Colleges and universities find themselves challenged to meet the academic, health and safety needs of students, faculty and staff at a time when ensuring liquidity and managing the balance of operating expenses to available funding has tipped negatively for many institutions. The current situation only exacerbates and further illuminates the struggle to provide quality academic programming and ensure achievement of mission within fiscal constraints. Governing boards have an obligation, now and always, to guarantee that institutions can continue to deliver on their missions and meet obligations to their stakeholders.
Higher education institutions across our nation are experiencing significant reductions in student-based revenues as physical campuses have closed and remote learning is the new norm – for the time being at least. Meanwhile, the costs of providing these services and maintaining capital assets remain. For many academic institutions, future downward trends in enrollment-related student revenue, lost sports revenue and significantly lower earnings on endowment assets will compound for a long-term negative revenue impact. A perfect fiscal impact storm results from these revenue trends, when combined with the deterioration in students’ ability to pay for the cost of attendance (e.g., tuition and ancillary services), along with unanticipated expenses related to the remote delivery of services and refunds due to campus closures.
The continuation of these uncertain times – resulting in major changes to all aspects of institution operations and programs – is putting tremendous pressures on accurately projecting the financial picture. It takes available collected cash, not expected student and auxiliary revenues, to meet obligations and survive economic downturns while achieving institutional objectives. When available cash reduces precipitously, operating costs and institutional commitments require scrutiny and diligence to understand cash flow and liquidity realities and options.
At a minimum, to survive this perfect storm, leaders should examine key drivers of fiscal and institutional performance and ensure careful analysis of options for now, and in the future, to make critical decisions and navigate potential alternatives for optimal performance. Confidence that available funding sources and levels are considered in the context of fiscal performance key drivers and expected missional commitments requires a careful and comprehensive assessment across a number of functional areas (e.g., academic continuity, stimulus relief options, capital project management, debt and liabilities, resource allocation, ROI, etc.). Asking all the right questions and examining the right variables can make the difference between “good” and “bad” decisions. Further, knowing what acceptable performance “looks like” relative to the current situation is paramount.
If the situation calls for more scrutiny of cash flow or specific drivers of fiscal position, a completed Cash Flow and Liquidity Management Financial Model (CFMM) can highlight critical decisions and planning requirements. It allows for scenario and “what if” analyses of various options and provides the inputs for more in-depth and longer-term planning.
The CFMM provides a detailed view of cash inflows, outflows and actions necessary to meet obligations as they come due. It details background information to assist in discussions with creditors and others where liquidity management is critical. The answer to where cash is produced and consumed and the resulting expected liquidity position is analyzed in weekly detail over each operating cycle. It helps to highlight problems in advance, so actions can be taken proactively.
The CFMM tool enables operational and capital decisions to be made with a better understanding of short- and long-term consequences and with a higher degree of confidence. This is especially relevant in our current environment, where uncertainty surrounding liquidity and solvency requires clear visibility of cash availability to meet needs such as payroll, refunds, debt service, material purchases and capital expenditures.
The current environment affects nearly every sector of our economy and is among the most impactful for higher education institutions as their operating cash cycles span the academic calendar year. Dollars spent today and over the coming months are critical as the cash inflows from students, federal funding, sports, auxiliary and other sources are not only cyclical, but now muddied with tremendous uncertainty. Therefore, it is more important than ever to assemble the most current and up-to-date information that can be refreshed regularly to enable nimble, informed decisions.
The CFMM tool, which combines known information with scenario analysis capabilities for the unknown, allows leadership to make better decisions over the coming days, weeks and months and provides a strong foundation for a more strategic, long-term financial plan when the current crisis is behind us. These decisions and activities likely include: summer and fall tuition pricing levels, net tuition analysis, financial aid packaging and relief fund assimilation, auxiliary contract and revenue reviews, capital commitments, debt service requirements, fixed and variable cost reductions, supplier terms negotiations, lender negotiations, bond refinancing, organizational changes, and Coronavirus Aid, Relief, and Economic Security (CARES) Act and Federal Emergency Management Agency (FEMA) stimulus reimbursement accounting and tracking, among many other things.
For more information or to learn how Baker Tilly specialists can help, contact our team.