Warning Sign #4: Debt Service Coverage Ratio (DSCR).
Most charter schools that own their facilities carry long-term debt, which introduces ongoing financial oversight and performance monitoring by lenders. Loan agreements typically include financial covenants—measured periodically—to assess the school's ability to meet its repayment obligations. Among these covenants, the Debt Service Coverage Ratio (DSCR) is nearly universal.
What is DSCR and How is it Calculated?
DSCR measures your organization's ability to generate sufficient cash flow to cover its annual debt payments. It is generally calculated using the following framework:
Take the trailing twelve-month adjusted net income (revenues in excess of expenses).
Add back non-cash and debt-related expenses, commonly interest expense and depreciation/amortization.
Divide that adjusted total by your total annual debt service (principal plus interest).
Lenders typically require a minimum DSCR ranging from approximately 1.0x to 1.5x, depending on your specific loan agreement.
The Risk of Falling Short
Falling below your required DSCR threshold triggers a covenant violation. While it doesn't always mean immediate foreclosure, it does put the school at the mercy of the lender, requiring formal waivers, adding unnecessary legal costs, and potentially triggering stricter oversight or higher interest rates.
Board Action Item: DSCR should be closely monitored by including it as a standard metric in each Treasurer's Report to the board. A declining or non-compliant ratio is a key warning indicator that should prompt timely evaluation and immediate corrective action to safeguard the school's relationship with its lenders.
Meeting your facility debt obligations requires a healthy operational cushion. By keeping a close eye on your DSCR every month, the board ensures the school generates enough cash to stay in good standing with lenders and keep its long-term financing secure.
But keeping your current lenders happy is only half the battle; you also need to look at the cumulative weight of your school's financial health over time. That big-picture view brings us directly to Warning Sign #3 — Net Assets.
This series is based on the CharterSage CPA guide: "10 Financial Warning Signs Florida Charter Boards Should Watch."
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