Key financial performance indicators for public tertiary education institutions

Indicator Description

Key financial performance indicators for tertiary education institutions – operating surplus; liquid assets; asset productivity; and net cash flow.

What We Have Found

Why This Is Important

The operating surplus of an institution provides it with the opportunity to invest or reinvest funds in further teaching, research and student learning and to provide something of a safety margin against budget variations and other untoward events.  It is helpful to express the operating surplus (or deficit) as a percentage of income, to give the return on income or operating margin.

The public tertiary education sector typically produces a relatively low return on income.  The level of return varies according to many institutional circumstances, including capitalisation levels, depreciation levels, the extent of plant or equipment leasing, development strategies and overall efficiency of operation.  Generally, however, an operating surplus of 3% or more is regarded by the Ministry of Education as an indicator of adequate financial health.

Liquid assets, asset productivity, and net cash flow are also important indicators of the financial health and viability of tertiary education institutions.  Liquid assets, which include the level of cash, bank deposits and readily liquefiable assets held by tertiary institutions, provides a buffer against variability in performance.  Asset productivity indicates how efficiently tertiary institutions generate income on each dollar of assets, and as such is a measure of efficiency of tertiary institutions from year to year.  Thresholds for cash cover and asset productivity of 12% and 40% respectively are seen as the minimum required for prudent operation.

Net cash flow is the amount of cash that a tertiary institution has left over after it has paid all of its expenses, including investments.  If a tertiary institution is spending so much cash, it should have a good reason for doing so and it should be earning a sufficiently high rate of return on its investments.  A cash flow of 11% is regarded as a minimum threshold.

How We Are Going

After having risen strongly between 2000 and 2003, the operating surplus as a percentage of tertiary education institution revenue fell in each year after 2003, dropping below the 3% threshold in 2005.  In 2006, the operating surplus for tertiary institutions was 1.9%, equating to 63% of the 3% threshold. 

There are a number of important factors which have contributed to this decline.  One reason has been the fall-off in international student numbers, with a 15% reduction from 2004 to 2005.  Another important factor has been the 30% decrease in enrolments at wānanga since 2004.  In addition, in the institutes of technology and polytechnics, changes to limit the amount of community education funded through the student component of the funding system have also had the effect of reducing surpluses.

Tertiary education institutions have exceeded the recommended thresholds for cash cover, asset productivity and cash flow in each of the last eight years.  Although tertiary education institutions remain well above the thresholds for each of these indicators, there have been reductions for all three indicators since 2003.

Key financial performance indicators for tertiary education institutions (1997 to 2006)

Tertiary education institutions have relatively low levels of debt, while the overall ratio of equity to assets is over 80%.

Where To Find Out More

Tertiary education institutions' income is generated principally from Government tuition subsidies, domestic and overseas student fees, and research. The following indicators contain information showing trends relating to these individual sources of tertiary sector income:

• Participation rates in tertiary education
• International students enrolled in tertiary education
• University research contract income
• Government funding of tertiary education

References

Ministry of Education (2007). New Zealand's Tertiary Education Sector Profile & Trends 2006. Wellington: Ministry of Education.

Ministry of Education (2006). Tertiary Education Strategy 2002/07: Monitoring Report 2005. Wellington: Ministry of Education.