Analyzing the Financial Condition of Higher Education Institutions Using Financial Ratio Analysis Page: 22
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well as sinking fund obligations to revenues. The accepted benchmark is 20 percent of
operating revenues, but 10 percent is better.
Debt Service = Debt Service/Operating Revenue
To measure the institution's commitment to continuing payments in proportion
to its revenue sources in the intermediate-term, the ratio of Restricted Income/Total
Income can be used. Heavy reliance on restricted revenues generally constitutes increased
exposure to financial risk.
Sources and Uses of Financial Resources
Many of the financial ratios that higher education institutions apply measure
from what sources financial revenues are earned and for what services expenses are
incurred. This allows both internal and external entities to monitor institutional
efficiency. The interrelationships that exist among financial resources require a
comprehensive examination of the institution's total financial structure. A clear
understanding of the trends in and the condition of the financial resources is important
to the early detection of any institutional distress. Changes in resources are symptoms
of those internal and external factors that cause financial distress or improvement. A
higher education institution with sufficient financial resources can withstand adverse
trends and has the flexibility to institute changes at opportune moments to reverse the
trends. Resources merely provide the opportunity to be flexible through economic
changes and experiment where possible without jeopardizing the institution's future.
Total revenues should be increasing at a rate comparable to the combined effects
of inflation and program needs on total expenditures. Higher education institutions
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Buddy, Nancy J. Analyzing the Financial Condition of Higher Education Institutions Using Financial Ratio Analysis, dissertation, May 1999; Denton, Texas. (https://digital.library.unt.edu/ark:/67531/metadc2194/m1/26/: accessed April 24, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; .