Hang Onto The Railing
Climbing the uncertain budgetary stairs
from Higher Education Digest in 'Ratio Analysis'
by Dr. John Minter, President of Minter Associates
Imagine you have an appointment in an unknown building on the second floor. You walk down a long fluorescent lit hallway and follow the sign that says, “Stairs”. Opening the door, you instinctively look around for the railing before approaching the steps. Holding onto the railing is second nature; it’s what you’ve always done for guidance and balance.
With higher education budgets being slashed left and right, the need for something to hang onto is greater than ever before. Ratio analysis for strategic planning might just be the railing higher ed budget planners need.
Ratio analysis is a concept straight out of the business world. It is based on the principle that competing businesses compare with one another on many dimensions. In order to survive in a competitive marketplace, businesses have developed standard measurements such as: the assets necessary to produce a level of sales, the amount of debt to carry, and profit levels acceptable to the investment community.
When businesses are in trouble and need to reallocate resources they look at these factors and see how they measure up compared to others in the same industry.
Profitability: Has the business made a reasonable profit compared to its expenses?
Return Ratios: Compared to its assets and capital employed, has the business made a reasonable profit?
Liquidity: Does the business have enough money to pay its current bills?
Asset Usage or Activity: How has the business invested its fixed and current assets?
Gearing: Does the company have a lot of debt or is it financed mainly by current revenue?
These same concepts can be applied to higher education. Common areas for analysis include:
Instruction: The cost per student. This can be further broken down as the cost per full-time equivalent (FTE) student, cost per credit hour, or the percentage of spending.
Academic support: The cost of information technology, staff support. What’s necessary and what can we do without?
Student affairs: How much are we spending per student? What’s the bare minimum we can get by with? (This is where cuts are often made first.)
Institution support: What is our ratio of administrative staff to faculty; to students?
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Physical plant: Are we using energy efficiently?
In 1980, Dr. John Minter, president of Minter Associates, entered into a relationship with Hans Jenny, CFO of College of Wooster and with Peat, Marwick, Mitchell & Co. Together, in 1982, they published Ratio Analysis in Higher Education—A Guide to Assessing the Institution’s Financial Condition.
The Higher Education Digest asked Dr. Minter to explain how applying ratio analysis can be used to determine the “best practices” for university comparisons.
Minter: Ratios and their trends offer a capsulized view of key conditions affecting institutional activities. The trend in these ratios reveals how the institution’s position has changed over time. For instance: an institution can examine their instruction expense and see whether they’re spending enough or too much. They can do the same with administration, institutional support, and all departments across the board. When compared to the expense ratios for institutions that are similar to yours, competing with you, you can see where strategic changes might be made.
HED: How can ratio analysis help with budget cutting?
Minter: Ratios offer no magic answer - they give clues as to where to start looking. It’s like peeling an onion. The macro ratios are the first layer. The next layer is typically the major cost, salaries and fringe benefits.
Comparisons have proved useful in identifying significant differences from the norms of comparison groups. The intent is not to suggest that all institutions should strive to be the same, but rather to demonstrate that institutional differences do exist and to permit trustees and administrators to explore the reasons for them. Often the recognition of such differences pinpoints the need for change.
HED: How does an institution decide whom to compare to?
Minter: Find a peer institution or a university your campus aspires to be like. Then ask how much more resources have to generate to be like college X. In the first edition of Ratio Analysis in Higher Education, all institutions were measured according to operating size and cost per FTE student.
HED: Can ratio analysis help determine quality?
Minter: To begin with, the institution needs to determine a standard for quality. There is not an automatic link between reducing costs and lowering quality. To understand quality you need to ask key questions:
• Does the service meet the needs/expectations of the students?
• How are we going to get the job done?
• Where are we going to invest our resources?
• Do we need to end programs that aren’t in demand?
HED: Can you give an example of a success story using ratio analysis?
Minter: Northwest Missouri State University has integrated activity-based costing techniques into its own quality management process. Ratios are their “dashboard” which they use to see where they’re going, how they’re doing and whether they’re being effective. Northwest has followed a seven-step process to improve the responsiveness and cut the costs of their environmental support (maintenance, custodial and landscaping) services, allowing the savings to be reinvested in other areas such as instruction, scholarships and research.
The Cost Containment and Continuous Quality Improvement in Higher Education Conference held last September at the University of Missouri-Columbia reported additional success stories using ratio analysis. The University of Missouri-Rolla analyzed the type and rate of accidents and developed a better safety program, thereby reducing workers compensation costs from $159,876 in 1996 to $52,351 in 1997 and to just $11,839 in 1998. Using macro-cost analysis Southwest Missouri State University implemented an energy conservation program that saved the university $3.7 million.
HED: What’s a university’s perspective on using ratios?
Minter: Olivet Nazarene University Chief Financial Officer, Doug Perry, summed it up by saying, “Tracking ratios avoids serious trouble. Ratio trend analysis has helped us track strengths and weaknesses over the years and to address issues before they become more difficult to resolve. Comparison ratios with our peers are also helpful.”
As Minter said, there is no magic answer to macro ratios. But during these uncertain times as you climb the budgetary stairs…not knowing where you’ll land, you need a railing to hang onto for balance. Ratio analysis might just be the guidance you need and justification for your decision making process.
W. John Minter, Ph.D. founded John Minter and Associations (JMA), a research and publishing firm specializing in comparative performance and planning studies and databases for colleges and universities nationwide and abroad, in 1974. He has consulted comparative financial and finance related studies for associations and institutions including:
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National Assoc. of College and University Business Officers
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National Assoc. of Independent Colleges, Universities
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The College Board, numerous
colleges and universities
