The Composite Financial Index (CFI) provides a more complex picture of the financial health of the institution at a point in time than is possible by simply comparing multiple indicators. Examining the trend of an institution’s CFI score over an extended period offers a more stable long-term view of an institution’s financial performance, given fluctuations in institutional conditions, and external circumstances, such as market performance.The CFI Methodology:
This method was developed by KPMG, Prager, Sealy & Co., LLC, and Bearing Point, Inc. (see Prager, F. J., Cowen, C. J., Beare, J., Mezzina, L., Salluzzo, R. E., Lipnick, J. & Tahey, P. (2005). Strategic Financial Analysis for Higher Education. (6th ed.): KPMG, Prager, Sealy & Co., LLC, and BearingPoint, Inc.). The CFI includes four commonly used financial ratios:
- Primary Reserve Ratio – A measure of the level of financial flexibility
- Net Operating Revenues Ratio – A measure of the operating performance
- Return on Net Assets Ratio – A measure of overall asset return and performance
- Viability Ratio – A measure of the ability to cover debt with available resources
Once each of the four ratios is calculated, the relative strength of the score, or strength factor, and its importance in the mix of creating a composite score, or weight, are computed. The result is one weighted score for each indicator that when added together produces the Composite Financial Index. The strength factors and CFI score are standardized scores that fall along a scale of -4 to 10. A CFI score of 3 is the threshold of institutional financial health. A score of less than 3 indicates a need for serious attention to the institution’s financial condition. A score of greater than 3 indicates an opportunity for strategic investment of institutional resources to optimize the achievement of institutional mission.