Higher education is at a breaking point. Declining enrollment, skyrocketing operational costs, and an impending enrollment cliff are threatening tuition-dependent and regional colleges like never before. The financial stress these institutions face amounts to an existential threat.
In this new normal, colleges have to take immediate, decisive action to secure their financial future. There are proven strategies that institutions can implement right now to stabilize their finances, regain control, and lay the groundwork for long-term sustainability.
Here are five best practices that can set a foundation for long-term sustainability.
1) Understand the Long-Term Cash Flow Runway
A financial crisis will often force a college into a difficult but necessary conversation. When institutions face budget shortfalls, declining enrollment, or rising operational costs, campus leaders must begin to grapple with transformational change, often along the lines of rethinking academic offerings, streamlining operations, and exploring structural shifts like departmental consolidation, program cuts, or institutional mergers. Waiting too long to act only narrows the available options. Institutions that proactively engage in bold, strategic discussions are those that emerge as stronger and more sustainable in the future.
Higher-education is highly regulated and complex, with stakeholders both on campus and in state and federal governance. Any major change requires at least three years to fully implement, and accordingly, adequate cash flow during the period. This ensures that any change can be completed, and more importantly, bear fruit.
If a college’s cash flow runway is shorter than three years, there are several options administrators can explore to shore up the campus’ financial position. Key options to consider include:
- Capital raising via strategic investments or partnerships.
- Renegotiating debt by working with lenders and bondholders to restructure terms.
- Fundraising campaigns that mobilize alumni and donors with urgency.
- Unrestricting restricted assets by reassessing endowments and restricted funds.
- Asset sales which can monetize underutilized real estate or other assets.
The goal here is to create breathing room for transformation. Without adequate cash runway, even the best initiatives will fail from a time crunch. Institutions must extend their financial horizon now to ensure they have the time and flexibility to implement and refine sustainable solutions.
2) Establish Weekly and Monthly Cash Flow Forecasts
Institutions have to have a firm grasp on their near-term cash flow. The abrupt closure of the University of the Arts in Philadelphia highlights how an inadequate understanding of cash-flow can quickly spiral into a crisis.
Cash flows in higher education are becoming increasingly unpredictable due to consistently higher operating costs, uncertainty of state and federal funding, and constrained liquidity. In response, campuses need to have a 13-week direct cash flow forecast coupled with a monthly cash flow forecast for the subsequent 9 months.
These tools will ensure that financial officers understand short- and mid-term liquidity needs and can plan for unforeseen events.
3) Improve Working Capital Management
According to a recent survey of more than 150 higher education leaders by ECSI and Higher Ed Dive, the majority of institutions are managing past-due accounts for tuition and fees in excess of $1 million, with one-third managing an amount that exceeds $5 million.
For a financially-stressed institution, improved working capital management can mean the difference between closure and survival.
On the accounts receivable side, institutions can consider:
- Resetting class registration and sports participation policies for students with outstanding balances
- Improving communication strategies with students who have outstanding balances
- Developing and/or improving monitoring of payment plans
- Outsourcing collections on a regular basis
With regard to vendor payments, many stressed colleges will often pay vendors before invoices are due, creating an artificial constraint on working capital. However, paying vendors within a reasonable period of time beyond the invoice due date can be a feasible, yet often overlooked, potential opportunity to improve short term cash flow.
Finally, campuses should work towards unrestricting restricted assets. This may involve a series of difficult conversations with donors in order to unrestrict their donations. While these conversations may be unpalatable for many institutions, it remains an effective means of accessing additional liquidity.
4) Communicate with Creditors
Any institution that either anticipates violating a covenant in the future, or has already done so, must communicate with their bondholders and/or bank lenders as soon as possible, with support from legal counsel and a financial advisor.
A college’s creditors are eager to understand the issues a school is facing as well as the plan that the board and leadership have, or are putting in place, going forward to address those issues.
Regular, open communication fosters an environment where both parties can work together to reach an agreement without conflict, which can be expensive and time-consuming, and can provide the college with breathing room to execute its remediation plan.
5) Reduce Costs
The most urgent challenge facing colleges today, and the hardest to solve, is declining revenue. Shrinking enrollment, deep tuition discounting, and reduced government support have created a financial squeeze that institutions can no longer ignore. But cutting costs to match lower revenues is not an easy task.
Payroll is the largest component of campus expenses. Many institutions expanded staff and faculty before the pandemic when enrollment was higher, but have not adjusted headcount to reflect current realities. A hard look at departmental staffing levels compared to 2018–2019, adjusted for enrollment declines, will often reveal necessary cuts.
Outsourcing overhead activities can also provide payroll relief. Institutions should evaluate whether shifting functions like janitorial and facilities management, dining services, student housing, and IT to external vendors could deliver significant savings. A competitive bidding process will help determine where outsourcing is cost-effective.
Reducing payroll is one of the hardest decisions colleges must make. It’s disruptive, emotional, and often met with intense pushback from campus stakeholders. Severance and buyouts can also mean the savings aren’t immediate. That being said, delaying these tough decisions will only increase financial risk and limit future options. The time to align costs with reality is today, well before the window for sustainable transformation closes.
The Time to Take Action is Now
Given the issues facing colleges today, waiting to take concrete, transformative actions can lead to a dire outcome. However, by understanding its long-term cash flow runway, establishing weekly and monthly cash flow forecasts, improving working capital management, communicating with creditors and reducing costs, colleges can stabilize their finances, regain control, and lay the groundwork for long-term sustainability.
