Sustaining Higher Ed is a monthly blog dedicated to helping college administrators and board trustees lead their organizations toward greater financial stability so they can stay on mission during challenging times.

 

Is Your Institution Built to Last?

Key pressures on higher education institutions

As we enter 2020, some higher education administrators and trustees may be feeling a bit bruised after a rough 2019. For many, lackluster enrollment exacerbated their institutions’ ongoing financial difficulties. But one of the most severe blows almost came this past November, when the college advising startup Edmit was poised to publish a list of struggling institutions that would likely close, based on its analysis of public financial data.

As expected, institutions across the country railed against the publication of what The Chronicle of Higher Education called a “Doomsday List,” and at least one college threatened legal action. Ultimately, leaders at Edmit chose to retract their decision to publish, so the list of anticipated college closures was never made public.

Yet winning this battle could hardly be considered a victory for higher education. If anything, the events underscore the troubling reality facing administrators and trustees. As colleges aim to provide students with the knowledge and skills that will give them a bright future, their own outlook may be dimming.

 

What to take away from the Edmit incident

While Edmit should be criticized for using a broad-brush approach to assess the colleges’ financial sustainability, the company shouldn’t be condemned for wanting to shed light on the precarious state of higher education.

Consider this: S&P Global Ratings just released a negative outlook for higher ed for the third year in a row, citing continued enrollment and revenue challenges, especially for regional institutions. About a month earlier, Moody’s Investors Service had changed the sector’s outlook from negative to stable, conceding that conditions will “remain difficult” for many institutions in the next 12 to 18 months. In a recent webinar, Moody’s also projected that smaller and tuition-dependent colleges would continue to face the greatest headwinds after several years of poor financial performance. What’s more, demographic shifts suggest that enrollment of traditional-age students will continue to decline, putting further pressure on margins.

Given these challenges, the Edmit incident should serve as a wake-up call to higher ed leaders to embrace greater financial rigor and discipline to protect their bottom line and focus on strategies to increase top-line revenue. Institutions that have been experiencing declining enrollment for several years and running significant operating deficits with very little unrestricted cash and investments must understand how long they can remain viable on their current financial trajectory.

Even institutions that aren’t in imminent danger should engage in rigorous financial stress-testing this year to gauge their level of financial resilience.

 

Improving your financial resilience

To prepare for whatever lies ahead, each college should develop a long-range financial plan that will help leaders evaluate what it will take to not merely survive but rather thrive into the future. Ultimately, such a plan will reveal the magnitude of the changes that leaders must make.

The long-range financial plan should answer questions such as:

  • What is the institution’s current financial position, and what is the best way for leaders to measure its financial health?
  • What is the institution’s trajectory, and what factors will influence it?
  • Which performance targets should be met to resolve any shortfalls?
  • Which actions should leaders take to meet their financial goals?
  • What resources does the institution have to help meet its goals, and where are these resources best deployed?
  • What additional resources should be identified to support top-line growth?
  • What risks must be monitored, and how may those risks alter the institution’s future financial position?
  • How much cash, beyond the endowment, does the organization have if deficits continue or worsen?
  • Which assets can be monetized to increase liquidity?
  • How much debt can the institution afford?

Many colleges are relying on the annual operating budget to answer these questions and to assess their future financial runway. However, annual operating budgets provide only a limited, short-term view of an institution’s finances and do not sufficiently incorporate all of its resources to provide a meaningful picture.

 

Upcoming blogs

Right now, colleges and universities are experiencing one of the most turbulent and challenging times in recent history, and we believe that their future viability and success requires disciplined planning and creative approaches that they can implement today.

Each month, my colleagues and I will talk about some of the best practices in strategic financial planning to consider as you aim to protect your institution’s future. We will help you examine your current business model and explore opportunities to diversify revenues, such as through online, hybrid, and open learning, as well as corporate partnerships and repurposing real estate. And we’ll discuss innovative ways to attract more students, including new programs and alternative revenue sources, that could help strengthen your institution’s financial position over time.

Our goal is to help you become champions of financial sustainability. With your leadership, your institution will be better resourced to stay on mission and continue to serve students for decades to come.

If you have questions or comments, please email Charles at Ckim@kaufmanhall.com.

Meet the Author
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Charles Kim

Charles Kim

Managing Director
Charles Kim directs Kaufman Hall’s Higher Education Management Consulting practice, and is involved in development of Kaufman Hall Axiom Software solutions for Higher Education.
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