Fiscal resiliency: tips and tools for effective modeling and analysis

This blog summarizes key takeaways from our fiscal resiliency podcast series, episode three.

When examining fiscal resiliency within the context of the current higher education landscape, it is clear that colleges and universities are facing pressure from many different directions.

Fiscal pressures have been mounting for decades as the competitive cost to operate an institution has increased and, along with it, the cost for students to attend has escalated. As a result, we’ve seen a huge increase in student tuition over the years. With COVID-19 playing a significant role this year, there has been a 4% decrease in nationwide undergraduate enrollment and a 22% decrease in community college enrollment for first time students this fall1. The drop in enrollment, and uncertainty the pandemic brings, has magnified the pressures the higher education industry is experiencing.  

“While schools have ‘rainy day’ funds, the rainy day is here – and it’s been here for more than eight months now,” Tim Meyers, senior higher education advisor at Baker Tilly, said on our recent podcast. “Institutions across the country are running short on (or have ­­exhausted) their excess reserves and are looking for more strategic means of survival.”

Considering these trends and what’s going on across the U.S., it is more important than ever for institutions to understand their current fiscal position – and the opportunities to protect their fiscal position in the future.

Modeling as a key to success

As emphasized above, 2020 has presented the perfect storm for higher education institutions in terms of fiscal challenges. They are getting pressured from every angle – and they need to know the specific details of what is necessary to bounce back. One critical part of a school’s resiliency plan should be sound financial modeling. A thorough three-to-five year financial model can analyze the impacts of rising costs, decreasing enrollment and, of course, COVID-19, among other factors.

Modeling should, at a minimum, examine an institution’s income statements, balance sheets and cash flows. This will allow higher education leaders to self-evaluate their school’s fiscal situation and understand key levers for improving their financial performance.

Generally speaking, a solid model is:

• Comprehensive: It looks at the institution’s income statements, balance sheets and cash flows, as well as other key financial and operational documentation, such as enrollment data.
• Integrated: When one lever is pulled, the impacts are seen in other areas.
• Easily used to facilitate scenario analyses: The ability of a model to be flexible, and to analyze “if X, then Y” situations, is particularly useful.

Critical fiscal drivers for strategic transformation

Times are changing and colleges and universities need to adapt to a transforming environment, which means modifying strategy to achieve fiscal resilience.

Gone should be the days of institutions using dollars allocated for maintenance for aesthetic purposes (i.e., to create a beautiful campus that draws in new students rather than to improve old infrastructure that desperately needs upgrades). The cost of deferred maintenance is roughly $100/square foot on average, according to a recent study by Jones Lang LaSalle2. Combined with the traditional annual influx of additional academic programs at most colleges, historically, there has not been much of a push to figure out the academic cost per hour.

During this period of necessary transformation, institutions of all sizes can benefit from a keen strategy based on the following:

• Renewing focus on affordability – Institutions may need to consider adjusting their tuition cost because if qualified students cannot afford to attend, then affordability may ultimately impact institutional sustainability.
• Making student success a top priority – Online learning competence, advanced degrees and other qualifications that college can bolster make students – and future alumni – more employable in the workforce.
• Considering creative combinations and shared services – Are nearby colleges teaching the same programs and recruiting the same students? Is there a better, smarter, more affordable way to educate? If so, institutions have an opportunity to work together to determine the best possible strategy to serve constituents and support fiscal resiliency.

Remember that the short term is all about surviving. But the long term – now and always – is about strategy.

Common issues, key tips and potential solutions

Planning and communication are critical parts of the fiscal modeling process to ensure resiliency, as it helps facilitate important decisions about the present and future, and the institution’s ability to stay cash flow positive. College and university leaders should keep these key tips and tools in mind:

• A good financial model should be dynamic and fairly simple. Complex models are common, but a thoughtful model doesn’t need to be overly detailed and over-engineered. Identifying intelligent assumptions and recognizing key drivers are critical for higher education institutions.
• Cash flow planning is a necessity. We’re seeing a lot of institutions struggling with cash flow and we help these schools examine their short-term and medium-term cash plans.
• Boards play an important role in surviving the COVID-19 climate and ultimately moving strategy forward. Boards must be flexible, unafraid to make changes, creative when it comes to managing endowments and freeing up liquidity and of course highly attentive to changing restrictions, laws and opinions.

Summary

Today’s higher education environment makes it crucial for leaders to truly know their institution to make strategic decisions about the school’s future. However, no matter how well-informed and prepared, projections and financial forecasts are not necessarily based on reality. Still, fiscal modeling can help decision makers narrow down a potential path to success.

Institutional leadership, board members and the executive team must unite to meet the goals of the institution and fulfill its mission. They need to collaborate to determine synergies and implement efficiencies that will ultimately bring down the cost of tuition. This change exploration process tends to result in a lot of questions, but not many answers. University leaders and board members need to figure out how to position the school for the long-run. Everything should be on the table. Students, faculty, staff and the alumni community deserve nothing less.

For more information, or to learn how Baker Tilly’s higher education specialists can help your institution gain fiscal resilience, contact our team.

Stay tuned for our next Higher Ed Advisor podcast that discusses the board’s role and perspective in achieving fiscal resiliency for higher education institutions.