Do You Really Know Your Institution’s Financial Position?

3 minute
Two people reviewing financial data

This is a time of significant uncertainty for many colleges and universities. Declining enrollments have been further complicated this year by the troubled rollout of the new FAFSA form, which has delayed schools’ ability to make financial aid offers to students and, for many, has pushed back the date for acceptance of an offer of admission. That, together with confusion regarding changes to affirmative action and standardized testing policies, has created what the Wall Street Journalrecently described as “the most confusing, chaotic admissions season in years.”

A highly divisive political atmosphere has also thrust many colleges and universities into an unwelcome spotlight. Donors are conditioning or even withholding gifts and state legislatures are putting new conditions on funding of public universities. There is little sign of these pressures abating as we move closer to a highly charged general election in November.

In this uncertain climate, having a firm grasp on your institution’s financial position is more important than ever. It enables a college’s leaders and trustees to understand the institution’s ability to withstand potential financial shocks. It reassures students and their families that the school has the financial resources to fund its degrees, certifications, and programs today and into the future. For alumni and other supporters, knowledge regarding financial position supports the perception of the institution as one that will sustainably provide value and a sense of pride.

Yet, as highlighted in a recent article in the Chronicle of Higher Education, information on an institution’s financial health can be difficult to come by for administrators, potential students, and students’ families. This impression was confirmed in a conversation we had last month with the higher education sector leaders from the three major rating agencies, who noted that they often are not provided multi-year projections of financial performance by institutions in the rating process.

One response to this might be, “How can I create a financial plan in a time of so much uncertainty?” The answer is, “How can you not?” Given the uncertainties facing higher education today, it is critical to understand what is driving an institution’s financial success, and what is holding it back. Only by understanding where an institution is thriving, where it is failing, and what key variables are generating those results can leadership plot a strategic path forward that will leverage the institution’s strengths. There should never be an instance where leadership is surprised by a material financial shortfall such as have been described at several institutions—including large public “flagship” universities—in recent months.

Earlier this month our firm’s chair, Ken Kaufman, published a blog post on “Revisiting the Importance of Financial Planning.” The post was directed to Kaufman Hall’s healthcare clients, but it made the broader point that “sophisticated financial planning remains the backbone for the management of complex organizations of any type or stripe,” a definition that certainly includes higher education.

Financial planning has been at the core of Kaufman Hall’s consulting services since the firm was founded in 1985, and we have done it for countless institutions: colleges and universities, community health systems, academic medical centers, and cultural institutions. And while times have changed since the mid-1980s, Ken’s blog post noted that the essential questions to be answered by the financial planning process have not. Here, slightly adapted for higher education, are those questions:

  1. What is the ambition of your organization as it relates to mission, financial success, program growth, and improvement in reputation?
  2. Based on the answer to question number 1, what would be the total required resources to achieve said financial success, program growth, and improvement in reputation?
  3. Based on the multi-year financial plan, is your organization on track to produce those resources as a combination of cash flow from operations, capital capacity, philanthropy, and other sources of funding such as grants and contracts or asset monetization?
  4. If not, what is the total shortfall in financial and capital capacity and are there operating and financial strategies available to close that shortfall?

These questions are, in fact, related to an integrated approach to both strategic and financial planning. Question 1 relates to strategy; Questions 2, 3, and 4 address financial planning and the need to integrate projected financial futures with required support for the strategic plan. Answers to the financial planning questions establish parameters for the strategic plan, defining the resources needed to achieve strategic goals as well as the institution’s ability to secure those resources.

It is important to note that financial planning can—and often should—be done before a strategy has been defined. Financial planning can quantify the gap between expenses and resources that the institution is facing. It also can identify which programs and services are currently contributing to closing that gap and which are making it wider. With this information in hand, leaders can begin to challenge potential strategies financially, refining them to create an integrated plan that ultimately drives the question of “what is our niche?” In other words, what should fuel an institution’s ambition as it considers Question 1 above?

Another set of questions—asked as part of the financial planning process—can help in answering Question 1:

  1. Where are we headed if we don’t do anything?
  2. What potential strategies do we have to change that trajectory (e.g., athletic programs, tuition discounting, new programs, eliminating programs)?
  3. To make the potential strategies successful, what resources will we need to generate, and where will those resources come from?
  4. Given this information, which strategies have the greatest chance of success for us?

Financial planning is the basis for defining viable and sustainable strategies; once those strategies are defined, the financial planning process also establishes the road map that delineates the steps, resources, and time required for those strategies to succeed. Most importantly, however, financial planning, done with rigor and discipline, tells an institution’s leaders and its stakeholders where it stands today and what will be required to ensure that it thrives into the future.

Jason Sussman has provided planning and financial advisory services for healthcare providers and higher education institutions nationwide for more than 35 years. He is a leader in Kaufman Hall’s Strategic and Financial Planning practice.
Larenda Mielke
Larenda Mielke is a Senior Vice President in the Higher Education division of Kaufman Hall’s Strategic and Financial Planning practice. She has extensive leadership experience in higher education in the areas of strategy, curriculum and program development, and more.
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