This week alone, I have received calls from two presidents and two provosts at four different institutions. All four asked about methods and services for maintaining the financial condition and sustainability of their institutions. On one hand, this is great news because it means that leaders other than the CFO also want to participate in this exercise.
The downside is that in all four instances, these institutions are really feeling the cash flow squeeze. or may already be dipping into restricted funds.
This means that the institution has waited way too long to sound the alarm. The closer you are to running out of unrestricted liquid assets, the harder it is to turn things around.
In an earlier article (Why Do Turnarounds Take So Long?), we mentioned it usually takes two years of tough decisions to see any impact. It can even take five years to return to break even cash flow depending on the size of the deficit.
This timeline means institutions need cash to fund some level of deficits during the 2 to 5 turnaround years.
When we see institutions closing their doors suddenly without notice, they have probably already run out of cash and could not develop a plan to eliminate deficits.
What tools will help you examine the financial condition of your institution?
- Use the Federal Audit Clearinghouse (fac.org) to see the most recent audit. You can analyze the data to understand what the cash deficit is in a normal year and learnwhere you were a year ago.
- Comparing the current year’s budget to actual results will indicate whether deficits are continuing. I highly recommend you compare the total expenses in the budget to the total expenses in the audit to understand whether you are looking at the full picture or just a piece of it. One of the biggest issues I see is that institutions often budget for operating activity only and are surprised by deficits on the audit. This information will give you a good sense of where you are now.
- Five-year projections need to be closely aligned with total expenses on the audited financial statements. We are often surprised to see that expenses continue to rise with inflation, while our net revenues decline, resulting in growing deficits. For most struggling institutions, the challenges will grow in each of the next five years if they take no action. Stress testing your 5-year enrollment projections will be critical as we see demographic declines that are not likely to be made up by additional retention efforts or new programs (which got many of us into trouble in the first place). This is the tool that gives you a looking glass into the future.
Stay tuned because this gives you insight into how to understand what the problem is. As in past articles like What’s the Process for Achieving Financial Sustainability?, future articles will continue to address actions you can take.
Photo by Lachlan Donald on Unsplash