Higher education institutions nationwide find themselves facing a variety of issues, both external and internal, that are testing their ability to achieve continued growth and sustainability.

To address these issues, colleges and universities have identified a range of strategies and initiatives. Among them, managing liquidity has always been a challenge for colleges and universities, with their unique blend of short- and long-term liquidity needs and organizational complexity. But the imperative to effectively manage—and optimize—liquidity is now stronger than ever, as is the opportunity to generate real return on those efforts:

Liquidity optimization can help mitigate the impact of the pressures colleges and universities face, and it can also provide real benefits, including enhanced return on investment, improved insights into cash flow, and increased operational efficiency. Liquidity optimization is also an area where focused effort can generate real return with little to no impact on institutional FTEs or operating structures. In fact, to the extent operational efficiencies are realized through streamlining and automating treasury processes, valuable staff resources can be freed up to pursue higher level analytical tasks.

With an opportunity for both financial and operational savings, a focus on liquidity can generate significant tangible value in the short term and, with the right structure in place, ensure that savings are retained going forward. Improving cash structuring, visibility, forecasting, and yield could easily double the value of operating deposits and unlock additional financial benefits, as discussed below.

Structuring

Structuring is the method by which cash is aggregated across operating accounts and investment vehicles. The efficient movement of cash across these channels ensures that daily disbursements are funded while minimizing the cash balance required to fulfill these obligations. The impact of optimal structuring is twofold. First, by minimizing cash held in short-term accounts, overall returns can be increased. Second, to the extent that the amount cash being held for short-term needs exceeds those needs, freeing up that cash enables the institution to put it to use in support of broader strategic initiatives.

The goal is to consolidate operating liquidity into one centralized pool, leveraging automated tools to move funds and efficiently reconcile transfers. Cash concentration can take many forms, although the physical consolidation of cash with the necessary underlying reporting tools is typically the most efficient way to gain access to the institution’s holistic balances on a daily basis.

Visibility

Visibility is the function of leveraging reliable and timely—potentially real-time—data to view and manage cash positions. As pressures to track and report balances increase, partly in response to the cybersecurity threats mentioned above, leading universities are better utilizing technology platforms to streamline the creation of daily cash position reports to provide insightful analytics. Access to this information supports more informed decision-making around cash deployment and provides the baseline for accurate forecasting.

Forecasting

A comprehensive cash forecast based on historical trends and future cash modifiers is a critical component of optimizing liquidity for treasury departments and forecasting needs have only intensified in light of growing uncertainties around enrollment trends and cost pressures. Historically, cash forecasting has been done, in general, using home-grown spreadsheets. This requires manual input of data with a significant lack of integration across financial and operating systems. These administratively burdensome reports often add little value to decision-making processes and quickly grow stale. Today, technology is available to unlock access to information and provide the tools necessary to produce meaningful cash balance forecasts.

Without a reliable cash forecast, it is difficult to properly segment cash across short-term and long-term segments. By leveraging additional functionality in existing systems or integrating new technology platforms, a treasury department can provide valuable insights across multiple time horizons using streamlined, automatic processes that significantly reduce the staff resources needed to generate these insights.

Optimizing the balance between risk and yield

Risk and yield are two sides of the same coin. With structuring, visibility, and forecasting functions in place, the treasury department’s next focus should be on positioning the institution to maximize its return on cash while properly managing the availability of funds and the risks associated with its cash positions.

Step one is to create or refresh the institution’s investment policy. This policy should detail how different segments of cash are viewed, with the understanding that short-term and long-term cash can leverage different investment vehicles. Once these cash segments have been established, the policy should define clear risk metrics that guide how different types of assets can be leveraged. With the investment policy in place, the institution should then prioritize investment vehicles that align to its overall treasury priorities (e.g., maximizing the earnings credit rate to reduce operating costs).

The next step is to automate the deployment of cash to minimize manual processes. Operational optimization that utilizes data feeds and technology supports the streamlined movement and reconciliation of cash across various investment vehicles. As rates continue to rise, the opportunity cost of inefficient cash deployments grows larger.

Institutions must also stay current on bank products and investment solutions to ensure they have a comprehensive understanding of yields and associated costs. For example, for balances held within operating accounts, the overall yield will be affected by balance-based charges or deposit assessment fees, which are applied to the collected funds and reduce the overall return. This cost could significantly impact decisions on how operating cash should be deployed.

An opportunity and an imperative

Liquidity optimization offers colleges and universities a significant financial opportunity. It also is an imperative to meet the mounting financial challenges and risks that higher education faces today. Institutions that are focused on cost savings and maximizing efficiency within their treasury operations should put liquidity optimization at the top of their priority list for 2023.

Meet the Authors
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Zech Decker headshot

Zech Decker

Vice President
Zech Decker is a Vice President with Kaufman Hall’s Treasury and Capital Markets practice, specializing in bond issuance, private placements, and treasury management.
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James Green headshot

James Green

Vice President
James Green is a Vice President with Kaufman Hall’s Treasury and Capital Markets practice. He provides analytical, quantitative, and strategic support for innovative treasury solutions.
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Geoff Stenger

Geoff Stenger

Senior Vice President
Geoff Stenger is a Senior Vice President with Kaufman Hall’s Treasury and Capital Markets practice, specializing in bond issuance, private placements, and treasury management. His expertise includes bank credit financing solutions and treasury operations consulting.
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