While still calculating the financial impact of the spring semester that quickly morphed from on-campus to remote learning, leaders must determine how to approach fall 2020. Some institutions insist they will open for the fall while others have made the tough choice to suspend on-campus activities for another semester. The California State University system, for example, announced in mid-May that it will cancel nearly all in-person classes in the fall, affecting more than 480,000 students.
COVID-19 has been a wake-up call for finance leaders struggling with long budget cycles. Institutions spending more than six months on budgeting rose from 34% in 2018 to 43% in 2020, according to a survey taken before the pandemic. In addition, one in five institutions with long budget cycles do not reforecast, which prevents finance teams from reallocating resources due to changing goals and economic conditions—such as a global pandemic. When asked about top financial planning initiatives for 2020, 67% of finance leaders said they wanted to improve long-range planning.
We convened a panel of Kaufman Hall experts from our Management Consulting and Software divisions to discuss how the financial planning landscape is changing, how higher education finance leaders are coping, and what actions they need to take now to prepare for uncertainty ahead.
Q: How do you anticipate the higher education financial planning landscape will change now that the initial COVID-19 emergency response phase is over and we’re looking toward the first recovery phase?
Stephanie Bartlett, Director of Product Management: Institutions need to be prepared for different scenarios, like how another COVID-19 wave would impact them. By understanding what realistic scenarios could happen and modeling what those look like, they can better prepare and communicate those plans to relevant stakeholders, too.
Logan Anderson, Industry Practice Lead: On the revenue side, institutions should project revenue at different levels and have countermeasures in place and ready to go. For example, a 5% drop in revenue triggers Scenario A, while a 10% drop triggers Scenario B. But most higher education institutions aren’t doing very robust financial planning from a balance sheet perspective and may have difficulty creating scenarios.
David Woodward, Vice President: Part of that question will be managing longer-term balance sheet positions and risk tolerance. A lot of institutions are going to take a liquidity hit. And you don't want to cut to the bone to minimize that liquidity hit. There will likely be a balance between having to accept a lower liquidity position and planning two or three years down the road to restore it.
The other part of the question is transformational — more about strategic decisions. What does the institution want to be after this pandemic? Do they think they’re going to be different? Where do they want to focus the decisions this year to help support what they want to be 10 years from now?
Q: What are your recommendations for increased rigor around planning?
Charles Kim, Managing Director: If I'm a CFO, I'd rather err on the side of caution and focus on the controls that we need so that we minimize damage. To me, it's not a planning issue or a budgeting issue but a controlling the environment issue. CFOs should be saying, “We're going to limit capital spending. We're going to pause hiring. We're going to review purchases and require approvals for spending on items that are above $20,000.”
Anderson: CFOs need to be able to explain to their boards what levers they can pull that will impact the budget to increase liquidity. If you furlough 10%, how far does that move the needle and how much money does that free up? What about 20%? Finance officials need to look at the low-hanging fruit first, then present options that can be acted upon depending on how the budget forecast looks.
Woodward: One best practice is the year-end forecast. Where do you think your actual results will be at the end of the fiscal year, and how does that compare with what you planned in your budget? This is the point where we need these levers. The CFO needs to know what can be done if the year-end forecast is way under, for example, because enrollment was down. Compile a one-year budget, and as you go through that year, there are checkpoints — at least quarterly — where you try to predict where you're going to land.
There's also this need, probably annually, to look at initiatives that you want to support. Get the portfolio of initiatives and stakeholders together and decide which ones you are going to do and which ones you’re going to postpone or not do.
Anderson: Because institutions have the constraint of enrollment based on capacity for first years, CFOs need to understand that any reduction in enrollment will drag through your model. If you get a 10% drop in freshmen enrollment and it goes back up to a historical level the next year, you’re still down 10% the following three years while those freshman progress throughout their academic career and eventually graduate. How are you going to address this issue? Will you get aggressive on transfers or international students if that opens back up? It could be a spring reaction. Typically, schools aren’t very aggressive for spring and net new enrollments. But some institutions might shift marketing, trying to get students to come earlier.
Woodward: That's true on the financial aid side, too. If you over-commit on your aid packages for a class, you've got to deal with that for the next four years. And if you’re trying to boost numbers, you also have to think about limited resources like on-campus housing. It’s certainly a numbers game, but those numbers impact operations across campus.
You can also choose to lower student quality, or you can choose to keep quality, maybe have fewer enrollments and take a slightly bigger hit on your balance sheet. But this is all in the context of what likely is a 12- to 18-month pandemic shock.
Q: What other process changes can institutions make to preserve cash flow?
Anderson: How institutions fund commitments is worth a look. Say you brought in a new faculty member and gave that person $5 million to set up a lab. The college of science could just put that money in a restricted fund that the dean can’t touch and that has very little flexibility. Or the dean can hold the money and fund the lab over time. The difference is how you manage those commitments and fund them.
If you don't have that practice in place now, COVID-19 gives you the ammunition to go and say, “Hey, we need this kind of practice because we didn't have the flexibility we needed when the pandemic hit.”
Q: Now that the initial crisis has passed, what steps can institutions take now at the executive level?
Kim: First solve for FY21. Then figure out what your recovery plan is. Do you let it drag out as a four-year recovery plan, a five-year recovery plan? Or are there things you can do to make it a two-year recovery plan?
Bartlett: Universities need the right people to step up, and they may be different than the traditional roles. For example, if you have a really big athletic program, make sure those leaders are included and helping you think through options.
You also need the right tools. Do you trust the data that you're using to make decisions? The key to making sound, strategic decisions is having a solid foundation to work from, and that foundation is built on trusted data.
Woodward: Student registration data is particularly pertinent, knowing the courses, the registrations, and the faculty who are teaching those courses. This is the type of data institutions are going to need as they think more strategically.
Anderson: Higher education needs to look at itself more as a business than purely mission-based. If you don't treat the institutions, at some level, like a business, then the mission is going to be sacrificed. You've got to elevate the business and financial planning practices to make sure the mission is supported.
Kim: Look at budgeting if you’re among the more than 40% of institutions where it takes over six months. Are there ways to streamline decision-making? And are there best practices from other industries where you can be nimbler? Being nimble is key here, but that doesn’t change overnight.
Q: From a budget director perspective, how can they be more tactical going forward?
Anderson: Budget directors need to have strong variance reporting in place and processes around evaluation of that reporting to ensure their controls have the desired impact. Most institutions have something, but there's not a lot of rigor around holding people accountable to that. In-year forecasting is a best practice, not just an annual budget, but a monthly budget that would give you a little more insight into performance.
Woodward: At the budget director level, along with the variance analysis, scenario risk analysis is critical. And they are the ideal people to shepherd this, running alternative possible outcomes and determining the financial impacts.
Anderson: Depending on how universities are structured and what they do with budget surplus at the end of the year, a challenge is making sure your faculty and staff are using the most-restricted dollars first. A lot of institutions don't have insight into the restriction level of their funds. But if you did, you could look at loosening up the restrictions on your endowment, where possible. You could evaluate those old agreements and go back to the families who made them. And you can tell them, “Hey, look. We're in different times. Do you mind giving us some reprieve or some flexibility?” Or, “We've built up enough reserve here where we could carve off some money to use for something else."
Learn how to make difficult decisions based on new financial realities in the on-demand webinar, Surviving the Financial Impact of COVID-19 on Higher Education.