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THE PROBLEM AND A REVIEW OF RELATED LITERATURE Since the late 1975s, the pace of growth in educational facilities and educational enrolment has been declining. The scarcity of financial resources increased as a result of the economic problems of the 1980s and the cutbacks in government spending in the context of structural adjustment programs. At the same time, the demand for education continued to increase due to population growth and the youthful age structure of the population (Coombs, 1985; Hallak, 1990). Even without the increase in enrolment, the cost of education tends to rise autonomously. First, if policies are not adjusted, fixed salary structures will lead to increasing salary costs as the teaching staff gets older and as more qualified teachers replace unqualified teachers. Secondly, the costs per student are much higher in secondary and higher education than in primary education. As more students enroll in secondary and higher education, the average expenditure per student increases. In the coming years the gap between the demand for education and the available resources is expected to widen even further. In the meantime, the quality of education has come under increasing criticism (Naik, 1998). Classes are large, students are often absent from school, and dropout rates are high. Teachers are underpaid, their training is often insufficient, and their motivation is low. Teaching materials are of poor quality, if available at all. These are concerns that beset Paulinian mission schools. While these schools are committed to deliver quality Catholic education, there is also the corresponding high cost of education.
The Setting of the Study The Second Plenary Council of the Philippines noted (PCP II, paragraphs 632 to 634) that among Catholic schools in the Philippines, (1) there exists a trend toward competition among different Catholic schools sometimes bordering on an unhealthy contest to have the best graduates of faculty, (2) many affluent Filipinos consider sending their children to Catholic schools as a status symbol, producing well-to-do students the feeling that “they are a people apart” and a misguided notion that education is merely a tool to gain privileges and advance one’s social class, (3) the prevailing consumerism in society offers the highest rewards to consumerist attitudes such that few would take courses leading to teaching because such do not offer high salary in comparison to those who take courses in the technological fields. Consequently, the school responds by offering quality programs and services, which correspondingly require high cost of maintenance as faculty and facilities. To cope up with these increasing cost of education, there is the tendency to raise fees charge to students which eventually deprived the already deprived to have equal access to quality education. On the other hand, “Life can best be understood backwards,” can best be applied as one studies the capability of an educational enterprise to support its commitment to quality education. Going through educational activities, such as salaries, wages and benefits and student services, etc., within a set period of time can be both tedious and rewarding. Tedious because it would take time to analyze expenditures on the different educational activities and rewarding because its results would guide a school
administrator to decide which activities could be minimized or done without thus maximizing the use of limited financial resources. Indeed, financial management is a necessary skill a school administrator would acquire, for as Peterson (1995) says, “a principal must be well grounded in budgeting and other nuts and bolts processes at the heart of a functioning school.” True enough, managing finances well in an era of hyperinflation could be very stressful, especially when one is managing a mission school. Nevertheless, knowing how to optimize meager resources, and being able to deliver quality education would be both meaningful and satisfying. This paper does not promise to eliminate financial constraints of low tuition fee based Paulinian schools. It gives directions as to how sources of outside financial resources can be best optimized to be able to achieve its commitment to deliver quality education in the present millennium. When assets are optimized, sustainability is attainable. While the SPC System undoubtedly is catering to the elite, the System has never lost its original vision, i.e., that the underprivileged will have equal access to quality education. The System also operates in areas where the economically deprived, yet has the desire to deliver quality education. Quality education when delivered to the poor will eventually raise him up from his present condition to become a productive member of society. Nevertheless, in the current millennium, managing a quality school has become prohibitively costly and takes a creative mind to cope up with this pressure. This study, therefore, addresses the reality that managing a quality school requires high cost but a committed management whose vision is to uplift the poor with a given
meager resources of a mission school, the SPC System will continue to offer quality Christian education to the underprivileged of society. The System will not renege to its rationale for being. This study includes eight mission schools owned and supervised by the Congregation of the Daughters of St. Paul de Chartres in the Philippines. Review of Related Literature Education is a process of becoming that brings out all the potential that is in a person. It is globally recognized as a form of investment in human beings that provides economic benefits and contributes to a country's future wealth through increased productive capacity of its people. Education contributes to the survival and success of many people. Coffield and Williamson (1997) opine that the challenge to do so, among others is an economic or financial issue. The task of education is to play its part in building the kind of society, which achieves high quality of life for all its members. This is to say that educational institutions contribute to these noble goals in the context of public realm. Throughout Asia, the Church’s involvement in education is extensive and highly visible and has become a key element of presence among the peoples of the continent. One area in which the Church in Asia has for many years been in the forefront of human promotion is that of education. In some parts of Asia, Christians are primarily known as educators and are respected for their schools and institutes of higher learning. The Synod Fathers in Asia are convinced of the need to extend and develop the apostolate of education in the region (Ecclesia in Asia, John Paul II, 1999, p.121). There is a need to pay close attention to the disadvantaged, so that all may be helped to take their rightful place as full citizens in society.
In Asia, according to the Synod Fathers (1999) the system of Catholic education needs to become more clearly directed towards an environment of human promotion. This is to say that students should receive formal elements of schooling to pursuing academic excellence for which they are already well known must retain a clear Christian identity in order to be a Christian leaven in Asian societies. The education industry assists a learner to become fully the possessor of the traditions that vitalize his society. Society expects educational institutions to produce leaders and individuals who feel personally responsible for the culture a learner has inherited, adding to its content and changing direction called for by the times and society in which they live. In 1999, the Philippine Department of Budget Management reported total budget expenditure for the Commission on Basic Education a total amount of P1.7 billion or an equivalent of $42 million. The total expenditure for education measured as a percentage of GNP stands at 2.2%. This is lower compared to the expenditure for education as a percentage of GNP of other ASEAN countries like Malaysia, 5.2%, Thailand, 4.1%, Brunei, 3.1%, Singapore, 3%, Cambodia 2.9%, Vietnam 2.7%. The average of all Asian countries is 2.9%. Article XIV of the 1987 Philippine Constitution Section 1 provides constitutional basis of education and its support system: …"the State shall establish, maintain and support a complete, adequate, and integrated system of education relevant to the of the people and society." 1 Sec. 3 (2) provides: …shall strengthen ethical and spiritual values, develop moral character and personal discipline, and encourage critical and creative thinking.2
Education Act of 1982 of the Philippines provides for the establishment and maintenance of an integrated system of education. This Act governs both public and private schools in all levels of the entire education system until now. The constitutional provisions and Education Act 1982 refer to both public and private schools, as they both strive to attain the goals of national development. Their distinguishing feature is on manner these two types of schools are financed. Public schools are financed from public funds while tuition and other fees finance private schools where Catholic universities are classified. The main educational burden rests on private schools. Thus, private
educational institutions do not merely supplement the government efforts in dispensing education to the people; they have become a main dispenser of education to the people. Unlike in business which can easily pass off to the customers any increase in production cost by just increasing the prices of products, private educational institutions cannot increase tuition fees proportionately. Education is not only an investment in human capital but it is also a basic human right. Since private schools need to increase tuition fees to survive, concerns were expressed that economic pressures could threaten private institutions or limit their availability only to the wealthiest, (Boletin 2000 p. 669). If education is the duty of the state and it is one of the services expected from the state in view of the taxes paid by the people then, the Philippine government needs more budgets to finance education. However, the history of the Philippines has shown that, from the financial viewpoint at least, the government cannot satisfy the growing needs of education in the country. It is partly for this reason that every year for instance,
thousands of students study in private institutions. Private institutions, however, are
experiencing hard times these days. Philippine laws, as dictated by economic conditions, have increased the salaries and living allowances of workers. Add to this is the double figure inflation rate now prevails in the country, these make the cost of education quite prohibitive. Private schools assist the government in providing basic education who, otherwise, would be out of school because they either cannot be accommodated in or accepted by public schools. In view of the growing demand for basic education and increasing cost of education, private institutions need direct financial assistance from the government to enable them to expand their operations or to continuously improve their quality of instruction. Since this is not done, heads of private institutions are challenged to find alternative ways of providing quality education while maintaining their institutional financial viability and sustainability. One of the main issues of Philippine Education today is governance of both of public or private institutions. Viewed with impartiality, the issue actually hews itself into equity control, competence in management, and equality in logistics support. If both enjoy academic freedom, because both serve the same clientele, why should not the same privileges be granted to both? If both are considered bastion of intellectual strength, why should public schools be given funding resources taken from the taxes of the people, while the private educational institutions like the Catholic institutions have to search for material resources in order to survive? Distinctiveness of Catholic Education The word Catholic is derived from the Greek word, "katholikos," meaning general, total, or universal. Catholicism refers to a particular experience of Christianity
shared by Christians in churches living in communion with the Church of Rome, (Glazier and Hellwig, 1996). Generally, Catholicism is sometimes understood as including other churches such as Orthodox and those of the Anglican communion that share the Catholic tradition. The word "education" comes from the cognate Latin words educere and educare. It is sometimes referred to as an experimental science because it provides exact knowledge of facts. Dewey (1976) defines education as "the participation of the
individual in the social consciousness of the race. For Cremin (1977), he says education is a "deliberate, systematic, and sustained effort to transmit, evoke, or acquire knowledge, attitudes, values, skills, or sensibilities, as well as any outcomes of that effort." From this definition, education implies value. Education involves knowing and understanding in depth and in breadth. It refers to the whole person and affects all of that person's relationships - with self, with others with things and with ideas. In a word, education implies wholeness. Pope Pius XI summed up a working definition of education when he wrote in 1929 that education "consists essentially in preparing man for what he must do here below in order to attain the sublime end for which he was created" (Pope Pius XI, 1930, p. 4). The concept of lifelong learning is of utmost importance. In rapidly changing economies, the labor market will constantly require new and different skills and so mechanisms must be enhanced to allow students to acquire skills and develop competencies needed in their career. With the emerging reality of globalization, peoples' needs of lifelong learning expanded in all countries and regions that made it necessary for
leaders of educational institutions to emphasize values However, ready access and flexibility must be the propelling values that should be given attention so that many will be benefited. This brings along with it the reality of lack of funds to finance the cost of life long learning. The Church has always considered that education is an essential dimension of mission. Thus, Catholic educational institutions are called to the radical witness to the
values of the Kingdom proposed to everyone in view of the definitive encounter with the Lord of history. According to O’Keefe (1996) there are three distinctive features of Catholic education as follows: 1. The personification of a view about the meaning of human persons and of
human life. This feature speaks of the basis of Catholic education, which is to uphold human beings and promote human life in general. There is a close connection between the Catholic faith and Catholic education. Catholic education is Christ focused and this direction is an attempt to assist the students in integrating faith, culture and life. In contrast to public education in pluralistic liberal democratic societies, Catholic education is based on a particular philosophy of life. 2. An aspiration to holistic influence. This distinctiveness of Catholic
education refers to the claim of Catholic school that orients the whole culture to the message of Christ. Thus, Catholic education offers integral formation in which there is a synthesis of culture and faith. This interplay of the different aspects of human knowledge and understanding of Gospel values are enriched in the human person. 3. Religious and moral formation. This feature brings to the fore the
distinctive and moral formation of students. Beyond the transmission of beliefs, it
emphasizes the religious and moral character of the person. Remarkable to this is the aspiration of Catholic education in terms of respect for freedom of conscience. McBrien (1980, p. 1172) writes, ' there is no one characteristic, apart from the Petrine doctrine, which sets the Catholic Church apart from all other churches'. However, according to O’Keefe (1996, p.109) there are pervading commitments that are specifically relevant for Catholic education. These commitments refer to Catholicism commitment to people's personhood, to who they become and their ethic of life, commitment to justice, and a commitment to universal concern. Vatican II's declaration on Christian Education, (Flannery, 1988), affirms this: "Since every man of whatever race, condition and age is endowed with dignity of a person, he has an inalienable right to an education corresponding to his proper destiny… (Art 1)." In his encyclical, The Development of Peoples, Pope Paul VI (1966) provided the Christians with his reflection on the economic and social development of the third world countries and on the right of all people to personal fulfillment. He described the total development of the person as humanism. He emphasized that the goal of human development is the orientation of the whole life of a person to God through Christ, the source of life. According to Flynn (1985), the development of the whole person, physical, intellectual, social, emotional, aesthetic, vocational, moral, and religious is greatly influenced by the effectiveness of Catholic education. Education shapes the values of
the human person in the educational institutions. Catholic universities have an essential role to play in educating the both faculty and students. O’Keefe’s (1996, p. 100) state that these universities should also be places where the research into the contemporary
challenges and opportunities for a broader commitment to the common good as well as the deeper cultural and philosophical resources for creative response is undertaken. Terrell H. Bell the former U.S. Commissioner of education, (Kisrsehenbaum, 1995) said: "If education system works, it provides with the skills and desire to learn and to keep on learning through life. It prepares students for a rewarding career in a field of their choice. Likewise, it gives them the ability to make wise decisions about their personal life and to participate responsibly in the democratic processes of our society." Borromeo (1995) state that the primary responsibility of the educational manager is the creation of an effective school, a school where meaningful learning takes place. He further states that leaders steer the organization to achieve its mission of facilitating meaningful learning and growth. Thus, leaders should have four essential competencies: management of meaning, management of attention, management of trust and management of self. Leadership and Challenges Leadership is described as a conscious acceptance of one's capacity to lead and at the same time an honest recognition of both power within oneself and the power inherent in the position. Leading, then, becomes not a matter of doing something, but being something. However, it does not mean that leaders were born leaders and therefore already equipped with the needed leadership skills. In fact, there are a lot of leadership skills that need to be practiced every day. Leadership is a day-after-day process that challenges individuals to a deeper awareness and integration, of the fundamental capacities that leaders must learn to access, cultivate, and balance in personal, spiritual,
and professional lives. Leadership is not mere position of power, but rather an access to the power that maximizes one's unique capacities and potentials. There are some common principles about leadership. Leaders actualize these practices instinctively. It is, however, a common effort among leaders, that knowing these practices is one thing, but committing them to practice daily is indeed a challenge. Every individual possesses some unique quality that can serve as the touchstone to increase a potential to be a good leader. The congruence between knowledge and
practice of leadership principles enhances innate leadership capacities. According to Kyle (1998) the following three principles make a leader: 1. Good leaders make daily choices to develop the positive personality traits and talents they have. These leaders make use of both positive and negative personality traits to assess their strength and anticipate their weaknesses. These leaders work consciously on both what promotes or hinders leadership abilities. In other words, these leaders take themselves on a continuous
development project. 2. Successful leaders are sensitive and keen observers. They use their both analytical skills and intuition as the basis of understanding the present events, opportunities or crises, but also to gain insight into the patterns that have led to those situations. 3. Effective leaders learn how to work with the intangibles - with both group energy and tension, with creating a vision and actualizing the mission, and with ways to motivate people to dedicated commitments.
There are emerging challenges for leaders in the 21st century, which are more complex and more demanding than the past. As values affect leaders and the way they influence the organization and so, leaders have the power to shape their organizations in ways that supported their personal values, assumptions, and style. According to the research of Drucker Foundation (1996), the leaders of nonprofit organization like the heads of Catholic schools tend to be more experienced and competent in managing their multiple constituencies. However, they tend to be less comfortable and competent in managerial skills compared to their counterparts in the private sector. Leaders have different values, managerial styles and priorities. Some are primarily concerned in making a difference in society while others chose to be known as the best. Delagoza (1996) opines that educational leadership adopts the flow of the times. In dealing with the challenges of the 21st century, leaders are an imperative factor. He further states that leaders influence, direct, dictate and manage education towards a better quality of life for the Filipino people. What is then, the role of Catholic schools? If the present trend of non-
government support for the private sector continues, particularly among Catholic schools, leaders will have to reexamine their mission, their finances, and their relationships to other sectors. Financial Management. Financial management is one aspect of Finance. Brigham and Gapenski (1997) state that it deals with the management of a firm with the aim of maximizing the shareholders’ value. According to Bittel (1978), modern financial management deals
primarily with the best combination of financing and commitment of funds to various uses in the business. It serves to maximize profitability with prudence in terms of risk. To the extent that management of finances contributes to the goal of profitability, the total value of the firm is increased. History has it that financial management has undergone dramatic changes. In the early development of financial management, financial managers were once limited to bookkeeping, cash management, and the acquisition of funds, today, they have a major role in all aspects of raising and allocating financial capital. In a changing global economy, prices are constrained by resistance and competition. When there is an increase in prices beyond reasonable levels, it will simply lose its market share. The role of financial managers in the operations of the firm has become increasingly critical in the last decade. In a time of unpredictable economic downturns, interest rates, inflation, painful shortages and excesses, and extreme optimism and pessimism, the financial manager must be able to maintain the financial viability of the firm. As globalization affects the financial markets, the financial manager must also manage the international financial affairs of the firm. The board of directors and the president depends on responsible financial manager to provide resource capital and to manage it efficiently. The field of finance is closely related to accounting and economics. Accounting is often called the language of finance. Accounting is sometimes said to be the language of finance because it provides financial data through income statements, balance sheets, and the statement of cash flows. Hopwood (1973) state that leadership moderates the relationship between accounting data and decision-making.
“Finance directors and other finance officers focus on the more commercial aspects of the business and support the Board with effective finance management, but traditionally they found it to difficult to devote time because they manage the day-to-day accounting, “(ACCA, 1999, p. 19). The financial manager must know how to interpret and use income statement, balance sheets, and the statements of cash flow in the allocation of the firm’s financial resources in order to generate the best return possible in the long run. Finance is the link that integrates economic theory with the numbers of accounting. All corporate managers, whether in the area of production, sales, research, marketing, management, or long run strategic planning, must know what it means to assess the financial performance of the firm. On the other hand Economics provides a structure for decision-making in such areas as risk analysis, pricing theory through supply and demand relationships, comparative return analysis, and many other important areas. Economics also provides the picture of the global economic environment as a sound support in decision-making. It is necessary that a financial manager understand the institutional structure of the reserve system, the banking commercial system, and the interrelationships between the various sectors of the economy. Economic variables, such as gross national product, industrial production, disposable income, unemployment, inflation, interest rates and taxes, must fit into the financial manager’s decision model and be applied correctly. Brigham and Gapenski (1997) state that a successful firm normally has rapid growth in sales, good investments in plant and equipment and inventory. He further states that the financial manager must help determine the optimal sales growth rate, and must help decide what specific assets to acquire. Should the firm finance with debt, equity or
some combination of the two? And if debt is used, how much should be long term and how much should be short-term? When sales are applied to any educational institution, it will be similar to tuition fees. If there is an increase in enrollment there will be a corresponding increase in tuition fees. The investment will be for classrooms and facilities for instruction. In order to understand this, a working knowledge of accounting is inevitable. Development of Financial Management In 1920, finance and economics emphasized consolidations, mergers, and public regulation of the different business giants. There was a passage of emphasis from
mergers and regulations to methods and procedures of acquiring funds. There was a shift in focus in the 1930s. Bankruptcy, liquidity management, and avoidance of financial
problems were emphasized. Because of this, government regulations and control were enforced. Thus, both business and securities markets were required to disclose large
volumes of corporate financial data. These data enabled the analysts to assess corporate performance that created new interests in financial analysis. At the turn of the 1940s and 1950s, methods and instruments for fund-raising, corporate bankruptcy, reorganization, mergers and consolidations became very popular. This however, led to increased emphasis in liquidity management, financial planning, and cash budgeting. In the late 1950s, the field of financial management underwent drastic changes. The point of view shifted from external environment to the internal environment of finance. This means that instead of an outsider assessing the performance of the
organization, the insider has been charged with the management and control of the firm’s
financial operations. Capital budgeting and firm valuation were introduced and this spurred interest in security analysis, portfolio theory, and capital structure theory. In effect, the field of finance evolved from a descriptive discipline dealing primarily with mergers, regulations, and raising capital to more encompassing quantitative activities that include all aspects of acquiring funds and effectively utilizing the same. In order to
maximize the value of the firm, the focal point shifted to managerial decisions in handling assets and liabilities. Valuation has been passed on to the 20th century and the analysis has been expanded to include: (a) inflation and its effects on managerial decisions, (b)
deregulation of financial institutions and the resulting trend toward large, broadly diversified financial services companies, (c) the dramatic increase in both the use of computers for analysis and electronic transfer of information; and (d) the increased importance of global markets and business operations. At the turn of the third millennium, the development of financial management continues at a globally faster pace. Financing innovations, economic activities, and new technological developments reshapes financial thought. Emery, Finnerty and Stowe
(1997) say that powerful, low-cost computing has become a part of life. Thus, computers and communications technology will affect the way financial decisions are made. Financial Managers will face emerging challenges in technological innovations like electronic commerce, networks of personal computers linked to one another, to the firm’s mainframe computers, to the internet and worldwide web, and to their customers’ and suppliers’ computers. Technology will necessitate sharing of information and “face-toface” meetings with distant colleagues through video teleconferencing. Online data that
are updated and real-time time information will be readily accessible. This means that “gut-feel” will be phased out and quantitative analyses will become paramount. As a result of this, the third millennium’s financial managers will survive only if they have stronger computer and quantitative skills. In the case of one of the major concerns of a financial manager, which involves the evaluation of risk-return tradeoffs, most financial decisions will involve some sort of risk-return tradeoff. The more risk the firm is willing to assume, the higher the expected return from the given course of action (Scott, Martin, Petty and Keown, 1988). Financial management encompasses a wider range of functions in business organizations. According to Ben-Horim (1987), it provides answers to relevant questions like how, where, and when money for investment is to be raised (the financing decision), what investments, short-term and long-term, are worth considering (the investment decision); what should be done with the firm’s profits (the dividend decision). A good financial manager should be able to answer these questions after evaluating substantial and most current information. A classic example in the history of the Philippines is East-Asean Growth Area (EAGA) authored by the former president of the Republic of the Philippines, Mr. Fidel V. Ramos that won the support of the private sector even before the completion of a favorable feasibility study conducted by the Asian Development Bank (Espinoza, 1996 p.72). EAGA is a growth polygon that includes Mindanao and Palawan in the Philippines; Sarawak and Sabah in Malaysia; Kalimantan and Sulawesi in Indonesia; and Brunei. (Paterno, 1996. p.74), says that growth area must be able to overcome three major obstacles: (a) it must improve communications, (b) it should introduce direct air
and sea links to enable easier traveling and trading, (c) the central government must enable the EAGA local governments and the business sector greater freedom. The case of EAGA is a classic example of a kind of leadership that provides not only values among the followers but also opportunities for financial sustainability. Goals of Financial Management The goal of financial management is to maximize value of the firm consistent with the concern for social responsibility like maximum access for the poor to quality education offered by Catholic universities. Unfortunately in a setting like the Philippines, Catholic universities have to depend on tuition fees as their main source of revenue. “The whole idea of being in business is to make profit. It may sound obvious, but believe me, many business people out there do not realize that they are not making money” (Alison, 1998). One may suggest that the most important goal of financial management is to earn the highest profit for the firm. If this criterion were followed, each decision would be evaluated on the basis of its overall contribution to the firm’s earnings. However, even if this approach appears desirable, there are some serious drawbacks that point to profit maximization as the primary goal of the firm. First, a change in profit may suggest a change in risk. A conservative firm that earned Php1.25 per share may be a less desirable investment if its earnings per share increases to Php1.50, but the risk inherent in the operation increases even more. A second possible drawback to the goal of maximizing profit is that it fails to take into account the timing of the benefits. If one could choose from two alternatives, he might be indifferent if the emphasis were solely on maximizing earning if for example,
after two periods, the two alternatives both would provide the same total earnings. However, one alternative is clearly superior to the other if this alternative has bigger benefits that occur earlier than the other does. One could reinvest the difference in earnings for this alternative one period sooner. Finally, the goal of maximizing profits suffers from the almost impossible task of accurately measuring the key variable in this case, namely, profit. A Valuation Approach. While there is no question that profits are important, the key issue is how to use them in setting a goal for the firm. The ultimate measure is not what is earned but how the investor values the earnings. In making an analysis of the firm, the investor will also consider the risk inherent in the firm’s operation, the time pattern over which the firm’s earnings increase or decrease the quality and reliability of reported earnings, and many other factors. Risk in general refers to deviation from what is expected. Moyer, Kretlow, and McGuigan (Moyer, 1997) state that, in finance, risk is often measured in terms of variability of returns. This means that a thorough
understanding of tradeoff between risk and required or expected return is necessary in making effective decisions. The concept of expected return refers to the anticipated benefits from an investment. However, the opposite concept of required return refers to the demands for return of an investor for assuming risk. In all these considerations, there is a need for the financial manager to be more adept in correct decision making. The financial manager needs a broader view of the over-all valuation of the firm. One good indicator of effective decision is when it either maintains or increases the overall value of the firm. Hence, from a financial viewpoint; an acceptable decision is when it increases the firm’s overall value; otherwise, a decision should be rejected.
Maximizing Owners’ Wealth By attaining the highest possible value of the firm, the broad goal of the firm can have a focus. This is not a simple task, since the financial manager cannot directly control the firm’s stock price, but can only act in a way that is consistent with the desires of owners in general. This is a difficult task of the financial manager. Schwab (1998) says that growth is what successful investing is all about. He further states that of all the many investments available, stocks provide the best chance for growth. Since prices of stocks are affected by expectations of the future as well as by the economic environment, there are various factors that affect the prices of stocks beyond management’s direct control. In fact, among the firms with favorable financial trends and good earnings do not always perform well in a declining stock market over the short term. One good question to ask at this point is: does smart corporate management actually follow the goal of maximizing owners’ wealth as defined? In many large corporations, stock ownership is diffused and fragmented. Management with a relatively small ownership position often controls the policy. Under these circumstances, the management is more interested in preserving private influence and maintaining its own tenure rather than maximizing the owners’ wealth. In terms of societal expectation, does the goal of maximizing the wealth of the firm consistent with a concern for social responsibility? In most instances, the answer is yes. By adopting policies that maximize values in the market, the firm is able to attract capital, provide employment, and offer benefits to its community. This is the basic
strength of the private enterprise system. For private schools where Catholic schools are classified, they fall primarily in this category. Although most private schools have to operate beyond break-even points to be more competitive, their ultimate objective is to be able to deliver quality education and relevant and responsible graduates. Yes, there is something crucial about the educational process, about communicating concepts and ideas and helping people to learn, says Catherine McGee (in Rowland, 1997) Unfortunately, in a setting like the Philippines, private schools have to depend on tuition fees as their main source of revenue. Although government has allowed deregulation in tuition fee increases, some private schools also face the danger of being eased out of the market losing a lot of their students who seek admission to less expensive schools like public educational institutions that are directly supported by the government. Public schools according to Philippine Laws are entitled to free primary and secondary education. Thus, more students enroll in these schools for economic reason. However, it has been observed that most of the teachers teaching in the public schools send their children to private schools such as Catholic schools offering primary and secondary education because of quality education. John Ueleke says, “ I do not think the law was drafted to apply to our type of situation. But, like it or not, we are stuck with the way the law is written” (in Rowland, 1997). Since the Philippine law does not grant direct subsidy to Catholic schools to finance its operation, these schools resort to tuition fee increases and other sources of income related to educational services. This is done keep up with the increasing cost of education and the need for offering global programs.
This study looks into the financial management systems practiced by Paulinian mission schools. That, despite their limited resources, these schools is able to offer quality education. Dominance of Educational Finance World Bank President, James D. Wolfenson says, "education is the single most important key to development and to poverty" (Manila Bulletin, May 29, 2000). According to Knezevich (1984) in the field of education and in the ministry of teaching, the heads of institutions are charged with special responsibilities for identifying, procuring, and managing the variety of resources essential to the delivery of quality educational services and programs. According to Drake and Roe (1994), financial management in educational institution is termed as school business administration. Its operation contributes to the success of the school. This includes curriculum and instruction. The goal of academic curriculum and instruction will be realized when the financial resources are available. However, Andres (1992) states that it is not excess or lack of funds, which led to the failure of some business, rather it was the lack of expertise in managing the funds of the enterprise. Knezevich (1984) states that there is a need to demonstrate leadership and management expertise in procuring and protecting the educational resources, as well as providing and propelling curriculum and instructional objectives. The role of finance in the success or failure of schools has become all the more important considering the dramatic increase in the cost of its operation. Coupled with ballooning cost is the plummeting peso and result of high inflation rates (Saldaña, 1992). As if these forces were not enough, school heads have to contend with the government
restriction on tuition fee increases. Saldaña (1992) points out that the firm is organized to perform a specific goal or mission, whether for economic gain or to do service. In school finance, the resources are managed so as to realize the objectives of academic curriculum and instruction towards the direction of the school mission and vision. Kimbrough and Nunnery (1988) state that the curriculum and instructional programs desired must be translated into the financing resources needed through budgeting. Money must be made available in order to implement these programs. After this has been acquired, it must be allocated to the desired program with the aim of providing quality education. Problems normally encountered in school financial
management are: (1) how to raise money needed to finance education, (2) how to allocate this money to optimize equal opportunity for students regardless of place or residence, (3) how to expand resources to optimize the attainment of organizational goals, and (4) the impact of educational expenditures on socio-economic conditions. Functions of Financial Management in Schools. Having examined the goals
and objectives of financial management, this section looks at the functions that must be performed. Due to the complexity of the finance activity, an approach focusing on the organizational hierarchy for finance is adopted in the classification of the finance function into three types: (1) financial policy and strategy, (2) financial management and control, and (3) financial analysis and performance. Generalizations are complicated by the fact that these functions are interrelated in practice and certain decisions (e.g., project selection) involve all types of functions. Nevertheless, it is easier to recognize the nature of the finance function in practice when the presentation follows an organizational motive. According to Bittel (1978), the
establishment of goals, the direction of cost control, and the measurement of or results is functions of finance. According to the study conducted by Gray, SPC (1972), the stable financial management system in the vision mission of the SPC education apostolate is a system that can directly affect the achievement of the core objective. She further states that this can be translated the general objectives of the finance department of any non-profit educational institution like (a) providing adequate funds at all times for its operational activities and capital investments, and (b) maximizing the utilization and safeguarding of funds. The study conducted by Marcelino, SPC (1998) looked into the alignment of existing financial management practices of Paulinian Schools and Colleges in Metro Manila to the vision-mission of the of the SPC Education Apostolate. The study revealed that the top management and the financial services group strongly agree that the visionmission is carried out in the financial practices of these schools. The three important services cited were (a) treasurership, (b) general accounting, and (c) salary and benefit administration. However, the study further revealed a number of perceived weaknesses such as: 1 2 3 4 5 the organizational set up not being attended to by the top management, there is no accounting manual guide, lack of budgeting system, absence of internal audit system, and; lack of inventory system and management.
The study concluded that the alignment of vision-mission is a timely strategy to meet the global environment. The weaknesses in the financial practices are determinant factors in strengthening, developing and improving the financial management system visà-vis the vision-mission. The non-existence of the ignored internal audit system and fixed asset management in Paulinian schools are priority concerns of top management. Recommendations proposed by the study state that there should be a financial management guide designed for Paulinian schools, application of information technology in the accounting systems, creation of audit team, and re-tooling for top management for a broader understanding of financial management. Likewise, the study proposed a teambased financial management where the top management should be actively involved. Some specific finance policies, decisions and planning roles follow which according to Garcia (1999) are useful guides in identifying and evaluating the financial management systems of Catholic universities in the Philippines: 1. Financial Policy and Strategy 1.1 Investment Policy • Choice of programs and capital projects
1.2 Capital Structure Policy • Working Capital Policy: balancing short-term versus long-term assets and liabilities • Leverage Policy: balancing long-term financing, i.e., debt versus equity
1.3 Growth Strategy • Whether growth should be pursued using internally generated funds or through consolidation
1.4 Retained Earning Policy 2. Financial Management and Control 2.1 Project Management • Assure that long-term projects are implemented according to planned investment outlays and to yield forecast cash returns. 2.2 Working Capital Management • Cash Management Provide for adequate cash balance for day-to-day operating needs Maximize returns on idle cash through investment in marketable securities. • Institute proper control for cash.
Accounts Receivable Management Optimize the accounts receivable investment through an evaluation of the trade-off between lost revenue opportunities and bad debts Institute sound credit evaluation and collection procedures
Management of Fund Sources Identify possible sources of short-term and long-term funds Negotiate and monitor credit facilities with financial institutions
Financial Analysis and Financial Performance 3.1 Financial Analysis • Financial Leverage Analysis: the effect of debt on earnings to owners
Analysis of fees and education costs
3.2. Financial Performance • • Financial ratios as overall indicators of performance Industry-wide (for all private schools) financial indicators in addition to an organizational and activity orientation. A schematic presentation of the listing of finance functions, decisions and organizational levels is shown in Figure 1.1. This figure presents the finance functions according to organizational level and the type of decisions. The three types of functions in the three organizational levels are top, middle and line functions. Organization Level and Role Investment Decisions
Top Management (Policy and Strategy)
1. Investment Policy 1. Capital Structure Policy 2. Growth Strategy 2. Retained Earning Policy
Operating Management 1. Project Management 1.Management of Fund Control Sources 2.Working Capital 2. Administration of Retained Earning Policy Financial Planning Staff (Technical Support) 1 . Financial analysis 2. Financial performance evaluation
Figure 1.1 Major Finance Functions Classified by Organization and Decision Type
From Figure 1.1 above, top management is referred to as policy or strategic level, middle as the operation and control level and line as the technical support level. O'Shea (Financial Executive, 2000, p. 35) says that the widespread economic and technological changes in recent years have delivered series of challenges to traditional corporate structure. The elements of globalization, partnership alliances, information technology, Internet and e-commerce created a need to make serious decisions. In the field of
financial management, there are two basic decisions to be made in terms of finance functions, one is on investment and the other is on financing. Top management is responsible for policy and strategic decisions. Decisions to be made by top management on in investment can either be in related to growth strategy or investment policy. For financing decisions at the top level, both capital structure and retained earning policies are included. The next functions are in the operation and control levels. Decisions to be made include project management and working capital management. The line function provide references for decisions, these are the result of financial analysis and performance as shown by the financial ratios. Financial analysis and performance activities remain a passive but integrated activity supporting both classes of decisions and levels of organization. Financial policy and strategy formulation is normally a top-level management function. It covers investment and financing decisions with long-term implications on the overall risk, profitability, and growth of the company. The financial management and control function is essentially a middle management level activity. Once strategies and policies have been set, the middle managers’ role is to ensure that operational and day-today decisions are consistent with the chosen overall directions. Financial analysis and
performance is primarily a staff function providing the necessary informational and analytical support to both financial policy and control decisions. According to Warner (1998) when there are conflicts of values and objectives, leaders situation may lead decision makers down various pathways. He further states that leaders may follow his own values, or accommodate the many values of his costakeholders without necessarily ranking them but utilizing these values in reference to tradeoffs between alternative solutions. On Financial Policy and Strategy Financial policy and strategy is a top management function. David (1998) states that financial condition is often considered the single and best measure of a firm’s competitive position and overall attractiveness to investors. In order to maximize the value of the firm, top management makes policies and formulates strategies. This goes to say that in practice, financial factor can alter existing implementation of policies and strategies. A good working capital management is important in this task. On Investment Policy. International Accounting Standards Committee (IASC,
2000) No. 25 defines investment as an asset held by an enterprise for accretion of wealth through capital distribution, such as interest, royalties, dividends and rentals, for capital appreciation or for other benefits. Top management employs policy and strategy. Investment is the engagement of funds in fecund assets for the purpose of maximizing value over a period of time. In terms of decision-making, investment decision is the proper allocation and reallocation of capital and resources to assets, projects and the different divisions of any institution. Ross, Westerfield, and Jordan (1997) say that investment involves the presumption that there is inherent risk in favor of a higher rate of
return. Good management takes into account different types of risks involved in various investment mediums. These risks affect the safety of principal and expected yield. It is important that the earning power and soundness of the issuer should be carefully examined when considering investment. Saldaña (1992) opines that in the Philippines, there is greater safety of principal in the case of bonds than stocks. In the same manner, mortgage bonds have priority over unsecured debenture obligations. In terms of assets, preferred stocks have preferences over common stocks. A strong working capital position can provide security for
principal at a given period, even when the earning power is seemingly deficient. A normal scenario is when a firm possesses a substantial presence of cash, it will be easier to pay the interest and dividends and meet the current maturing obligations. The
investors of securities enjoy a higher degree of certitude where there is substantial earning power and large working capital resources. In terms of investment, Brealey and Myers (1991) say that the concept of value additivity speaks of a well-functioning capital markets. There is a close relationship between the security of principal and safety of income. Marketable securities yield high corporate profits just as they suffer the drawback of business recession or reduced economic activity. In the case of bonds, safety of income is part of the stipulation in the contract. However, like the safety of principal, the issuer serves as the touchstone for the safety of income. In this study, it showed that among Catholic universities in the Philippines, the average short-term investment to total asset is only 5.6%. There are several sources of investment funds but the most common particularly among educational institutions are
undistributed revenues from tuition and miscellaneous fees. This amount is usually intended to pay the monthly salaries of faculty for the whole year and shall consist of idle working capital when not invested. In the Philippines, Republic Act Number 6728 (1989) provides that the standard expense for salaries is 70% of total tuition fees and 20% for operating expenses and 10% for return on investment. On Capital Structure Policy. Ross (1993) says that a firm's capital structure refers to the specific mixture of long-term debt equity the firm uses to finance its operations. He further states that the financial manager has two main concerns. First, it deals with debts, or how much is the needed amount to be borrowed. Second, it refers to the least expensive sources of funds. Irresponsible cash management may result to illiquidity or insolvency. Saldaña (1992) states that insolvency is a situation where the institution is unable to meet its maturing obligations on time. This is the case where the institution is technically
insolvent because it lacks the necessary resources to make prompt payment on its current debt or obligations. It should be noted that services would be stalled when there are no cash or too little cash available to pay the bills. If there is excessive cash, however, the value of the institution in the financial market will be suppressed due to large cost of income foregone. The explicit yield from idle cash is zero or nothing. The financial manager strikes an acceptable balance between holding too much cash and too little cash. This is the focal point of risk-return-tradeoff. A large cash investment minimizes the chances of insolvency, but penalizes the institution’s profitability. On the other hand, a small cash investment frees excess balances for
investment in both marketable securities and long-lived assets. This condition intensifies an institution’s profitability and the value of the institution equity. increases the chances of running out of cash. On Current and Long-term Liabilities. Liabilities are debts of the firm. These are economic obligations payable to individuals or organizations outside the business firm. Current liabilities are obligations that will be due within a short time, usually one year or less, and these are to be paid out of current assets. Statement of Financial Accounting Standards No. 1 (SFAS, 2000) states that classified current liabilities are expected to be settled in the normal course of the firm’s operating cycle when these are due within the twelve months of the balance sheet date. On the other hand, long-term liabilities are However, this
obligations that are not due for a comparatively long period of time, usually beyond one year. Equity. Horngren and Harrison (1990) define equity as a legal and economic claim to the assets of a business. In terms of claims, equity is subdivided into two. The outsider claims is called liabilities while the insider claims is called owner’s equity or capital. Related to the aspect of investment, firms invest in the stocks and bonds of other companies as well as bonds issued by various government agencies. Equity securities
are securities issued by business firms as a form of ownership that does not bear any maturity date. On the other hand, according to Porter and Norton (1995), debt securities are also available in the form of bonds issued by corporations and government bodies. They further state that the term of a bond can be relatively short, such as 5 years, or much longer, such as 20 or 30 years.
The unique Philippine business environment influences the
leverage policy of the Catholic schools. Chronic shortage of long-term capital due to underdeveloped capital market and inflation remains a problem. The joint International Monetary Fund and World Bank Mission, Saldaña (1992), recorded that in the Philippines, the number of public equity issues averaged only 30 a year while new corporations are registered at an average of 5,000 a year. This shows how limited is the long-term capital base of the Philippine market. On the other hand, inflation in the country has always been an unresolved problem. Inflation causes the upsurge of prices and requires the increase of funds in order to do the same volume of business. As a result, obligations are settled beyond the nominal terms and capital investments are deferred due to inadequate capital. Another effect of inflation is the increase in interest rate due to the increased demand for capital. Financing decision determines the capital structure and affects the overall value of the firm. Through the use of leverage, the cost of capital can be lowered and the market value per share of the firm can be increased. Modigliani and Miller (1958) argue that in the absence of taxes and other market imperfections, the total value of the firm and cost of capital are independent of capital structure. This is based on the theory that investment value is preserved so that no matter how the pie between equity claims and debt are divided the total pie or investment value of the firm stays the same. This means that leverage is said to be irrelevant. On Growth Strategy. According to Ross, et al. (1993), there are four determinants of growth as follows:
Profit margin. Sustainable growth is increased by an increase in profit margin
and the corresponding increase in the ability of the firm to generate funds internally.
An increase in debt to equity ratio increases the financial In this way, availability of additional debt financing will
leverage of the business.
increase the sustainable growth rate.
Total Asset turnover. This is computed by dividing sales over assets. When there
is a corresponding increase in asset turnover, the sales generated for each peso in assets increases as well. The effect of this is a decrease on the need of the firm to acquire new assets because as sales grow it also increases the sustainability growth.
When dividends are paid out, there is a decrease in the
percentage of income. However, this will increase the retention ratio. This will increase the internal generation of equity and thus increases the sustainability rate. In a school environment, plant assets or fixed assets, or other titles employed are property, plant, and equipment are applied to “long-lived” assets which are relatively fixed or permanent in nature. Typical examples of plant assets are buildings, equipment, land, furniture, tools, machinery and fixtures. With the passage of time, all plant assets except land lose their capacity to yield services. Van Horne (1999) states that in accounting, the cost of this asset is transferred to expense account in a systematic manner during the expected useful life. Depreciation is the expense account used to account for the periodic cost of wear and tear. There are several factors that contribute to the decline in the usefulness of plant assets. These factors include wear and tear due the use and deterioration form the action
of the elements, called physical depreciation; another factor include inadequacy and obsolescence called functional depreciation. Thus, plant asset becomes inadequate if its capacity is not sufficient to meet the demands of increased production and services. A good property manager is a role model of managing building and property’s important operations and space utilization (Gaite, 1998). He further states that it is easy to make a place look nice or beautiful as long as one has the money to do it; it is impossible to create something beautiful in a structurally defective environment. Modern buildings require better designs, methods of construction, usability and maintenance. The level of building management will depend on various factors such as mechanical, electrical, structural, and other services. However, the most important factor is the financial side because without the budget no amount of designs and methods will make or build an edifice. On Retained Earnings. According to Bittel (1973), retained earnings in the
business results from the declaration of dividends in an amount less than that of earnings. Such earnings are kept in the business and are invested to benefit the operation of the firm. In accounting retained earnings are classified as part common stockholders’ equity. However, in non-profit and non-stock corporations like Catholic schools, retained earnings become part of the fund balance, and are flowed back to the educational services. Financial Management and Control. The middle level finance function of
financial management refers to investment decisions on project management and working
capital management. In terms of financing decision, it refers to management of both fund sources and retained earnings.
Project Management In project management, Brigham and Gapenski (1997) say that the most important step in evaluating a potential project is to estimate its cash flows. Cash flows refer to the required investment outlays and the net cash inflows from the project. Thus, when a project appears to be highly profitable, one strategy that a middle manager should employ is to assess the cause of its high profitability. Ross, et. al (1993) says that the effect of undertaking a project should be to change the present and future over all cash flows of the firm. The changes in the cash flows must be considered in relation to its effect to the value maximization of the firm. Thus, good project management looks at the relevant
cash flow for a project. This relevant cash flow for a project means that there had been a change in the firm's overall future cash flow that was engendered as a direct consequence of the decision to pursue the project. It should be emphasized that the incremental cash flows should add to the value of the firm. According to Franco (1994), the advantages of project management are: (a) commitments are made only to achievable technical, cost and scheduled goals, and (b) every project is planned, scheduled and controlled so that commitment are achieved. On Working Capital Management. Managing the institution’s working capital is known as working capital management. Bittel (1978) defines working capital as the current liquid resources required to operate a business such as cash, current marketable securities, accounts receivable and inventory. Likewise, it determines appropriate
investment in cash, marketable securities, and inventory turnover and accounts receivable turnover. The risks involved with these investments are given priority attention by the decision-makers. In accounting, working capital is the excess of current assets over current liabilities. Liquidity is a primary concern in managing the institution working capital. There are two main issues in managing working capital. First is managing the institution’s investment in current assets, while the second is managing the institution’s use of current liabilities. Cash management policy of an educational institution is concerned with minimizing the institution’s risk of insolvency. According to New York Conference Board Report No. 580, (1973) cash management is an important finance function that has significant bearing on the business. It further states that the more efficient the use of cash is, the lesser is the probability of infusing investment therein. Management of Fund Sources. Fund sources refer to the receipts or income that the firm generates from its business operations. Good financial manager manages these funds efficiently so as to carry the out the goals of the business. Laya (1985) says that like other business functions, financial management is primarily charged with the economic function of allocating scarce resources among a multiplicity of possible users. He further states that it specifically aims to (a) ensure the most efficient use of capital presently employed by the firm; and (b) obtain additional capital from the best sources legally possible. Warner and Crosthwaite, (1995), state that the recent dramatic changes in the funding structures within education have forced educational institution to reassess itself. Educational institutions are now seen as a service industry, with approximately 75% of
operational costs attributed to staff, the control of cash flow and apportionment becomes critical. The study done by Baquitro (1974) aimed to explore the financial problems of Notre Dame of Marbel University through the analysis of its business and financial administration, financial policies and financial performance. The financial performance of the university was compared with the financial performance of three other schools in the region facing the same financial problems. The primary data such as the financial statements, enrollment profile and faculty profile of the four schools obtained and trend ratios were computed. The administrators, accountant and cashier were interviewed. A funds flow analysis was also undertaken to assess how the school manages the fund sources and uses. Ratios of students to full time faculty were also computed from statistics available. The findings of the study showed that Notre Dame of Marbel University has an adequate business and financial organization. There was proper control of expenses because of budget performance report. The student-faculty ratios were rather low. The study further revealed that the source of funds from tuition fees would never be sufficient to meet the spiraling costs and expenses of providing quality education. The following recommendations were indicated to increase its fund sources: to expand the canteen operation and manage it profitably, the university should tap other sources of income such as the alumni association, investments in the money market, and to tap local civic organizations and business establishments to sponsor scholarships. Arevalo's study (1977) of St. Peter and Paul Technical Institute in Sorsogon, Philippines analyzed the prevailing financial operations in terms of goals and objectives.
The study revealed that the increase in the enrollment's demography was based on the price shifts of copra and abaca, which are the major industries, and sources of income in the place. Another factor for the increase was the introduction of technical and
vocational courses in the college level. The main sources of income of the school are dependent on tuition fees. Findings revealed that the earnings of the school are plowed back into the school by way of better facilities and modern equipment. The school adheres to trust and confidence policy as shown by its trust in the finance officer. The financial statements submitted at the end of the school year do not follow the generally accepted accounting procedures and principles for financial reporting. The study concluded that there is weak management of finances. There is no defined planning and control system. The study recommended that the financial officer should prepare adequate financial records that follow the accepted bookkeeping and accounting procedures. Further, it was
recommended that the school should have a definite financial policy on sources and uses of funds as well as internal control system. A study was conducted by Alabado (1980) to analyze the financial situation of St. Anthony's High School in Antique, Philippines. Trend ratio and common-size
percentages were used to analyze the data in the financial statements. The growth rate and retention rate were computed to find out how the rate of enrollment increases. The study revealed that most of the fund sources, or the total income were spent to pay the salaries of faculty and staff. The trend showed that there was an increase in fund sources in terms of enrollment increase, but the rate of increase of salaries was higher the increase of total income during the same period. The study gave the
recommendation that the fund sources to be allocated to pay the faculty and staff salaries should be limited to 60% and the remaining 40% should be available to other expenditures of the school. The teachers and other staff members should participate in increasing fund sources through enrollment campaign. The financial manager should consider the tuition increase since these are rather low. Financial Management Analysis and Performance On Financial Management Analysis. Mejorada (1999) states that financial
analysis refers to examination of financial data of a firm to determine profitability, growth, solvency, stability, and effectiveness of its management. Brigham and Gapenski, (1997) say, to forecast the future is what financial analysis is all about, while from management’s viewpoint, financial analysis is useful both as a way to anticipate the future conditions and, more important, as a starting point for planning actions that will affect the future course of events. The first step in financial analysis is done through ratio analysis. An analysis of a set of ratios is designed to show relationships between
financial statement accounts. The main job of financial analysts is to gather and process financial information and prepare financial analyses. The financial ratios provide the analyst an overview of the financial condition of the firm. In cases of anticipated problems, the analyst estimates additional ratios so as to understand the situation better. When there are problems, the analyst prepares probable recommendations to check the problems. In this case, the role of the financial analysts is to assist in the decisionmaking process of the firm. Helfert (1991) states that the financial analysis has three objectives: (a) the use of comparative data; (b) the analysis of financial markets; and (c) the interpretation of
financial information. The first involves the comparison of data covering more than one period to be followed by the assessment of financial data. interpretation that is necessary for projections. According to Pinches (1996), there are three ideas to keep in mind when conducting an analysis. First, it is imperative to study the trends for a period of time. Evaluating the financial data for more than a year to have a frame of reference for comparison does this. In practice, a minimum of three to five years’ financial data is ideal to ascertain the financial performance of the firm. Second, an industry performance standard is a helpful comparison. Lastly, the analysis brings more questions to the fore that necessitates additional information. It is important to understand that financial analysis is not the end solution to any financial problem. Rather, it helps the decisionmakers of the firm to assess its performance and assists them in determining the future course of action. Helfert (1991) states that financial analysis has three objectives: (a) the interpretation of financial information; (b) the use of comparative data; and (c) analysis of financial markets. In interpreting the financial data the firm must have standards as a frame of comparison. These standards may be in terms of ratios, changes in budgets, industry average, competitors’ financial performance, and the firm’s financial performance in the prior periods . On Financial Management Performance. The audited financial statements are good sources of data for management in assessing the strengths and weaknesses of the financial performance of any institution like catholic schools. However, Carr (1994) opines that the typical financial The third involves the
effectiveness measures such as return on capital invested, return on equity and earnings per share are not applicable to colleges. Cave, Hanney, Koganand and Trevett (1988) suggest that the use of performance indicators in education be expanded significantly to improve planning, monitoring, and evaluation of performance. According to Carr (1994), there are three measurement
indicators of performance. The following are the three measurement areas: 1 Economy, which refers to the allocated resources or inputs such as people, space,
and supplies. This can be used as performance indicators for purchasing, maintenance and mix of educational cost. 2 Efficiency is the measurement used for the conversion of inputs to outputs in
relation to college outputs such as lecturer hour or course delivered or students taught. The performance indicators are staff student ratios and unit costs per course/student. 3 Effectiveness is the relationship of outputs to college objectives. Car further
states that measurement of effectiveness in non-profit organization is difficult because the objectives are normally qualitative. Thus, indirect guides to effectiveness like
performance in terms of successful course completion, ethnic or gender mix on course success in gaining employment are used. Carr (1994) further suggests that a college must put together a well balance scorecard which covers economy, efficiency, and effectiveness as set of performance indicators that will include both financial and non-financial measures of providing comprehensive evaluation of a college performance.
Financial Planning Hentschke (1975) defines planning as the continuous, systematic, step-by-step process of changing present organizational environments and goals to fit new situations. In planning, specific objectives are supported by study and analysis of relevant alternatives. According to Pinches (1984) financial planning involves: 1 Financial Analysis of the different transactions involving investment, This emphasizes wealth
financing, short and long term plan for the university.
maximization while it provides sufficient liquidity to meet current obligations. It also deals with risk in terms of reality, magnitude, and timing of expected returns. 2 Choosing from alternatives and it can be in terms of marketing,
production, human resource, and the like. In the decision process, the university defines at this stage the strategy for the future. 3 Anticipating the consequence of decision that provides the means to link
the past, present and what is to come. 4 Measuring actual financial performance versus financial plan.
Financial Management Models for Financial Statement Analysis It is uncommon in the Philippines that a study is conducted to assess the financial management system of an educational institution using the financial models in analyzing its operation. The researcher has become interested to know how it will fit into an
institution dedicated to service. The presented models are intended to clarify the different tools used in financial statement analysis. Management must constantly evaluate its financial performance to ensure that it is using its resources efficiently (Rao, 1997). The financial statements alone may not be
able to indicate the efficiency of performance. The common approach to this situation is to perform financial statement analysis. The financial statement analysis is the method used by interested parties such as investors, creditors, and management to evaluate the past, current, and projected conditions and performance of the firm (Malig, 1998). The following are four models of common procedures used by analysts and investors to analyze and interpret the financial statements. Financial Ratio Analysis A good financial manager makes rational decisions in line with the objectives of the firm. To do so, one must have the analytical tools. Ratios are a valuable analytical tool when used as part of a thorough financial analysis. They are just one piece of a financial jigsaw puzzle that can show the standing of a particular company, within a particular industry (Rogers, 1998) Financial ratios are the significant relationships between items in the financial statements expressed in mathematical form (Mejorada, 1999). Financial analysts and managers find it helpful to calculate financial ratios when interpreting a company’s financial statements (Emery, Finnerty and Stowe, 1998). In analyzing and interpreting the financial statements, ratios are indicators. This means that these are used as guides in determining the particular area that needs improvement and priority attention in the operation. Bolton and Conn (1981) state that using ratios in analyzing financial
statements tells us something about the financial conditions and operations of the firm. There are certain ratios that are used as a rule of thumb to compare the financial condition of the firm against industry wide standards. When the firm’s ratio in a key area is worse than the industry standard, there is a signal that there is a potential inferior financial performance; when the ratio is better than the industry standard, there is a signal that
there is better potential for superior financial performance, at least in a given particular area. Understanding basic financial statements gives a head start with other financial reports. There are four key financial statements: the income statement, the balance sheet, the statement of retained earnings, and the statement of cash flows, and their footnotes. These statements are the quickest way to get a basic understanding of a company, (Rane, 1998) Moshe Ben-Horim (1987) states that the balance sheet and income statement give useful information in order to evaluate a firm’s financial strength, liquidity, risk, and profitability. It is usually not easy to determine a firm’s strength and weaknesses by just looking at these statements. In this regard, financial ratios are helpful. Ratios show the relationships of balance sheet and income statement items to one another. Financial ratios are designed to measure specific characteristics of the firm’s financial status and activity. These ratios are divided into four categories: ratios, (3) leverage ratios, and (4) profitability ratios. Keown, Martin, Petty, and Scott (1988) state that financial ratios are the principal tools of financial analysis because these can be used to determine the financial well being of a firm. For instance, liquidity ratios can be helpful to a manager of a commercial bank to determine if a loan applicant is solvent or liquid before approving a loan. Financial ratios also provide a way of making meaningful comparisons of a firm’s financial data at different points in time and with other firms. standing and well being of the firm. These ratios can indicate the financial (1) activity ratios, (2) liquidity
Financial ratio analysis requires simple
mathematical applications. However, using and interpreting financial ratios requires a great deal of skill and a thorough understanding of the tools of financial analysis. Gitman (1998) states that shareholders, creditors, and financial managers commonly use ratio analysis to assess the financial condition of the firm. It is a useful tool since ratios provide a relative measure of the firm’s performance. The basic input for ratio analysis is in a given period’s income and balance sheet statements. Using the financial data of these statements, various ratios can be computed that permit an evaluation of certain aspects of performance. On the other hand, Gitman cautions that a single ratio does not generally provide significant information to judge the overall performance of the firm. It is only when a group of ratios is used that reasonable judgments concerning overall financial conditions can be made. The analyst should also be sure that the period covered by the financial statements being compared is the same. Thirdly, it is best to use audited financial statements for ratio analysis. Lastly, it is important to make sure that the data being compared have been developed in the same way. treatments can distort the results of ratio analysis. Common Size Statement Analysis Malig (1998) defines common-size statements as comparative statements that give the vertical percentages or ratios for financial data without giving peso value. He further states that a common-size financial statement is a form of financial analysis in which the relative percentages of financial items, as well as their peso amounts are shown. This means that the absolute amount in either the balance sheet or income statement is converted into more easily understood percentages or some base amount. The use of different accounting
The result will give the analyst certain insights not evident from the raw figures themselves. Furthermore, the different statements can be compared both over time and across firms within the industry. A common size statement is useful in describing the trends found in the financial statements. Pinches (1984) describe the common size statement as one of the most direct and simplest ways to analyze changes over time. Such comparisons show patterns or trends over time with respect to the proportion of resources committed to various asset categories and help identify shifts in sources of financing. Application of common size statement analysis enables the analyst to see the relationships of percentages to totals such as total assets or total sales, or to some base year. According Van Horne (1999), the evaluation of trends in financial statement
percentages over time affords the analyst insight into the underlying improvement or deterioration in financial condition and performance of the firm. It is true that even if a good portion of this insight is revealed in the analysis of financial ratios, broader understanding of the trends is also possible by extending the considerations to the different components of a balance sheet and income statement. For example, expressing the components of the balance sheet as percentages of the total assets can do this. In the same manner, this can be done for the income statement, but in relation to sales. In this case of an income statement, the gross and net profit margins are typical examples of this expression, and can be extended to all items on the income statement. The expression of individual financial items as percentages of totals usually permits insights not possible from a review of raw figures themselves (Van Horne, 1999). Philippatos and Sihler
(1991) state that common size statements can be used to compare the behavior of a firm’s financial performance either over time or as part of a larger industrial group. The Funds Flow Analysis One of the tools for the analysis of past financial performance and financial planning is the funds-flow statement analysis. Cruz (1997) states that the strength of this model is that funds flow analysis shows the detailed movement of funds so that management can analyze if such movement need to be remedied or improved. According to Mejorada (1999), funds may refer to (a) cash; (b) working capital; (c) quick assets; or (d) net quick assets which includes cash, marketable securities, and receivable less current liabilities. The funds flow analysis evaluates how a firm uses funds and determines how these uses are financed. In other words, this tool enables the financial manager to assess the growth and financial needs of the firm as well as the best way to finance these needs. As described earlier, the financial ratios are useful tool for analysts to pin point the strengths and weaknesses of the firm. On the other hand, one type of information, which is found in the basic financial statements, is not explicitly dealt with by the financial ratio analysis. This refers to flow of funds. In this regard, the flow of funds analysis is a useful tool for planning and control. Ben-Horim (1987) states that the flowof-funds analysis is designed to reveal an exact breakdown of both the sources and uses of funds during a period of time. It will enable analysts to answer the questions such as, how much of the money used during the period was internally generated and how much was raised externally and from what sources.
Core Values and Financial Management Integration. In any business firm, the primary goal of management is stockholders’ wealth maximization. But for a non-profit, Non-stock Corporation like a Catholic school, the
goal of value maximization as expanded to social responsibility or society’s concern must be reflected in the value maximization of the institution. Value maximization is not limited to shareholders but to stakeholders and community as well. In educational
institutions, the aspect of risk and of qualitative or social goals is considered because mission is the primary reason for existence. However, this does not preclude presidents or administrators of the universities to employ sound financial policies and strategies to ensure continuity of education services. In fact, because of a greater responsibility and the seriousness of the mission, a sound financial management is necessary. Thus, any risk reflected as an effect of investment to the institution, or on benefits, as well as the drawback it brings, must be seriously examined. Efficiency as applied to financial management deals with the effective utilization of assets and debts to generate revenues and profits with the least cost. For Catholic universities, efficient financial management has a far deeper meaning for it touches on a more conscious following of the Gospel values. Thus, a greater emphasis on value integration in efficient financial management is important. Financial management decisions are based on the assumption that individuals and firms will pursue their own self-interest. This assumption is in fact required for the efficacy of a capitalist economy. Some people, especially the religious with a vow of poverty, cringe at the thought of an entire economic system relying on such a “crass” behavioral assumptions. Others equate self-interest with “immoral” behavior and frown
on “big business.” These reactions are based in a misunderstanding of exactly what selfinterest entails. There is nothing intrinsically wrong with the pursuit of self-interest. This is simply pursuing the course of action that one believes is best for one-self. This applies both to the speculator in the stock market, to the monk, and obviously to an academic finance officer who needs to generate funds for quality operations. All of them are pursuing their self-interest; the speculator aims at becoming a millionaire, and the monks’ hopes for spiritual salvation, and the finance officer to keep his university above “turbulent waters.” Adam Smith would agree that there is nothing fundamentally wrong with what either one is doing. Thus, if self-interest is replaced with opportunism, which includes deception, unfair business practices, exploitation, lying, deceit, stealing, and other such conduct that can be characterized as unethical, society will be worse off. In fact, Smith’s concept of virtue addressed far more than pure opportunism. He recognized the possibility that selfinterest factions could operate to the detriment of society as a whole and urged that the members of society, and especially their political leaders, adhere to a respect for diversity and for the common interest of society as a whole. Regardless of whether the firm is ethical or unethical, financial management decisions are made. The finance manager has to adapt to realities of running the finances of his institution and at the same time adhering to the stated values that his company professes. Financial management provides the rationale tools for organizations to make effective decisions. These decisions fall into three main categories: how the firm makes
its day-to-day operating decisions, the investments the firm makes in both short- and long-term assets, and how the firm is financed. These areas are important not only for businesses and other financial institutions but also in governmental operations, schools, hospitals and highway departments. It is imperative then that the finance manager makes decisions regarding which assets his organization should acquire, how these assets should be financed, and how that organization should manage its existing resources. Working capital management decisions. Working capital management involves the administration, within the policy guidelines, of current assets and current liabilities. There are three alternative policies regarding the total amount of current assets carried. These policies differ with regard to the amount of current assets carried to support any given level of revenue, hence, in the turnover of those assets. The first alternative policy is a relaxed current asset investment (or fat policy) where relatively large amounts of cash, marketable securities are carried and where revenue is stimulated by the use of a credit policy that provides liberal financing to clientele and a corresponding high level of receivables. Conversely, under the restricted current asset investment (or lean-and-mean) policy, the holdings of cash, securities and receivables are minimized. Under the restricted policy, current assets are turned over more frequently so each peso of current assets is forced to “work harder.” The moderate current asset investment policy is between the two extremes. If revenue, operating costs, and payment periods could be predicted with certainty, the university would hold only minimal levels of current assets. Any larger amount would increase the need for external funding without a corresponding increase in
profits, while any smaller holdings would involve late payments to wages and salaries and suppliers and lost in revenue due to an overly restrictive credit policy. In a relax policy, revenue is stimulated by a relax credit policy, that is, the university practices an open admission with very affordable entrance fees. Nevertheless, under this policy, high levels of receivables are expected. Under this policy, the university demonstrates its value of opening its doors even to the economically deprived. On the downside, the high level of receivables that is surely to be experienced will burdened the university meeting its current cash needs like paying salaries, paying suppliers and settling current debts. Likewise, a great number of its students who are able to enroll under a liberal entrance fee policy eventually drop out for being unable to pay remaining obligations. For example, the finance officer so decides that academic fees be paid in full upon enrollment or that more than half of total academic fees be paid at once. This decision will certainly decrease the level of current assets, specifically receivables. Also, because of the large amount of one time collection, the university will have to deposit its cash on a long-term investment. This decision will have two negative consequences. First, it will discriminate students of middle- and below income groups. This decision goes against the professed value of a catholic on preferential to the poor. This policy that leads to a tight credit policy will further disenfranchised poor students of their right to quality education as if will become difficult for them to settle their current obligations to the university. Worst scenario, the poor student will eventually drop out. Second, because of the reduced level of current assets, such as cash, the university will use instead debt or may postpone settlement of some obligations.
A restricted, lean-and-mean current asset investment policy generally provides the highest expected return on this investment, but it entails the greatest risk while the reverse is true under a relaxed policy. The moderate policy seeks to find an optimal mix of cash, marketable security and receivables. This mix is influenced by its credit policy, which must favor the majority of its clientele. This decision is to hold the amount of working capital carried to the minimum consistent with running the university without interruption. To determine the optimal mix is not easy. The finance officer has to consider both the economic viability of the university without sacrificing the needs of its students. If he leans more to the economic viability of the university, he sacrifices his professed core values. If he leans more to the core values, he may find the university closing up in the near future. Investment decisions. The issue concerning the firm’s investment decision is capital budgeting. The finance manager needs to know what investments he has to make to enhance growth of his firm. In an academic setting, the finance manager has to make decisions on what programs to offer types of expansion to make and investment opportunities to handle. All these decisions should enhance the quality and economic viability of the institution. In as much as these capital investments require massive cash outlays, the school is placed in a risky position of how to finance these investments. Should it be equity? But this scheme will drain owner’s resources very fast. Should it be debt? The school can be running through unhealthful resources due to the uncertainty of the future. Or it could mean increasing education fees. This decision, however, raises many ethical issues like, educational revenues to finance expansions or investments,
additional burden to the students who are already suffering from increasing educational fees and other costs. Financing decisions. Managers make decisions in a very uncertain and changing environment in which cash flows and their volatility are not easily analyzed. Thus, it is very important to make allowances for the risk associated with future cash flows. The manager is faced with three options: financing from funds generated from operations, the use of equity, the use of debt, or a combination of these three options. Much as the educational manager wants to utilize only funds from operations, this decision alone will exhaust the resources of the school knowing that most of the schools operating expenses exceed educational fees. The other option of using equity will also place owners in a difficult situation since they keep on contributing to the operations of the school and yet never receiving in monetary return. The option of using debt becomes rational only the school can shoulder when its cost is without impairing its normal operations. An option that can be look into is through non-educational income. Nevertheless, as the school is perceived to be a non-profit entity, it must not engage itself into non-educational income generation otherwise it will be seen as a profit-oriented organization. These issues place the finance officer into a precarious situation, one side on how to finance quality-related programs needing large cash outlays while on the other side, avoiding “immoral” acts to source these programs. The issues raised are indeed raise questions on “moral” uprightness. The school, specifically a catholic school that is looked at a bastion of untarnished moral uprightness is on the line.
This paper is an attempt to demonstrate that in spite of the hard economic times faced by St. Paul Mission Schools in the Philippines, leadership continue to adhere to the core values that is expected to be embedded and more importantly practiced not only in decision policies but also equally in their day-to-day encounters with their constituents. The creation of wealth is essential to the continuing growth of a nation. Five important elements in the creation of wealth are labor, capital, technology, resources, and management. All five are enhanced through education, increasing individual wealth, and improving the quality of life for society (Kaplan, 1988). Concerning labor, educated workers are more skilled, take more pride in their work, and are able to do a better job, faster than more creatively less educated. Education moves workers to more production and better fulfillment of organizational and personal needs (Blanchard, 1978; Michaels and Wood, 1989). Capital begets capital (Jones, 1991). Those who have a college education generally earn nearly twice as much as high school dropouts and consequently have more to invest. Investment in organizations, public or private, generally benefits society through the production of goods and services for all. The more education, the more wealth is developed for investment purposes, which creates more capital, in an endless cycle (Gaiser, 1994). The wonders of modern technology have been made possible largely because of education. The position of Japan (Garvin, 1988; Juran, 1974; Crosby, 1979; Feigenbaum, 1991; Deming, 1982; Ishikawa, 1985; Main, 1994) holds in technical improvements is the result of an educational system that encourages research, creativity, and practical
application. Much of today’s wealth is tied to technology, and technology is advanced through education. Every area of resources, human, physical, and financial, is improved and refined through education (James, Garms and Pierce, 1988). Even the environment is better appreciated and preserved through education. Methods of mining, lumbering, and other forms of natural resource production and use have been improved through the development of skills and training, and more is produced through better use of resources (Adam, 1976). Management enhances wealth. As managers and leader learn about personnel skills, they are better able to make decisions leading to more production, less dissatisfaction among workers, and more efficient accomplishment of the organization’s goals. Effective management of the four elements of wealth, labor, capital, technology, and resources, promotes wealth (Werbane, 1991). Increasing Expenditures and the Economy It has been established that there is a close and positive relationship between investment in education and the productivity of a nation (Benson, 1978). Educational development is more important than the extent of natural resources in determining the productivity and individual income level of nations. Fortunate indeed is a nation that has extensive natural resources and also highly developed human resources. A nation with high educational development may overcome to a great degree any lack of natural resources, but no nation having a poor educational system, even with tremendous stores of natural wealth, has been able to approach high individual economic productivity
(Aklilu, 1983). A deficiency in both these areas automatically relegates a nation to low productivity and inferior economic status. Expenditures Benefit Individuals and Society. There is proof that education helps the individual, and those who point to the costs of education often consider only individual benefits (Wilkenson, 1990). Generally, the more education a person attains the better job he will have. As income rises, so do taxes, which are able to do two benefits society’s programs. The Increasing Costs of Education. One of the central tasks of educational administration is to allocate funds, facilities, personnel, and information in such a way that the improvement in educational achievement between entering and leaving students is maximized (Schultz, 1970). To that end, the general purpose of the compensation process is to allocate resources for salaries, wages, benefits, and rewards in a manner that will attract and retain a school staff. It is also for this reason that a mission school faces difficulties in meeting these requirements due to the nature of its students who are mostly marginalized. The School and its Environment Aside from delivering academic excellence, the school is expected to perform a specific economic goal (Coleman et al., 1966). In undertaking this goal, the school should be able to do two things: (1) meet and adjust to the demands of its environment, and (2) choose a set of goals and corresponding policies and programs to meet these demands. Owners. The school consists of two groups, owners and management. The owners provide the capital funds, which are employed by the school in its productive economic activities. As owners, they may delegate the actual day-to-day control of the school to a
second group of individuals called the managers. This act of delegation, however, is accompanied by the assignment of responsibility, in the form of corporate goals set by owners for its managers. Viewed this way, the setting of corporate objectives or goals is the owners’ primary means of communicating their preferences to the managers. Based on these goals, management chooses and implements policies and programs, which will achieve these objectives. Thus, the role of management is one of execution of policies. On the other side, the school cannot be separated from various sectors of society. There are several influences, which are immediately recognizable (Coons, 1970): 1 It will partly depend on alternative uses and returns for the capital invested
in the school. Thus, there is a market for investor capital and the school should be able to deliver to its owners the benefits, which would have been derived if the funds were invested in this outside market. The same reasoning applies if the firm avails of loan funds from creditors, e.g., banks and financial institutions. 2 The school exists within a legal or political and economic framework. Its
objectives and implementing policies/programs should not be inconsistent with society’s prevailing legal norms and values. Stated in another way, the school should produce some direct or indirect benefits to society. Otherwise, it becomes irrelevant. 3 Management could not act as if it is accountable only to its owners and not to
society. At the very least, the presence of alternative opportunities in the managerial labor market may influence managers to do a better job in order to increase their “market value.” 4 The school’s choice of operating plans, projects and service mix, will be done
in face of a competitive market.
One common lesson to be learned from the preceding discussion is that society and outside markets for capital, labor and services serve to provide the discipline necessary for rational goal setting by owners and managerial efficiency within the school. The need for this discipline becomes evident in the inherent conflict posited between the owners and management and others. Conflict in Owner and Management Goals Many theories of the school suggest that while the goals of owners may have been set rationally given the capital markets, there is an inherent divergence in managerial goals (Coleman, 1966): 1 Managers may “overspend” on salaries and perquisites (e.g., cars,
representation, plush offices) because these also have the effect of increased personal consumption (Williamson, 1963). On the other hand, owners would only want to spend on these perquisites to the extent that they benefit the school. For example, representation expenses should be allowed only if they increase future enrollment. Beyond this level (e.g., if “too frequent” or if non-client guests are included), the management can only derive personal satisfaction from the expense without contributing to the profit goals of owners. 2 Managers may engage in “shirking” behavior, preferring leisure to any further
exertion to achieve or even exceed the owners’ goals. This hypothesis is related to the concept of “satisficing” behavior (Baumol, 1967). Here, the manager may decide not to exert effort to exploit all opportunities for the owners preferring instead to achieve the goal assigned to him with the minimum efforts.
Managers may supplant the stated goals of the owners with some of their
own. For example, management might attempt to expand with little attention to the effects on the goals of owners for short run earnings. 4 Managers may engage in outright manipulation and misrepresentation of
corporate performance in order to show attainment of owners’ goals. When this happens, it is often in consonance with a management compensation scheme based on the attainment of owners’ goals. Key Policy Issues During the first few years after World War II educational policy was mainly concerned with the quantitative expansion of educational facilities. Not much thought was given to the educational curriculum. Education was seen as a driving force in economic development. In this respect, the rapid expansion of education was the counterpart of capital accumulation in the industrialization strategy. In addition, education would contribute to social modernization political integration. Plans to expand the educational system were based partly on the political convictions and ideologies of political leaders in post-war developing countries, and also various educational planning models. In educational planning, three types of analyses have been of importance (Hardiman and Midgley, 1982: Gillis et al., 1992), as follows: 1 2 3 Planning based on the social demand for education. Manpower planning. Planning on the basis of cost-benefit analyses.
Planning based on the Social Demand for Education This type of planning is based on the numbers of students who enrolled in various kinds of education in the past. Past enrollment trends are extrapolated into the future. This kind of planning is the easiest from a political point of view, but it does not always lead to efficient outcomes. The over expansion of secondary and higher education was to some extent due to planning on the basis of social demand. Members of social elite who want their children to receive a good higher education are more likely to make their voices heard in the political process than powerless rural people who would benefit more from an improvement in primary education. Manpower Planning Manpower planning tries to determine the social needs for employees with different kinds of education. Educational systems are designed to fulfill these needs. For example, estimates are made of the number of doctors required. These estimates determine the capacity of medical schools. In theory, this is a valuable approach. In practice, however, the experiences with manpower planning have been very disappointing, both in developing countries and in more developed countries (Gillis et al., 1992). It seems to be impossible to predict the demand for various categories of employees more than two to three years ahead. Since it takes years for changes in the educational system to be realized, the situation may well have changed by the time new graduates come into the labor market. Moreover, manpower planning does not pay any attention to the costs of education.
Cost-Benefit Analysis of Education In keeping with the recommendations of human capital theory, this form of planning calculates costs of different types of education for individuals and the community, and the direct and indirect financial benefits deriving from that education. This allows one to compare the returns on investment in education to the returns on investment in physical capital stock. One can also determine which kind of educational investment- vocational, general, technical, primary, or higher education, and so on- will have the highest return. Educational planners are of course primarily interested in social rather than private costs and benefits. Since the 1960s, many cost-benefit analyses of education have been performed. Although attractive on theoretical grounds, cost-benefit analysis has some serious drawbacks. First, one knows the present remuneration of different categories of
employees with different levels of schooling, but one does not know how the structure of earnings will develop in the future. Secondly, one cannot be sure that income differentials actually reflect differences in productivity. Finally, cost-benefit analysis usually disregards both the content and the quality of education; analyses have normally been restricted to comparisons between primary, secondary, and higher education. Therefore, in practice cost-benefit does not offer a sound basis for detailed policy-making. Cost-benefit analyses have shown that the returns to investment in education are higher than returns to investment in physical capital goods. The returns are the highest in countries with the lowest per capita incomes (Psacharapoulos, 1993). One of the most important recommendations derived from cost-benefit analyses is that primary education should be given high priority. The returns to primary education are significantly higher
than to secondary and tertiary education (Psacharapoulos, 1993). Policymakers, in educational planning social demand have never followed this recommendation and political priorities have predominated. With regard to vocational education, recent research indicates that the returns to general secondary education are higher than returns to vocational education (Psacharapoulos, 1993). This seems to contradict the earlier call for more vocational education. The issue of relevance perhaps depends more on the content of education than on the type of schooling. Psacharapoulos (1989) pointed out that there is a wide gap between educational planning and educational practice. Often educational plans are formulated in a highly abstract manner, disregarding problems of implementation and resource availability. This actually explains why so many educational reforms never get beyond the drawing-board stage. Since the early1970s, the debate on educational policy has increasingly centered on the content and quality of education. This debate resulted in a series of proposal and recommendations for reform that dominate the educational agenda even to the present and beyond. Despite the scarcity of financial means, the St. Paul Congregation tries to provide adequately for the increasing need for education in the coming years for the underprivileged. Scarce resources are identified and utilized as efficiently as possible with due regard to costs. Four-Stage Model for Designing Cost and Performance Measurement Systems
Financial managers can view the development of their integrated cost and performance measurement systems as a journey through four sequential stages (Kaplan, 1990). Stage I Systems The characteristics of Stage I systems are extensive amounts of time and resources required to consolidate different reporting entities within the company and to close the books each accounting period. There are unexpected variances occurring at the end of each accounting period when physical inventories are reconciled against book values. There exist also large write-downs of inventory after internal and external audits. Many post closing adjusting entries are involved in the financial accounts and the existence of a general lack of integrity and auditability of the system. Stage II Systems Companies that have financial systems best described as Stage II systems are characterized with meeting financial reporting requirements. They collect costs by responsibility centers but not by activities and operating processes, have nonexistent or highly distorted customer costs, and provide feedback to managers and employees that is too late, too aggregate and too financial. Stage II financial systems are fine for valuing inventory for financial purposes and for preparing periodic financial reports. They have common data and account definitions across different departments so those financial managers can readily compare and consolidate financial results across departments. The system can provide complete financial statements shortly after the close of an accounting period that require few, if any, post closing adjustments. They prepare statements consistent with standards
established by financial reporting, government, regulatory, and tax authorities; the systems data recording and processing have excellent integrity so that they satisfy stringent auditability and internal control standards. Stage II financial systems, however, also report individual costs, employing the same simple and aggregate methods used for external financial reporting, to value inventory. It provides financial feedback to managers and employees on the same
reporting cycle used to prepare the aggregate organizational financial statements. Nevertheless, Stage II costs systems are completely inadequate in two key managerial purposes: (1) estimating the cost of activities and operating processes, and the cost and profitability of services and customers, and (2) providing useful feedback to improve operating processes. Stage III Systems: Customized, Managerially Relevant, Stand-alone The new costing philosophy is embedded when a company develops Stage III systems for financial reporting, cost measurement, and performance management. Stage III contain a traditional but well-functioning financial system that performs basic accounting and transactions-capturing functions, and prepares monthly or quarterly financial statements for external users, using conventional methods for allocating periodic operating costs. It has one or more activity-based cost systems that take data from the “official” financial system, as well as from other information and operating systems, to measure accurately the costs of activities, processes, customers and organizational units. Lastly, it provides for operational feedback systems that provide employees with timely accurate information, both financial and nonfinancial, on the efficiency, and quality of operating processes.
In Stage III, the company retains its existing (Stage II) financial system to prepare financial reports for external constituencies. It needs this basic financial system to capture the transactions occurring continually throughout its operations, to assign these transactions to accounts in a general ledger system, and to aggregate and process them to prepare the statutory financial statements. With the availability of powerful microcomputers and networked client-server systems, the processing of available information into specialized managerial accounting systems is not a difficult or expensive task. The powerful capabilities of new information technology- hardware, software, and networks- enable the company to introduce two customized cost and performance measurement systems for managerial purposes. These new systems are (1) activity-based cost systems to provide accurate information about the costs of activities and processes, and the costs of individual and customers. Secondly (2), operational control and learning systems provide new and more timely feedback to employees, including nonfinancial and financial information, for its problem-solving and improvement activities. Stage IV Systems: Integrated Cost Management and Financial Reporting In Stage IV the activity-based cost systems and operational feedback systems are integrated and together provide the basis for preparing external financial statements. The actual expenses required to prepare periodic financial statements can be found in the feedback systems that have been capturing data continually form actual operations. The financial elements in operational feedback systems can be aggregated together periodically and given to the financial accountants when they are ready to prepare external financial reports. In this way, the operational feedback system for managerial
purposes becomes integrated with the system preparing periodic financial reports for external constituencies. What is remarkable is the shift in emphasis from Stage II to Stage IV. In Stage II, financial accounting and external reporting are kings. Managerially relevant information- for costing activities and customers, for example- must be derived and extracted from financial accounting reports. Now, managers can find managerially relevant information in the accounting reports they received. Using ABC for Budgeting When managers have access to such systems, they can use their ABC model to provide information for important, ongoing managerial processes, including budgeting, what-if-analysis and pricing. By using ABC for budgeting, a practice called ActivityBased Budgeting (ABB), managers determine the supply of resources to operating units and responsibility centers based on the demands for activities they are expected to perform. ABB is an extremely important application; it is the process by which costs, previously thought to be fixed, are made variable. What-if analysis enables managers to assess the consequences of major changes in services and customer mix. Tuition setting allows current ABC information on service costs and capacity utilization to be incorporated into the operating, pricing, and service decisions of decentralized organizational units. The Impact of Activity-Based Budgeting In building an ABC model, there is a need to estimate appropriate activity costs and cost driver rates based on actual or budgeted costs and the capacity of supplied (budgeted) resources. In the ABC model, the budgeted expenses are treated as endogenous to activity-based management (ABM), not a decision made external to the
ABC system. In fact, real sustainable payoffs from ABC and ABM cannot occur unless they become embedded in the organization’s budgeting process. ABB gives the organization the opportunity to authorize and control the resources they supply based on the anticipated demands for the activities performed by the resources. Conventional budgeting practice is an iterative, negotiating process between heads of responsibility centers and managers. Responsibility center managers continually seek more resources while managers continually attempt to control increases in the spending authorized for their decentralized units. The result is that the budget for the next year builds on that of the previous year, plus or minus a few percent depending upon the outcome of the negotiations between managers and local management. ABB offers the opportunity for such discussions to be based more upon facts, and less upon power, influence, and negotiating ability. If implemented successfully, ABB demolishes conventional thinking about fixed and variable costs. The resources that are most variable, or flexible, within short periods of time represent mostly resources the organization purchases from outside suppliers: vendors from whom it purchases energy, manpower agencies from whom it purchases temporary, part-time employees, and individual labor suppliers from whom it purchases labor hours as needed or pays for on a piece-work basis. Left unaddressed by conventional variable or marginal cost thinking is the entire organizational infrastructure of (1) personnel with whom the organization has a long-term contractual commitment, (2) equipment and facilities, and (3) information systems supplying computing and telecommunications. Decisions to acquire new resources or to continue to maintain current level of these committed resources are most likely made
during the annual budgeting process. Once the authorization to acquire and maintain organizational resources have been made, the expenses of these resources appears fixed and unrelated to local, short-term decisions about fees and customer relationships. The time to make spending on these resources variable is during the budgeting process. ABC gives managers the information they need to acquire, supply, and maintain only those resources needed to perform the activities to be demanded in the future. The different models and key issues presented serve as a basis for the researcher to formulate her eclectic framework toward a financial system model for mission schools. Synthesis The review started with the involvement of the Church in education society. In Asia, the system of Catholic education needs to become more clearly directed towards an environment of human promotion. The next to be reviewed is education delivery in Philippine context. Article XIV of the 1987 Philippine Constitution Section 1 provides constitutional basis of education and its support system: …”the State shall establish, maintain and support a complete, adequate, and integrated system of education relevant to the people and society.” Education Act 1982 refers to both public and private schools, as they both strive to attain the goals of national development. However, the main educational burden rests on private schools becoming a main dispenser of education to the people. If education is not only an investment in human capital but it is also a basic human right. However, the history of the Philippines has shown that, from the financial viewpoint, the government cannot satisfy the growing needs of education in the country.
It is partly for this reason that every year, thousands of students study in private schools. Private schools, however, are experiencing hard times. Catholic education is the personification of a view about the meaning of human persons and of human life. It is an aspiration to holistic influence. This interplay of of the different aspects of human knowledge and understanding of Gospel values are enriched in the human person. The development of the whole person is greatly influenced by the effectiveness of Catholic education. It is therefore, the primary responsibility of the educational manager to create an effective school, a school where meaningful learning takes place. The educational manager then has four essential competencies: management of meaning, management of attention, management of trust and management of self. However, the key challenge to attain an effective leadership is the availability of an adequate support system. One such key area is finance. In a time of stiff competition, globalization and scarce resource, the financial manager must be able to maintain the financial viability of the school. Several models on effective financial management are reviewed. For the valuation approach, while there is no question that profits are important, the key issue is how to use them in setting a goal for an institution. The ultimate measure is not what is earned but how the investor values the earnings. An understanding of tradeoff between risk and required or expected return is necessary in making effective decisions. An acceptable decision is when it increases the institution’s overall value, otherwise, the decision should be rejected. Another model, maximizing owner’s wealth, aims to attain the highest possible value of the institution. This model would be in direct contrast with a Catholic school.
Although most private schools are expected to operate beyond beak-even points to be more competitive, the ultimate objective should be to be able to delivery quality education and relevant and responsible graduates. The role of finance in the success or failure of schools, however, has become all the more important considering the dramatic increase in the cost of operations exacerbated by the plummeting peso and high inflation rates. Studies that are reviewed show that sound financial policies and decisions provide the tool for financial viability. An optimal interaction of revenues, expenses, leverage, utilization of assets, capital expenditures and other income will bring out financial stability. Financial management models for financial analysis are also reviewed. The models provide that management must constantly evaluate its financial performance to ensure that it is using its resources efficiently. Finally, models addressing increasing expenditures in education are examined. Since there is a close and positive relationship between investment in education and the productivity of a nation, a nation with high educational development may overcome to a great degree any lack of natural resources, but no nation having a poor educational system, even with tremendous stores of natural wealth, has been able to approach high individual economic productivity. A deficiency in both areas automatically relegates a nation to very low productivity and inferior economic status. The poor in the Philippines comprise more than 60% of the population. The lack of education or deficiency of education among this marginalized sector has motivated the researcher to look again at the mission/vision of the Paulinian Congregation. If the poor
is to be uplifted, and a lot of them are enrolled in mission schools, the more these mission schools commit themselves to educating the poor. Thus, given this desire to improve the poor, the researcher embarked in this study. The different models and key issues presented in the review are all directed toward financial stability. These are utilized to develop an eclectic model appropriate for this study. Conceptual Framework The framework of this study is as shown below.
Financial condition 1.1 working capital level 1.2 liquidity Asset utilization 2.1 Accounts receivable turnover 2.2 Capital assets utilization 2.3 Total assets turnover Expense management 3.1 operating expense 3.2 capital expense Sources of income Historical/ Quantitative Ratio Analysis Trend Analysis Growth Rates Analysis A Model for Sustainability of Low Tuition Fee Based Paulinian Schools
Feedback Figure 1 Framework for Sustainability of Low Tuition Fee Based Paulinian Schools
The Financial Condition of a School The financial condition of a school is reflected in each working capital level and level of liquidity. In terms of working capital level, it refers to the amount of cash available to meet both short- and long-term needs for cash. For short-term needs, the school must have sufficient cash to meet at least one-month salary requirements. Its current level of cash, marketable securities and accounts receivables can address this. If its mentioned current assets are not sufficient, this can be supplemented through the use of short-term debts. In terms of its long-term needs, its sources of funds can be through the sale of its long-term assets as stocks and bonds or the sale of assets, which are unproductive. Another source of fund can be through available long-term debt. When the required conditions are met, the school is said to be financially sound in terms of working capital. Another measure of financial condition is its level of liquidity. As a rule-ofthumb, a current ratio equal to one is desirable. This reflects the ability of the school to settle its current obligations i.e., for every Php1.00 debt, there is available current asset of Php2.00 to meet this need. If the current ratio is greater than 2, it will reflect the presence of excess current assets. These excess current assets are considered to be idle and therefore, unproductive. However, if the current ratio is less than 2, the school is considered to be financially unhealthy. It is said to be illiquid, i.e., it is always short of cash, which could lead to bankruptcy.
Asset Utilization Asset utilization is a measure of efficiency in the use of assets to generate revenue. There are three utilization measures, which are applicable to schools: accounts receivable turnover (ART), fixed assets turnover (FAT) and total assets turnover (TAT). ART indicates how many times in a year (or the number of days in a year) in which receivables are collected. An ART < 12 times a year (or less than a month) is considered to be ideal. If ART is greater than a month, the school will experience difficulty in obtaining cash to meet current obligations and can also create bad debts. FAT is a measure of efficiency in the utilization of fixed assets to generate revenue. For schools, the ideal FAT is 1. This indicates that fixed assets are fully maximized. If FAT is greater than 1, fixed assets are over utilized that can result to a rapid deterioration of fixed assets. If FAT is less than 1, it indicates that there are fixed assets that are either not utilized or under utilized. TAT is a measure of efficiency in the utilization of total assets to generate revenue. Total assets include both current, fixed assets and other long-term investments such as stocks and bonds. An optimal mix of these assets provides expected maximum returns in the use of these assets. Expenses Management Expense management refers to the efficient control of operating and capital expenditures. Operating expense include instructional, administrative and other general expenses that are incurred within a year. A school is considered to have managed its operating expense well if the operating expense ratio is at most 65% of its net revenue.
Beyond 65%, the school is considered too expensive to operate or it has not control its expenditures. Capital expenditures are incurred for fixed assets and other assets that are expected to last for over a year. These assets are expected to have a return, which are greater than their original costs to be considered efficient. Sources of Income Due to continuing constriction of the economy cause by various factors as regionwide financial crisis, unemployment or the lack of employment opportunities, etc., schools are no longer dependent on school fees as a major source of revenue. Schools are now exploring other possible avenues to source their funds to finance quality and improvement targets. Growth of Fund Balance The fund balance refers to the amount of capital that the school has already poured into the long-term operation of the school. For business, as a matter of rule-ofthumb, the accepted growth rate for financially healthy companies is at least 15%. For schools, since they are mot classified as profit-oriented institutions, the ideal fund balance growth rate is 10%. A school, therefore, which grow by less than 10% is considered to be financially unhealthy in the long-run which will eventually caused its closure if not subsidized. The Challenge The Congregation of the Sisters of St. Paul of Chartres owns and run several schools, which are either subsidized or operating just at break-even point levels. These schools are considered economically non-viable but they are being operated as part of the
mission of the Congregation. The challenge is to make these schools viable through efficient use of available resources without raising fees significantly. An in-depth examination into the financial affairs of operation and sourcing, financial management and control, and financial allocation priorities of these mission schools should give light to strategic alternatives in running these schools. Statement of the Problem The study seeks to determine the level of sustainability of low-tuition based mission schools managed by the St. Paul System. These schools are being managed to meet the mission of the Congregation to cater to low-income groups. Specifically, this study addresses the following areas of concern: 1 1. What is the profile of these mission schools in the areas of: 2 1.1 financial management: 3 4 5 6 7 8 9 10 1.1.1 Educational and non-educational revenues; 1.1.2 Operating expenses; 1.1.3 Capital expenses; 1.1.4 Financial health as working capital and liquidity; 1.1.5 Investment of liquid assets; 1.1.6 Asset utilization; 1.1.7 Leverage; and, 1.1.8 Profitability.
11 1.2 School profile: 12 13 1.2.1 Enrolment; 1.2.2 Number of Faculty; and,
1.2.3 Faculty average salary level.
1.3 Clienteles’ profile: 1.3.1 1.3.2 2 3
Family size; and, Family average monthly salary ranges.
How do these mission schools source their revenue, internally and externally? How do they manage excess (deficits)? What is the model of sustainability practiced by these mission schools?
Significance of the Study The importance of education in the growth of the national economy is no longer challenged. Historically, education has been the largest public function and the country’s biggest business, when viewed in terms of the numbers of people and pesos of income involved in its operation. The expansion of educational services and the greatly increasing costs of education year after year have had a tremendous beneficial effect on the nation'’ economy. It is not likely that this condition will change. Most economists now recognize the importance of investment in education for developing the nation’s largest reservoir of human capital. The economists of an earlier era emphasized the roles of land, labor and capital in achieving economic growth, and they gave only in passing attention to the economic importance of education. Economists paid little attention to this point of view until after World War II. Since that time, most of them have emphasized the value of education as a factor in stimulating economic growth. Education is now referred to as investment in human capital. Such leaders as John Kenneth Galbraith, Harold Groves, Milton Friedman, Theodore Schultz, and Charles Benson have documented the relation between education
and economic growth. They have deplored the waste of the labor force and human resources that automatically accompanies inadequate education, regardless of its causes. Consistent of what had been noted by these great persons, human capital has the fundamental attributes of the basic economic concept of capital; namely, it is a source of future satisfactions, or of future earnings, or both of them. What makes it human capital is the fact that it becomes an integral part of a person. But we are taught that land, labor and capital are the basic factors of production. Thus, we find it hard to think of the useful skills and knowledge that each of us has acquired as forms of capital. The mission schools of the Congregation are investing in future human resources. This part of the population comprises almost 67% of households below poverty line. The result of this study, then, serves as a model for other mission schools that are currently operating or yet to be opened. The investment on this large chunk of deprived and underprivileged certainly yields favorable economic returns in the future. Scope and Limitations This study focuses on the financial management policies, practices, and control of the mission schools of the Sisters of St. Paul of Chartres in the Philippines. The timeframe of the study is within a five-year period of operation. Specially to be noted are the difficult years during the Asian Financial Crisis 1997-1999. The study zeroes in on the different alternatives that these mission schools adopted to cope with the financial crunch. To be able to end-up to an unbiased finding, no respondents from the schools under study are involved. The respondents are parents of pupils enrolled in these schools to determine whether or not these students do come from poor families. The sources of
financial data are financial statements, decisions arrive at during board meetings and administrative meetings and other relevant documents.
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