Private Schools may need a Lesson in Accounting
By Lorin Port, Senior Controller at PBO Advisory Group
PBO Advisory has several unique nonprofit areas of expertise, including private schools.
With over 10 years of working as a controller and CFO for many private schools, I understand the differences in accounting procedures required in this sector, including the process of recording and reporting deferred tuition revenue and adequate cash management of tuition received in advance.
Both areas are critical to the strength of your school’s financial operations and management of both areas can be highly scrutinized during the audit process.
Recording and Reporting Deferred Tuition Revenue
Private schools typically bill for tuition in advance of the fiscal school year. There are usually multiple payment plans that range from a single payment to a monthly plan, but all can be deferred, with varying due dates, based on the payment plan chosen. This is one of the most heavily reviewed and tested areas during an audit, so the methodology and process should be documented and as easy to follow as possible.
Once the deferred revenue is calculated it is divided by the number of months in the school year. Some schools choose to recognize it over the full twelve months, while others recognize it during the active school year (typically 10 months). Either method is acceptable as long as it remains consistent.
A few items to note:
- Additional tuition that is billed during the school year (such as for new students) is added to the deferred balance and divided by the number of months remaining in the school year.
- For proper statement of the deferred revenue balance for the fiscal year that the tuition is billed in (typically a month or two before the end of the prior fiscal year), it is important to present the deferred revenue net of any related accounts receivable.
- This is accomplished by taking the total deferred revenue minus any A/R related to the uncollected tuition payments.
- By doing this, your A/R for the current fiscal yearend only includes A/R related to the current fiscal year, and your deferred revenue only includes amounts already collected.
Adequate Cash Management of Advance Tuition Payments
Since the majority of tuition payments are received in advance, most schools carry a significant amount of cash in their bank accounts for much of the fiscal year. It is important to address how these funds are managed in a well-defined investment policy, which should include options that are fairly liquid. Typical investments include:
- Money Market Accounts
- A laddered group of Certificate of Deposits
- Life Insurance
It is vital to have strong cash management policies in place. With high cash balances and no sound fiscal policies, schools can get into trouble by spending cash early in the year and not be able to meet obligations as the year goes on.
Part of your monthly financial reporting package should include a cash balance analysis that details:
Total Cash Balance + Total Investments Balance – Net Deferred Revenue (Deferred Revenue – Related A/R) – Additional Cash Reserves = Net Free Cash
Net free cash should be reviewed each month to ensure that adequate balances are being maintained throughout the year. A minimum allowable balance should be established and an alternative source, such as an operating line of credit, should be in place, if needed.
Like most non-profits, a school relies heavily on donations, which can greatly improve cash flow and increase net assets. Proper recognition of tuition revenue and strong management over large amounts of cash received in advance are the two most unique and important items for private schools.
Attention to these two issues can either make or break a private school.
For help with these critical areas or any assistance with helping your school strengthen its financial operations, contact Lorin at firstname.lastname@example.org or (858) 935-4867.