In a new report, The Financial Resilience of Independent Colleges and Universities, the Council of Independent Colleges (CIC) indicates that although challenges facing higher education are not likely to subside, private colleges survived the recession and continued to adapt between 2000 and 2014, resulting in an improved financial condition for the majority.[1]
According to the report, two-thirds of small and mid-sized private colleges and universities achieved a level of financial health at or above the determined “threshold of viability” as measured by four core financial ratios and a composite financial index (CFI).
What of the other third? Smaller institutions, with fewer than 1,000 students, have seen poor financial performance, with a CFI at or below the viability threshold in 13 of the 14 years covered in the report. For some of these institutions, continued poor financial performance may make closure inevitable.
Whether or not an institution scored at, above, or below the threshold of viability, too many colleges and universities are managing financial health with a limited, short-term view. During the past 14 years, many private colleges and universities have achieved year-to-year survival using only a strategic plan and an annual budget. Currently, many institutions do not perform any financial planning beyond their annual budget development. These exercises do not take into account the institution’s capital requirements, financing capabilities, cash requirements, operating performance requirements, or future risks.
Therefore, it is no surprise that nearly 70 percent of finance executives participating in a recent Kaufman Hall survey said that their institutions are not able to respond quickly to changing circumstances or are unsure that they could, based on their existing financial planning processes.[2]
Wide-ranging views on an institution’s financial health, which are common in higher education today, make it difficult to influence change. One reason is an emphasis on the operating budget as a basis for measuring financial health. Although useful as a guide for spending, the operating budget provides only a partial view of the financial issues facing an institution. Additionally, due to its granularity and short-term view, incorporating the impact of key strategic decisions is often difficult.
Achieving Health through Financial Planning
A strategic plan—as more commonly used in higher education—describes an institution’s current business and operating environment, its desired strategic goals/position in that environment, and related initiatives and timing to achieve the goals. What does a financial plan do? Like the strategic plan, a solid financial plan:
- Articulates the current financial position of the institution
- Depicts the future financial position and the critical factors that influence it
- Defines a clear set of “executables” required to meet the financial goals, including strategic initiatives, required capital investments, financing transactions, and operating changes
- Identifies and quantifies potential resources, risks, and offsets to such risks
A financial plan is an exceptionally powerful leadership tool for three reasons. First, it can serve as a single source of truth that clearly lays out the institution’s financial condition now, and its financial runway for the future.
Additionally, a financial plan can be an influential communication tool to drive consensus toward organizational change. Once leaders coalesce through thoughtful analytics around the "single source of truth," they can better understand why certain decisions or changes are needed.
Finally, the financial plan is an effective decision-making framework within which the impact of key decisions and trade-offs can be clearly assessed. The financial stewardship of the college or university can be improved by processing all major decisions through this framework. This is in sharp contrast to annual budget-based disparate, one-off decision making that may not align with the strategic plan or may negatively affect the institution’s financial position.
A Working Roadmap
Just like a strategic plan, a financial plan is worthless unless an institution executes against it with rigorous discipline. The leadership team needs to monitor performance against the financial plan and make timely course corrections if goals and targets are not met. Then, as business conditions change or when evaluating key strategic or operating decisions, the team should update the financial plan, as appropriate. This kind of proactive management of the financial plan’s execution will enable the leadership team to make more informed strategic, operating, and capital decisions.
As higher education faces increasingly demanding business challenges, working on a year-to-year basis will not be enough to support many institutions. The colleges and universities that start attaining strong performance during CIC’s next study period likely will be those that have developed and are using a robust financial plan and planning process.
For more information email ckim@kaufmanhall.com or 847.441.8780.
[1] Chessman, H.M., Hartley, H.V., and Williams, M.: “The Financial Resilience of Independent Colleges and Universities.” The Council of Independent Colleges, Aug. 2017. www.cic.edu/resources-research/research-studies-reports
[2]2018 CFO Outlook: Performance Management Trends and Priorities in Higher Education. Forthcoming in December 2017 at www.kaufmanhall.com.