CHAPTER 1
Since the late 1975s, the pace of growth in educational facilities and educational
enrolment has been declining. The scarcity of financial resources increased as a result of
the economic problems of the 1980s and the cutbacks in government spending in the
context of structural adjustment programs. At the same time, the demand for education
continued to increase due to population growth and the youthful age structure of the
Even without the increase in enrolment, the cost of education tends to rise
autonomously. First, if policies are not adjusted, fixed salary structures will lead to
increasing salary costs as the teaching staff gets older and as more qualified teachers
replace unqualified teachers. Secondly, the costs per student are much higher in
secondary and higher education than in primary education. As more students enroll in
secondary and higher education, the average expenditure per student increases. In the
coming years the gap between the demand for education and the available resources is
In the meantime, the quality of education has come under increasing criticism
(Naik, 1998). Classes are large, students are often absent from school, and dropout rates
are high. Teachers are underpaid, their training is often insufficient, and their motivation
These are concerns that beset Paulinian mission schools. While these schools are
committed to deliver quality Catholic education, there is also the corresponding high cost
of education.
2
The Second Plenary Council of the Philippines noted (PCP II, paragraphs 632 to
634) that among Catholic schools in the Philippines, (1) there exists a trend toward
contest to have the best graduates of faculty, (2) many affluent Filipinos consider sending
their children to Catholic schools as a status symbol, producing well-to-do students the
feeling that “they are a people apart” and a misguided notion that education is merely a
tool to gain privileges and advance one’s social class, (3) the prevailing consumerism in
society offers the highest rewards to consumerist attitudes such that few would take
courses leading to teaching because such do not offer high salary in comparison to those
which correspondingly require high cost of maintenance as faculty and facilities. To cope
up with these increasing cost of education, there is the tendency to raise fees charge to
students which eventually deprived the already deprived to have equal access to quality
education.
On the other hand, “Life can best be understood backwards,” can best be applied
quality education. Going through educational activities, such as salaries, wages and
benefits and student services, etc., within a set period of time can be both tedious and
rewarding. Tedious because it would take time to analyze expenditures on the different
educational activities and rewarding because its results would guide a school
3
acquire, for as Peterson (1995) says, “a principal must be well grounded in budgeting and
other nuts and bolts processes at the heart of a functioning school.” True enough,
when one is managing a mission school. Nevertheless, knowing how to optimize meager
resources, and being able to deliver quality education would be both meaningful and
satisfying.
This paper does not promise to eliminate financial constraints of low tuition fee
resources can be best optimized to be able to achieve its commitment to deliver quality
attainable.
While the SPC System undoubtedly is catering to the elite, the System has never
lost its original vision, i.e., that the underprivileged will have equal access to quality
education. The System also operates in areas where the economically deprived, yet has
the desire to deliver quality education. Quality education when delivered to the poor will
eventually raise him up from his present condition to become a productive member of
society. Nevertheless, in the current millennium, managing a quality school has become
prohibitively costly and takes a creative mind to cope up with this pressure.
This study, therefore, addresses the reality that managing a quality school requires
high cost but a committed management whose vision is to uplift the poor with a given
4
meager resources of a mission school, the SPC System will continue to offer quality
Christian education to the underprivileged of society. The System will not renege to its
rationale for being. This study includes eight mission schools owned and supervised by
Education is a process of becoming that brings out all the potential that is in a
Education contributes to the survival and success of many people. Coffield and
Williamson (1997) opine that the challenge to do so, among others is an economic or
financial issue. The task of education is to play its part in building the kind of society,
which achieves high quality of life for all its members. This is to say that educational
visible and has become a key element of presence among the peoples of the continent.
One area in which the Church in Asia has for many years been in the forefront of human
promotion is that of education. In some parts of Asia, Christians are primarily known as
educators and are respected for their schools and institutes of higher learning. The Synod
Fathers in Asia are convinced of the need to extend and develop the apostolate of
education in the region (Ecclesia in Asia, John Paul II, 1999, p.121). There is a need to
pay close attention to the disadvantaged, so that all may be helped to take their rightful
In Asia, according to the Synod Fathers (1999) the system of Catholic education
This is to say that students should receive formal elements of schooling to pursuing
academic excellence for which they are already well known must retain a clear Christian
The education industry assists a learner to become fully the possessor of the
traditions that vitalize his society. Society expects educational institutions to produce
leaders and individuals who feel personally responsible for the culture a learner has
inherited, adding to its content and changing direction called for by the times and society
expenditure for the Commission on Basic Education a total amount of P1.7 billion or an
equivalent of $42 million. The total expenditure for education measured as a percentage
of GNP stands at 2.2%. This is lower compared to the expenditure for education as a
percentage of GNP of other ASEAN countries like Malaysia, 5.2%, Thailand, 4.1%,
Brunei, 3.1%, Singapore, 3%, Cambodia 2.9%, Vietnam 2.7%. The average of all Asian
countries is 2.9%.
basis of education and its support system: …"the State shall establish, maintain and
support a complete, adequate, and integrated system of education relevant to the of the
people and society." 1 Sec. 3 (2) provides: …shall strengthen ethical and spiritual values,
develop moral character and personal discipline, and encourage critical and creative
thinking.2
6
Education Act of 1982 of the Philippines provides for the establishment and
maintenance of an integrated system of education. This Act governs both public and
private schools in all levels of the entire education system until now. The constitutional
provisions and Education Act 1982 refer to both public and private schools, as they both
manner these two types of schools are financed. Public schools are financed from public
funds while tuition and other fees finance private schools where Catholic universities are
classified. The main educational burden rests on private schools. Thus, private
education to the people; they have become a main dispenser of education to the people.
Unlike in business which can easily pass off to the customers any increase in production
cost by just increasing the prices of products, private educational institutions cannot
Education is not only an investment in human capital but it is also a basic human
right. Since private schools need to increase tuition fees to survive, concerns were
expressed that economic pressures could threaten private institutions or limit their
If education is the duty of the state and it is one of the services expected from the
state in view of the taxes paid by the people then, the Philippine government needs more
budgets to finance education. However, the history of the Philippines has shown that,
from the financial viewpoint at least, the government cannot satisfy the growing needs of
education in the country. It is partly for this reason that every year for instance,
experiencing hard times these days. Philippine laws, as dictated by economic conditions,
have increased the salaries and living allowances of workers. Add to this is the double
figure inflation rate now prevails in the country, these make the cost of education quite
prohibitive.
accepted by public schools. In view of the growing demand for basic education and
increasing cost of education, private institutions need direct financial assistance from the
quality of instruction. Since this is not done, heads of private institutions are challenged
public or private institutions. Viewed with impartiality, the issue actually hews itself into
enjoy academic freedom, because both serve the same clientele, why should not the same
privileges be granted to both? If both are considered bastion of intellectual strength, why
should public schools be given funding resources taken from the taxes of the people,
while the private educational institutions like the Catholic institutions have to search for
The word Catholic is derived from the Greek word, "katholikos," meaning
shared by Christians in churches living in communion with the Church of Rome, (Glazier
churches such as Orthodox and those of the Anglican communion that share the Catholic
tradition.
The word "education" comes from the cognate Latin words educere and educare.
individual in the social consciousness of the race. For Cremin (1977), he says education
attitudes, values, skills, or sensibilities, as well as any outcomes of that effort." From this
depth and in breadth. It refers to the whole person and affects all of that person's
relationships - with self, with others with things and with ideas. In a word, education
implies wholeness.
1929 that education "consists essentially in preparing man for what he must do here
below in order to attain the sublime end for which he was created" (Pope Pius XI, 1930,
p. 4).
economies, the labor market will constantly require new and different skills and so
competencies needed in their career. With the emerging reality of globalization, peoples'
needs of lifelong learning expanded in all countries and regions that made it necessary for
9
flexibility must be the propelling values that should be given attention so that many will
be benefited. This brings along with it the reality of lack of funds to finance the cost of
mission. Thus, Catholic educational institutions are called to the radical witness to the
values of the Kingdom proposed to everyone in view of the definitive encounter with the
Lord of history. According to O’Keefe (1996) there are three distinctive features of
human life. This feature speaks of the basis of Catholic education, which is to uphold
human beings and promote human life in general. There is a close connection between
the Catholic faith and Catholic education. Catholic education is Christ focused and this
direction is an attempt to assist the students in integrating faith, culture and life. In
education refers to the claim of Catholic school that orients the whole culture to the
message of Christ. Thus, Catholic education offers integral formation in which there is a
synthesis of culture and faith. This interplay of the different aspects of human knowledge
3. Religious and moral formation. This feature brings to the fore the
emphasizes the religious and moral character of the person. Remarkable to this is the
McBrien (1980, p. 1172) writes, ' there is no one characteristic, apart from the
Petrine doctrine, which sets the Catholic Church apart from all other churches'. However,
according to O’Keefe (1996, p.109) there are pervading commitments that are
commitment to people's personhood, to who they become and their ethic of life,
"Since every man of whatever race, condition and age is endowed with dignity of a
(Art 1)." In his encyclical, The Development of Peoples, Pope Paul VI (1966) provided
the Christians with his reflection on the economic and social development of the third
world countries and on the right of all people to personal fulfillment. He described the
total development of the person as humanism. He emphasized that the goal of human
development is the orientation of the whole life of a person to God through Christ, the
source of life.
the human person in the educational institutions. Catholic universities have an essential
role to play in educating the both faculty and students. O’Keefe’s (1996, p. 100) state
that these universities should also be places where the research into the contemporary
11
challenges and opportunities for a broader commitment to the common good as well as
the deeper cultural and philosophical resources for creative response is undertaken.
1995) said:
"If education system works, it provides with the skills and desire to learn
and to keep on learning through life. It prepares students for a rewarding
career in a field of their choice. Likewise, it gives them the ability to
make wise decisions about their personal life and to participate
responsibly in the democratic processes of our society."
Borromeo (1995) state that the primary responsibility of the educational manager
is the creation of an effective school, a school where meaningful learning takes place. He
further states that leaders steer the organization to achieve its mission of facilitating
meaningful learning and growth. Thus, leaders should have four essential competencies:
management of self.
the same time an honest recognition of both power within oneself and the power inherent
in the position. Leading, then, becomes not a matter of doing something, but being
something. However, it does not mean that leaders were born leaders and therefore
already equipped with the needed leadership skills. In fact, there are a lot of leadership
skills that need to be practiced every day. Leadership is a day-after-day process that
capacities that leaders must learn to access, cultivate, and balance in personal, spiritual,
12
and professional lives. Leadership is not mere position of power, but rather an access to
There are some common principles about leadership. Leaders actualize these
practices instinctively. It is, however, a common effort among leaders, that knowing
these practices is one thing, but committing them to practice daily is indeed a challenge.
Every individual possesses some unique quality that can serve as the touchstone to
1. Good leaders make daily choices to develop the positive personality traits and
talents they have. These leaders make use of both positive and negative
development project.
2. Successful leaders are sensitive and keen observers. They use their both
analytical skills and intuition as the basis of understanding the present events,
opportunities or crises, but also to gain insight into the patterns that have led
to those situations.
3. Effective leaders learn how to work with the intangibles - with both group
energy and tension, with creating a vision and actualizing the mission, and
There are emerging challenges for leaders in the 21st century, which are more
complex and more demanding than the past. As values affect leaders and the way they
influence the organization and so, leaders have the power to shape their organizations in
organization like the heads of Catholic schools tend to be more experienced and
private sector. Leaders have different values, managerial styles and priorities. Some are
the best.
Delagoza (1996) opines that educational leadership adopts the flow of the times.
In dealing with the challenges of the 21st century, leaders are an imperative factor. He
further states that leaders influence, direct, dictate and manage education towards a better
What is then, the role of Catholic schools? If the present trend of non-
government support for the private sector continues, particularly among Catholic schools,
leaders will have to reexamine their mission, their finances, and their relationships to
other sectors.
Financial Management.
state that it deals with the management of a firm with the aim of maximizing the
primarily with the best combination of financing and commitment of funds to various
uses in the business. It serves to maximize profitability with prudence in terms of risk.
To the extent that management of finances contributes to the goal of profitability, the
History has it that financial management has undergone dramatic changes. In the
bookkeeping, cash management, and the acquisition of funds, today, they have a major
competition. When there is an increase in prices beyond reasonable levels, it will simply
lose its market share. The role of financial managers in the operations of the firm has
downturns, interest rates, inflation, painful shortages and excesses, and extreme optimism
and pessimism, the financial manager must be able to maintain the financial viability of
the firm. As globalization affects the financial markets, the financial manager must also
manage the international financial affairs of the firm. The board of directors and the
manage it efficiently.
is often called the language of finance. Accounting is sometimes said to be the language
of finance because it provides financial data through income statements, balance sheets,
and the statement of cash flows. Hopwood (1973) state that leadership moderates the
“Finance directors and other finance officers focus on the more commercial
aspects of the business and support the Board with effective finance management, but
traditionally they found it to difficult to devote time because they manage the day-to-day
accounting, “(ACCA, 1999, p. 19). The financial manager must know how to interpret
and use income statement, balance sheets, and the statements of cash flow in the
allocation of the firm’s financial resources in order to generate the best return possible in
the long run. Finance is the link that integrates economic theory with the numbers of
accounting. All corporate managers, whether in the area of production, sales, research,
marketing, management, or long run strategic planning, must know what it means to
areas as risk analysis, pricing theory through supply and demand relationships,
comparative return analysis, and many other important areas. Economics also provides
is necessary that a financial manager understand the institutional structure of the reserve
system, the banking commercial system, and the interrelationships between the various
sectors of the economy. Economic variables, such as gross national product, industrial
production, disposable income, unemployment, inflation, interest rates and taxes, must fit
Brigham and Gapenski (1997) state that a successful firm normally has rapid
growth in sales, good investments in plant and equipment and inventory. He further states
that the financial manager must help determine the optimal sales growth rate, and must
help decide what specific assets to acquire. Should the firm finance with debt, equity or
16
some combination of the two? And if debt is used, how much should be long term and
When sales are applied to any educational institution, it will be similar to tuition
fees. The investment will be for classrooms and facilities for instruction. In order to
regulation of the different business giants. There was a passage of emphasis from
mergers and regulations to methods and procedures of acquiring funds. There was a shift
problems were emphasized. Because of this, government regulations and control were
enforced. Thus, both business and securities markets were required to disclose large
volumes of corporate financial data. These data enabled the analysts to assess corporate
At the turn of the 1940s and 1950s, methods and instruments for fund-raising,
This however, led to increased emphasis in liquidity management, financial planning, and
cash budgeting.
In the late 1950s, the field of financial management underwent drastic changes.
The point of view shifted from external environment to the internal environment of
finance. This means that instead of an outsider assessing the performance of the
organization, the insider has been charged with the management and control of the firm’s
17
financial operations. Capital budgeting and firm valuation were introduced and this
spurred interest in security analysis, portfolio theory, and capital structure theory. In
effect, the field of finance evolved from a descriptive discipline dealing primarily with
mergers, regulations, and raising capital to more encompassing quantitative activities that
include all aspects of acquiring funds and effectively utilizing the same. In order to
maximize the value of the firm, the focal point shifted to managerial decisions in
Valuation has been passed on to the 20th century and the analysis has been
expanded to include: (a) inflation and its effects on managerial decisions, (b)
deregulation of financial institutions and the resulting trend toward large, broadly
diversified financial services companies, (c) the dramatic increase in both the use of
computers for analysis and electronic transfer of information; and (d) the increased
continues at a globally faster pace. Financing innovations, economic activities, and new
(1997) say that powerful, low-cost computing has become a part of life. Thus, computers
and communications technology will affect the way financial decisions are made.
electronic commerce, networks of personal computers linked to one another, to the firm’s
mainframe computers, to the internet and worldwide web, and to their customers’ and
face” meetings with distant colleagues through video teleconferencing. Online data that
18
are updated and real-time time information will be readily accessible. This means that
“gut-feel” will be phased out and quantitative analyses will become paramount. As a
result of this, the third millennium’s financial managers will survive only if they have
stronger computer and quantitative skills. In the case of one of the major concerns of a
financial manager, which involves the evaluation of risk-return tradeoffs, most financial
decisions will involve some sort of risk-return tradeoff. The more risk the firm is willing
to assume, the higher the expected return from the given course of action (Scott, Martin,
like how, where, and when money for investment is to be raised (the financing decision),
what investments, short-term and long-term, are worth considering (the investment
decision); what should be done with the firm’s profits (the dividend decision). A good
financial manager should be able to answer these questions after evaluating substantial
(EAGA) authored by the former president of the Republic of the Philippines, Mr. Fidel
V. Ramos that won the support of the private sector even before the completion of a
favorable feasibility study conducted by the Asian Development Bank (Espinoza, 1996
p.72). EAGA is a growth polygon that includes Mindanao and Palawan in the
Philippines; Sarawak and Sabah in Malaysia; Kalimantan and Sulawesi in Indonesia; and
Brunei. (Paterno, 1996. p.74), says that growth area must be able to overcome three
major obstacles: (a) it must improve communications, (b) it should introduce direct air
19
and sea links to enable easier traveling and trading, (c) the central government must
enable the EAGA local governments and the business sector greater freedom. The case
of EAGA is a classic example of a kind of leadership that provides not only values
with the concern for social responsibility like maximum access for the poor to quality
Catholic universities have to depend on tuition fees as their main source of revenue. “The
whole idea of being in business is to make profit. It may sound obvious, but believe me,
many business people out there do not realize that they are not making money” (Alison,
1998).
One may suggest that the most important goal of financial management is to earn
the highest profit for the firm. If this criterion were followed, each decision would be
evaluated on the basis of its overall contribution to the firm’s earnings. However, even if
this approach appears desirable, there are some serious drawbacks that point to profit
First, a change in profit may suggest a change in risk. A conservative firm that
earned Php1.25 per share may be a less desirable investment if its earnings per share
increases to Php1.50, but the risk inherent in the operation increases even more.
A second possible drawback to the goal of maximizing profit is that it fails to take
into account the timing of the benefits. If one could choose from two alternatives, he
might be indifferent if the emphasis were solely on maximizing earning if for example,
20
after two periods, the two alternatives both would provide the same total earnings.
However, one alternative is clearly superior to the other if this alternative has bigger
benefits that occur earlier than the other does. One could reinvest the difference in
Finally, the goal of maximizing profits suffers from the almost impossible task of
A Valuation Approach. While there is no question that profits are important, the
key issue is how to use them in setting a goal for the firm. The ultimate measure is not
what is earned but how the investor values the earnings. In making an analysis of the
firm, the investor will also consider the risk inherent in the firm’s operation, the time
pattern over which the firm’s earnings increase or decrease the quality and reliability of
reported earnings, and many other factors. Risk in general refers to deviation from what
is expected. Moyer, Kretlow, and McGuigan (Moyer, 1997) state that, in finance, risk is
making effective decisions. The concept of expected return refers to the anticipated
benefits from an investment. However, the opposite concept of required return refers to
the demands for return of an investor for assuming risk. In all these considerations, there
is a need for the financial manager to be more adept in correct decision making. The
financial manager needs a broader view of the over-all valuation of the firm. One good
indicator of effective decision is when it either maintains or increases the overall value of
the firm. Hence, from a financial viewpoint; an acceptable decision is when it increases
By attaining the highest possible value of the firm, the broad goal of the firm can
have a focus. This is not a simple task, since the financial manager cannot directly control
the firm’s stock price, but can only act in a way that is consistent with the desires of
owners in general. This is a difficult task of the financial manager. Schwab (1998) says
that growth is what successful investing is all about. He further states that of all the many
investments available, stocks provide the best chance for growth. Since prices of stocks
are affected by expectations of the future as well as by the economic environment, there
are various factors that affect the prices of stocks beyond management’s direct control. In
fact, among the firms with favorable financial trends and good earnings do not always
One good question to ask at this point is: does smart corporate management
actually follow the goal of maximizing owners’ wealth as defined? In many large
small ownership position often controls the policy. Under these circumstances, the
management is more interested in preserving private influence and maintaining its own
In terms of societal expectation, does the goal of maximizing the wealth of the
firm consistent with a concern for social responsibility? In most instances, the answer is
yes. By adopting policies that maximize values in the market, the firm is able to attract
capital, provide employment, and offer benefits to its community. This is the basic
22
strength of the private enterprise system. For private schools where Catholic schools are
classified, they fall primarily in this category. Although most private schools have to
able to deliver quality education and relevant and responsible graduates. Yes, there is
something crucial about the educational process, about communicating concepts and
ideas and helping people to learn, says Catherine McGee (in Rowland, 1997)
Unfortunately, in a setting like the Philippines, private schools have to depend on tuition
fees as their main source of revenue. Although government has allowed deregulation in
tuition fee increases, some private schools also face the danger of being eased out of the
market losing a lot of their students who seek admission to less expensive schools like
public educational institutions that are directly supported by the government. Public
schools according to Philippine Laws are entitled to free primary and secondary
education. Thus, more students enroll in these schools for economic reason. However, it
has been observed that most of the teachers teaching in the public schools send their
children to private schools such as Catholic schools offering primary and secondary
John Ueleke says, “ I do not think the law was drafted to apply to our type of
situation. But, like it or not, we are stuck with the way the law is written” (in Rowland,
1997). Since the Philippine law does not grant direct subsidy to Catholic schools to
finance its operation, these schools resort to tuition fee increases and other sources of
income related to educational services. This is done keep up with the increasing cost of
This study looks into the financial management systems practiced by Paulinian
mission schools. That, despite their limited resources, these schools is able to offer
quality education.
World Bank President, James D. Wolfenson says, "education is the single most
important key to development and to poverty" (Manila Bulletin, May 29, 2000).
According to Knezevich (1984) in the field of education and in the ministry of teaching,
the heads of institutions are charged with special responsibilities for identifying,
procuring, and managing the variety of resources essential to the delivery of quality
success of the school. This includes curriculum and instruction. The goal of academic
curriculum and instruction will be realized when the financial resources are available.
However, Andres (1992) states that it is not excess or lack of funds, which led to the
failure of some business, rather it was the lack of expertise in managing the funds of the
enterprise. Knezevich (1984) states that there is a need to demonstrate leadership and
The role of finance in the success or failure of schools has become all the more
important considering the dramatic increase in the cost of its operation. Coupled with
ballooning cost is the plummeting peso and result of high inflation rates (Saldaña, 1992).
As if these forces were not enough, school heads have to contend with the government
24
restriction on tuition fee increases. Saldaña (1992) points out that the firm is organized to
perform a specific goal or mission, whether for economic gain or to do service. In school
finance, the resources are managed so as to realize the objectives of academic curriculum
and instruction towards the direction of the school mission and vision.
Kimbrough and Nunnery (1988) state that the curriculum and instructional
programs desired must be translated into the financing resources needed through
budgeting. Money must be made available in order to implement these programs. After
this has been acquired, it must be allocated to the desired program with the aim of
management are: (1) how to raise money needed to finance education, (2) how to allocate
this money to optimize equal opportunity for students regardless of place or residence, (3)
how to expand resources to optimize the attainment of organizational goals, and (4) the
and objectives of financial management, this section looks at the functions that must be
performed. Due to the complexity of the finance activity, an approach focusing on the
function into three types: (1) financial policy and strategy, (2) financial management and
Generalizations are complicated by the fact that these functions are interrelated in
practice and certain decisions (e.g., project selection) involve all types of functions.
Nevertheless, it is easier to recognize the nature of the finance function in practice when
establishment of goals, the direction of cost control, and the measurement of or results is
functions of finance.
According to the study conducted by Gray, SPC (1972), the stable financial
management system in the vision mission of the SPC education apostolate is a system
that can directly affect the achievement of the core objective. She further states that this
can be translated the general objectives of the finance department of any non-profit
educational institution like (a) providing adequate funds at all times for its operational
activities and capital investments, and (b) maximizing the utilization and safeguarding of
funds.
The study conducted by Marcelino, SPC (1998) looked into the alignment of
Manila to the vision-mission of the of the SPC Education Apostolate. The study revealed
that the top management and the financial services group strongly agree that the vision-
mission is carried out in the financial practices of these schools. The three important
services cited were (a) treasurership, (b) general accounting, and (c) salary and benefit
such as:
meet the global environment. The weaknesses in the financial practices are determinant
factors in strengthening, developing and improving the financial management system vis-
à-vis the vision-mission. The non-existence of the ignored internal audit system and
fixed asset management in Paulinian schools are priority concerns of top management.
in the accounting systems, creation of audit team, and re-tooling for top management for
based financial management where the top management should be actively involved.
Some specific finance policies, decisions and planning roles follow which
according to Garcia (1999) are useful guides in identifying and evaluating the financial
liabilities
through consolidation
27
• Program diversification
• Cash Management
securities.
organizational levels is shown in Figure 1.1. This figure presents the finance functions
according to organizational level and the type of decisions. The three types of functions
in the three organizational levels are top, middle and line functions.
Investment Financing
Figure 1.1
Major Finance Functions Classified by Organization and Decision Type
29
From Figure 1.1 above, top management is referred to as policy or strategic level,
middle as the operation and control level and line as the technical support level. O'Shea
(Financial Executive, 2000, p. 35) says that the widespread economic and technological
Internet and e-commerce created a need to make serious decisions. In the field of
financial management, there are two basic decisions to be made in terms of finance
responsible for policy and strategic decisions. Decisions to be made by top management
financing decisions at the top level, both capital structure and retained earning policies
are included. The next functions are in the operation and control levels. Decisions to be
made include project management and working capital management. The line function
provide references for decisions, these are the result of financial analysis and
activities remain a passive but integrated activity supporting both classes of decisions and
levels of organization.
function. It covers investment and financing decisions with long-term implications on the
overall risk, profitability, and growth of the company. The financial management and
control function is essentially a middle management level activity. Once strategies and
policies have been set, the middle managers’ role is to ensure that operational and day-to-
day decisions are consistent with the chosen overall directions. Financial analysis and
30
According to Warner (1998) when there are conflicts of values and objectives,
leaders situation may lead decision makers down various pathways. He further states that
leaders may follow his own values, or accommodate the many values of his co-
stakeholders without necessarily ranking them but utilizing these values in reference to
Financial policy and strategy is a top management function. David (1998) states
that financial condition is often considered the single and best measure of a firm’s
value of the firm, top management makes policies and formulates strategies. This goes to
say that in practice, financial factor can alter existing implementation of policies and
2000) No. 25 defines investment as an asset held by an enterprise for accretion of wealth
through capital distribution, such as interest, royalties, dividends and rentals, for capital
appreciation or for other benefits. Top management employs policy and strategy.
Investment is the engagement of funds in fecund assets for the purpose of maximizing
proper allocation and reallocation of capital and resources to assets, projects and the
different divisions of any institution. Ross, Westerfield, and Jordan (1997) say that
investment involves the presumption that there is inherent risk in favor of a higher rate of
31
return. Good management takes into account different types of risks involved in various
investment mediums. These risks affect the safety of principal and expected yield. It is
important that the earning power and soundness of the issuer should be carefully
Saldaña (1992) opines that in the Philippines, there is greater safety of principal
in the case of bonds than stocks. In the same manner, mortgage bonds have priority over
over common stocks. A strong working capital position can provide security for
principal at a given period, even when the earning power is seemingly deficient. A
normal scenario is when a firm possesses a substantial presence of cash, it will be easier
to pay the interest and dividends and meet the current maturing obligations. The
In terms of investment, Brealey and Myers (1991) say that the concept of value
between the security of principal and safety of income. Marketable securities yield high
corporate profits just as they suffer the drawback of business recession or reduced
economic activity. In the case of bonds, safety of income is part of the stipulation in the
contract. However, like the safety of principal, the issuer serves as the touchstone for the
safety of income.
In this study, it showed that among Catholic universities in the Philippines, the
average short-term investment to total asset is only 5.6%. There are several sources of
investment funds but the most common particularly among educational institutions are
32
undistributed revenues from tuition and miscellaneous fees. This amount is usually
intended to pay the monthly salaries of faculty for the whole year and shall consist of idle
working capital when not invested. In the Philippines, Republic Act Number 6728
(1989) provides that the standard expense for salaries is 70% of total tuition fees and 20%
On Capital Structure Policy. Ross (1993) says that a firm's capital structure refers
to the specific mixture of long-term debt equity the firm uses to finance its operations.
He further states that the financial manager has two main concerns. First, it deals with
debts, or how much is the needed amount to be borrowed. Second, it refers to the least
(1992) states that insolvency is a situation where the institution is unable to meet its
maturing obligations on time. This is the case where the institution is technically
insolvent because it lacks the necessary resources to make prompt payment on its current
debt or obligations.
It should be noted that services would be stalled when there are no cash or too
little cash available to pay the bills. If there is excessive cash, however, the value of the
institution in the financial market will be suppressed due to large cost of income
The financial manager strikes an acceptable balance between holding too much
cash and too little cash. This is the focal point of risk-return-tradeoff. A large cash
profitability. On the other hand, a small cash investment frees excess balances for
33
investment in both marketable securities and long-lived assets. This condition intensifies
an institution’s profitability and the value of the institution equity. However, this
On Current and Long-term Liabilities. Liabilities are debts of the firm. These are
Current liabilities are obligations that will be due within a short time, usually one year or
less, and these are to be paid out of current assets. Statement of Financial Accounting
Standards No. 1 (SFAS, 2000) states that classified current liabilities are expected to be
settled in the normal course of the firm’s operating cycle when these are due within the
twelve months of the balance sheet date. On the other hand, long-term liabilities are
obligations that are not due for a comparatively long period of time, usually beyond one
year.
Equity. Horngren and Harrison (1990) define equity as a legal and economic
claim to the assets of a business. In terms of claims, equity is subdivided into two. The
outsider claims is called liabilities while the insider claims is called owner’s equity or
capital.
Related to the aspect of investment, firms invest in the stocks and bonds of other
are securities issued by business firms as a form of ownership that does not bear any
maturity date. On the other hand, according to Porter and Norton (1995), debt securities
are also available in the form of bonds issued by corporations and government bodies.
They further state that the term of a bond can be relatively short, such as 5 years, or much
leverage policy of the Catholic schools. Chronic shortage of long-term capital due to
underdeveloped capital market and inflation remains a problem. The joint International
Monetary Fund and World Bank Mission, Saldaña (1992), recorded that in the
Philippines, the number of public equity issues averaged only 30 a year while new
corporations are registered at an average of 5,000 a year. This shows how limited is the
long-term capital base of the Philippine market. On the other hand, inflation in the
country has always been an unresolved problem. Inflation causes the upsurge of prices
and requires the increase of funds in order to do the same volume of business. As a
result, obligations are settled beyond the nominal terms and capital investments are
deferred due to inadequate capital. Another effect of inflation is the increase in interest
Financing decision determines the capital structure and affects the overall value of
the firm. Through the use of leverage, the cost of capital can be lowered and the market
value per share of the firm can be increased. Modigliani and Miller (1958) argue that in
the absence of taxes and other market imperfections, the total value of the firm and cost
of capital are independent of capital structure. This is based on the theory that investment
value is preserved so that no matter how the pie between equity claims and debt are
divided the total pie or investment value of the firm stays the same. This means that
On Growth Strategy.
According to Ross, et al. (1993), there are four determinants of growth as follows:
35
and the corresponding increase in the ability of the firm to generate funds internally.
leverage of the business. In this way, availability of additional debt financing will
3 Total Asset turnover. This is computed by dividing sales over assets. When there
is a corresponding increase in asset turnover, the sales generated for each peso in assets
increases as well. The effect of this is a decrease on the need of the firm to acquire new
4 Dividend policy. When dividends are paid out, there is a decrease in the
percentage of income. However, this will increase the retention ratio. This will increase
the internal generation of equity and thus increases the sustainability rate.
In a school environment, plant assets or fixed assets, or other titles employed are
property, plant, and equipment are applied to “long-lived” assets which are relatively
fixed or permanent in nature. Typical examples of plant assets are buildings, equipment,
With the passage of time, all plant assets except land lose their capacity to yield
services. Van Horne (1999) states that in accounting, the cost of this asset is transferred
to expense account in a systematic manner during the expected useful life. Depreciation
is the expense account used to account for the periodic cost of wear and tear.
There are several factors that contribute to the decline in the usefulness of plant
assets. These factors include wear and tear due the use and deterioration form the action
36
of the elements, called physical depreciation; another factor include inadequacy and
Thus, plant asset becomes inadequate if its capacity is not sufficient to meet the
important operations and space utilization (Gaite, 1998). He further states that it is easy
to make a place look nice or beautiful as long as one has the money to do it; it is
buildings require better designs, methods of construction, usability and maintenance. The
electrical, structural, and other services. However, the most important factor is the
financial side because without the budget no amount of designs and methods will make or
build an edifice.
business results from the declaration of dividends in an amount less than that of earnings.
Such earnings are kept in the business and are invested to benefit the operation of the
firm. In accounting retained earnings are classified as part common stockholders’ equity.
earnings become part of the fund balance, and are flowed back to the educational
services.
Project Management
In project management, Brigham and Gapenski (1997) say that the most important
step in evaluating a potential project is to estimate its cash flows. Cash flows refer to the
required investment outlays and the net cash inflows from the project. Thus, when a
project appears to be highly profitable, one strategy that a middle manager should employ
is to assess the cause of its high profitability. Ross, et. al (1993) says that the effect of
undertaking a project should be to change the present and future over all cash flows of the
firm. The changes in the cash flows must be considered in relation to its effect to the
value maximization of the firm. Thus, good project management looks at the relevant
cash flow for a project. This relevant cash flow for a project means that there had been a
change in the firm's overall future cash flow that was engendered as a direct consequence
of the decision to pursue the project. It should be emphasized that the incremental cash
commitments are made only to achievable technical, cost and scheduled goals, and (b)
every project is planned, scheduled and controlled so that commitment are achieved.
known as working capital management. Bittel (1978) defines working capital as the
current liquid resources required to operate a business such as cash, current marketable
investment in cash, marketable securities, and inventory turnover and accounts receivable
turnover. The risks involved with these investments are given priority attention by the
capital. There are two main issues in managing working capital. First is managing the
institution’s investment in current assets, while the second is managing the institution’s
Board Report No. 580, (1973) cash management is an important finance function that
has significant bearing on the business. It further states that the more efficient the use of
Management of Fund Sources. Fund sources refer to the receipts or income that
the firm generates from its business operations. Good financial manager manages these
Laya (1985) says that like other business functions, financial management is
primarily charged with the economic function of allocating scarce resources among a
multiplicity of possible users. He further states that it specifically aims to (a) ensure the
most efficient use of capital presently employed by the firm; and (b) obtain additional
Warner and Crosthwaite, (1995), state that the recent dramatic changes in the
funding structures within education have forced educational institution to reassess itself.
Educational institutions are now seen as a service industry, with approximately 75% of
39
operational costs attributed to staff, the control of cash flow and apportionment becomes
critical.
The study done by Baquitro (1974) aimed to explore the financial problems of
Notre Dame of Marbel University through the analysis of its business and financial
of the university was compared with the financial performance of three other schools in
The primary data such as the financial statements, enrollment profile and faculty
profile of the four schools obtained and trend ratios were computed. The administrators,
accountant and cashier were interviewed. A funds flow analysis was also undertaken to
assess how the school manages the fund sources and uses. Ratios of students to full time
The findings of the study showed that Notre Dame of Marbel University has an
adequate business and financial organization. There was proper control of expenses
because of budget performance report. The student-faculty ratios were rather low. The
study further revealed that the source of funds from tuition fees would never be sufficient
expand the canteen operation and manage it profitably, the university should tap other
sources of income such as the alumni association, investments in the money market, and
Arevalo's study (1977) of St. Peter and Paul Technical Institute in Sorsogon,
Philippines analyzed the prevailing financial operations in terms of goals and objectives.
40
The study revealed that the increase in the enrollment's demography was based on the
price shifts of copra and abaca, which are the major industries, and sources of income in
the place. Another factor for the increase was the introduction of technical and
vocational courses in the college level. The main sources of income of the school are
Findings revealed that the earnings of the school are plowed back into the school
by way of better facilities and modern equipment. The school adheres to trust and
confidence policy as shown by its trust in the finance officer. The financial statements
submitted at the end of the school year do not follow the generally accepted accounting
procedures and principles for financial reporting. The study concluded that there is weak
management of finances. There is no defined planning and control system. The study
recommended that the financial officer should prepare adequate financial records that
recommended that the school should have a definite financial policy on sources and uses
A study was conducted by Alabado (1980) to analyze the financial situation of St.
percentages were used to analyze the data in the financial statements. The growth rate
and retention rate were computed to find out how the rate of enrollment increases.
The study revealed that most of the fund sources, or the total income were spent
to pay the salaries of faculty and staff. The trend showed that there was an increase in
fund sources in terms of enrollment increase, but the rate of increase of salaries was
higher the increase of total income during the same period. The study gave the
41
recommendation that the fund sources to be allocated to pay the faculty and staff salaries
should be limited to 60% and the remaining 40% should be available to other
expenditures of the school. The teachers and other staff members should participate in
increasing fund sources through enrollment campaign. The financial manager should
growth, solvency, stability, and effectiveness of its management. Brigham and Gapenski,
(1997) say, to forecast the future is what financial analysis is all about, while from
future conditions and, more important, as a starting point for planning actions that will
affect the future course of events. The first step in financial analysis is done through ratio
financial statement accounts. The main job of financial analysts is to gather and process
financial information and prepare financial analyses. The financial ratios provide the
problems, the analyst estimates additional ratios so as to understand the situation better.
When there are problems, the analyst prepares probable recommendations to check the
problems. In this case, the role of the financial analysts is to assist in the decision-
Helfert (1991) states that the financial analysis has three objectives: (a) the use of
comparative data; (b) the analysis of financial markets; and (c) the interpretation of
42
financial information. The first involves the comparison of data covering more than one
period to be followed by the assessment of financial data. The third involves the
According to Pinches (1996), there are three ideas to keep in mind when
conducting an analysis. First, it is imperative to study the trends for a period of time.
Evaluating the financial data for more than a year to have a frame of reference for
comparison does this. In practice, a minimum of three to five years’ financial data is
ideal to ascertain the financial performance of the firm. Second, an industry performance
standard is a helpful comparison. Lastly, the analysis brings more questions to the fore
analysis is not the end solution to any financial problem. Rather, it helps the decision-
makers of the firm to assess its performance and assists them in determining the future
course of action.
Helfert (1991) states that financial analysis has three objectives: (a) the
interpretation of financial information; (b) the use of comparative data; and (c) analysis
of financial markets. In interpreting the financial data the firm must have standards as a
The audited financial statements are good sources of data for management in
assessing the strengths and weaknesses of the financial performance of any institution
like catholic schools. However, Carr (1994) opines that the typical financial
43
effectiveness measures such as return on capital invested, return on equity and earnings
Cave, Hanney, Koganand and Trevett (1988) suggest that the use of performance
1 Economy, which refers to the allocated resources or inputs such as people, space,
and supplies. This can be used as performance indicators for purchasing, maintenance
relation to college outputs such as lecturer hour or course delivered or students taught.
The performance indicators are staff student ratios and unit costs per course/student.
Carr (1994) further suggests that a college must put together a well balance
indicators that will include both financial and non-financial measures of providing
Financial Planning
process of changing present organizational environments and goals to fit new situations.
financing, short and long term plan for the university. This emphasizes wealth
deals with risk in terms of reality, magnitude, and timing of expected returns.
production, human resource, and the like. In the decision process, the university defines
its operation. The researcher has become interested to know how it will fit into an
institution dedicated to service. The presented models are intended to clarify the different
using its resources efficiently (Rao, 1997). The financial statements alone may not be
45
able to indicate the efficiency of performance. The common approach to this situation is
to perform financial statement analysis. The financial statement analysis is the method
used by interested parties such as investors, creditors, and management to evaluate the
past, current, and projected conditions and performance of the firm (Malig, 1998). The
following are four models of common procedures used by analysts and investors to
the firm. To do so, one must have the analytical tools. Ratios are a valuable analytical
tool when used as part of a thorough financial analysis. They are just one piece of a
financial jigsaw puzzle that can show the standing of a particular company, within a
Financial ratios are the significant relationships between items in the financial
financial statements (Emery, Finnerty and Stowe, 1998). In analyzing and interpreting
the financial statements, ratios are indicators. This means that these are used as guides in
determining the particular area that needs improvement and priority attention in the
operation. Bolton and Conn (1981) state that using ratios in analyzing financial
statements tells us something about the financial conditions and operations of the firm.
There are certain ratios that are used as a rule of thumb to compare the financial condition
of the firm against industry wide standards. When the firm’s ratio in a key area is worse
than the industry standard, there is a signal that there is a potential inferior financial
performance; when the ratio is better than the industry standard, there is a signal that
46
there is better potential for superior financial performance, at least in a given particular
area.
Understanding basic financial statements gives a head start with other financial
reports. There are four key financial statements: the income statement, the balance sheet,
the statement of retained earnings, and the statement of cash flows, and their footnotes.
These statements are the quickest way to get a basic understanding of a company, (Rane,
1998)
Moshe Ben-Horim (1987) states that the balance sheet and income statement give
useful information in order to evaluate a firm’s financial strength, liquidity, risk, and
profitability. It is usually not easy to determine a firm’s strength and weaknesses by just
looking at these statements. In this regard, financial ratios are helpful. Ratios show the
relationships of balance sheet and income statement items to one another. Financial
ratios are designed to measure specific characteristics of the firm’s financial status and
activity. These ratios are divided into four categories: (1) activity ratios, (2) liquidity
Keown, Martin, Petty, and Scott (1988) state that financial ratios are the principal
tools of financial analysis because these can be used to determine the financial well being
of a firm. For instance, liquidity ratios can be helpful to a manager of a commercial bank
ratios also provide a way of making meaningful comparisons of a firm’s financial data at
different points in time and with other firms. These ratios can indicate the financial
standing and well being of the firm. Financial ratio analysis requires simple
47
great deal of skill and a thorough understanding of the tools of financial analysis.
commonly use ratio analysis to assess the financial condition of the firm. It is a useful
tool since ratios provide a relative measure of the firm’s performance. The basic input
for ratio analysis is in a given period’s income and balance sheet statements. Using the
financial data of these statements, various ratios can be computed that permit an
On the other hand, Gitman cautions that a single ratio does not generally provide
significant information to judge the overall performance of the firm. It is only when a
group of ratios is used that reasonable judgments concerning overall financial conditions
can be made. The analyst should also be sure that the period covered by the financial
statements being compared is the same. Thirdly, it is best to use audited financial
statements for ratio analysis. Lastly, it is important to make sure that the data being
compared have been developed in the same way. The use of different accounting
give the vertical percentages or ratios for financial data without giving peso value. He
which the relative percentages of financial items, as well as their peso amounts are
shown. This means that the absolute amount in either the balance sheet or income
statement is converted into more easily understood percentages or some base amount.
48
The result will give the analyst certain insights not evident from the raw figures
themselves. Furthermore, the different statements can be compared both over time and
A common size statement is useful in describing the trends found in the financial
statements. Pinches (1984) describe the common size statement as one of the most direct
and simplest ways to analyze changes over time. Such comparisons show patterns or
trends over time with respect to the proportion of resources committed to various asset
Application of common size statement analysis enables the analyst to see the
relationships of percentages to totals such as total assets or total sales, or to some base
year. According Van Horne (1999), the evaluation of trends in financial statement
percentages over time affords the analyst insight into the underlying improvement or
deterioration in financial condition and performance of the firm. It is true that even if a
good portion of this insight is revealed in the analysis of financial ratios, broader
different components of a balance sheet and income statement. For example, expressing
the components of the balance sheet as percentages of the total assets can do this. In the
same manner, this can be done for the income statement, but in relation to sales. In this
case of an income statement, the gross and net profit margins are typical examples of this
expression, and can be extended to all items on the income statement. The expression of
individual financial items as percentages of totals usually permits insights not possible
from a review of raw figures themselves (Van Horne, 1999). Philippatos and Sihler
49
(1991) state that common size statements can be used to compare the behavior of a firm’s
One of the tools for the analysis of past financial performance and financial
planning is the funds-flow statement analysis. Cruz (1997) states that the strength of this
model is that funds flow analysis shows the detailed movement of funds so that
According to Mejorada (1999), funds may refer to (a) cash; (b) working capital;
(c) quick assets; or (d) net quick assets which includes cash, marketable securities, and
receivable less current liabilities. The funds flow analysis evaluates how a firm uses
funds and determines how these uses are financed. In other words, this tool enables the
financial manager to assess the growth and financial needs of the firm as well as the best
As described earlier, the financial ratios are useful tool for analysts to pin point
the strengths and weaknesses of the firm. On the other hand, one type of information,
which is found in the basic financial statements, is not explicitly dealt with by the
financial ratio analysis. This refers to flow of funds. In this regard, the flow of funds
analysis is a useful tool for planning and control. Ben-Horim (1987) states that the flow-
of-funds analysis is designed to reveal an exact breakdown of both the sources and uses
of funds during a period of time. It will enable analysts to answer the questions such as,
how much of the money used during the period was internally generated and how much
maximization. But for a non-profit, Non-stock Corporation like a Catholic school, the
institutions, the aspect of risk and of qualitative or social goals is considered because
mission is the primary reason for existence. However, this does not preclude presidents
the seriousness of the mission, a sound financial management is necessary. Thus, any risk
of assets and debts to generate revenues and profits with the least cost. For Catholic
universities, efficient financial management has a far deeper meaning for it touches on a
more conscious following of the Gospel values. Thus, a greater emphasis on value
Financial management decisions are based on the assumption that individuals and
firms will pursue their own self-interest. This assumption is in fact required for the
efficacy of a capitalist economy. Some people, especially the religious with a vow of
poverty, cringe at the thought of an entire economic system relying on such a “crass”
behavioral assumptions. Others equate self-interest with “immoral” behavior and frown
51
on “big business.” These reactions are based in a misunderstanding of exactly what self-
interest entails.
simply pursuing the course of action that one believes is best for one-self. This applies
both to the speculator in the stock market, to the monk, and obviously to an academic
finance officer who needs to generate funds for quality operations. All of them are
pursuing their self-interest; the speculator aims at becoming a millionaire, and the monks’
hopes for spiritual salvation, and the finance officer to keep his university above
“turbulent waters.” Adam Smith would agree that there is nothing fundamentally wrong
unfair business practices, exploitation, lying, deceit, stealing, and other such conduct that
can be characterized as unethical, society will be worse off. In fact, Smith’s concept of
virtue addressed far more than pure opportunism. He recognized the possibility that self-
interest factions could operate to the detriment of society as a whole and urged that the
members of society, and especially their political leaders, adhere to a respect for diversity
decisions are made. The finance manager has to adapt to realities of running the finances
of his institution and at the same time adhering to the stated values that his company
professes.
effective decisions. These decisions fall into three main categories: how the firm makes
52
its day-to-day operating decisions, the investments the firm makes in both short- and
long-term assets, and how the firm is financed. These areas are important not only for
businesses and other financial institutions but also in governmental operations, schools,
hospitals and highway departments. It is imperative then that the finance manager makes
decisions regarding which assets his organization should acquire, how these assets should
be financed, and how that organization should manage its existing resources.
the administration, within the policy guidelines, of current assets and current liabilities.
There are three alternative policies regarding the total amount of current assets
carried. These policies differ with regard to the amount of current assets carried to
support any given level of revenue, hence, in the turnover of those assets. The first
alternative policy is a relaxed current asset investment (or fat policy) where relatively
large amounts of cash, marketable securities are carried and where revenue is stimulated
by the use of a credit policy that provides liberal financing to clientele and a
corresponding high level of receivables. Conversely, under the restricted current asset
investment (or lean-and-mean) policy, the holdings of cash, securities and receivables are
minimized. Under the restricted policy, current assets are turned over more frequently so
each peso of current assets is forced to “work harder.” The moderate current asset
certainty, the university would hold only minimal levels of current assets. Any larger
amount would increase the need for external funding without a corresponding increase in
53
profits, while any smaller holdings would involve late payments to wages and salaries
and suppliers and lost in revenue due to an overly restrictive credit policy.
In a relax policy, revenue is stimulated by a relax credit policy, that is, the
university practices an open admission with very affordable entrance fees. Nevertheless,
under this policy, high levels of receivables are expected. Under this policy, the
university demonstrates its value of opening its doors even to the economically deprived.
On the downside, the high level of receivables that is surely to be experienced will
burdened the university meeting its current cash needs like paying salaries, paying
suppliers and settling current debts. Likewise, a great number of its students who are able
to enroll under a liberal entrance fee policy eventually drop out for being unable to pay
remaining obligations.
For example, the finance officer so decides that academic fees be paid in full upon
enrollment or that more than half of total academic fees be paid at once. This decision
will certainly decrease the level of current assets, specifically receivables. Also, because
of the large amount of one time collection, the university will have to deposit its cash on
a long-term investment. This decision will have two negative consequences. First, it will
discriminate students of middle- and below income groups. This decision goes against the
professed value of a catholic on preferential to the poor. This policy that leads to a tight
credit policy will further disenfranchised poor students of their right to quality education
as if will become difficult for them to settle their current obligations to the university.
Worst scenario, the poor student will eventually drop out. Second, because of the reduced
level of current assets, such as cash, the university will use instead debt or may postpone
highest expected return on this investment, but it entails the greatest risk while the
The moderate policy seeks to find an optimal mix of cash, marketable security
and receivables. This mix is influenced by its credit policy, which must favor the
majority of its clientele. This decision is to hold the amount of working capital carried to
the minimum consistent with running the university without interruption. To determine
the optimal mix is not easy. The finance officer has to consider both the economic
viability of the university without sacrificing the needs of its students. If he leans more to
the economic viability of the university, he sacrifices his professed core values. If he
leans more to the core values, he may find the university closing up in the near future.
capital budgeting. The finance manager needs to know what investments he has to make
to enhance growth of his firm. In an academic setting, the finance manager has to make
opportunities to handle. All these decisions should enhance the quality and economic
viability of the institution. In as much as these capital investments require massive cash
outlays, the school is placed in a risky position of how to finance these investments.
Should it be equity? But this scheme will drain owner’s resources very fast. Should it be
debt? The school can be running through unhealthful resources due to the uncertainty of
the future. Or it could mean increasing education fees. This decision, however, raises
additional burden to the students who are already suffering from increasing educational
environment in which cash flows and their volatility are not easily analyzed. Thus, it is
very important to make allowances for the risk associated with future cash flows. The
manager is faced with three options: financing from funds generated from operations, the
use of equity, the use of debt, or a combination of these three options. Much as the
educational manager wants to utilize only funds from operations, this decision alone will
exhaust the resources of the school knowing that most of the schools operating expenses
exceed educational fees. The other option of using equity will also place owners in a
difficult situation since they keep on contributing to the operations of the school and yet
never receiving in monetary return. The option of using debt becomes rational only the
school can shoulder when its cost is without impairing its normal operations. An option
that can be look into is through non-educational income. Nevertheless, as the school is
perceived to be a non-profit entity, it must not engage itself into non-educational income
the finance officer into a precarious situation, one side on how to finance quality-related
programs needing large cash outlays while on the other side, avoiding “immoral” acts to
The issues raised are indeed raise questions on “moral” uprightness. The school,
is on the line.
56
This paper is an attempt to demonstrate that in spite of the hard economic times
faced by St. Paul Mission Schools in the Philippines, leadership continue to adhere to the
core values that is expected to be embedded and more importantly practiced not only in
decision policies but also equally in their day-to-day encounters with their constituents.
important elements in the creation of wealth are labor, capital, technology, resources, and
management. All five are enhanced through education, increasing individual wealth, and
Concerning labor, educated workers are more skilled, take more pride in their
work, and are able to do a better job, faster than more creatively less educated. Education
moves workers to more production and better fulfillment of organizational and personal
Capital begets capital (Jones, 1991). Those who have a college education
generally earn nearly twice as much as high school dropouts and consequently have more
through the production of goods and services for all. The more education, the more
wealth is developed for investment purposes, which creates more capital, in an endless
The wonders of modern technology have been made possible largely because of
education. The position of Japan (Garvin, 1988; Juran, 1974; Crosby, 1979; Feigenbaum,
1991; Deming, 1982; Ishikawa, 1985; Main, 1994) holds in technical improvements is
the result of an educational system that encourages research, creativity, and practical
57
through education.
Every area of resources, human, physical, and financial, is improved and refined
through education (James, Garms and Pierce, 1988). Even the environment is better
appreciated and preserved through education. Methods of mining, lumbering, and other
forms of natural resource production and use have been improved through the
development of skills and training, and more is produced through better use of resources
(Adam, 1976).
skills, they are better able to make decisions leading to more production, less
goals. Effective management of the four elements of wealth, labor, capital, technology,
It has been established that there is a close and positive relationship between
development is more important than the extent of natural resources in determining the
productivity and individual income level of nations. Fortunate indeed is a nation that has
extensive natural resources and also highly developed human resources. A nation with
high educational development may overcome to a great degree any lack of natural
resources, but no nation having a poor educational system, even with tremendous stores
of natural wealth, has been able to approach high individual economic productivity
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(Aklilu, 1983). A deficiency in both these areas automatically relegates a nation to low
Expenditures Benefit Individuals and Society. There is proof that education helps
the individual, and those who point to the costs of education often consider only
individual benefits (Wilkenson, 1990). Generally, the more education a person attains the
better job he will have. As income rises, so do taxes, which are able to do two benefits
society’s programs.
that the improvement in educational achievement between entering and leaving students
is maximized (Schultz, 1970). To that end, the general purpose of the compensation
process is to allocate resources for salaries, wages, benefits, and rewards in a manner that
will attract and retain a school staff. It is also for this reason that a mission school faces
difficulties in meeting these requirements due to the nature of its students who are mostly
marginalized.
specific economic goal (Coleman et al., 1966). In undertaking this goal, the school should
be able to do two things: (1) meet and adjust to the demands of its environment, and (2)
choose a set of goals and corresponding policies and programs to meet these demands.
Owners. The school consists of two groups, owners and management. The owners
provide the capital funds, which are employed by the school in its productive economic
activities. As owners, they may delegate the actual day-to-day control of the school to a
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second group of individuals called the managers. This act of delegation, however, is
owners for its managers. Viewed this way, the setting of corporate objectives or goals is
the owners’ primary means of communicating their preferences to the managers. Based
on these goals, management chooses and implements policies and programs, which will
achieve these objectives. Thus, the role of management is one of execution of policies.
On the other side, the school cannot be separated from various sectors of society.
There are several influences, which are immediately recognizable (Coons, 1970):
1 It will partly depend on alternative uses and returns for the capital invested
in the school. Thus, there is a market for investor capital and the school should be able to
deliver to its owners the benefits, which would have been derived if the funds were
invested in this outside market. The same reasoning applies if the firm avails of loan
2 The school exists within a legal or political and economic framework. Its
prevailing legal norms and values. Stated in another way, the school should produce
3 Management could not act as if it is accountable only to its owners and not to
society. At the very least, the presence of alternative opportunities in the managerial labor
market may influence managers to do a better job in order to increase their “market
value.”
4 The school’s choice of operating plans, projects and service mix, will be done
One common lesson to be learned from the preceding discussion is that society
and outside markets for capital, labor and services serve to provide the discipline
necessary for rational goal setting by owners and managerial efficiency within the school.
The need for this discipline becomes evident in the inherent conflict posited between the
Many theories of the school suggest that while the goals of owners may have been
set rationally given the capital markets, there is an inherent divergence in managerial
representation, plush offices) because these also have the effect of increased personal
consumption (Williamson, 1963). On the other hand, owners would only want to spend
on these perquisites to the extent that they benefit the school. For example, representation
expenses should be allowed only if they increase future enrollment. Beyond this level
(e.g., if “too frequent” or if non-client guests are included), the management can only
derive personal satisfaction from the expense without contributing to the profit goals of
owners.
exertion to achieve or even exceed the owners’ goals. This hypothesis is related to the
concept of “satisficing” behavior (Baumol, 1967). Here, the manager may decide not to
exert effort to exploit all opportunities for the owners preferring instead to achieve the
3 Managers may supplant the stated goals of the owners with some of their
own. For example, management might attempt to expand with little attention to the
corporate performance in order to show attainment of owners’ goals. When this happens,
During the first few years after World War II educational policy was mainly
concerned with the quantitative expansion of educational facilities. Not much thought
was given to the educational curriculum. Education was seen as a driving force in
economic development. In this respect, the rapid expansion of education was the
Plans to expand the educational system were based partly on the political
convictions and ideologies of political leaders in post-war developing countries, and also
have been of importance (Hardiman and Midgley, 1982: Gillis et al., 1992), as follows:
2 Manpower planning.
This type of planning is based on the numbers of students who enrolled in various
kinds of education in the past. Past enrollment trends are extrapolated into the future.
This kind of planning is the easiest from a political point of view, but it does not always
lead to efficient outcomes. The over expansion of secondary and higher education was to
some extent due to planning on the basis of social demand. Members of social elite who
want their children to receive a good higher education are more likely to make their
voices heard in the political process than powerless rural people who would benefit more
Manpower Planning
Manpower planning tries to determine the social needs for employees with
different kinds of education. Educational systems are designed to fulfill these needs. For
example, estimates are made of the number of doctors required. These estimates
manpower planning have been very disappointing, both in developing countries and in
more developed countries (Gillis et al., 1992). It seems to be impossible to predict the
demand for various categories of employees more than two to three years ahead. Since it
takes years for changes in the educational system to be realized, the situation may well
have changed by the time new graduates come into the labor market. Moreover,
manpower planning does not pay any attention to the costs of education.
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planning calculates costs of different types of education for individuals and the
community, and the direct and indirect financial benefits deriving from that education.
This allows one to compare the returns on investment in education to the returns on
investment in physical capital stock. One can also determine which kind of educational
investment- vocational, general, technical, primary, or higher education, and so on- will
have the highest return. Educational planners are of course primarily interested in social
Since the 1960s, many cost-benefit analyses of education have been performed.
employees with different levels of schooling, but one does not know how the structure of
earnings will develop in the future. Secondly, one cannot be sure that income differentials
disregards both the content and the quality of education; analyses have normally been
in practice cost-benefit does not offer a sound basis for detailed policy-making.
Cost-benefit analyses have shown that the returns to investment in education are
higher than returns to investment in physical capital goods. The returns are the highest in
countries with the lowest per capita incomes (Psacharapoulos, 1993). One of the most
should be given high priority. The returns to primary education are significantly higher
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educational planning social demand have never followed this recommendation and
research indicates that the returns to general secondary education are higher than returns
to vocational education (Psacharapoulos, 1993). This seems to contradict the earlier call
for more vocational education. The issue of relevance perhaps depends more on the
Psacharapoulos (1989) pointed out that there is a wide gap between educational
planning and educational practice. Often educational plans are formulated in a highly
actually explains why so many educational reforms never get beyond the drawing-board
stage.
Since the early1970s, the debate on educational policy has increasingly centered
on the content and quality of education. This debate resulted in a series of proposal and
recommendations for reform that dominate the educational agenda even to the present
and beyond.
Despite the scarcity of financial means, the St. Paul Congregation tries to provide
adequately for the increasing need for education in the coming years for the
Financial managers can view the development of their integrated cost and
1990).
Stage I Systems
resources required to consolidate different reporting entities within the company and to
close the books each accounting period. There are unexpected variances occurring at the
end of each accounting period when physical inventories are reconciled against book
values. There exist also large write-downs of inventory after internal and external audits.
Many post closing adjusting entries are involved in the financial accounts and the
Stage II Systems
Companies that have financial systems best described as Stage II systems are
responsibility centers but not by activities and operating processes, have nonexistent or
highly distorted customer costs, and provide feedback to managers and employees that is
Stage II financial systems are fine for valuing inventory for financial purposes and
for preparing periodic financial reports. They have common data and account definitions
across different departments so those financial managers can readily compare and
consolidate financial results across departments. The system can provide complete
financial statements shortly after the close of an accounting period that require few, if
any, post closing adjustments. They prepare statements consistent with standards
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systems data recording and processing have excellent integrity so that they satisfy
Stage II financial systems, however, also report individual costs, employing the
same simple and aggregate methods used for external financial reporting, to value
Nevertheless, Stage II costs systems are completely inadequate in two key managerial
purposes: (1) estimating the cost of activities and operating processes, and the cost and
profitability of services and customers, and (2) providing useful feedback to improve
operating processes.
The new costing philosophy is embedded when a company develops Stage III
systems for financial reporting, cost measurement, and performance management. Stage
III contain a traditional but well-functioning financial system that performs basic
financial statements for external users, using conventional methods for allocating
periodic operating costs. It has one or more activity-based cost systems that take data
from the “official” financial system, as well as from other information and operating
organizational units. Lastly, it provides for operational feedback systems that provide
employees with timely accurate information, both financial and nonfinancial, on the
In Stage III, the company retains its existing (Stage II) financial system to prepare
financial reports for external constituencies. It needs this basic financial system to capture
transactions to accounts in a general ledger system, and to aggregate and process them to
systems is not a difficult or expensive task. The powerful capabilities of new information
technology- hardware, software, and networks- enable the company to introduce two
customized cost and performance measurement systems for managerial purposes. These
new systems are (1) activity-based cost systems to provide accurate information about the
costs of activities and processes, and the costs of individual and customers. Secondly (2),
operational control and learning systems provide new and more timely feedback to
employees, including nonfinancial and financial information, for its problem-solving and
improvement activities.
In Stage IV the activity-based cost systems and operational feedback systems are
integrated and together provide the basis for preparing external financial statements. The
actual expenses required to prepare periodic financial statements can be found in the
feedback systems that have been capturing data continually form actual operations. The
periodically and given to the financial accountants when they are ready to prepare
external financial reports. In this way, the operational feedback system for managerial
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purposes becomes integrated with the system preparing periodic financial reports for
external constituencies. What is remarkable is the shift in emphasis from Stage II to Stage
IV. In Stage II, financial accounting and external reporting are kings. Managerially
relevant information- for costing activities and customers, for example- must be derived
and extracted from financial accounting reports. Now, managers can find managerially
When managers have access to such systems, they can use their ABC model to
what-if-analysis and pricing. By using ABC for budgeting, a practice called Activity-
Based Budgeting (ABB), managers determine the supply of resources to operating units
and responsibility centers based on the demands for activities they are expected to
in services and customer mix. Tuition setting allows current ABC information on service
costs and capacity utilization to be incorporated into the operating, pricing, and service
and cost driver rates based on actual or budgeted costs and the capacity of supplied
(budgeted) resources. In the ABC model, the budgeted expenses are treated as
ABC system. In fact, real sustainable payoffs from ABC and ABM cannot occur unless
they become embedded in the organization’s budgeting process. ABB gives the
organization the opportunity to authorize and control the resources they supply based on
seek more resources while managers continually attempt to control increases in the
spending authorized for their decentralized units. The result is that the budget for the next
year builds on that of the previous year, plus or minus a few percent depending upon the
outcome of the negotiations between managers and local management. ABB offers the
opportunity for such discussions to be based more upon facts, and less upon power,
and variable costs. The resources that are most variable, or flexible, within short periods
of time represent mostly resources the organization purchases from outside suppliers:
vendors from whom it purchases energy, manpower agencies from whom it purchases
temporary, part-time employees, and individual labor suppliers from whom it purchases
organizational infrastructure of (1) personnel with whom the organization has a long-term
contractual commitment, (2) equipment and facilities, and (3) information systems
continue to maintain current level of these committed resources are most likely made
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during the annual budgeting process. Once the authorization to acquire and maintain
organizational resources have been made, the expenses of these resources appears fixed
and unrelated to local, short-term decisions about fees and customer relationships. The
time to make spending on these resources variable is during the budgeting process. ABC
gives managers the information they need to acquire, supply, and maintain only those
The different models and key issues presented serve as a basis for the researcher
to formulate her eclectic framework toward a financial system model for mission schools.
Synthesis
The review started with the involvement of the Church in education society. In
Asia, the system of Catholic education needs to become more clearly directed towards an
and its support system: …”the State shall establish, maintain and support a complete,
adequate, and integrated system of education relevant to the people and society.”
Education Act 1982 refers to both public and private schools, as they both strive to attain
the goals of national development. However, the main educational burden rests on private
human right. However, the history of the Philippines has shown that, from the financial
viewpoint, the government cannot satisfy the growing needs of education in the country.
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It is partly for this reason that every year, thousands of students study in private schools.
persons and of human life. It is an aspiration to holistic influence. This interplay of of the
different aspects of human knowledge and understanding of Gospel values are enriched
in the human person. The development of the whole person is greatly influenced by the
takes place. The educational manager then has four essential competencies: management
an adequate support system. One such key area is finance. In a time of stiff competition,
globalization and scarce resource, the financial manager must be able to maintain the
Several models on effective financial management are reviewed. For the valuation
approach, while there is no question that profits are important, the key issue is how to use
them in setting a goal for an institution. The ultimate measure is not what is earned but
how the investor values the earnings. An understanding of tradeoff between risk and
decision is when it increases the institution’s overall value, otherwise, the decision should
be rejected.
Another model, maximizing owner’s wealth, aims to attain the highest possible
value of the institution. This model would be in direct contrast with a Catholic school.
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Although most private schools are expected to operate beyond beak-even points to be
The role of finance in the success or failure of schools, however, has become all
the more important considering the dramatic increase in the cost of operations
Studies that are reviewed show that sound financial policies and decisions provide
the tool for financial viability. An optimal interaction of revenues, expenses, leverage,
utilization of assets, capital expenditures and other income will bring out financial
stability.
Financial management models for financial analysis are also reviewed. The
models provide that management must constantly evaluate its financial performance to
Since there is a close and positive relationship between investment in education and the
great degree any lack of natural resources, but no nation having a poor educational
system, even with tremendous stores of natural wealth, has been able to approach high
The poor in the Philippines comprise more than 60% of the population. The lack
of education or deficiency of education among this marginalized sector has motivated the
researcher to look again at the mission/vision of the Paulinian Congregation. If the poor
73
is to be uplifted, and a lot of them are enrolled in mission schools, the more these mission
Thus, given this desire to improve the poor, the researcher embarked in this study.
The different models and key issues presented in the review are all directed toward
financial stability. These are utilized to develop an eclectic model appropriate for this
study.
Conceptual Framework
1 Financial condition
1.1 working capital level
1.2 liquidity
Historical/ A Model
2 Asset utilization Quantitative for
2.1 Accounts receivable turnover Sustainability
2.2 Capital assets utilization Ratio Analysis of
2.3 Total assets turnover Trend Analysis Low Tuition
Growth Rates Fee
3 Expense management Analysis Based
3.1 operating expense Paulinian
3.2 capital expense Schools
4 Sources of income
Feedback
Figure 1
Framework for Sustainability of Low Tuition Fee Based Paulinian Schools
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The financial condition of a school is reflected in each working capital level and
level of liquidity. In terms of working capital level, it refers to the amount of cash
available to meet both short- and long-term needs for cash. For short-term needs, the
school must have sufficient cash to meet at least one-month salary requirements. Its
current level of cash, marketable securities and accounts receivables can address this. If
its mentioned current assets are not sufficient, this can be supplemented through the use
of short-term debts.
In terms of its long-term needs, its sources of funds can be through the sale of its
long-term assets as stocks and bonds or the sale of assets, which are unproductive.
When the required conditions are met, the school is said to be financially sound in
thumb, a current ratio equal to one is desirable. This reflects the ability of the school to
settle its current obligations i.e., for every Php1.00 debt, there is available current asset of
Php2.00 to meet this need. If the current ratio is greater than 2, it will reflect the presence
of excess current assets. These excess current assets are considered to be idle and
therefore, unproductive. However, if the current ratio is less than 2, the school is
Asset Utilization
revenue. There are three utilization measures, which are applicable to schools: accounts
receivable turnover (ART), fixed assets turnover (FAT) and total assets turnover (TAT).
ART indicates how many times in a year (or the number of days in a year) in
which receivables are collected. An ART < 12 times a year (or less than a month) is
considered to be ideal. If ART is greater than a month, the school will experience
difficulty in obtaining cash to meet current obligations and can also create bad debts.
revenue. For schools, the ideal FAT is 1. This indicates that fixed assets are fully
maximized. If FAT is greater than 1, fixed assets are over utilized that can result to a
rapid deterioration of fixed assets. If FAT is less than 1, it indicates that there are fixed
revenue. Total assets include both current, fixed assets and other long-term investments
such as stocks and bonds. An optimal mix of these assets provides expected maximum
Expenses Management
expenses that are incurred within a year. A school is considered to have managed its
operating expense well if the operating expense ratio is at most 65% of its net revenue.
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Beyond 65%, the school is considered too expensive to operate or it has not control its
expenditures.
Capital expenditures are incurred for fixed assets and other assets that are
expected to last for over a year. These assets are expected to have a return, which are
Sources of Income
schools are no longer dependent on school fees as a major source of revenue. Schools are
now exploring other possible avenues to source their funds to finance quality and
improvement targets.
The fund balance refers to the amount of capital that the school has already
poured into the long-term operation of the school. For business, as a matter of rule-of-
thumb, the accepted growth rate for financially healthy companies is at least 15%. For
schools, since they are mot classified as profit-oriented institutions, the ideal fund balance
growth rate is 10%. A school, therefore, which grow by less than 10% is considered to be
financially unhealthy in the long-run which will eventually caused its closure if not
subsidized.
The Challenge
The Congregation of the Sisters of St. Paul of Chartres owns and run several
schools, which are either subsidized or operating just at break-even point levels. These
schools are considered economically non-viable but they are being operated as part of the
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mission of the Congregation. The challenge is to make these schools viable through
examination into the financial affairs of operation and sourcing, financial management
and control, and financial allocation priorities of these mission schools should give light
mission schools managed by the St. Paul System. These schools are being managed to
meet the mission of the Congregation to cater to low-income groups. Specifically, this
10 1.1.8 Profitability.
12 1.2.1 Enrolment;
2 How do these mission schools source their revenue, internally and externally?
challenged. Historically, education has been the largest public function and the country’s
biggest business, when viewed in terms of the numbers of people and pesos of income
involved in its operation. The expansion of educational services and the greatly
increasing costs of education year after year have had a tremendous beneficial effect on
the nation'’ economy. It is not likely that this condition will change.
developing the nation’s largest reservoir of human capital. The economists of an earlier
era emphasized the roles of land, labor and capital in achieving economic growth, and
Economists paid little attention to this point of view until after World War II.
Since that time, most of them have emphasized the value of education as a factor in
capital. Such leaders as John Kenneth Galbraith, Harold Groves, Milton Friedman,
Theodore Schultz, and Charles Benson have documented the relation between education
79
and economic growth. They have deplored the waste of the labor force and human
Consistent of what had been noted by these great persons, human capital has the
future satisfactions, or of future earnings, or both of them. What makes it human capital
is the fact that it becomes an integral part of a person. But we are taught that land, labor
and capital are the basic factors of production. Thus, we find it hard to think of the useful
The mission schools of the Congregation are investing in future human resources.
This part of the population comprises almost 67% of households below poverty line. The
result of this study, then, serves as a model for other mission schools that are currently
operating or yet to be opened. The investment on this large chunk of deprived and
This study focuses on the financial management policies, practices, and control of
the mission schools of the Sisters of St. Paul of Chartres in the Philippines. The
timeframe of the study is within a five-year period of operation. Specially to be noted are
the difficult years during the Asian Financial Crisis 1997-1999. The study zeroes in on
the different alternatives that these mission schools adopted to cope with the financial
under study are involved. The respondents are parents of pupils enrolled in these schools
to determine whether or not these students do come from poor families. The sources of
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financial data are financial statements, decisions arrive at during board meetings and