Context #
The College acknowledges that, in the context of its capital development decisions, a decision to make use of loan funds at fixed or variable interest gives rise to the possibility that The Association may be exposed to increased financial risk. The higher the level of debt funding, the more susceptible the College is to potential financial difficulty if student numbers decrease or interest rates increase. The executive will consider and quantify this risk during the course of decisions which involve the use of interest bearing loan funds.
Operational Approach #
Financial Risk #
It is acknowledged that many traditional indices which describe financial risk are not appropriate in the context of schools. It is considered that the ratios listed below are the most relevant for The Association’s business decisions involving capital projects to be financed by debt:
- Current Liabilities to Total Liabilities
- Interest Cover
- Liabilities to Members Funds
- Total Liabilities per Student
- External Debt per Student
The finance executive will calculate these ratios in order to determine the effect of any material debt financing decision on the liquidity, solvency and financial viability of the College. Ratios that are considered to fall within the normal range for the education sector are published annually by The Association of School Business Administrators, and are used as the minimum benchmark for risk management decisions.
Liquidity #
The Executive is cognisant that the liquidity ratios as revealed by the College financial statements reveal the adequacy or otherwise of the routine cash flow, and will ensure that a sufficient reserve of uncommitted cash is maintained in line with prudent financial management practice. In measuring liquidity, the following ratios are observed and compared with sector normal standards as published by ASBA:
- Working Capital Ratio (Current Assets : Current Liabilities)
- Quick Ratio (Current Cash Assets : Current Liabilities)
Liquidity ratios are calculated monthly.
For the current publication of ratios and information relevant to the education sector, see File 116