Cash Flow Issues in
Challenging Economic Times
The (not so) Golden State Experience
Tony Shen (EdTec)
Adam Miller (CCSA)
Caroline Roemer Shirley (Louisiana Association of Public
Charter Schools)
National Charter Schools Conference
June 22, 2011
Agenda
The Problem
California Cash Flow Schedule and Deferrals
Typical Expense Timing and Cash Flow for Charters
Resulting Cash Deficits
Potential Solutions
Negotiate with Vendors
Bank Loans and Lines of Credit
Private Loans
Receivables Sales
Charter State Organization Approach
Program Development/Management
Advocacy
Education
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The CA Cash Flow Problem
The problems with charter school cash flow exist because of the
mismatch in timing between revenues and expenses
The Problem
California Cash Flow Schedule and Deferrals
Typical Expense Timing and Cash Flow for Charters
Resulting Cash Deficits
Potential Solutions
Negotiate with vendors
Bank Loans and Lines of Credit
Private Loans
Receivables Sales
Charter State Organization Approach
Program Development/Management
Advocacy
Education
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The CA Cash Flow Problem
Why is the state deferring payments?
The state of California is in a poor cash situation, and is pushing the
burden on those that depend on it for funding
STATE CASH ON STATE CASH
HAND OBLIGATIONS
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Understanding the CA Deferral Schedule
Deferrals Create Meaningful Cash Flow Problems
Current CA Deferral Snapshot – 2010-11
~29% of state attendance-based funding payments delayed until next fiscal
year
Multiple intrayear deferrals as well
Schools will not be “made whole” for current year until September/October
2011
Estimating the CA Deferrals – 2011-12 – May change with CA Budget Approval
Via 13 scheduled deferrals, ~59% of revenue will be deferred at some point in
2011-12
Only ~12% of total revenue will received before December 2011
~35% deferred into 2012-2013
Deferred receipt of revenues causes substantial cash flow issues
Few charter school expenses can be deferred to match the deferred revenue
schedule
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Typical Charter School Expenses
Typical expense patterns for charter schools are fairly evenly
distributed over the entire year
July August Septem ber October Novem ber Decem ber
1000's - Certificated Salaries 2% 7% 9% 10% 9% 9%
2000's - Classified Salaries 6% 7% 9% 9% 9% 9%
3000's - Employee Benefits 8% 6% 10% 9% 9% 8%
4000's - Books & Supplies 4% 10% 14% 13% 7% 7%
5000's - Services & Other
Operating Expenses 4% 6% 9% 8% 8% 7%
Total - Expense 4% 7% 9% 9% 9% 8%
Cumulative Expense 4% 11% 20% 29% 38% 46%
January February March April May June
1000's - Certificated Salaries 9% 9% 9% 9% 9% 9%
2000's - Classified Salaries 8% 9% 9% 9% 9% 10%
3000's - Employee Benefits 11% 8% 9% 9% 8% 5%
4000's - Books & Supplies 6% 6% 7% 5% 7% 13%
5000's - Services & Other
Operating Expenses 7% 8% 8% 7% 8% 21%
Total - Expense 8% 8% 8% 8% 9% 13%
Cumulative Expense 54% 62% 71% 79% 87% 100%
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CA Charter Schools’ Cash Deficit
Expenses are relatively evenly distributed throughout the year while
revenues are deferred; massive cash deficits result
July August September October November December
Cumulative Expense 3.99% 10.71% 20.05% 29.18% 37.72% 45.68%
Cumulative State Revenue 0.00% 0.00% 0.00% 11.53% 11.53% 20.53%
Cumulative Deficit -3.99% -10.71% -20.05% -17.65% -26.19% -25.15%
January February March April May June
Cumulative Expense 54.03% 62.30% 70.73% 78.89% 87.41% 100.00%
Cumulative State Revenue 29.53% 55.00% 56.32% 56.32% 62.84% 64.93%
Cumulative Deficit -24.50% -7.30% -14.41% -22.57% -24.57% -35.07%
• Deficits reflect 2011-12 payment schedule; June deficit reaches 35%
• Growing schools have an even more dramatic cash deficit because of the
timing of the catch-up payments under CA funding
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Deficit Example
Revenues and expense timing mismatch creates a six figure deficit in ten
months during the year
Example: $1M Budget School
July August Septem ber October Novem ber Decem ber
Monthly Expense $ 39,862 $ 67,234 $ 93,387 $ 91,312 $ 85,432 $ 79,559
Monthly Revenue $ - $ - $ - $ 115,300 $ - $ 90,000
Monthly Deficit $ (39,862) $ (67,234) $ (93,387) $ 23,988 $ (85,432) $ 10,441
Cum ulative Deficit $ (39,862) $ (107,096) $ (200,483) $ (176,494) $ (261,927) $ (251,486)
January February March April May June
Monthly Expense $ 83,475 $ 82,699 $ 84,339 $ 81,550 $ 85,299 $ 125,851
Monthly Revenue $ 90,000 $ 254,700 $ 13,200 $ - $ 65,200 $ 20,900
Monthly Deficit $ 6,525 $ 172,001 $ (71,139) $ (81,550) $ (20,099) $ (104,951)
Cum ulative Deficit $ (244,961) $ (72,961) $ (144,100) $ (225,650) $ (245,749) $ (350,700)
Ending deficit = $350K
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Potential Cash Flow Solutions
There is no one magic solution, but schools should consider all alternatives
Why the problem exists
Overview of State Cash Flow Schedule and Deferrals
Review of typical expense timing and cash flow for charters
Cash deficits that occur because of revenue and expense timing
Potential Solutions
Negotiate with vendors
Bank Loans and Lines of Credit
Private Loans
Receivables Sales
Charter State Organization Approach
Program Development/Management
Advocacy
Education
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Negotiating with Vendors
Strong credit relationships are critical in times of slow cash flow
Immediately establish credit relationships with major vendors (i.e.
Staples, Office Max, Dell, textbook publishers).
Have honest conversations with your landlord; share cash flow
projections.
Seek out vendors who are willing to accept purchase orders; negotiate
payment terms to coincide with cash flow.
As much as is practicable, limit vendor relationships to those who work
exclusively with and/or understand the unique financial needs of public
schools.
Engage in honest negotiations with your authorizer regarding payment
delays for any fees or charges payable by your charter school (if
applicable).
When making promises to pay, be realistic about the timing of funds.
Once a promise to pay is made, work hard to meet that deadline.
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Bank Loans and Lines of Credit
Loans from your bank (or other banks) are worth exploring
Lines of credit: great source of capital because of the flexibility in
withdrawals and repayments
Minimize interest by only using line when needed
Plan ahead for when to draw down line and when to repay
LOC challenge: difficult to obtain in the current market
Lenders are not familiar with charter school finance and do not know how to
underwrite the risk
– Obtain help from someone familiar with LOCs to help put together the loan package and present
your case to the bank
Charter schools have few hard assets to collateralize debt
Many schools do not have a sufficient operating history and track record to give
lenders comfort
Will usually require school to move funds to bank
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Private Party Loans
Loans from a private party might not be available, but are worth exploring
Possible private party lenders: authorizers, landlords, vendors or any
other school partners (individual or organization)
May provide a cash flow loan because they understand the school better than a
bank would
Terms can be negotiated to be beneficial for both parties
– Example: An 8% simple interest rate loan with no up front fees is cheaper than most
available options and provides an acceptable return to many lenders
Challenges
Lenders are likely not financial institutions and probably cannot perform a
complex underwriting
Some political risk with approaching certain parties about a loan
Potential complicated legal issues; consult counsel before going down this
path.
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Sale of Receivables
Low Risk Financing Vehicle for Lenders to CA Charter Schools
Selling receivables does not necessarily imply high financing costs for schools
Investor purchases a receivable payable to a school, at a discount to face
value, in advance of the payment date
The right to receive funds is sold to the investor
Pricing reflects time value of money and credit/collection risk
Selling receivables in other industries can be expensive due to
unpredictability of timing of payment and collection risk.
Charter school receivables are less unpredictable
Single Payor -- State of California
Earned Receivables -- collection risk is low on earned receivables;
timing of payment is the greater, but more manageable risk
Yet, cost of capital for receivables purchasing programs remains high
Investors are not well-versed in charter school funding and associated
risks – so receivable sales are not inexpensive
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Sale of Receivables
Issues for schools
Receivable sales have provided needed cash flow financing for schools unable to obtain
more cost-effective options
Sales have become a major source of short term financing for charter schools in California
Benefits
• Quick approval and funding
• Financial partner that understands charter school finance
Challenges
Accounting for financing costs
Maintaining budget discipline after sale
Getting off of the treadmill
Selling more than a school needs
Origination fee paid whether the school “needs” the funds or not
Schools spend funds unwisely and don’t preserve capital for future needs, then
need to sell more receivables to finance future expenditures
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Receivables Sales Example in CA
New School needs $250,000 due to State deferrals
New School agrees to sell $1.5MM in receivables over the year
Fee of 3% = $45k
First sale – Receives $384k for selling $400k in receivables
New School is okay but did not reduce expenses by $61k ($45k
+ $16k)
Back to the well! Sells additional receivable to cover additional
months
Receives $385k for selling another $400k
Total cost of the program has increased 20% and can wipe out
reserves
Without meaningful cuts, the school will continue to dig a hole
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Identifying Which Receivables to Sell
Think strategically about which receivables to sell; goal in any financing situation
should be minimizing total dollar cost while meeting cash need
Jan Feb Mar Apr May Jun Jul Aug
Beginning Cash $ 100,000 $ 110,000 $ 38,484 $ (41,516) $ 13,706 $ (49,659)
Apportionment $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000
Deferral Net $ (81,516) $ (90,000) $ 45,223 $ (73,365) $ (90,000) $ 221,241 $ 68,417
Total Revenue $ 90,000 $ 8,484 $ - $ 135,223 $ 16,635 $ - $ 221,241 $ 68,417
Total Expense $ 80,000 $ 80,000 $ 80,000 $ 80,000 $ 80,000 $ 80,000
Ending Cash Balance $ 110,000 $ 38,484 $ (41,516) $ 13,706 $ (49,659) $(129,659)
In this example the school would have several options to finance March cash deficit:
Option 1: Sell April receivables to fund March – Least expensive way to finance
March since the discount rate on the receivables sale would only reflect one month,
but the school would face cash deficits later
Option 2: Sell all remaining receivables (Apr-Aug) – Provides the most funding
and solves the cash flow deficit, but school incurs unnecessarily high fees by selling
more receivables than needed
Option 3: Sell enough July receivables ($130-150K) to cover June deficit –
Provides the school enough funding to cover all months, while keeping origination and
discount fees low 16
Sales of Receivables
Available Options in CA
If your state defers payments and charter schools face similar cash flow
challenges as those in CA, you can contact the companies below to see if
they are interested in purchasing receivables in your state.
In all events, schools should seek proposals from any and all receivable
sales providers to find which one best meets their actual cash flow needs.
Advanced Placement Capital - www.advancedplacementcapital.com
Charter School Capital – www.charterschoolcapital.org
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Summary
Because of large revenue deferrals from the state, CA schools
need to start planning early to manage cash flow
Cash flow projections should be long range (at least 6-8 months)
and updated monthly
A rough multi-year cash projection is important as deferrals will likely
persist
Begin considering financing options early as underwriting processes
can be lengthy
Start negotiating with vendors
Identify which cash flow solutions your school qualifies for
Begin the process for lengthier, less expensive financing (e.g., state
loan programs and LOC’s)
Evaluate pricing and timing of all options and carefully consider
before making final decision
Goal: minimizing financing costs (total $’s) while securing
sufficient financing
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Role of the Charter Association
CCSA’s Experience
The Problem
California Cash Flow Schedule and Deferrals
Typical Expense Timing and Cash Flow for Charters
Resulting Cash Deficits
Potential Solutions
Negotiate with Vendors
RANs
Bank Loans and Lines of Credit
Private Loans
Receivables Sales
Charter State Organization Approach
Program Development/Management
Advocacy
Education
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CSO Program Development/Management
Growth Loan Program
Started in 2004
$43 Million; 152 schools
CDFI Partners: NFF, LIIF, NCB, Prudential, Raza & others
CCSA Role: Program Developer, “Lender”, Assist in Raising Capital,
Marketer, Screener, Translator, and Ongoing Manager.
Emergency Loan Program
Started in 2009
$5 million; 20 schools
CCSA Role: Similar to Growth Loan Program
Revenue Anticipation Notes (RANs)
Facilitated $13 million for a school and a CMO
Pooled programs – multiple false starts
CCSA Role: Convener (lenders, lawyers, state agencies, schools,
foundations) 20
Advocacy
Government
Eliminate Need - Waivers for charter schools
Improve Lending Environment - Empower state agency to intercept
funds for bond issuances to charters
Equity -TRANs Inclusion
Lending Community
CDFIs
Commercial Banks
Credit Unions
Receivable Purchasers
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Education
Charter School Members
Financial Planning and Management
Financing 101
How to Approach a Lender
Vendors
Presentation at Annual Conference
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Working Group
Email Adam at adam@calcharters.org to
be added to the distribution list
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