Using the Composite Financial Index as a Self-Benchmarking Tool

Higher Education

By Patrick Kerns

The Composite Financial Index (CFI), which was developed for use by institutions of higher education, is a very effective tool for self-benchmarking. While the CFI does permit comparison of scores among institutions, the CFI is also a useful tool to benchmark an institution’s financial health over a period of time. In order to effectively benchmark your institution, the authors recommend that you use at least five years’ worth of data when charting the CFI. This uncovers emerging trends affecting your institution’s financial condition.

The CFI is composed of four ratios (the primary reserve and viability ratios, which are measures of the strength of an institution’s balance sheet; and the return on net assets and net income ratios, which are measures of the results of operations or the income statement). Understanding both inputs and outputs allows users to develop an internal trend analysis of the institution’s financial health.

A few items to focus on when evaluating your CFI as an internal benchmark –

  • Evaluate multi-year declines and understand what contributes to those declines and what you can do to reverse any trends.
  • What is your ability to grow revenue? How do changing demographics or other factors impact your ability to grow revenue?
  • How diverse are your revenue streams?
  • What is the composition of your net assets? How much is expendable?
  • How does your institution use debt? Is it is used strategically to grow revenue?
  • What is your investment in physical plant? How much is funded through fundraising or sources other than operations or debt?
  • At what rate are expenses increasing? Is expense growth outpacing revenue growth?
  • As an institution, does your board of trustees (and other key stakeholders) encourage strategic risk-taking for growth?
  • What is the operating cash flow margin for the institution, as well for each of the academic offerings?

Evaluating these questions, and other factors unique to your institution, could promote more strategic or meaningful dialogues and operating plans that support the long-term viability and sustainability of the institution.

Need help with assessing and interpreting your institution’s CFI score? – Please contact us.

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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.

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