Eternal Enterprise

Photograph by Darren Braun

 

Institutional finance can be a difficult topic for boards, senior leaders, up-and-coming leaders, and faculty. To some, financial statements can be inscrutable, if not intimidating. That’s true for even those with a measure of financial literacy. Yet it’s vital that leaders have a solid grasp of the financial picture.

Chris Meinzer, the COO and senior director of administration for the Association of Theological Schools, is a recognized leader in school finances. He is a strong advocate of training leaders and providing them resources to help them succeed. We asked him what board members and leaders should know about finances.

 

In a big-picture overview, what are the financial challenges and opportunities facing seminaries and theological schools?

In general, ATS schools have relatively small enrollments when compared to higher education. A number of our schools do have more than 1,000 students, but the median size is about 145 students. In addition, overall enrollment has been going down for most of the years since 2005. At the same time, spending across ATS schools has been increasing at about 3-4 percent annually for most of the last two decades. The only period that it did not increase was the three years after the Great Recession. With enrollment sliding down and spending sliding up, the cost to educate a student across ATS schools continues to increase. The challenge is that the costs per student are climbing to unsustainable levels in many schools. For some, this has created both an opportunity and a requirement to rethink their economic, educational, operational, and governance structures to reimagine strategies that serve their current and future realities.

 

Not everyone will be an expert in finances, but what are some questions you would want board members to know to ask?

Here are some questions I would recommend, and I could come up with so many more! My hope is that these questions would lead to deeper conversations and understanding. I would want the board member to ask second- and third-level “why” questions: Listen for the answer to these questions and then ask “why” a time or two to get a little deeper in comprehending how things actually operate in their school.

Do we generate operating surpluses on an annual basis?

What are our major revenue streams? How are they generated? What internal and external factors impact them?

How dependent are we on tuition? What is our strategy for providing scholarships?

How dependent are we on giving? What are the major sources of our donors? Are our donors concentrated in a few persons?

How dependent are we on our endowment? What percent do we draw annually? Is it sustainable? Why or why not?

What have been our patterns of spending over the last 5-10 years? What is our spending per student?

What percent of our budget is spent on personnel? What percent of our spending budget is fixed? How much spending flexibility do we have?

What are the trends on student educational debt incurred in seminary? What is most impacting the trend?

What proportions of our net assets are without donor restriction, with donor restriction by time or purpose, and with donor restriction in perpetuity? How do we ensure that we honor donor intentions in our spending policies?

What assets do we have that act as a reserve or “rainy day” fund? In other words, how much financial flexibility do we have in the event we would have a financially difficult year or years? How much flexibility do we have to invest in new ideas?

 

What would you say are key mistakes boards make or trouble spots they can get into with an institution’s finances?

Board members come with many talents and experiences, but the challenge can come in translating those gifts to theological education and to the work of a theological school. Business principles and ideas can certainly be beneficial to administering a theological institution, but these principles may not be eagerly accepted by everyone within the school. The work of translation requires a board member and leader to understand and appreciate the many facets of the institution, find ways to listen to and offer suggestions and discern key areas where these talents, experiences, and ideas can best help move the mission forward.

Board members and new leaders should also receive a thorough orientation to the work of the schools, and this should include a comprehensive financial primer. Board members and leaders need to understand some of the unique characteristics of nonprofit accounting. For example, in nonprofit accounting, assets can come without donor restriction (unrestricted), with donor restriction by time or purpose (temporarily restricted), and with donor restriction in perpetuity (permanently restricted). Many schools have assets and revenues that have been restricted by donors, and those assets and revenues are to be used only for their intended purposes. It is imperative that board members and leaders understand the purpose of these restrictions and fulfill their fiduciary obligation to ensure that schools are faithful to donor intentions. Leadership might benefit from a primer from both the CFO and the independent auditor to receive both an internal and external perspective.

 

What is the one red flag leaders should look for?

As simple as it sounds, the most important financial red flag to contend with is annual operating results. In a research study completed by Anthony Ruger and me in July 2014 entitled, Through Toil & Tribulation, we concluded that the most important item leading to a theological school’s financial success is consistent operating surpluses. In the study, we note: “Our observation from the interviews is that the leadership of financially successful schools came to the firm conviction that deficits are unacceptable, toxic, and to be energetically avoided.” Leaders need to read and understand their monthly financials. Board members need to read and understand the financial audit presented to them. All need to give attention to the revenues and how they are derived, expenditures and how they are incurred, and whether the school is living within its means. If it is not, then adjustments need to be made for the long-term vitality of the school.

 

What financial issues do accreditors look for?

The ATS accrediting standards include an entire standard on institutional resources. In particular, I would share an excerpt from Standard 10.3, which says, “The school has sufficient and stable financial resources to achieve its mission with educational quality and financial stability.… Budgeted and actual revenues and expenditures are realistic, holistic, and sustainable, with actual operating results demonstrating a consistent pattern of surpluses over time.” Note that accreditors are concerned with finances and financial stability, but within the context of achieving the school’s mission. Schools should be able to demonstrate how they steward their economic and human resources to optimize the fulfillment of their mission. In addition, the economic structure of the school reflected in its annual revenues and expenditures needs to be utilized in a sustainable fashion while seeking surpluses over time (an indicator that the school is living within its means). There are other important sections within Standard 10, but I believe this to be the most important section – using the school’s resources in support of the mission in a sustainable way over time.

 

What’s one piece of advice you’d give a new leader about finances?

Don’t assume. Don’t assume that someone has asked your question. Don’t assume you know the answer. Don’t assume you understand how things actually work in your school. Don’t assume the first answer is right – ask second- and third-level “why” questions. Don’t assume that resources are being used in the most efficient and effective way in fulfillment of the mission. Don’t assume folks will like your question.


See Chris Meinzer’s resource on reading financial statements, other tips, and a link to his May 12 webinar here

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