or other foundations that may give money to help education. Part of the new liquidity disclosure allows schools to tell their story and demonstrate where funds are allocated and why they can be trusted with additional contributions, either to build up for reserve or to use at the donor’s request.”

Equally important is the fact that these new disclosures not only help validate a school’s search for additional funds, but they also give stakeholders a sense of confidence in how the school is using funds and how the budget fits into the overall plan.

“This new standard encourages management to address potential stakeholder concerns and showcase some of their strengths a bit more than the prior accounting standard,” Eby notes.

A comprehensive view

By diligently managing liquid assets and being able to tell a comprehensive story to stakeholders and donors, schools can put themselves in a prime position for optimal performance. These benefits improve the functionality of the school, as well as make it attractive to both students and faculty.

Keep your business afloat through better liquid asset management

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