Beauty Link - Volume 3, Issue 4 - (Page 53)
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Calculating Your Composite Score
Why does it matter?
Philip Courtney Hogan, CPA, ABV, CFF
here are a few words that you never want to hear from your auditor: IRS, jail or default to name a few. Point nine (.9) is another. Point nine is a failing composite score. Low composite scores can cause your school to face harsh penalties from the Department of Education. You can be forced to put up additional collateral or be put under heightened cash monitoring. These penalties will make operating your school difﬁcult; therefore passing your composite score should be one of your school’s top priorities. Your students are always reminded that in order to pass their tests they must prepare and study. Similarly, in order to pass your composite score, your school must prepare. You need to understand what the score is, how it works, and what causes low and failing composite scores.
What is the composite score and what is a passing grade?
The composite score is an outgrowth of a scoring system called the Z score. Developed in 1968 by NYU Professor Edward Altman to help predict the potential of a company ﬁling for bankruptcy within two years, the Z score was modiﬁed by Price Waterhouse and adapted by the Department of Education to measure the ﬁnancial viability of a school. Three ratios are calculated and scored for strength and weight. A composite score of 1.5 to 3.0 designates a school ﬁnancially responsible not requiring oversight; a school will require oversight with a score of 1.0 to 1.4, even though it is in a ﬁnancially responsible range; and a school scoring -1.0 to .9 is deemed not ﬁnancially responsible, and the heavy hand of the government falls.
Net property plant and equipment Goodwill net of amortization 9. Long-term debt (including current) 10. Amount owed for retirement liabilities 11. Total assets The critical point to measuring your composite score is keeping your ﬁnancials according to generally accepted accounting principles or GAAP. Many schools keep their books on a cash basis, which is not a generally accepted accounting principle. Schools can enter their data into a composite score calculator. Calculators are available at www.NACCAS.org and at our website at www.pchogancpa.com. I suggest every school monitor their score on a monthly (or at least quarterly) basis to stay alert to any failing ratios and give you time to improve them. The wise owner will make achieving a high composite score a priority. This is money in the bank, literally, and assures your continued Title IV program participation.
Courtney Hogan is a Certiﬁed Public Accountant who obtained his BBA degree from Southern Methodist University in 1971. In 2000 he became certiﬁed as an Accredited Business Valuator (ABV). In 2007, Hogan purchased George Gross and Co., a ﬁrm with an expertise in auditing trade schools and now audits more than 30 trade schools located in 13 states.
Avoid these situations to prevent a failing composite score.
Capital Withdrawals: Often small-business owners take loans or bonuses out of the school’s proﬁ ts. Composite scores treat a loan to an owner like a capital withdrawal. Cash Isn’t King: Paying all cash for property and equipment is treated as a reduction of the school’s equity. If purchasing a building or any property, use long-term ﬁnancing to offset any negative effects to your equity. Loaning Money to an Afﬁliate: This is the same as making a loan to a shareholder and will decrease your composite score because it is treated as a reduction in your school’s equity. Unproﬁtability: This is the most important status to avoid. Stay on top of your revenue and expenses, and maintain your school’s proﬁ tability.
What are the ratios and how are they calculated?
The three ratios that must be calculated for the composite score are: 1. The Primary Reserve Ratio 2. The Equity Ratio 3. The Net Income Ratio In order to calculate these ratios eleven items are needed: 1. Net Income before taxes 2. Total revenue (annual or last 12 months) 3. Total owner’s equity 4. Total expenses (annual or last 12 months) 5. Amount owed to the school by owners 6. Amounts owed to the school by afﬁ liates
B E A U T YL I NK | R E FLE C T I O N | 2 0 1 1 |
Table of Contents for the Digital Edition of Beauty Link - Volume 3, Issue 4
Five Simple Secrets for Building a Habit that Lasts Julie Gray
Trends 2011: The looks and treatments that drove us mad— and the multifaceted methods behind them Amy Drew Thompson
2011 AACS Annual Convention Photo Spread & Recap
Economic Education: Introducing the true cost of debt to students PART ONE OF A TWO-PART SERIES Kenneth J. Zarda
Reflecting on Performance: Evaluations, goal-setting and reaching beyond Angie Shuler
Delivering a World-Class Experience: Strengthening your school’s service aptitude John DiJulius
True Potential: Understanding the value of self-reflection Desiree Jumchai
Wild Dinner Stories: Thoughts and lessons of the unexpected Jeff Pulford
Keeping Connections: Alumni programs are powerful business-building tools Angela Watson
Is One Duck Out of Line? The educator’s role in financial aid Ray Testa
Calculating Your Composite Score: Why does it matter? Philip Courtney Hogan
Beauty Link - Volume 3, Issue 4