Demographic shifts. Rising interest rates. Increased labor costs. All of these factors—and more—have led to the closure of college and university campuses across the United States. Even blue chip institutions like the University of Chicago have lately experienced financial challenges having recently reported a $239 million budget deficit.
Given the ongoing issues across higher education, it’s critical that all campuses acknowledge the reality of these troubled times.
Emergency preparedness often takes the form of fire or earthquake drills. These routine exercises ensure that when a crisis does occur, everyone understands how to act. Just like these safety drills, a financial contingency plan can help prepare colleges and universities to effectively navigate future financial challenges.
Getting Past the Culture of Optimism
The first step in the creation of a financial contingency plan is to sidestep the culture of optimism that may prevail on campus. Stakeholders, especially the board of trustees, may find it hard to believe that there is, or could be, trouble on the horizon.
Perhaps this means empowering the campus’ Chief Financial Officer to thoroughly understand and communicate the current and future financial outlook. It can also mean recognizing larger forces that will dictate a campus’ future.
Opening up the conversation around financial stress and its causes allows stakeholders to recognize the potential for trouble and the importance of preparing a contingency plan.
Recognize Pain Points
Building a contingency plan involves planning for potential negative outcomes. Understanding these outcomes begins with a thorough assessment of revenue sources (such as enrollment and tuition pricing, institutional aid, federal and state funding, and alumni donations), spending categories and patterns (from faculty and staff to department discretionary expenditures, and all the way up to capital spending, and debt service), and investment returns, and how these pieces are related to a variety of macro trends.
This financial assessment aims to identify strengths, weaknesses, and areas for improvement within the current financial framework, providing a baseline understanding of the institution’s financial resilience. It provides an opportunity to focus on key areas that may need adjustment, such as pricing, budgeting, fundraising strategies, curriculum alignment, and expense management.
Assess Cash Flow Runway
A campus needs to have a minimum cash flow runway of three years to be able to address a period of financial distress. This liquidity runway allows an institution to operate in the ordinary course while it implements options to transform itself to ensure a stable and sustainable future.
Cash flow remains essential even in dire situations where a campus may be facing closure. The timeline from announcement to closure can be at least six months, and sometimes longer. During that period a college will need to implement its teach-out plan and wind down operations. That kind of lead time highlights the need for proactive planning.
Prepare and Communicate
Similar to an emergency drill, a contingency plan will need to simulate a worst-case scenario. This will often occur via scenario analysis and stress testing.
A campus will need to simulate various financial crises, including enrollment declines, government funding cuts, economic recessions, and increased borrowing costs to properly assess their impact on the budget and operations.
This kind of proactive approach will help colleges identify vulnerabilities and develop response strategies in lieu of making these decisions on the fly, when time is short and the pressure is at a breaking point. By stress-testing financial resilience, institutions can better prepare for uncertainties, make informed decisions, and adapt swiftly to changing economic conditions.
Effective and transparent communication with various campus stakeholders will ensure an environment of trust and collaboration. By openly communicating financial challenges and risk-mitigation strategies, campuses can sidestep the maelstrom of opposing views and the hardening of positions that can occur when a school’s challenges are communicated at the last possible moment, and when emotions are running high.
Transparency becomes part of a financial contingency plan because it builds campus resilience, encourages support from stakeholders, and enhances preparedness for navigating financial crises collectively.
Creating a financial contingency plan for educational institutions involves assessing financial health, ensuring sufficient availability of cash, understanding closure timelines, conducting scenario analyses, and fostering transparent communication.
By integrating lessons from emergency preparedness into financial contingency planning, institutions can navigate uncertainties with confidence, safeguard long-term sustainability, and ensure educational continuity.
To connect with Mark, please visit here.