The fall of 2025 will be the first year of the demographic cliff, although many small colleges have been experiencing it for a while. In the past few years, we have seen fewer high school graduates choosing this path. Recently, the National Student Clearinghouse reported that their calculation of first year enrollments has been incorrect since 2020. At that time, their algorithm improperly classified some of these students as enrolled in both high school and college. Despite what appears to be an increase in undergraduate enrollment numbers, many small institutions have seen a continued decline, indicating a shift.
This may be further accelerated by the new secretary of education focusing on career pathways and the awarding of financial aid. As a side note, I do not believe the Department of Education will be dismantled but I do believe we will see a priority shift over the next four years.
This will force closures for small and fragile institutions, as cash gets tight and the following year’s budgets become clearer. While I do not wish for closures, the institutions who face this reality have been struggling for years. Their folding is not as sudden as we like to believe.
These closures will make students available to other schools, but not enough to stave off further struggles and closures.
These issues will cause institutions to focus on timely, accurate, and meaningful financial reporting to provide clarity and insight for the board, president, and leadership team. This shift occurred last year as more leadership started to question whether their institutions were in trouble.
Data is key
Use of data for understanding key financial drivers will continue to build. Days cash on hand and debt service coverage can hide problems by allowing restricted funds to cloud the picture. These new measures will sound more like a manufacturing company’s margin on instruction, athletics, auxiliaries, and fundraising. They will be overlaid with sales metrics like conversion of inquiries to enrollments and a deeper dive into retention measures and discount rate.
The focus for the year will be clarifying market position and striving for financial sustainability.
Yes, there will be mergers of various types this year, but I still do not believe they will be as prevalent as they should be given the struggles of some institutions.
I wonder if this will be the year presidents start to retire or change institutions as they face the challenges of the decline. This will cause a shift in provost positions as I believe most presidential replacements will still come from the academic side rather than finance and administration.
Provosts face mounting pressure to restructure academic programs. As universities tap more for presidencies, we will see burnout, turnover, and instability on the academic side of small institutions, making these critical initiatives even harder to achieve.
How does this shape the priorities of the finance department for the coming year?
Priority #1:
Cost restructuring and analysis remains at the top
We have heard a lot about academic restructuring this past year, but we spend only about 30-40% of our budget on academics. That means we need to take a holistic look at how our institutions spend money. If you are running a deficit now, it will continue to grow as you face the mounting pressure of inflation.
Many institutions are still reflecting enrollment increases. Given the market pressure, this is not likely unless you are a highly selective school.
Some institutions are planning to launch new academic programs to draw new enrollments. They need to understand how many students they need to make each program financially sustainable. For most small institutions, it is somewhere around 100 students. If you plan to launch a new program, be sure your enrollment targets increase by at least 100 students for each one. This means recruiting 30-40 new freshmen and graduating 20 of them per year (depending on your retention rates).
We still have significant opportunities to save money by sunsetting or modifying existing low enrolled programs. Generally, if you graduate less than 20 students per year in any program, it is low enrolled.
Priority #2:
Financial modeling rises above automation
As I said above, if you are running deficits now, they will likely increase over the next few years. If you do not have 5-year projections overlayed with your cash and board-designated liquidity you are “flying blind”. My advice to all presidents, demand to have projections in the first quarter, before you finalize your budget for next year. It takes about 40 hours to put together, so make sure it is a priority.
Strategic planning and storytelling
The financial headwinds we face cause us to have conversations around strategic planning. A critical outcome of planning is knowing the financial impact of decisions and whether we can afford to make changes. We can use the link between the strategic plan and financial projections to tell the important story of our future.
Whether we start new programs, eliminate old ones, offer micro-credentials, increase our online presence, or downsize our physical campus, we need to know whether these changes will save money. Projections are a critical tool for understanding the financial impact of our strategic plans.
Priority #3:
Automation (for reporting & budgeting) slips from #2 last year
It surprises me that so many institutions still create financial reports using Excel. The one purpose for financial statements is to use them to make data-informed decisions about the future. The longer it takes to get timely, accurate and meaningful financial information, the slower the pace of decisions. In this environment, we cannot afford to lag, especially when it already takes us two years to effect real change.
How can we ask budget managers to be accountable for a budget when they are simply seeing a long list of accounts across multiple departments showing small dollar amounts? A VP overseeing 15 cost centers needs a clear picture of the financial situation. Unless we aggregate all 15 cost centers and distill them into twenty line items, the VP will not see the impact of all the smaller decisions. I’ve often said that if you want to prevent someone from knowing what’s going on, give them lots of data. They will be so overwhelmed by the weeds; they will not see the forest.
I hear lots of reasons why people don’t automate reports, but it is usually a lack of prioritization and lack of understanding on how to get started. There are many tools available, even tools that combine budgeting and reporting. The ability to analyze and monitor financial results will be more critical in the next few years. You will see more pressure from presidents, boards, and VPs for meaningful and timely financial information.
If we are not able to easily generate timely financial reports, the projection modeling exercise becomes more difficult. Further, understanding the interplay between all funds is critical. Many of us think only of unrestricted operations, which is not a complete picture. We must spend all the restricted funds available, rather than allowing budget managers to hold them for a rainy day.
Are we focusing on the right time horizon?
This means that if you, dear CFOs, are not looking all the way to the right (diagram above), you will need to work quickly to get there by aligning people, processes and platforms.
Stay tuned throughout the year as we bring you more real-time insights into the work we do every day with institutions like yours!
Photo by Shane Hauser on Unsplash