04 July 2011

The Bottom Line

Those who are wise, in reference to how DLSL grew from a tiny school to a large college inside 15 years, will ask the question, “How did they do it?” The wise will ask that question without malice, prejudice or suspicion; but instead, with the inquisitiveness of someone who genuinely wishes to learn something new that can be used to his or her own benefit.

In April 2005, just a few days after I went up to join the executive management team, an invited resource speaker who would subsequently become a member of the school’s Board of Trustees told a gathering of middle to executive level administrators in a seminar this famous line, “You must treat your school like it’s a business.”

She probably thought she was speaking to archetypal school administrators, the sort plucked from teaching posts where they excelled to do jobs that would, in a corporate set-up, be occupied by management professionals who trained for these jobs. The nods all around the auditorium, however, were in appreciation of the affirmation that the speaker was giving to what was, in fact, already being practised by those in the administration side of the organization.

That was the way the former President, the late Brother Rafael Donato FSC, set up the organization. Even before the vision of university was put forth, he saw the school as a center of management in the region. That was why the license to operate the Master in Management Technology (MMT) program was vigorously pursued. Equivalent to an MBA, it was the natural advanced studies program to top the Bachelor’s management programs that the school already had.

School administrators and other employees were encouraged – if not sent outright – to attend the MMT. In those days, distinguished professors from colleges and universities outside of the province were invited to infuse new knowledge into the program; as opposed to hiring from within the province, where the teaching pool was comparatively shallow and the knowledge base confined to the relatively few higher educational institutions present.

While many of us agreed with the speaker, management professionals that we were, we also knew that we could treat the school as a business only insofar as operations were concerned. As a non-stock non-profit corporation, the profit side of business operations was something that could NOT be taken too seriously.

Quoted verbatim from chanrobles.com, the Corporation Code of the Philippines says:
“...any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized...”
When I stepped into executive management in 2005 – and the finance department came under my jurisdiction – coming from day-to-day operations as I did, my own personal take on the organization’s state of finances was that it was too unnaturally robust for its own good. Knowing as I did how frequently proposed acquisitions and programs were stymied by alleged budgetary constraints, I felt that the bottom line was artificially high; and incidental it definitely was not.

Just to make sure that anyone who is reading this is able to stay with me, the bottom line is Accounting jargon for net profit and is the last line of the income statement. It says how much money has been made or lost after operational expenses have been deducted from income within the course of a fiscal year or Accounting cycle.

A hefty bottom line is what every commercial business organization aspires for; and indeed, praise was lavished upon management by the school’s Board of Trustees each and every year that the bottom line was on the rise. But then, petty operational foibles are not mentioned at board level; and so its members were not briefed about the obsolescent computers around the campus; the engineering equipment that was required by the Commission on Higher Education but was not purchased; or the countless other little requisitions that were turned down for one reason or the other. While the amount of money left over at the end of each Accounting cycle was actually getting higher...

It was a deceptive statistic. A commercial business organization, of course, we never were.

To my mind, a hefty bottom line for an organization such as ours can only come from two reasons. First, because of an unexpected surge in student enrolment. In layman’s terms, when more students than anticipated come in, each paying tuition and fees that are over and beyond what is already budgeted for. Propitious as this may be to the organization, it also brings into question management’s ability – or, the lack of it – to make reasonably accurate projections.

As a case in mind, I was surprised to discover during my first year in upper management that the projection method erstwhile used for budget preparation was space- or capacity- rather than market- and history-based. As an example, an Economics class that was averaging five enrollees was still annually projected at the capacity of 40 – or, the number of students that could be reasonably accommodated by a classroom. I had this changed to the latter method; and I believe the Registrar – particularly of the College – will be willing to attest to the fact that actual enrolment numbers vis-à-vis projections have not been as volatile since.

As a consequence of this minor tweak, the preparation of the budget – which is based on projected income from the projected enrolment numbers – for the next school year could then be made more rationally and accurately because the numbers were less volatile than they used to be. I believe calculating the expected income became even more precise after I asked my former colleagues in finance to use actual tuition figures for the next school year as opposed to the averaging method previously preferred and utilized. This takes us to the second reason for having a hefty bottom line.

It goes without saying that, discounting the first reason and taking into account the fact that both income and expenditures can be reasonably predicted, the only other reason for having a hefty bottom line is if a school is taking in more money than it actually needs to have to be able to operate. A budget is really nothing but a plan for expenditures based on expected income. If so much is left over at the end of an accounting period, then the obvious question to ask is why was so much money collected in the first place?

Corporate law does not explicitly state how much profit is allowable; but then law is seldom explicit. While I am not a lawyer, I would imagine that the use of the word “incident” in reference to any profit from a previous Accounting period is as loudly implicit as a statement can get that any such profits are not expected to be substantive.

Remember also that whatever profits are made – if at all – are to be used, or so law says, for the furtherance of the purpose for which the corporation was organized. That purpose – or so I would like to continue believing – in the case of the school we were managing was the education of the youth; not the accumulation of profits or the hoarding of financial resources.

One of the former members of the Board of Trustees – a Certified Public Accountant – in fact during one meeting wanted to know why a tuition increase was being put forth for approval when there was so much left over already from the previous school year. Food for thought; albeit, in fairness, the increase had to be requested because school employees, just like those everywhere else, were entitled to earn a decent living. But that is a different matter altogether...

A huge bottom line earns bragging rights for commercial organizations; but we were a school and a non-stock non-profit one at that. Our bragging rights, as we saw it, ought to always originate from what we achieved in education; and certainly not inside bank vaults.

Money, I used to say often enough to my former colleagues, is the lifeblood of an organization. To deny it from the organization is to deny it its chance to grow.

My former colleagues in administration will attest to how frequently I mentioned that we were all, in a manner of speaking, even burdened by the artificially high bottom line that we all inherited. To lower it drastically would appear, to the Board, that we were mismanaging the monies of the school.

As things were, we had a 12M outlay for brand new computers, started purchasing the backlog of expensive Engineering equipment made mandatory by the Commission on Higher Education, opened new and innovative programs and began being more liberal with requisitions with still an eye firmly fixed on the bottom line.

Spend blindly we did not, contrary to hearsay. In fact, I thought we were a very logical and professional management group. If we were to infuse blood into the organization, we wanted it to grow into something healthy and productive and in a very deliberately planned manner.

After a year of bedding in and learning the ropes on-the-job, it was time – for me, at least – in 2006 for some really meaty strategic planning. I invited my boss, Sonny Lozano, and my colleague in academics, Cora Abansi, to sit with me in a special session to interpret the school’s Mission Statement in motherhood statements that would be, nonetheless, action-oriented.

We combined these statements with Brother President Manuel Pajarillo FSC’s 10-Point Agenda and produced a master document that all administrators who worked with us will remember as the Table of Key Concepts for Strategic Planning. Offhand, and because it was how I named the MS Word file, everyone referred to it as the TSP01.

To cite relevant excerpts from that document, with which we outlined how we all thought “an excellent educational institution” ought to be:
“one which has a global outlook and strives to become part of the global community by way of a realistic internationalization policy;

“one that takes care of the welfare of its employees;

“one which produces graduates who are knowledgeable and academically competent and, therefore, highly employable in their chosen fields of endeavor;

“one that offers top grade facilities for use by the academic community;

“one that is financially stable and where operations are cost-efficient; and

“one that stays in touch with rapid technological changes and, where possible, participates in technological development.”
These were just a few of the building blocks for the creation of dynamic department strategic plans that, everyone hoped, would inch us towards the attainment of what we said we wanted to be in the Mission Statement. We were prepared to make money available for these plans.

I am a believer in the maxim that you only get what you pay for; and you do not get excellence on the cheap. It was this excellence, in fact, that we were paying for.

There were those, naturally, who were not in agreement with what we were doing. No organization is ever perfect; and I will be the last to claim that our management was.

That said, we were working for the good of the ENTIRE organization rather than on small and self-serving pockets of dissent. I also know for a fact that those who moaned the loudest were also the ones who benefited the most from our time in management. I signed the payroll, after all. I do not recall that even the most bitter of the lot said no to the percentages we had released to cover inflation or the Christmas baskets that had so much more in them than there used to be!

But what good story does not have a wicked twist of irony?

By the time I stepped down from management in 2010, the bottom line was just below half of what we inherited back in 2005. There were those who were aghast that the bottom line had dropped so much. Personally, I thought we were just halfway through bringing it down! There was no mystery to simply giving back to the stakeholders what they had paid for in the first place.

There will be those who like their millions sleeping away in some bank vault earning 5% per cent per annum. In fact, the banks do not keep the monies in the vaults for long; these are funneled back into the economy so that the banks will have earned so much more than the interests they have to pay back to the depositors. In other words, the banks are just using other people’s monies to earn their profits; as is the very nature of the banking industry and as it is done everywhere in the corporate world.

And as we were doing with the monies that were paid to us by the client base: growing as we were and building facilities and introducing new programs and having licensure exams top-notchers and getting accreditations at half or even a third of the tuition rates of some of the supposedly more distinguished schools...

The wise would have noted these. There was nothing illegal or immoral – as had been comically insinuated by some not very qualified people – and definitely nothing mystifying about it. It was just this thing we all call “business.” Was it not an esteemed member of the Board, no less, who had told us to treat the school as such?

We were also ammortizing without fail the original hundred-million loan with which all the school’s earlier fabulous buildings were built. We were held in such high esteem by the banking community that one local bank, without us asking for it, raised the school’s credit line from 30M to 50M. That simply meant that, at a moment’s notice, that bank was prepared to lend us as much as 50M if ever we came to need it. What bank in its right mind will do that if an organization is in financial distress?

Indeed, how did we do it? Those who did not know how, if only they chose to, could have wondered instead if, perhaps, ours was the BETTER rather than the wrong way. Were my feet in their shoes, I would have asked myself why it took so much goddamned money for students to be able to enrol in some other – or should I say “their” – schools! Particularly when our graduates were starting to out-perform other schools' in licensure examinations, were we not starting to make their tuition structures appear grossly overpriced?

Of course, there were those who suggested that we had no right to use the monies paid in advance because these had not yet been earned. The idea was absurd and utter horse dung. Following their own line of thinking, then should the proper way to collect payments not be to ask students to pay at the end of each class; pretty much like paying at the counter after you get a haircut? I do not believe even the proponents of that silly notion ever thought of it this way.

And again following that silly line of thinking, if the advanced payments are placed in banks and start earning interests – as it is actually done, by the way – does this not then obligate the school to have these interests subsequently redistributed back to those who paid in advance because these were earned by monies that the school supposedly did not yet own? I can imagine some bright-eyed neophyte management student begging to ask the question why-oh-why, then, do schools have advanced payment schemes.

Indeed, that same neophyte management student will cringe to discover that the principles of accounting, finance and management that he and fellow students around the country are being taught inside their classrooms are NOT how some of their very own schools are being run. We, on the other hand, were running our school the same way students were being taught inside their management classrooms.

How odd was it, for instance, that our financial reporting format was once described as difficult to understand – when our external auditors, Sycip, Gorres and Velayo had ensured we were compliant with international and Philippine Accounting Standards? Suffice it to say that many other schools were not. We were obliged to follow a format that, truth be told, even our own accountants initially did not know what to make of; but we did the sensible thing and kept our compliant format, nonetheless.

The fearful will hoard resources for a rainy day. That makes sense, to be perfectly fair; and indeed, every housewife knows this. But how much has to be set aside for that rainy day? And what will subsequently cause the rainy day to come?

On the other hand, we were a large organization; not a household. The truth of the matter is that the monies will only really stop coming when those who are paying start to think that they are not getting what they are paying for. It is then that the fearful will fully appreciate what a rainy day is. Will you keep buying food that your taste buds do not agree with?

In all honesty, all these silly notions emanated from people not trained in Finance making their own pedestrian conclusions instead of respectfully deferring to those trained to understand. Can a non-programmer interpret software code written in C++? Ah, the tribulations that the clueless can cause...

When money is paid in advance, its value is recorded in the books and portions of this value are subsequently funneled to where they are needed AT THE TIME they are needed. It is the cash paid that is freely utilized for operational transactions, without compromising the value of the money that was paid and the purpose for which it was paid. This is called cash management. After all, cash flows in and out of an organization in the normal business cycle; or for as long as an organization is viable in a business sense.

That is why the accountants keep what is called a cash budget; and that is why there is an Accounting Office to monitor the books and each operational transaction. If you are not making anything of this, then it will serve you well to leave things to the experts rather than make your own silly assumptions.

To conclude, the bottom line for us was that we preferred our bottom line hanging out on the tarpaulin wall trumpetting to all and sundry what everyone had achieved; and because that was what we all wanted and that was what we all said we wanted to do in our strategic plans. The monies we had were spent liberally; but also productively, wisely and for the purposes for which these were collected. We were just being a well-run and professionally-managed organization.

It is said that there is always another side to a story. I am happily done from there; but my sense of fairness continues to feel offended for as long as I am unable to tell this part which, I guess, you will have to consider our side of the story. And those who know me well will tell you that I have this characteristic of just saying things the way they really are...

Astrology in Management
Manila Bus




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