Amid the uncertainty brought about by the Coronavirus, Charter Management Organizations (CMOs) are faced with many daunting challenges, and at Afton Partners we understand that the most pressing challenges involve ensuring the safety of employees and students while continuing to provide quality education. And the broader impact of the virus will include financial challenges and budgetary uncertainties. At Afton, we often stress the importance of cash management and planning for reducing organizational risk. We believe that rigorous, diligent cash planning is a mechanism for CMOs to communicate their stability, trustworthiness, fiscal responsibility and financial resilience to key stakeholders. It also leads to tangible results that further a CMO’s mission, such as favorable facility financing terms and charter contract terms. Cash planning is incredibly important in times of uncertainty – for this reason, we are sharing our checklist of Charter Management Organization Cash Planning Best Practices. We hope you find it helpful!
In times of greater financial uncertainty, take extra financial precautions, be proactive in your communication, and leverage options for cheap capital.
- Communicate with your authorizer to understand the impact of the virus on projected Q4 payments, federal funds reimbursements, and projected FY21 per pupil revenues.
- Consider the impact of the new Coronavirus Aid, Relief, and Economic Security (CARES) Act on your organization.
- State Education Agencies will receive an additional $13.5 billion and are required to allocate funds to LEAs based on the relative share of federal Title I funding they received last year. See more here.
- Under the CARES Act stimulus bill, organizations can access a loan valued at up to two-and-a-half months of payroll expenses. See more here.
- Run a tight ship to reduce non-critical uses of cash.
- Reassess capital expenditure plans. Postpone non-critical capital expenditure and reassess the importance of short- to medium-term capital projects.
- Shore up access to liquidity – consider tapping into or securing lines of credit or revolving loan funds to protect normal course operations.
- We found BCG’s recently shared COVID-19 Rapid Crisis Response Checklist to be helpful. While this report is not specifically for the Charter Sector, it includes important insights, particularly the Financial Resilience Section on page 7. Some additional items from BCG’s checklist to consider include:
- Assess credit risks to current accounts receivable
- Engage with your debt holders and banks to discuss the potential for extending financing
- Ensure procurement control tower in place (e.g., PO authorization processes, active management of open POs and delivery schedules)
- Variabilize cost to as great an extent as possible (e.g. slowing or pausing discretionary hiring)
- Mitigate or redirect discretionary spend to build financial flexibility
- Understand employee base (e.g., best attendance records, longest history with company) to prepare for uncertain future
- Avoid conducting business-as-usual under pre-crisis assumptions (e.g., signing lease agreements or renewals)
- Communicate financial resilience to key stakeholders
Continuously monitor cash position, and take actions when targets are not met.
- Institute a rolling monthly (if not weekly) cash flow forecast to anticipate needs well in advance, communicate well with funders, and ensure ability to raise capital. Use an input-driven, dynamic forecast model to plan for and stress test multiple scenarios – from a worst-case to a best-case. Develop an action plan for your worst-case cash flow scenario. The CMO board and leadership team should have an action plan for addressing short to medium-term liquidity needs.
- The finance team should prepare monthly year-to-date financial statements, with notes on progress toward cash targets, and the Board Finance Committees should be briefed on this progress in each Finance Committee meeting.
- Finance Committees should monitor cash flow and liquidity by reviewing current bank cash status and projected weekly or monthly cash flow, monitoring timing and magnitude of philanthropy, and reviewing/approving any contracts above a board-designated threshold.
- Ensure your Finance Committee is asking the right questions when reviewing the cash flow forecast:
- How many days of cash do we have on hand? What is our “minimum cash on hand” target?
- What is our low point during the year? Do we need a contingency plan?
- What are the key sources of funds that we are relying upon in this cash flow forecast? How do they compare to budget? What is the timing assumed and why?
- What are the key disbursements that we are planning in this cash flow forecast? How do they compare to budget?
- What would a “downside scenario” look like, with a more conservative view of timing and magnitude of funds received and disbursed?
- Be ready to quickly adapt and make changes to operations when targets are not met.
The annual budget process is now. Ensure that a budget is set that is mindful of short- and long-term, specifically-defined cash targets. Meanwhile, be conservative and proactive in planning, especially for:
- Enrollment – consider that the broader impact of the virus could lead to higher family mobility. Also consider that families falling on hard financial times may decide to remove their children from private schools to enroll in the public sector.
- Public funding – there is a strong likelihood of flat or decreasing per pupil dollars in FY21 considering the national and state-level economic crisis.
- Private funding – the philanthropic environment is likely to be tighter than ever – do not assume that fundraising is the bailout answer.
- Staff supports – supporting and celebrating staff is an important consideration to be successful in the aftermath of COVID-19. There will be a new normal, and the staff has played a critical role to pivot to a new way of teaching and learning while in the midst of what is a personal crisis for everyone.
- Student supports – different students will have even more varying needs than ever before. Some will have mastered their learning more than they would have had they been in school. Many others will have experienced significant learning loss. What more, some students may have experienced significant trauma and hardship while away from school. Instructional and socio-emotional supports will be needed to meet children where they are.
Cash reserves matter, and governing boards should set long- and short-term cash targets.
- Days of Cash on Hand (DOCH) measures how many days the organization could meet operating expenses without receiving new income. It is a good metric to track for organizations of any size and is often included in covenant requirements in debt service terms.
- Consider S&P’s report on charter school credit rating methodology, where they consider 75-150 DOCH (Unrestricted) to be “Adequate”.