Activity 5: Financial Ratios

**Part One:** The Worksheet below can be used to assist your school with
the calculation of a composite score
[668.172](http://frwebgate.access.gpo.gov/cgi-bin/get-cfr.cgi?TITLE=34&PART=668&SECTION=172&TYPE=TEXT):

**To access the hyperlinks in this activity, please refer to the main
page of the Fiscal Management Assessment**.

Proprietary School

Step One: Calculate the Ratios

+-----------------------+-----------------------+-----------------------+
| Ratio                 | Formula               | Result                |
+-----------------------+-----------------------+-----------------------+
| Primary Reserve Ratio | Adjusted Equity       |                       |
|                       |                       |                       |
|                       | Total Expenses        |                       |
+-----------------------+-----------------------+-----------------------+
| Equity Ratio          | Modified Equity       |                       |
|                       |                       |                       |
|                       | Modified Assets       |                       |
+-----------------------+-----------------------+-----------------------+
| Net Income Ratio      | Income Before Taxes   |                       |
|                       |                       |                       |
|                       | Total Revenues        |                       |
+-----------------------+-----------------------+-----------------------+

Step Two: Calculate the Strength Factor Score

  ----------------------------------------------- -----------------------
  Primary Reserve Strength Factor Score = 20 X\*  Result:      
  Primary Reserve Ratio                           

  Equity Strength Factor Score = 6 X Equity Ratio Result:      

  Net Income Strength Factor Score = 1 + (33.3 X  Result:      
  Net Income Ratio)                               
  ----------------------------------------------- -----------------------

[Note:]{.underline} If the strength factor score for any ratio is
greater than or equal to 3, the strength factor score for that ratio is
3. If the strength factor score for any ratio is less than or equal to
-1, the strength factor score for that ratio is -1.

Step Three: Calculate the Weighted Score

  ----------------------------------------------- -----------------------
  Primary Reserve Weighted Score = 30% X Primary  Result:      
  Reserve Strength Factor Score                   

  Equity Weighted Score = 40% X Equity Strength   Result:      
  Factor Score                                    

  Net Income Weighted Score = 30% X Net Income    Result:      
  Strength Factor Score                           
  ----------------------------------------------- -----------------------

Step Four: Calculate the Composite Score

+-----------------------------------------------------------------------+
| Sum of All weighted Scores in Step Three above:                       |
|                                                                       |
| Round the composite score 0 one digit after the decimal point to      |
| determine the final score.                                            |
+-----------------------------------------------------------------------+

Financial Responsibility Composite Score Scale:

  -------- --------------------------------------------------------------
  1.5 to   In the "Zone." Financial Responsibility without further
  3.0      oversight.

  1.0 to   In the "Zone." The school is considered financially
  1.4      responsible but additional oversight is required.

  -1.0 to  Financially responsible if the school meets the 50% or greater
  .9       letter of credit alternative.
  -------- --------------------------------------------------------------

\*The symbol "X" denotes multiplication

The definition of terms used in the ratios and the applicable strength
factor algorithms and weighting percentages are found in [Appendix A,
Subpart L, of the General
Provisions](http://www.access.gpo.gov/nara/cfr/cfrhtml_00/Title_34/34cfr668_00.html)
for proprietary schools.

Private Non-profit School

Step One: Calculate the Ratios

+-----------------------+-----------------------+-----------------------+
| Ratio                 | Formula               | Result                |
+-----------------------+-----------------------+-----------------------+
| Primary Reserve Ratio | Expendable Net Assets |                       |
|                       |                       |                       |
|                       | Total Expenses        |                       |
+-----------------------+-----------------------+-----------------------+
| Equity Ratio          | Modified Net Assets   |                       |
|                       |                       |                       |
|                       | Modified Assets       |                       |
+-----------------------+-----------------------+-----------------------+
| Net Income Ratio      | Change in             |                       |
|                       | Unrestricted\         |                       |
|                       | Net Assets            |                       |
|                       |                       |                       |
|                       | Total Revenues        |                       |
+-----------------------+-----------------------+-----------------------+

Step Two: Calculate the Strength Factor Score

+----------------------------------------------+-----------------------+
| Primary Reserve Strength Factor Score = 10   | Result:               |
| X\* Primary Reserve Ratio                    |                       |
+----------------------------------------------+-----------------------+
| Equity Strength Factor Score = 6 X Equity    | Result:               |
| Ratio Result                                 |                       |
+----------------------------------------------+-----------------------+
| Net Income Strength Factor Score = (IF NET   | Result:               |
| INCOME RATIO IN STEP ONE IS POSITIVE), use   |                       |
| this formula: 1 + (50 X Net Income Ratio     |                       |
| Result)                                      |                       |
|                                              |                       |
| (IF THE NET INCOME RATIO IN STEP ONE IS 0)   |                       |
| then the Strength Factor Score =1            |                       |
|                                              |                       |
| (IF THE NET INCOME RATIO IS STEP ONE IS      |                       |
| NEGATIVE), use this formula: 1 + (25 X Net   |                       |
| Income Ratio Result)                         |                       |
+----------------------------------------------+-----------------------+

[Note:]{.underline} If the strength factor score for any ratio is
greater than or equal to 3, the strength factor score for that ratio is
3. If the strength factor score for any ratio is less than or equal to
-1, the strength factor score for that ratio is -1.

Step Three: Calculate the Weighted Score

  ----------------------------------------------- -----------------------
  Primary Reserve Weighted Score = 40% X Primary  Result:      
  Reserve Strength Factor Score                   

  Equity Weighted Score = 40% X Equity Strength   Result:      
  Factor Score                                    

  Net Income Weighted Score = 20% X Net Income    Result:      
  Strength Factor Score                           
  ----------------------------------------------- -----------------------

Step Four: Calculate the Composite Score

+-----------------------------------------------------------------------+
| Sum of All weighted Scores in Step Three above:                       |
|                                                                       |
| Round the composite score 0 one digit after the decimal point to      |
| determine the final score.                                            |
+-----------------------------------------------------------------------+

Financial Responsibility Composite Score Scale:

  -------- --------------------------------------------------------------
  1.5 to   In the "Zone." Financial Responsibility without further
  3.0      oversight.

  1.0 to   In the "Zone." The school is considered financially
  1.4      responsible but additional oversight is required.

  -1.0 to  Financially responsible if the school meets the 50% or greater
  .9       letter of credit alternative.
  -------- --------------------------------------------------------------

\*The symbol "X" denotes multiplication

The definition of terms used in the ratios and the applicable strength
factor algorithms and\
weighting percentages are found in [Appendix B, Subpart L, of the
General
Provisions](http://www.access.gpo.gov/nara/cfr/cfrhtml_00/Title_34/34cfr668_00.html)
for Private\
Non-profit schools.

**Part Two:** Policies & Procedures

  ----------------------- ----------------------- -----------------------
  Responsibility          Office responsible      Requirement Met? Yes/
                                                  No

  Who is responsible for                               
  ensuring that ratios                            
  are calculated                                  
  correctly at your                               
  school?                                         

  Where is the                                         
  documentation needed                            
  for the calculation                             
  kept?                                           

  Is the documentation                                 
  used to calculate the                           
  ratios kept on file in                          
  case of audit or                                
  program review                                  
  questions?                                      
  ----------------------- ----------------------- -----------------------

For further information regarding the calculation of your composite
scores, please contact your SCHOOL PARTICIPATION TEAM using our
[Technical Assistance
Resources](http://fsa4schools.ed.gov/help/contacts.htm)
(*http://fsa4schools.ed.gov/help/contacts.htm*)