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.


The first two posts in our series on “Liquidity in Higher Education” focused on communication with stakeholders outside the finance division. We now pivot to topics that tangentially concern these stakeholders but remain critical for finance staff, namely, cash modeling and investment structure. Today’s post recommends approaches for developing cash-projection models while the fourth, and last, post will review considerations when deciding whether to invest cash in higher-return, but higher-risk, securities.


Two Models Are Needed for Projecting Institutional Liquidity

Last month’s post offered metrics and measures for answering two common questions: How much cash do we have, and is it enough? This month, we focus on two related questions of critical concern for the finance division: Are we solvent, and can we pay the bills? Given the scope and complexity of cash in higher education, we recommend two separate models for projecting institutional liquidity and answering these questions.


1. Strategic Financial Planning…to address the question, “Are we solvent?”

Strategic financial planning is the process through which institutions balance the pursuit of mission with the prudent use of resources. The strategic financial planning model supports the cash metrics recommended in last month’s post, and as stated in that post, cash—or reserves—are a critical factor for institutions to assess “prudent use.” If financial projections of reserves are declining or even depleted, boards and executive leadership know they are assuming significant risk and they can revise plans to maintain the desired level of reserves. Sound strategic financial planning should ensure adequate funds over the long term for the institution’s operating account.


2. Operating Account(s)…to address the question, “Can we pay the bills?”

The operating account (or accounts) is the account at an institution’s bank that is drawn for payroll, vendor payments, debt service, pension contributions, and all other distributions from the institution to a party outside the institution. The operating account excludes investments which may comprise a significant portion of an institution’s reserves. While strategic financial planning should ensure operating funds are adequate over the long term, operating accounts are subject to significant cash flow volatility in the short term based on tuition receipts, fundraising, capital expenditures, and other large and often unpredictable cash flows. The finance division needs actively to manage and project the operating account, perhaps with the support of a line of credit, to ensure the institution can meet its cash obligations as they come due. Since operating accounts have little strategic value, however, the finance division will seldom if ever share operating account projections with the board or executive leadership.


Model Design Do’s and Don’ts

Cash models, whether for financial planning or operating purposes, are challenging to develop because virtually all financial transactions have cash implications. Since models should not endeavor to replicate virtually all financial transactions, the primary decision for developing cash models is the level of detail required to produce meaningful output. Below are several recommended do’s and don’ts as your institution develops its cash models.




1: Strategic Financial Planning

· Project all line items in the audited statement of activity (SOA) and balance sheet

· Model in annual increments for 5 to 10 years

· Close model logic to cash (i.e., cash = net assets + liabilities – noncash assets)

· Model additional detail if deemed pertinent (e.g., enrollment, multiple investment portfolios, separate debt issue service schedules, indirect research cost recovery, individual capital projects)

· Allow for transfer of cash into investments and vice versa

· Include line-of-credit financing

· Project each line item in the audited statement of cash flows (instead, prepare a summary report of cash flows based on the projected balance sheet and SOA)

· Project “restricted assets” (instead, preserve “restricted” as a net asset description and project accumulating or deteriorating restricted balances there, essentially as difference between new gifts and releases to operating revenue)

2: Operating Account

· Reconcile operating account(s) balance to balance sheet cash and equivalents

· Isolate major inflows and outflows to operating account(s) (e.g., operating margin x depreciation, working capital changes, principal payments, new construction, restricted gifts, pension contributions)

· Project in monthly increments for 12 to 18 months

· Use historical monthly data as estimate of monthly timing of planned receipts and revise as needed for expectations

· Include line-of-credit financing

· Project all line items that flow into and out of the operating account (basic historical analysis of all flows into and out of the operating account can help identify and aggregate material categories for modeling)

· Project line items in the audited statement of cash flows (instead, prepare summary report of cash flows based on major inflows and outflows to the operating account)


Finally, it is important to note the two cash models are related. Cash flow and balances in the financial planning model should serve as a control for cash flow and balances in the operating account model. For example, if tuition receipts are assumed to be $100 million in the first year of the financial planning model, then the sum of the 12 months of tuition receipts should add to $100 million in the operating account model (generally, tuition accruals that are collected at the beginning of the year can be assumed to be offset by tuition that accrues at the end of the year). Ideally, the two models are developed in tandem to facilitate their line-item relationships.

Financial modeling, especially cash modeling, is a highly quantitative and technical endeavor that requires the integration of numerous factors to project information that is useful for institutional decision-making. Fundamentally, financial planning in higher education comes down to the question, “Do we have enough sources of cash to fund our planned uses of cash at an acceptable level of risk.” The cash models above will support the projections of cash flows and balances to address this question.