A widely used metric across the Higher Education industry is the Composite Financial Index, also known as the CFI. The CFI is intended to assist institutions in understanding the affordability of their strategies and is used to monitor the financial results of their strategic initiatives. The institution is best served if the CFI is calculated over an established time period. This gives a more accurate picture of overall financial health.
There are four core ratios that make up the CFI: primary reserve ratio, net income ratio, return-on-net-assets ratio, and viability ratio.
The primary reserve ratio measures the financial strength of an institution in terms of whether or not its resources are sufficient to support the institution’s mission. It is calculated by dividing the institution’s expendable net assets by its total expenses.
The net income ratio helps institutions determine whether or not their operating results indicate that they are living within their available resources. It is calculated by dividing the institution’s change in net assets without restrictions by its revenues without restrictions.
The return-on-net-assets ratio helps institutions interpret their total economic return. It is calculated by dividing the institution’s change in net assets by its total net assets.
The viability ratio helps institutions determine if debt resources are appropriately managed. It is calculated by dividing total expendable net assets by long-term debt.
Once each component is computed, these numbers are then converted to strength factors across a common scale, which is then multiplied by specific weight factors. The resulting four numbers are then added together, which results in an overall CFI score. The CFI score will tell institutions more about the financial components of their well-being, which range from considering financial exigency to deploying resources to achieve a robust mission. The CFI should then be utilized by management in conjunction with other metrics to help understand the overall health of the institution.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.