This specialized group of metrics helps to assess overall financial health and is based on a set of ratios which, after properly weighting and scoring, can create a single score known as the Composite Financial Index (CFI)[1]. CFI is useful in helping boards and other key stakeholders with little or no knowledge of PAC financials understand the financial position that the institution holds in the marketplace. The metric also proves valuable in assessing the prospects of the PAC and functions as an “affordability index” of a strategic plan.
CFI is established first by creating the values of the four core ratios:
These ratios compare the institution’s operating commitments (Primary Reserve Ratio) and its outstanding long-term obligations (Viability Ratio) against its expendable wealth. They measure the ability of the organization on a short-term basis to live within its means (Net Income Ratio) and the ability of the PAC to generate overall return against all net resources (Return on Net Assets Ratio).
The core ratios were selected because they represent the measurement of key components in relation to institutional risk that must be consistently addressed. As an example, outstanding debt, by itself, is not a particularly informative number. But within the context of usable retained wealth, the relative debt level becomes informative, allowing an understanding of the institution’s capital structure and the affordability of its debt. Expendable net assets provide insight into whether the organization’s operating size is reasonable within the context of usable retained wealth. The return that the institution has been able to achieve, both in terms of current operating size and in terms of total wealth, for which the board has fiduciary responsibility is a key indicator of overall financial performance.
This set of metrics highlights two basic concepts that run throughout our approach to analysis. First, that a few measures can effectively provide insight into financial health; and second, that the ratios are most useful if the information is readily obtainable and the calculations repeatable. Note that the ratios deal only with the financial aspects of the PAC and must be blended with KPIs in other areas such as activity and utilization to understand a more complete measure of institutional strength.
This ratio measures financial strength of the PAC by comparing expendable net assets to total expenses. The ratio represents a snapshot of financial strength and flexibility by indicating how long the PAC could function using its expendable reserves without relying on additional net assets generated by operations. The ratio also serves as a counterpoint to the Viability Ratio.
Answers the question: Are resources sufficient and flexible enough to support the mission?