Salient Institutional Relationships for the Chief Financial Officer

by Michael K. Townsley | May 21, 2022 | Financial Strategy and Operations

A CFO’s contribution to the mission of an institution – building and sustaining its financial viability – depends upon the relationships that she/he has with salient positions within the institution. Positions are salient when they are directly involved in budgetary and financial decisions. If a CFO has the skills to work well with salient positions, then there is a good chance that the financial condition of the college will reach a state of economic equilibrium^[1], ceteris paribus. Conflict with one or more of these positions reduces the opportunity to achieve equilibrium. It is in the interest of the institution to have a CFO who can foster strong relationships with salient positions that can influence the dynamics of producing financial strategies to foster and sustain the financial viability of the institution.

Key Salient Positions – Board of Trustees and President

The board of trustees and the president are the key salient positions for the CFO because they shape the goals, responsibilities, and much of the routine activities (for example, debt, major contracts, and budgets) of the CFO and the business office. In addition, the board and the president can provide validation and affirmation for financial decisions that the CFO must carry out.

Why is validation and affirmation important? Validation may be needed prior to taking action on a decision and when statute, regulation, or requirement by another legally-constituted entity requires formal authorization by the board of trustees. These conditions are mainly present in public institutions during the submission of budgets and for private institutions in applying for grants or offering a publicly-backed bond. Without validation, the CFO does not have the authority to act and may be held liable for unauthorized actions. Affirmation is the concept that prior to a finalizing a decision that she/he has the authority to make without the direct approval from someone higher in the administrative hierarchy, the CFO goes ahead and seeks the approval of the board and/or the president to approve her/his decision anyway. Affirmation is always a useful step to take to avoid future opposition that could stall the work of the CFO and/or the college. Ideally, there are board and college policies that identify categories of decisions that require affirmation by a higher level of authority, such as dollar limits on signing contracts and the types of gifts that the college will accept from benefactors.

The president and the CFO need to establish a mutually supportive relationship because it is in their self-interest to support the decisions and plans of each other subject to legal constraints. Of course, this proposition of mutual affirmation is subject to the good sense rule that it is not judicious for either party to make a decision without first acquiring mutual affirmation for the decision. There is nothing more upsetting to a president than to discover that the CFO has taken unilateral action, even though it is within the prescribed authority of the CFO, especially when the subject is sensitive to the mission of the college and to the president. For example, even though facilities may be under the authority of the CFO, start dates, length of the project, and the scope of projects should be shared with the president. There is nothing more upsetting to a president than to hear that work on the plant is taking place with news of the work coming not from the CFO but from someone else.

The CFO also plays an important role by being the proxy naysayer for the president. The implied understanding (but not formal duty) of the CFO is to say that some actions cannot be taken because it violates policy, budgetary plans, or other authority of the business office. Even though this duty can be distasteful to the CFO, it is imperative that she/he undertake this task so that the president can remain neutral and save his/her personal relationship capital for critical issues that must affect the well-being of the college. In support of the “nay saying” task, the president should acknowledge that the CFO has the authority to say “no” and that the president supports the decision without further argument. The aim is to make the CFO, not the president, the “go-to” person on budget and financial issues, policies, procedures, and requests. This practice can help the institution maintain the value of budget and business office policies, procedures, and plans. This practice is also in keeping with the basic management theory that employees, in this case the CFO, have the appropriate authority and responsibility to perform their jobs.

The chief components of the salient relationship with the board of trustees and president are to inform, educate, and expeditiously prepare solutions. To inform is to provide immediate and clear information about the current financial conditions of the institution and describe any factors that could have a positive or negative influence on those conditions. Information is best disseminated through a simple dashboard report. To educate is to explain complex financial transactions and reports in a fashion that can be understood by a layperson. To be prepared with solutions is to be able to design financial plans that respond to issues that the board or president wish addressed, such as changes in discount rates, debt financing, or employee benefits.

Because of the important responsibilities of the CFO, it is critical that the president and CFO have an open and on-going dialog to ensure that they are on the same page. The CFO must have a firm understanding of the institution’s mission and the trustees’ and president’s vision for the future of the college or university.

Key Salient Colleagues

CFOs obviously cannot perform their duties with only the input of the board and president. They need the support from their key salient colleagues: other senior administrators, especially the chief academic officer (CAO); the registrar and the staff from admissions; buildings and grounds; information technology; financial aid, billing, purchasing, and payroll. The relationship with these colleagues is predicated on involving them in operational meetings, budgetary performance reviews, and new operational and capital plans.

Operational meetings should be subdivided between formal and informal arrangements to assure a constant flow of information about conditions that affect current budgets and shape plans for future budgets. It is essential that regular formal meetings be held because informal arrangements too often result in missed communications or forgotten and/or ignored issues. Therefore, formal meetings should have agendas, minutes, and regularly scheduled items for review. The purpose of informal meetings is for the CFO to get into the infrastructure and get a sense for what is happening with policies, procedures, and budgets as they are used by the people who are actually carrying out the work and plans of the institution. Operational meetings ensure an ongoing understanding of policies and procedures. They are also useful in planning and reviewing new initiatives, for example, a new refund policy.

Budgetary performance reviews do not entail evaluation of the budget work performed by employees, but they do involve working with colleagues to ascertain if performance fits with expectations. The purpose of the budget performance review is to determine why existing or new policies, procedures, or plans do not conform to expectations. It is meant to question if the problems are caused by errors in understanding of the task or by unanticipated glitches in the system. Once the problem is understood, colleagues and the front-line staff can develop corrective actions to redesign the policy or procedure or plan to eliminate the problem.

Operational and capital requirement plans depend upon good information so that budgets and capital plans are based upon reliable data, true assumptions, and a valid conception of need. Budget and financial data should be collected in a tightly structured manner so that there is a direct link between the data, real conditions, and plans. The CFO should work through budget planning committees with fellow administrators or with staff who have responsibilities for the following information:

1. Enrollment – work with admission manager (enrollment manager, if the position exists), registrar, and financial aid staff to establish realistic revenue numbers. Too often, institutional managers drive enrollment estimates based on their expense budget or they estimate enrollment by adding a percentage increase that has no basis in fact or in the college’s share of the student market.
2. Faculty needed to cover enrollment for the coming year.
3. Student services needed to support the expected proportion of new students who may need academic assistance or personal support.
4. Building and grounds where a comprehensive list of renovations, repair, updating, or expansion of the plant and grounds is needed.
5. Auxiliary services budget requirements commonly include estimates of the number of students who will live in residence halls, use food services, or make purchases at the bookstore. Also, a list of renovations, repairs, updating, or expansion of auxiliary plant should be developed.
6. Capital projects plans should define the purpose, scope, and timing of new projects.
7. Business Operations –review if revenue or expenses could be affected by changes in the level of student collections, requirements for cash, and reformation of operational policies and procedure.
8. Cost Management Team should formulate solutions for cutting or minimizing cost increases.

Budget and capital planning groups do not guarantee that there will be no budget errors, but these meetings can reduce the chance for errors due to inattention. Additionally, the CFO cannot act in a vacuum on revenue and expense projections. The CFO must consult with each department about its budget goals, new initiatives, staffing, and support expenses. The budgetary meetings should be seen as an opportunity to conduct an annual review of spending trends and budgetary decisions over the past several years. The impact of decisions upon the budget become apparent over time; and the CFO, in conjunction with budget managers, should assess whether past decisions represent the best allocation of resources to serve the mission of the department and, most importantly, the mission of the institution.

The relationship between the CAO and the CFO needs to be fostered by both because their mutual understanding of the connection between academic mission, programs, and budget are essential to developing a valid budget. It is imperative that the CAO have direct input into the goals and operational estimates for the budget. The CAO is the conduit for the budget process to the faculty. If the faculty perceives that the budget process is transparent and that the CFO understands the requirements and constraints of the academic mission, then most faculty will be willing to support changes in financial strategies. The importance of the CAO-CFO relationship is indicated by the annual meeting for these officers conducted by the Council for Independent Colleges (CIC) and the National Association of College and Business Officials (NACUBO).

Common Set of Economic and Financial Principles

Financial management must necessarily rest on the assumption that everyone involved in developing and managing financial strategy and budgetary plans agrees with a common set of economic and financial principles. If they do not agree, financial management will deteriorate into a continuing squabble over revenue sources, expense allocations, responsibilities, and appropriate level for financial resources. These squabbles are not just sources of heartburn for everyone involved, but they also foster chaotic conditions in managing financial operations, which could also diminish the financial stability of the institution. Too often, it is the loudest department, not the department that has a significant role in the academic strategy of the college, which receives the largest share of the budget pie. Therefore, it is imperative that managers reach an accommodation on basic economic and financial principles. How agreement is achieved will depend on the unique characteristics of a specific institution.

The basic principles that the administration of the institution agree upon should state obvious and standard practices in managing finances in an institution of higher education. Agreement about a common set of principles has several direct benefits for the business office and the institution. Principles reduce disputes over finance; they can improve the quality of financial decisions; and they can promote the financial condition of the institution. The basic principles, which are discussed below, cover these areas at a minimum: economic forces, budget policies and rules, and essential accounting rules.

Economic Forces

There are three economic forces that affect the financial condition of an institution: revenue markets (sub-divided into student, gift, and grant markets), labor markets, and price. These forces involve classic economics in which the intersection of demand (revenue markets) and supply (educational output) determine price, while the marginal labor cost (the primary cost factor in higher education often accounting for 70% of the cost) and marginal revenue determine profit^[2]. If the college plans to continue on its current economic path, senior administrators need to understand how supply and demand will affect the institution and if those forces are or are not changing. It is a useful exercise during budget planning for senior administrators to meet and review what is happening with its markets and competition and how changes could affect its financial condition. If the college wants to change its targeted student market, it is a necessary exercise that senior administrators clarify and agree upon the structure of supply, demand, and competition that will affect its plans.

Budget Policies and Rules

There is an economic principle that is often only seen as a minor element in budgetary planning in higher education; the concept is “scarce resources”. Too many involved in budgets and capital planning treat expenditures and uses of funds as an issue independent of sources of funds, as mentioned earlier. It would seem to be the case that resources are assumed to be infinitely elastic and can be expanded to whatever need is deemed important. The likelihood that scarce resources are ignored increases as planning moves down into the organization or away from positions that have to produce financial resources. This happens because either the position makes little or no contribution to the production of funds or because her/his responsibility is so small that they do not see the larger impact of their requests on the budget or the finances of the institution. CFOs must not let the belief prevail that “scarce resources” are irrelevant in their institution if they want to have a financial and budgetary system built upon accepted principles of economics and just plain good sense.

Independent institutions that operate as not-for-profit entities must work within the financial constraint that excess revenue does not accrue to managers, trustees, or other members of the college or university. It is a misconception that not-for-profits cannot generate profit or excess revenue. If this constraint was true, the institution would never be able to generate adequate resources to maintain the purchasing power of its current assets (cash); or sustain the efficient, useful, and safe operation of the plant and grounds; or keep the purchasing power and the plant in line with changes in technology, student demand, government regulations, or the labor market.

The president, CFO, CAO, other senior administrators, faculty, and staff must understand and agree that the institution must grow its financial resources if it is to achieve its mission, successfully compete in the marketplace for higher education, and deliver graduates prepared for the job market. Understanding and agreement often depends upon the ability of the CFO to convince key decision makers and important constituencies that the college must do more than break-even. Failure to agree that the college must continuously expand its financial resources means it will face the possibility that erosion of financial resources will compromise the college’s or university’s ability to deliver on its mission and its educational goals.

Essential Accounting and Business Office Rules

Few things have greater potential for upsetting the relationship between CFOs and non-financial managers than problems related to accounting rules. CFOs typically see accounting rules as a given that guide the logical and coherent activities of the business office. On the other hand, non-financial managers see accounting rules as a maniacal plan that defies common sense and imposes unworkable rules as they try to solve budget problems that confront them daily. Therefore, it is important that non-financial managers understand the rationale behind essential accounting and business office rules and have ready access to those rules so that the CFO or her/his staff does not have to devote their time (which is in short supply) answering questions that are trivial. The CFO should also prepare and educate the president about reports and business office practices. CFO’s must inform and educate non-financial managers, which may resolve issues before they become contentious.

New and current staff in the business office must also understanding these essential accounting and business office rules:

1. Structure of the budget reports
2. Definition of line account titles and numbers
3. Rules on assignment of revenue to programs, departments and line accounts
4. Restrictions on what can be expensed to a specific line account
5. Authority limits on:
   1. Dollar amounts that can be spent through petty cash
   2. Dollar amounts that each level in the institution can approve for a contract
   3. When a purchase order has to be prepared
6. Process for filing a purchase order and for requesting an invoice for payment
7. Process for requesting transfers between line accounts and limits on which accounts can be used for transfers

Misunderstandings sometimes occur around gifts and restricted funds. Established policy from the Federal Accounting Standards Board (FASB) delineates how gifts and restricted funds are to be treated in the business office. Many non-financial managers do not understand that the receipt of a pledge is not the same as the receipt of cash; nor do they understand that the use of restricted gifts is limited to the income generated by the gift. Cash received in a latter year for a prior year pledge is not posted as revenue to the fiscal year in which it is received. Therefore, budgets cannot be balanced on the back of cash received for pledge receivables. Gifts that are restricted for a particular purpose are placed in the endowment, and only the income from the gift can be used for the stated purpose. It is paramount that the CFO clearly and precisely inform everyone (the president, senior administrators, and non-financial managers) dealing with the gift how it is to be used and how regulations limit its use to its income. The proper controls, records, and assurance of the correct use of gifts and restricted funds are an essential duty of the CFO.

Obviously, these rules discussed above are not exhaustive, but they do indicate what non-financial managers need to know to effectively work with the business office. It would help if the CFO could assign a lead person on the business office staff to meet with non-financial managers to identify what questions they have and what information they need from the business office. These rules should be promulgated through short training meetings and then placed on the institution’s website for easy access to help someone quickly find an answer. As policies and procedures change, the changes should be sent out and should also be added to the website.

Summary

Salient relationships, as this chapter has noted, are critical to the success of a CFO. They cannot be ignored and should be part of a CFO’s approach to his/her strategic and operational plans. For the CFO, the task of building and maintaining successful relationships with salient positions must be founded on the following principles:

1. Inform, educate, and respond to the board and president about financial plans and operations.
2. Work with colleagues who are critical to strengthening the financial condition of the institution and include them in:
   1. Operational meetings, which involve formal and informal meetings
   2. Budgetary performance reviews to determine if budget plans are on or off course and what can be done to resolve operational problems
   3. Budget and capital requirement planning so that colleagues can provide their insight into ways of improving the allocation of resources and of identifying potential problems
   4. Establishing financial teams designed around important segments of financial or budgetary plans
   5. Reaching common agreement on economic forces that shape the financial condition of the college
   6. Work with non-financial managers so that they understand the rationale and benefits behind accounting and business office policies and procedures

Even if a CFO is a skilled communicator, which is becoming a significant requirement for this position, and a competent accountant and financial manager, this should not lead to the conclusion that all problems will be eliminated in their relationship with salient colleagues. The reality is that CFOs, presidents, chief academic officers, and other chief administrative officers have different interests because the goals and processes of their positions push them away from accepting the basic demands placed on the office of the CFO. The best that a good CFO can do under these circumstances is to see issues that salient colleagues raise as opportunities and not as tribulations to be born in disgruntlement and resentment. The latter makes for unhealthy relationships and an unhealthy life style. It is comforting to know that most problems, when viewed in the rear view mirror of time, are often much smaller than when you are next to them.

1. Economic equilibrium is a state where the institution produces sufficient resources to support its mission. See chapter XIII for more information. ↑

2. Of course, we do not call it profit in higher education; it is referred to as a positive change in net assets. ↑

A CFO’s contribution to the mission of an institution – building and sustaining its financial viability – depends upon the relationships that she/he has with salient positions within the institution. Positions are salient when they are directly involved in budgetary and financial decisions. If a CFO has the skills to work well with salient positions, then there is a good chance that the financial condition of the college will reach a state of economic equilibrium^[1], ceteris paribus. Conflict with one or more of these positions reduces the opportunity to achieve equilibrium. It is in the interest of the institution to have a CFO who can foster strong relationships with salient positions that can influence the dynamics of producing financial strategies to foster and sustain the financial viability of the institution.

Key Salient Positions – Board of Trustees and President

The board of trustees and the president are the key salient positions for the CFO because they shape the goals, responsibilities, and much of the routine activities (for example, debt, major contracts, and budgets) of the CFO and the business office. In addition, the board and the president can provide validation and affirmation for financial decisions that the CFO must carry out.

Why is validation and affirmation important? Validation may be needed prior to taking action on a decision and when statute, regulation, or requirement by another legally-constituted entity requires formal authorization by the board of trustees. These conditions are mainly present in public institutions during the submission of budgets and for private institutions in applying for grants or offering a publicly-backed bond. Without validation, the CFO does not have the authority to act and may be held liable for unauthorized actions. Affirmation is the concept that prior to a finalizing a decision that she/he has the authority to make without the direct approval from someone higher in the administrative hierarchy, the CFO goes ahead and seeks the approval of the board and/or the president to approve her/his decision anyway. Affirmation is always a useful step to take to avoid future opposition that could stall the work of the CFO and/or the college. Ideally, there are board and college policies that identify categories of decisions that require affirmation by a higher level of authority, such as dollar limits on signing contracts and the types of gifts that the college will accept from benefactors.

The president and the CFO need to establish a mutually supportive relationship because it is in their self-interest to support the decisions and plans of each other subject to legal constraints. Of course, this proposition of mutual affirmation is subject to the good sense rule that it is not judicious for either party to make a decision without first acquiring mutual affirmation for the decision. There is nothing more upsetting to a president than to discover that the CFO has taken unilateral action, even though it is within the prescribed authority of the CFO, especially when the subject is sensitive to the mission of the college and to the president. For example, even though facilities may be under the authority of the CFO, start dates, length of the project, and the scope of projects should be shared with the president. There is nothing more upsetting to a president than to hear that work on the plant is taking place with news of the work coming not from the CFO but from someone else.

The CFO also plays an important role by being the proxy naysayer for the president. The implied understanding (but not formal duty) of the CFO is to say that some actions cannot be taken because it violates policy, budgetary plans, or other authority of the business office. Even though this duty can be distasteful to the CFO, it is imperative that she/he undertake this task so that the president can remain neutral and save his/her personal relationship capital for critical issues that must affect the well-being of the college. In support of the “nay saying” task, the president should acknowledge that the CFO has the authority to say “no” and that the president supports the decision without further argument. The aim is to make the CFO, not the president, the “go-to” person on budget and financial issues, policies, procedures, and requests. This practice can help the institution maintain the value of budget and business office policies, procedures, and plans. This practice is also in keeping with the basic management theory that employees, in this case the CFO, have the appropriate authority and responsibility to perform their jobs.

The chief components of the salient relationship with the board of trustees and president are to inform, educate, and expeditiously prepare solutions. To inform is to provide immediate and clear information about the current financial conditions of the institution and describe any factors that could have a positive or negative influence on those conditions. Information is best disseminated through a simple dashboard report. To educate is to explain complex financial transactions and reports in a fashion that can be understood by a layperson. To be prepared with solutions is to be able to design financial plans that respond to issues that the board or president wish addressed, such as changes in discount rates, debt financing, or employee benefits.

Because of the important responsibilities of the CFO, it is critical that the president and CFO have an open and on-going dialog to ensure that they are on the same page. The CFO must have a firm understanding of the institution’s mission and the trustees’ and president’s vision for the future of the college or university.

Key Salient Colleagues

CFOs obviously cannot perform their duties with only the input of the board and president. They need the support from their key salient colleagues: other senior administrators, especially the chief academic officer (CAO); the registrar and the staff from admissions; buildings and grounds; information technology; financial aid, billing, purchasing, and payroll. The relationship with these colleagues is predicated on involving them in operational meetings, budgetary performance reviews, and new operational and capital plans.

Operational meetings should be subdivided between formal and informal arrangements to assure a constant flow of information about conditions that affect current budgets and shape plans for future budgets. It is essential that regular formal meetings be held because informal arrangements too often result in missed communications or forgotten and/or ignored issues. Therefore, formal meetings should have agendas, minutes, and regularly scheduled items for review. The purpose of informal meetings is for the CFO to get into the infrastructure and get a sense for what is happening with policies, procedures, and budgets as they are used by the people who are actually carrying out the work and plans of the institution. Operational meetings ensure an ongoing understanding of policies and procedures. They are also useful in planning and reviewing new initiatives, for example, a new refund policy.

Budgetary performance reviews do not entail evaluation of the budget work performed by employees, but they do involve working with colleagues to ascertain if performance fits with expectations. The purpose of the budget performance review is to determine why existing or new policies, procedures, or plans do not conform to expectations. It is meant to question if the problems are caused by errors in understanding of the task or by unanticipated glitches in the system. Once the problem is understood, colleagues and the front-line staff can develop corrective actions to redesign the policy or procedure or plan to eliminate the problem.

Operational and capital requirement plans depend upon good information so that budgets and capital plans are based upon reliable data, true assumptions, and a valid conception of need. Budget and financial data should be collected in a tightly structured manner so that there is a direct link between the data, real conditions, and plans. The CFO should work through budget planning committees with fellow administrators or with staff who have responsibilities for the following information:

1. Enrollment – work with admission manager (enrollment manager, if the position exists), registrar, and financial aid staff to establish realistic revenue numbers. Too often, institutional managers drive enrollment estimates based on their expense budget or they estimate enrollment by adding a percentage increase that has no basis in fact or in the college’s share of the student market.
2. Faculty needed to cover enrollment for the coming year.
3. Student services needed to support the expected proportion of new students who may need academic assistance or personal support.
4. Building and grounds where a comprehensive list of renovations, repair, updating, or expansion of the plant and grounds is needed.
5. Auxiliary services budget requirements commonly include estimates of the number of students who will live in residence halls, use food services, or make purchases at the bookstore. Also, a list of renovations, repairs, updating, or expansion of auxiliary plant should be developed.
6. Capital projects plans should define the purpose, scope, and timing of new projects.
7. Business Operations –review if revenue or expenses could be affected by changes in the level of student collections, requirements for cash, and reformation of operational policies and procedure.
8. Cost Management Team should formulate solutions for cutting or minimizing cost increases.

Budget and capital planning groups do not guarantee that there will be no budget errors, but these meetings can reduce the chance for errors due to inattention. Additionally, the CFO cannot act in a vacuum on revenue and expense projections. The CFO must consult with each department about its budget goals, new initiatives, staffing, and support expenses. The budgetary meetings should be seen as an opportunity to conduct an annual review of spending trends and budgetary decisions over the past several years. The impact of decisions upon the budget become apparent over time; and the CFO, in conjunction with budget managers, should assess whether past decisions represent the best allocation of resources to serve the mission of the department and, most importantly, the mission of the institution.

The relationship between the CAO and the CFO needs to be fostered by both because their mutual understanding of the connection between academic mission, programs, and budget are essential to developing a valid budget. It is imperative that the CAO have direct input into the goals and operational estimates for the budget. The CAO is the conduit for the budget process to the faculty. If the faculty perceives that the budget process is transparent and that the CFO understands the requirements and constraints of the academic mission, then most faculty will be willing to support changes in financial strategies. The importance of the CAO-CFO relationship is indicated by the annual meeting for these officers conducted by the Council for Independent Colleges (CIC) and the National Association of College and Business Officials (NACUBO).

Common Set of Economic and Financial Principles

Financial management must necessarily rest on the assumption that everyone involved in developing and managing financial strategy and budgetary plans agrees with a common set of economic and financial principles. If they do not agree, financial management will deteriorate into a continuing squabble over revenue sources, expense allocations, responsibilities, and appropriate level for financial resources. These squabbles are not just sources of heartburn for everyone involved, but they also foster chaotic conditions in managing financial operations, which could also diminish the financial stability of the institution. Too often, it is the loudest department, not the department that has a significant role in the academic strategy of the college, which receives the largest share of the budget pie. Therefore, it is imperative that managers reach an accommodation on basic economic and financial principles. How agreement is achieved will depend on the unique characteristics of a specific institution.

The basic principles that the administration of the institution agree upon should state obvious and standard practices in managing finances in an institution of higher education. Agreement about a common set of principles has several direct benefits for the business office and the institution. Principles reduce disputes over finance; they can improve the quality of financial decisions; and they can promote the financial condition of the institution. The basic principles, which are discussed below, cover these areas at a minimum: economic forces, budget policies and rules, and essential accounting rules.

Economic Forces

There are three economic forces that affect the financial condition of an institution: revenue markets (sub-divided into student, gift, and grant markets), labor markets, and price. These forces involve classic economics in which the intersection of demand (revenue markets) and supply (educational output) determine price, while the marginal labor cost (the primary cost factor in higher education often accounting for 70% of the cost) and marginal revenue determine profit^[2]. If the college plans to continue on its current economic path, senior administrators need to understand how supply and demand will affect the institution and if those forces are or are not changing. It is a useful exercise during budget planning for senior administrators to meet and review what is happening with its markets and competition and how changes could affect its financial condition. If the college wants to change its targeted student market, it is a necessary exercise that senior administrators clarify and agree upon the structure of supply, demand, and competition that will affect its plans.

Budget Policies and Rules

There is an economic principle that is often only seen as a minor element in budgetary planning in higher education; the concept is “scarce resources”. Too many involved in budgets and capital planning treat expenditures and uses of funds as an issue independent of sources of funds, as mentioned earlier. It would seem to be the case that resources are assumed to be infinitely elastic and can be expanded to whatever need is deemed important. The likelihood that scarce resources are ignored increases as planning moves down into the organization or away from positions that have to produce financial resources. This happens because either the position makes little or no contribution to the production of funds or because her/his responsibility is so small that they do not see the larger impact of their requests on the budget or the finances of the institution. CFOs must not let the belief prevail that “scarce resources” are irrelevant in their institution if they want to have a financial and budgetary system built upon accepted principles of economics and just plain good sense.

Independent institutions that operate as not-for-profit entities must work within the financial constraint that excess revenue does not accrue to managers, trustees, or other members of the college or university. It is a misconception that not-for-profits cannot generate profit or excess revenue. If this constraint was true, the institution would never be able to generate adequate resources to maintain the purchasing power of its current assets (cash); or sustain the efficient, useful, and safe operation of the plant and grounds; or keep the purchasing power and the plant in line with changes in technology, student demand, government regulations, or the labor market.

The president, CFO, CAO, other senior administrators, faculty, and staff must understand and agree that the institution must grow its financial resources if it is to achieve its mission, successfully compete in the marketplace for higher education, and deliver graduates prepared for the job market. Understanding and agreement often depends upon the ability of the CFO to convince key decision makers and important constituencies that the college must do more than break-even. Failure to agree that the college must continuously expand its financial resources means it will face the possibility that erosion of financial resources will compromise the college’s or university’s ability to deliver on its mission and its educational goals.

Essential Accounting and Business Office Rules

Few things have greater potential for upsetting the relationship between CFOs and non-financial managers than problems related to accounting rules. CFOs typically see accounting rules as a given that guide the logical and coherent activities of the business office. On the other hand, non-financial managers see accounting rules as a maniacal plan that defies common sense and imposes unworkable rules as they try to solve budget problems that confront them daily. Therefore, it is important that non-financial managers understand the rationale behind essential accounting and business office rules and have ready access to those rules so that the CFO or her/his staff does not have to devote their time (which is in short supply) answering questions that are trivial. The CFO should also prepare and educate the president about reports and business office practices. CFO’s must inform and educate non-financial managers, which may resolve issues before they become contentious.

New and current staff in the business office must also understanding these essential accounting and business office rules:

1. Structure of the budget reports
2. Definition of line account titles and numbers
3. Rules on assignment of revenue to programs, departments and line accounts
4. Restrictions on what can be expensed to a specific line account
5. Authority limits on:
   1. Dollar amounts that can be spent through petty cash
   2. Dollar amounts that each level in the institution can approve for a contract
   3. When a purchase order has to be prepared
6. Process for filing a purchase order and for requesting an invoice for payment
7. Process for requesting transfers between line accounts and limits on which accounts can be used for transfers

Misunderstandings sometimes occur around gifts and restricted funds. Established policy from the Federal Accounting Standards Board (FASB) delineates how gifts and restricted funds are to be treated in the business office. Many non-financial managers do not understand that the receipt of a pledge is not the same as the receipt of cash; nor do they understand that the use of restricted gifts is limited to the income generated by the gift. Cash received in a latter year for a prior year pledge is not posted as revenue to the fiscal year in which it is received. Therefore, budgets cannot be balanced on the back of cash received for pledge receivables. Gifts that are restricted for a particular purpose are placed in the endowment, and only the income from the gift can be used for the stated purpose. It is paramount that the CFO clearly and precisely inform everyone (the president, senior administrators, and non-financial managers) dealing with the gift how it is to be used and how regulations limit its use to its income. The proper controls, records, and assurance of the correct use of gifts and restricted funds are an essential duty of the CFO.

Obviously, these rules discussed above are not exhaustive, but they do indicate what non-financial managers need to know to effectively work with the business office. It would help if the CFO could assign a lead person on the business office staff to meet with non-financial managers to identify what questions they have and what information they need from the business office. These rules should be promulgated through short training meetings and then placed on the institution’s website for easy access to help someone quickly find an answer. As policies and procedures change, the changes should be sent out and should also be added to the website.

Summary

Salient relationships, as this chapter has noted, are critical to the success of a CFO. They cannot be ignored and should be part of a CFO’s approach to his/her strategic and operational plans. For the CFO, the task of building and maintaining successful relationships with salient positions must be founded on the following principles:

1. Inform, educate, and respond to the board and president about financial plans and operations.
2. Work with colleagues who are critical to strengthening the financial condition of the institution and include them in:
   1. Operational meetings, which involve formal and informal meetings
   2. Budgetary performance reviews to determine if budget plans are on or off course and what can be done to resolve operational problems
   3. Budget and capital requirement planning so that colleagues can provide their insight into ways of improving the allocation of resources and of identifying potential problems
   4. Establishing financial teams designed around important segments of financial or budgetary plans
   5. Reaching common agreement on economic forces that shape the financial condition of the college
   6. Work with non-financial managers so that they understand the rationale and benefits behind accounting and business office policies and procedures

Even if a CFO is a skilled communicator, which is becoming a significant requirement for this position, and a competent accountant and financial manager, this should not lead to the conclusion that all problems will be eliminated in their relationship with salient colleagues. The reality is that CFOs, presidents, chief academic officers, and other chief administrative officers have different interests because the goals and processes of their positions push them away from accepting the basic demands placed on the office of the CFO. The best that a good CFO can do under these circumstances is to see issues that salient colleagues raise as opportunities and not as tribulations to be born in disgruntlement and resentment. The latter makes for unhealthy relationships and an unhealthy life style. It is comforting to know that most problems, when viewed in the rear view mirror of time, are often much smaller than when you are next to them.

1. Economic equilibrium is a state where the institution produces sufficient resources to support its mission. See chapter XIII for more information. ↑

2. Of course, we do not call it profit in higher education; it is referred to as a positive change in net assets. ↑

A CFO’s contribution to the mission of an institution – building and sustaining its financial viability – depends upon the relationships that she/he has with salient positions within the institution. Positions are salient when they are directly involved in budgetary and financial decisions. If a CFO has the skills to work well with salient positions, then there is a good chance that the financial condition of the college will reach a state of economic equilibrium^[1], ceteris paribus. Conflict with one or more of these positions reduces the opportunity to achieve equilibrium. It is in the interest of the institution to have a CFO who can foster strong relationships with salient positions that can influence the dynamics of producing financial strategies to foster and sustain the financial viability of the institution.

Key Salient Positions – Board of Trustees and President

The board of trustees and the president are the key salient positions for the CFO because they shape the goals, responsibilities, and much of the routine activities (for example, debt, major contracts, and budgets) of the CFO and the business office. In addition, the board and the president can provide validation and affirmation for financial decisions that the CFO must carry out.

Why is validation and affirmation important? Validation may be needed prior to taking action on a decision and when statute, regulation, or requirement by another legally-constituted entity requires formal authorization by the board of trustees. These conditions are mainly present in public institutions during the submission of budgets and for private institutions in applying for grants or offering a publicly-backed bond. Without validation, the CFO does not have the authority to act and may be held liable for unauthorized actions. Affirmation is the concept that prior to a finalizing a decision that she/he has the authority to make without the direct approval from someone higher in the administrative hierarchy, the CFO goes ahead and seeks the approval of the board and/or the president to approve her/his decision anyway. Affirmation is always a useful step to take to avoid future opposition that could stall the work of the CFO and/or the college. Ideally, there are board and college policies that identify categories of decisions that require affirmation by a higher level of authority, such as dollar limits on signing contracts and the types of gifts that the college will accept from benefactors.

The president and the CFO need to establish a mutually supportive relationship because it is in their self-interest to support the decisions and plans of each other subject to legal constraints. Of course, this proposition of mutual affirmation is subject to the good sense rule that it is not judicious for either party to make a decision without first acquiring mutual affirmation for the decision. There is nothing more upsetting to a president than to discover that the CFO has taken unilateral action, even though it is within the prescribed authority of the CFO, especially when the subject is sensitive to the mission of the college and to the president. For example, even though facilities may be under the authority of the CFO, start dates, length of the project, and the scope of projects should be shared with the president. There is nothing more upsetting to a president than to hear that work on the plant is taking place with news of the work coming not from the CFO but from someone else.

The CFO also plays an important role by being the proxy naysayer for the president. The implied understanding (but not formal duty) of the CFO is to say that some actions cannot be taken because it violates policy, budgetary plans, or other authority of the business office. Even though this duty can be distasteful to the CFO, it is imperative that she/he undertake this task so that the president can remain neutral and save his/her personal relationship capital for critical issues that must affect the well-being of the college. In support of the “nay saying” task, the president should acknowledge that the CFO has the authority to say “no” and that the president supports the decision without further argument. The aim is to make the CFO, not the president, the “go-to” person on budget and financial issues, policies, procedures, and requests. This practice can help the institution maintain the value of budget and business office policies, procedures, and plans. This practice is also in keeping with the basic management theory that employees, in this case the CFO, have the appropriate authority and responsibility to perform their jobs.

The chief components of the salient relationship with the board of trustees and president are to inform, educate, and expeditiously prepare solutions. To inform is to provide immediate and clear information about the current financial conditions of the institution and describe any factors that could have a positive or negative influence on those conditions. Information is best disseminated through a simple dashboard report. To educate is to explain complex financial transactions and reports in a fashion that can be understood by a layperson. To be prepared with solutions is to be able to design financial plans that respond to issues that the board or president wish addressed, such as changes in discount rates, debt financing, or employee benefits.

Because of the important responsibilities of the CFO, it is critical that the president and CFO have an open and on-going dialog to ensure that they are on the same page. The CFO must have a firm understanding of the institution’s mission and the trustees’ and president’s vision for the future of the college or university.

Key Salient Colleagues

CFOs obviously cannot perform their duties with only the input of the board and president. They need the support from their key salient colleagues: other senior administrators, especially the chief academic officer (CAO); the registrar and the staff from admissions; buildings and grounds; information technology; financial aid, billing, purchasing, and payroll. The relationship with these colleagues is predicated on involving them in operational meetings, budgetary performance reviews, and new operational and capital plans.

Operational meetings should be subdivided between formal and informal arrangements to assure a constant flow of information about conditions that affect current budgets and shape plans for future budgets. It is essential that regular formal meetings be held because informal arrangements too often result in missed communications or forgotten and/or ignored issues. Therefore, formal meetings should have agendas, minutes, and regularly scheduled items for review. The purpose of informal meetings is for the CFO to get into the infrastructure and get a sense for what is happening with policies, procedures, and budgets as they are used by the people who are actually carrying out the work and plans of the institution. Operational meetings ensure an ongoing understanding of policies and procedures. They are also useful in planning and reviewing new initiatives, for example, a new refund policy.

Budgetary performance reviews do not entail evaluation of the budget work performed by employees, but they do involve working with colleagues to ascertain if performance fits with expectations. The purpose of the budget performance review is to determine why existing or new policies, procedures, or plans do not conform to expectations. It is meant to question if the problems are caused by errors in understanding of the task or by unanticipated glitches in the system. Once the problem is understood, colleagues and the front-line staff can develop corrective actions to redesign the policy or procedure or plan to eliminate the problem.

Operational and capital requirement plans depend upon good information so that budgets and capital plans are based upon reliable data, true assumptions, and a valid conception of need. Budget and financial data should be collected in a tightly structured manner so that there is a direct link between the data, real conditions, and plans. The CFO should work through budget planning committees with fellow administrators or with staff who have responsibilities for the following information:

1. Enrollment – work with admission manager (enrollment manager, if the position exists), registrar, and financial aid staff to establish realistic revenue numbers. Too often, institutional managers drive enrollment estimates based on their expense budget or they estimate enrollment by adding a percentage increase that has no basis in fact or in the college’s share of the student market.
2. Faculty needed to cover enrollment for the coming year.
3. Student services needed to support the expected proportion of new students who may need academic assistance or personal support.
4. Building and grounds where a comprehensive list of renovations, repair, updating, or expansion of the plant and grounds is needed.
5. Auxiliary services budget requirements commonly include estimates of the number of students who will live in residence halls, use food services, or make purchases at the bookstore. Also, a list of renovations, repairs, updating, or expansion of auxiliary plant should be developed.
6. Capital projects plans should define the purpose, scope, and timing of new projects.
7. Business Operations –review if revenue or expenses could be affected by changes in the level of student collections, requirements for cash, and reformation of operational policies and procedure.
8. Cost Management Team should formulate solutions for cutting or minimizing cost increases.

Budget and capital planning groups do not guarantee that there will be no budget errors, but these meetings can reduce the chance for errors due to inattention. Additionally, the CFO cannot act in a vacuum on revenue and expense projections. The CFO must consult with each department about its budget goals, new initiatives, staffing, and support expenses. The budgetary meetings should be seen as an opportunity to conduct an annual review of spending trends and budgetary decisions over the past several years. The impact of decisions upon the budget become apparent over time; and the CFO, in conjunction with budget managers, should assess whether past decisions represent the best allocation of resources to serve the mission of the department and, most importantly, the mission of the institution.

The relationship between the CAO and the CFO needs to be fostered by both because their mutual understanding of the connection between academic mission, programs, and budget are essential to developing a valid budget. It is imperative that the CAO have direct input into the goals and operational estimates for the budget. The CAO is the conduit for the budget process to the faculty. If the faculty perceives that the budget process is transparent and that the CFO understands the requirements and constraints of the academic mission, then most faculty will be willing to support changes in financial strategies. The importance of the CAO-CFO relationship is indicated by the annual meeting for these officers conducted by the Council for Independent Colleges (CIC) and the National Association of College and Business Officials (NACUBO).

Common Set of Economic and Financial Principles

Financial management must necessarily rest on the assumption that everyone involved in developing and managing financial strategy and budgetary plans agrees with a common set of economic and financial principles. If they do not agree, financial management will deteriorate into a continuing squabble over revenue sources, expense allocations, responsibilities, and appropriate level for financial resources. These squabbles are not just sources of heartburn for everyone involved, but they also foster chaotic conditions in managing financial operations, which could also diminish the financial stability of the institution. Too often, it is the loudest department, not the department that has a significant role in the academic strategy of the college, which receives the largest share of the budget pie. Therefore, it is imperative that managers reach an accommodation on basic economic and financial principles. How agreement is achieved will depend on the unique characteristics of a specific institution.

The basic principles that the administration of the institution agree upon should state obvious and standard practices in managing finances in an institution of higher education. Agreement about a common set of principles has several direct benefits for the business office and the institution. Principles reduce disputes over finance; they can improve the quality of financial decisions; and they can promote the financial condition of the institution. The basic principles, which are discussed below, cover these areas at a minimum: economic forces, budget policies and rules, and essential accounting rules.

Economic Forces

There are three economic forces that affect the financial condition of an institution: revenue markets (sub-divided into student, gift, and grant markets), labor markets, and price. These forces involve classic economics in which the intersection of demand (revenue markets) and supply (educational output) determine price, while the marginal labor cost (the primary cost factor in higher education often accounting for 70% of the cost) and marginal revenue determine profit^[2]. If the college plans to continue on its current economic path, senior administrators need to understand how supply and demand will affect the institution and if those forces are or are not changing. It is a useful exercise during budget planning for senior administrators to meet and review what is happening with its markets and competition and how changes could affect its financial condition. If the college wants to change its targeted student market, it is a necessary exercise that senior administrators clarify and agree upon the structure of supply, demand, and competition that will affect its plans.

Budget Policies and Rules

There is an economic principle that is often only seen as a minor element in budgetary planning in higher education; the concept is “scarce resources”. Too many involved in budgets and capital planning treat expenditures and uses of funds as an issue independent of sources of funds, as mentioned earlier. It would seem to be the case that resources are assumed to be infinitely elastic and can be expanded to whatever need is deemed important. The likelihood that scarce resources are ignored increases as planning moves down into the organization or away from positions that have to produce financial resources. This happens because either the position makes little or no contribution to the production of funds or because her/his responsibility is so small that they do not see the larger impact of their requests on the budget or the finances of the institution. CFOs must not let the belief prevail that “scarce resources” are irrelevant in their institution if they want to have a financial and budgetary system built upon accepted principles of economics and just plain good sense.

Independent institutions that operate as not-for-profit entities must work within the financial constraint that excess revenue does not accrue to managers, trustees, or other members of the college or university. It is a misconception that not-for-profits cannot generate profit or excess revenue. If this constraint was true, the institution would never be able to generate adequate resources to maintain the purchasing power of its current assets (cash); or sustain the efficient, useful, and safe operation of the plant and grounds; or keep the purchasing power and the plant in line with changes in technology, student demand, government regulations, or the labor market.

The president, CFO, CAO, other senior administrators, faculty, and staff must understand and agree that the institution must grow its financial resources if it is to achieve its mission, successfully compete in the marketplace for higher education, and deliver graduates prepared for the job market. Understanding and agreement often depends upon the ability of the CFO to convince key decision makers and important constituencies that the college must do more than break-even. Failure to agree that the college must continuously expand its financial resources means it will face the possibility that erosion of financial resources will compromise the college’s or university’s ability to deliver on its mission and its educational goals.

Essential Accounting and Business Office Rules

Few things have greater potential for upsetting the relationship between CFOs and non-financial managers than problems related to accounting rules. CFOs typically see accounting rules as a given that guide the logical and coherent activities of the business office. On the other hand, non-financial managers see accounting rules as a maniacal plan that defies common sense and imposes unworkable rules as they try to solve budget problems that confront them daily. Therefore, it is important that non-financial managers understand the rationale behind essential accounting and business office rules and have ready access to those rules so that the CFO or her/his staff does not have to devote their time (which is in short supply) answering questions that are trivial. The CFO should also prepare and educate the president about reports and business office practices. CFO’s must inform and educate non-financial managers, which may resolve issues before they become contentious.

New and current staff in the business office must also understanding these essential accounting and business office rules:

1. Structure of the budget reports
2. Definition of line account titles and numbers
3. Rules on assignment of revenue to programs, departments and line accounts
4. Restrictions on what can be expensed to a specific line account
5. Authority limits on:
   1. Dollar amounts that can be spent through petty cash
   2. Dollar amounts that each level in the institution can approve for a contract
   3. When a purchase order has to be prepared
6. Process for filing a purchase order and for requesting an invoice for payment
7. Process for requesting transfers between line accounts and limits on which accounts can be used for transfers

Misunderstandings sometimes occur around gifts and restricted funds. Established policy from the Federal Accounting Standards Board (FASB) delineates how gifts and restricted funds are to be treated in the business office. Many non-financial managers do not understand that the receipt of a pledge is not the same as the receipt of cash; nor do they understand that the use of restricted gifts is limited to the income generated by the gift. Cash received in a latter year for a prior year pledge is not posted as revenue to the fiscal year in which it is received. Therefore, budgets cannot be balanced on the back of cash received for pledge receivables. Gifts that are restricted for a particular purpose are placed in the endowment, and only the income from the gift can be used for the stated purpose. It is paramount that the CFO clearly and precisely inform everyone (the president, senior administrators, and non-financial managers) dealing with the gift how it is to be used and how regulations limit its use to its income. The proper controls, records, and assurance of the correct use of gifts and restricted funds are an essential duty of the CFO.

Obviously, these rules discussed above are not exhaustive, but they do indicate what non-financial managers need to know to effectively work with the business office. It would help if the CFO could assign a lead person on the business office staff to meet with non-financial managers to identify what questions they have and what information they need from the business office. These rules should be promulgated through short training meetings and then placed on the institution’s website for easy access to help someone quickly find an answer. As policies and procedures change, the changes should be sent out and should also be added to the website.

Summary

Salient relationships, as this chapter has noted, are critical to the success of a CFO. They cannot be ignored and should be part of a CFO’s approach to his/her strategic and operational plans. For the CFO, the task of building and maintaining successful relationships with salient positions must be founded on the following principles:

1. Inform, educate, and respond to the board and president about financial plans and operations.
2. Work with colleagues who are critical to strengthening the financial condition of the institution and include them in:
   1. Operational meetings, which involve formal and informal meetings
   2. Budgetary performance reviews to determine if budget plans are on or off course and what can be done to resolve operational problems
   3. Budget and capital requirement planning so that colleagues can provide their insight into ways of improving the allocation of resources and of identifying potential problems
   4. Establishing financial teams designed around important segments of financial or budgetary plans
   5. Reaching common agreement on economic forces that shape the financial condition of the college
   6. Work with non-financial managers so that they understand the rationale and benefits behind accounting and business office policies and procedures

Even if a CFO is a skilled communicator, which is becoming a significant requirement for this position, and a competent accountant and financial manager, this should not lead to the conclusion that all problems will be eliminated in their relationship with salient colleagues. The reality is that CFOs, presidents, chief academic officers, and other chief administrative officers have different interests because the goals and processes of their positions push them away from accepting the basic demands placed on the office of the CFO. The best that a good CFO can do under these circumstances is to see issues that salient colleagues raise as opportunities and not as tribulations to be born in disgruntlement and resentment. The latter makes for unhealthy relationships and an unhealthy life style. It is comforting to know that most problems, when viewed in the rear view mirror of time, are often much smaller than when you are next to them.

1. Economic equilibrium is a state where the institution produces sufficient resources to support its mission. See chapter XIII for more information. ↑

2. Of course, we do not call it profit in higher education; it is referred to as a positive change in net assets. ↑

A CFO’s contribution to the mission of an institution – building and sustaining its financial viability – depends upon the relationships that she/he has with salient positions within the institution. Positions are salient when they are directly involved in budgetary and financial decisions. If a CFO has the skills to work well with salient positions, then there is a good chance that the financial condition of the college will reach a state of economic equilibrium^[1], ceteris paribus. Conflict with one or more of these positions reduces the opportunity to achieve equilibrium. It is in the interest of the institution to have a CFO who can foster strong relationships with salient positions that can influence the dynamics of producing financial strategies to foster and sustain the financial viability of the institution.

Key Salient Positions – Board of Trustees and President

The board of trustees and the president are the key salient positions for the CFO because they shape the goals, responsibilities, and much of the routine activities (for example, debt, major contracts, and budgets) of the CFO and the business office. In addition, the board and the president can provide validation and affirmation for financial decisions that the CFO must carry out.

Why is validation and affirmation important? Validation may be needed prior to taking action on a decision and when statute, regulation, or requirement by another legally-constituted entity requires formal authorization by the board of trustees. These conditions are mainly present in public institutions during the submission of budgets and for private institutions in applying for grants or offering a publicly-backed bond. Without validation, the CFO does not have the authority to act and may be held liable for unauthorized actions. Affirmation is the concept that prior to a finalizing a decision that she/he has the authority to make without the direct approval from someone higher in the administrative hierarchy, the CFO goes ahead and seeks the approval of the board and/or the president to approve her/his decision anyway. Affirmation is always a useful step to take to avoid future opposition that could stall the work of the CFO and/or the college. Ideally, there are board and college policies that identify categories of decisions that require affirmation by a higher level of authority, such as dollar limits on signing contracts and the types of gifts that the college will accept from benefactors.

The president and the CFO need to establish a mutually supportive relationship because it is in their self-interest to support the decisions and plans of each other subject to legal constraints. Of course, this proposition of mutual affirmation is subject to the good sense rule that it is not judicious for either party to make a decision without first acquiring mutual affirmation for the decision. There is nothing more upsetting to a president than to discover that the CFO has taken unilateral action, even though it is within the prescribed authority of the CFO, especially when the subject is sensitive to the mission of the college and to the president. For example, even though facilities may be under the authority of the CFO, start dates, length of the project, and the scope of projects should be shared with the president. There is nothing more upsetting to a president than to hear that work on the plant is taking place with news of the work coming not from the CFO but from someone else.

The CFO also plays an important role by being the proxy naysayer for the president. The implied understanding (but not formal duty) of the CFO is to say that some actions cannot be taken because it violates policy, budgetary plans, or other authority of the business office. Even though this duty can be distasteful to the CFO, it is imperative that she/he undertake this task so that the president can remain neutral and save his/her personal relationship capital for critical issues that must affect the well-being of the college. In support of the “nay saying” task, the president should acknowledge that the CFO has the authority to say “no” and that the president supports the decision without further argument. The aim is to make the CFO, not the president, the “go-to” person on budget and financial issues, policies, procedures, and requests. This practice can help the institution maintain the value of budget and business office policies, procedures, and plans. This practice is also in keeping with the basic management theory that employees, in this case the CFO, have the appropriate authority and responsibility to perform their jobs.

The chief components of the salient relationship with the board of trustees and president are to inform, educate, and expeditiously prepare solutions. To inform is to provide immediate and clear information about the current financial conditions of the institution and describe any factors that could have a positive or negative influence on those conditions. Information is best disseminated through a simple dashboard report. To educate is to explain complex financial transactions and reports in a fashion that can be understood by a layperson. To be prepared with solutions is to be able to design financial plans that respond to issues that the board or president wish addressed, such as changes in discount rates, debt financing, or employee benefits.

Because of the important responsibilities of the CFO, it is critical that the president and CFO have an open and on-going dialog to ensure that they are on the same page. The CFO must have a firm understanding of the institution’s mission and the trustees’ and president’s vision for the future of the college or university.

Key Salient Colleagues

CFOs obviously cannot perform their duties with only the input of the board and president. They need the support from their key salient colleagues: other senior administrators, especially the chief academic officer (CAO); the registrar and the staff from admissions; buildings and grounds; information technology; financial aid, billing, purchasing, and payroll. The relationship with these colleagues is predicated on involving them in operational meetings, budgetary performance reviews, and new operational and capital plans.

Operational meetings should be subdivided between formal and informal arrangements to assure a constant flow of information about conditions that affect current budgets and shape plans for future budgets. It is essential that regular formal meetings be held because informal arrangements too often result in missed communications or forgotten and/or ignored issues. Therefore, formal meetings should have agendas, minutes, and regularly scheduled items for review. The purpose of informal meetings is for the CFO to get into the infrastructure and get a sense for what is happening with policies, procedures, and budgets as they are used by the people who are actually carrying out the work and plans of the institution. Operational meetings ensure an ongoing understanding of policies and procedures. They are also useful in planning and reviewing new initiatives, for example, a new refund policy.

Budgetary performance reviews do not entail evaluation of the budget work performed by employees, but they do involve working with colleagues to ascertain if performance fits with expectations. The purpose of the budget performance review is to determine why existing or new policies, procedures, or plans do not conform to expectations. It is meant to question if the problems are caused by errors in understanding of the task or by unanticipated glitches in the system. Once the problem is understood, colleagues and the front-line staff can develop corrective actions to redesign the policy or procedure or plan to eliminate the problem.

Operational and capital requirement plans depend upon good information so that budgets and capital plans are based upon reliable data, true assumptions, and a valid conception of need. Budget and financial data should be collected in a tightly structured manner so that there is a direct link between the data, real conditions, and plans. The CFO should work through budget planning committees with fellow administrators or with staff who have responsibilities for the following information:

1. Enrollment – work with admission manager (enrollment manager, if the position exists), registrar, and financial aid staff to establish realistic revenue numbers. Too often, institutional managers drive enrollment estimates based on their expense budget or they estimate enrollment by adding a percentage increase that has no basis in fact or in the college’s share of the student market.
2. Faculty needed to cover enrollment for the coming year.
3. Student services needed to support the expected proportion of new students who may need academic assistance or personal support.
4. Building and grounds where a comprehensive list of renovations, repair, updating, or expansion of the plant and grounds is needed.
5. Auxiliary services budget requirements commonly include estimates of the number of students who will live in residence halls, use food services, or make purchases at the bookstore. Also, a list of renovations, repairs, updating, or expansion of auxiliary plant should be developed.
6. Capital projects plans should define the purpose, scope, and timing of new projects.
7. Business Operations –review if revenue or expenses could be affected by changes in the level of student collections, requirements for cash, and reformation of operational policies and procedure.
8. Cost Management Team should formulate solutions for cutting or minimizing cost increases.

Budget and capital planning groups do not guarantee that there will be no budget errors, but these meetings can reduce the chance for errors due to inattention. Additionally, the CFO cannot act in a vacuum on revenue and expense projections. The CFO must consult with each department about its budget goals, new initiatives, staffing, and support expenses. The budgetary meetings should be seen as an opportunity to conduct an annual review of spending trends and budgetary decisions over the past several years. The impact of decisions upon the budget become apparent over time; and the CFO, in conjunction with budget managers, should assess whether past decisions represent the best allocation of resources to serve the mission of the department and, most importantly, the mission of the institution.

The relationship between the CAO and the CFO needs to be fostered by both because their mutual understanding of the connection between academic mission, programs, and budget are essential to developing a valid budget. It is imperative that the CAO have direct input into the goals and operational estimates for the budget. The CAO is the conduit for the budget process to the faculty. If the faculty perceives that the budget process is transparent and that the CFO understands the requirements and constraints of the academic mission, then most faculty will be willing to support changes in financial strategies. The importance of the CAO-CFO relationship is indicated by the annual meeting for these officers conducted by the Council for Independent Colleges (CIC) and the National Association of College and Business Officials (NACUBO).

Common Set of Economic and Financial Principles

Financial management must necessarily rest on the assumption that everyone involved in developing and managing financial strategy and budgetary plans agrees with a common set of economic and financial principles. If they do not agree, financial management will deteriorate into a continuing squabble over revenue sources, expense allocations, responsibilities, and appropriate level for financial resources. These squabbles are not just sources of heartburn for everyone involved, but they also foster chaotic conditions in managing financial operations, which could also diminish the financial stability of the institution. Too often, it is the loudest department, not the department that has a significant role in the academic strategy of the college, which receives the largest share of the budget pie. Therefore, it is imperative that managers reach an accommodation on basic economic and financial principles. How agreement is achieved will depend on the unique characteristics of a specific institution.

The basic principles that the administration of the institution agree upon should state obvious and standard practices in managing finances in an institution of higher education. Agreement about a common set of principles has several direct benefits for the business office and the institution. Principles reduce disputes over finance; they can improve the quality of financial decisions; and they can promote the financial condition of the institution. The basic principles, which are discussed below, cover these areas at a minimum: economic forces, budget policies and rules, and essential accounting rules.

Economic Forces

There are three economic forces that affect the financial condition of an institution: revenue markets (sub-divided into student, gift, and grant markets), labor markets, and price. These forces involve classic economics in which the intersection of demand (revenue markets) and supply (educational output) determine price, while the marginal labor cost (the primary cost factor in higher education often accounting for 70% of the cost) and marginal revenue determine profit^[2]. If the college plans to continue on its current economic path, senior administrators need to understand how supply and demand will affect the institution and if those forces are or are not changing. It is a useful exercise during budget planning for senior administrators to meet and review what is happening with its markets and competition and how changes could affect its financial condition. If the college wants to change its targeted student market, it is a necessary exercise that senior administrators clarify and agree upon the structure of supply, demand, and competition that will affect its plans.

Budget Policies and Rules

There is an economic principle that is often only seen as a minor element in budgetary planning in higher education; the concept is “scarce resources”. Too many involved in budgets and capital planning treat expenditures and uses of funds as an issue independent of sources of funds, as mentioned earlier. It would seem to be the case that resources are assumed to be infinitely elastic and can be expanded to whatever need is deemed important. The likelihood that scarce resources are ignored increases as planning moves down into the organization or away from positions that have to produce financial resources. This happens because either the position makes little or no contribution to the production of funds or because her/his responsibility is so small that they do not see the larger impact of their requests on the budget or the finances of the institution. CFOs must not let the belief prevail that “scarce resources” are irrelevant in their institution if they want to have a financial and budgetary system built upon accepted principles of economics and just plain good sense.

Independent institutions that operate as not-for-profit entities must work within the financial constraint that excess revenue does not accrue to managers, trustees, or other members of the college or university. It is a misconception that not-for-profits cannot generate profit or excess revenue. If this constraint was true, the institution would never be able to generate adequate resources to maintain the purchasing power of its current assets (cash); or sustain the efficient, useful, and safe operation of the plant and grounds; or keep the purchasing power and the plant in line with changes in technology, student demand, government regulations, or the labor market.

The president, CFO, CAO, other senior administrators, faculty, and staff must understand and agree that the institution must grow its financial resources if it is to achieve its mission, successfully compete in the marketplace for higher education, and deliver graduates prepared for the job market. Understanding and agreement often depends upon the ability of the CFO to convince key decision makers and important constituencies that the college must do more than break-even. Failure to agree that the college must continuously expand its financial resources means it will face the possibility that erosion of financial resources will compromise the college’s or university’s ability to deliver on its mission and its educational goals.

Essential Accounting and Business Office Rules

Few things have greater potential for upsetting the relationship between CFOs and non-financial managers than problems related to accounting rules. CFOs typically see accounting rules as a given that guide the logical and coherent activities of the business office. On the other hand, non-financial managers see accounting rules as a maniacal plan that defies common sense and imposes unworkable rules as they try to solve budget problems that confront them daily. Therefore, it is important that non-financial managers understand the rationale behind essential accounting and business office rules and have ready access to those rules so that the CFO or her/his staff does not have to devote their time (which is in short supply) answering questions that are trivial. The CFO should also prepare and educate the president about reports and business office practices. CFO’s must inform and educate non-financial managers, which may resolve issues before they become contentious.

New and current staff in the business office must also understanding these essential accounting and business office rules:

1. Structure of the budget reports
2. Definition of line account titles and numbers
3. Rules on assignment of revenue to programs, departments and line accounts
4. Restrictions on what can be expensed to a specific line account
5. Authority limits on:
   1. Dollar amounts that can be spent through petty cash
   2. Dollar amounts that each level in the institution can approve for a contract
   3. When a purchase order has to be prepared
6. Process for filing a purchase order and for requesting an invoice for payment
7. Process for requesting transfers between line accounts and limits on which accounts can be used for transfers

Misunderstandings sometimes occur around gifts and restricted funds. Established policy from the Federal Accounting Standards Board (FASB) delineates how gifts and restricted funds are to be treated in the business office. Many non-financial managers do not understand that the receipt of a pledge is not the same as the receipt of cash; nor do they understand that the use of restricted gifts is limited to the income generated by the gift. Cash received in a latter year for a prior year pledge is not posted as revenue to the fiscal year in which it is received. Therefore, budgets cannot be balanced on the back of cash received for pledge receivables. Gifts that are restricted for a particular purpose are placed in the endowment, and only the income from the gift can be used for the stated purpose. It is paramount that the CFO clearly and precisely inform everyone (the president, senior administrators, and non-financial managers) dealing with the gift how it is to be used and how regulations limit its use to its income. The proper controls, records, and assurance of the correct use of gifts and restricted funds are an essential duty of the CFO.

Obviously, these rules discussed above are not exhaustive, but they do indicate what non-financial managers need to know to effectively work with the business office. It would help if the CFO could assign a lead person on the business office staff to meet with non-financial managers to identify what questions they have and what information they need from the business office. These rules should be promulgated through short training meetings and then placed on the institution’s website for easy access to help someone quickly find an answer. As policies and procedures change, the changes should be sent out and should also be added to the website.

Summary

Salient relationships, as this chapter has noted, are critical to the success of a CFO. They cannot be ignored and should be part of a CFO’s approach to his/her strategic and operational plans. For the CFO, the task of building and maintaining successful relationships with salient positions must be founded on the following principles:

1. Inform, educate, and respond to the board and president about financial plans and operations.
2. Work with colleagues who are critical to strengthening the financial condition of the institution and include them in:
   1. Operational meetings, which involve formal and informal meetings
   2. Budgetary performance reviews to determine if budget plans are on or off course and what can be done to resolve operational problems
   3. Budget and capital requirement planning so that colleagues can provide their insight into ways of improving the allocation of resources and of identifying potential problems
   4. Establishing financial teams designed around important segments of financial or budgetary plans
   5. Reaching common agreement on economic forces that shape the financial condition of the college
   6. Work with non-financial managers so that they understand the rationale and benefits behind accounting and business office policies and procedures

Even if a CFO is a skilled communicator, which is becoming a significant requirement for this position, and a competent accountant and financial manager, this should not lead to the conclusion that all problems will be eliminated in their relationship with salient colleagues. The reality is that CFOs, presidents, chief academic officers, and other chief administrative officers have different interests because the goals and processes of their positions push them away from accepting the basic demands placed on the office of the CFO. The best that a good CFO can do under these circumstances is to see issues that salient colleagues raise as opportunities and not as tribulations to be born in disgruntlement and resentment. The latter makes for unhealthy relationships and an unhealthy life style. It is comforting to know that most problems, when viewed in the rear view mirror of time, are often much smaller than when you are next to them.

1. Economic equilibrium is a state where the institution produces sufficient resources to support its mission. See chapter XIII for more information. ↑

2. Of course, we do not call it profit in higher education; it is referred to as a positive change in net assets. ↑

A CFO’s contribution to the mission of an institution – building and sustaining its financial viability – depends upon the relationships that she/he has with salient positions within the institution. Positions are salient when they are directly involved in budgetary and financial decisions. If a CFO has the skills to work well with salient positions, then there is a good chance that the financial condition of the college will reach a state of economic equilibrium^[1], ceteris paribus. Conflict with one or more of these positions reduces the opportunity to achieve equilibrium. It is in the interest of the institution to have a CFO who can foster strong relationships with salient positions that can influence the dynamics of producing financial strategies to foster and sustain the financial viability of the institution.

Key Salient Positions – Board of Trustees and President

The board of trustees and the president are the key salient positions for the CFO because they shape the goals, responsibilities, and much of the routine activities (for example, debt, major contracts, and budgets) of the CFO and the business office. In addition, the board and the president can provide validation and affirmation for financial decisions that the CFO must carry out.

Why is validation and affirmation important? Validation may be needed prior to taking action on a decision and when statute, regulation, or requirement by another legally-constituted entity requires formal authorization by the board of trustees. These conditions are mainly present in public institutions during the submission of budgets and for private institutions in applying for grants or offering a publicly-backed bond. Without validation, the CFO does not have the authority to act and may be held liable for unauthorized actions. Affirmation is the concept that prior to a finalizing a decision that she/he has the authority to make without the direct approval from someone higher in the administrative hierarchy, the CFO goes ahead and seeks the approval of the board and/or the president to approve her/his decision anyway. Affirmation is always a useful step to take to avoid future opposition that could stall the work of the CFO and/or the college. Ideally, there are board and college policies that identify categories of decisions that require affirmation by a higher level of authority, such as dollar limits on signing contracts and the types of gifts that the college will accept from benefactors.

The president and the CFO need to establish a mutually supportive relationship because it is in their self-interest to support the decisions and plans of each other subject to legal constraints. Of course, this proposition of mutual affirmation is subject to the good sense rule that it is not judicious for either party to make a decision without first acquiring mutual affirmation for the decision. There is nothing more upsetting to a president than to discover that the CFO has taken unilateral action, even though it is within the prescribed authority of the CFO, especially when the subject is sensitive to the mission of the college and to the president. For example, even though facilities may be under the authority of the CFO, start dates, length of the project, and the scope of projects should be shared with the president. There is nothing more upsetting to a president than to hear that work on the plant is taking place with news of the work coming not from the CFO but from someone else.

The CFO also plays an important role by being the proxy naysayer for the president. The implied understanding (but not formal duty) of the CFO is to say that some actions cannot be taken because it violates policy, budgetary plans, or other authority of the business office. Even though this duty can be distasteful to the CFO, it is imperative that she/he undertake this task so that the president can remain neutral and save his/her personal relationship capital for critical issues that must affect the well-being of the college. In support of the “nay saying” task, the president should acknowledge that the CFO has the authority to say “no” and that the president supports the decision without further argument. The aim is to make the CFO, not the president, the “go-to” person on budget and financial issues, policies, procedures, and requests. This practice can help the institution maintain the value of budget and business office policies, procedures, and plans. This practice is also in keeping with the basic management theory that employees, in this case the CFO, have the appropriate authority and responsibility to perform their jobs.

The chief components of the salient relationship with the board of trustees and president are to inform, educate, and expeditiously prepare solutions. To inform is to provide immediate and clear information about the current financial conditions of the institution and describe any factors that could have a positive or negative influence on those conditions. Information is best disseminated through a simple dashboard report. To educate is to explain complex financial transactions and reports in a fashion that can be understood by a layperson. To be prepared with solutions is to be able to design financial plans that respond to issues that the board or president wish addressed, such as changes in discount rates, debt financing, or employee benefits.

Because of the important responsibilities of the CFO, it is critical that the president and CFO have an open and on-going dialog to ensure that they are on the same page. The CFO must have a firm understanding of the institution’s mission and the trustees’ and president’s vision for the future of the college or university.

Key Salient Colleagues

CFOs obviously cannot perform their duties with only the input of the board and president. They need the support from their key salient colleagues: other senior administrators, especially the chief academic officer (CAO); the registrar and the staff from admissions; buildings and grounds; information technology; financial aid, billing, purchasing, and payroll. The relationship with these colleagues is predicated on involving them in operational meetings, budgetary performance reviews, and new operational and capital plans.

Operational meetings should be subdivided between formal and informal arrangements to assure a constant flow of information about conditions that affect current budgets and shape plans for future budgets. It is essential that regular formal meetings be held because informal arrangements too often result in missed communications or forgotten and/or ignored issues. Therefore, formal meetings should have agendas, minutes, and regularly scheduled items for review. The purpose of informal meetings is for the CFO to get into the infrastructure and get a sense for what is happening with policies, procedures, and budgets as they are used by the people who are actually carrying out the work and plans of the institution. Operational meetings ensure an ongoing understanding of policies and procedures. They are also useful in planning and reviewing new initiatives, for example, a new refund policy.

Budgetary performance reviews do not entail evaluation of the budget work performed by employees, but they do involve working with colleagues to ascertain if performance fits with expectations. The purpose of the budget performance review is to determine why existing or new policies, procedures, or plans do not conform to expectations. It is meant to question if the problems are caused by errors in understanding of the task or by unanticipated glitches in the system. Once the problem is understood, colleagues and the front-line staff can develop corrective actions to redesign the policy or procedure or plan to eliminate the problem.

Operational and capital requirement plans depend upon good information so that budgets and capital plans are based upon reliable data, true assumptions, and a valid conception of need. Budget and financial data should be collected in a tightly structured manner so that there is a direct link between the data, real conditions, and plans. The CFO should work through budget planning committees with fellow administrators or with staff who have responsibilities for the following information:

1. Enrollment – work with admission manager (enrollment manager, if the position exists), registrar, and financial aid staff to establish realistic revenue numbers. Too often, institutional managers drive enrollment estimates based on their expense budget or they estimate enrollment by adding a percentage increase that has no basis in fact or in the college’s share of the student market.
2. Faculty needed to cover enrollment for the coming year.
3. Student services needed to support the expected proportion of new students who may need academic assistance or personal support.
4. Building and grounds where a comprehensive list of renovations, repair, updating, or expansion of the plant and grounds is needed.
5. Auxiliary services budget requirements commonly include estimates of the number of students who will live in residence halls, use food services, or make purchases at the bookstore. Also, a list of renovations, repairs, updating, or expansion of auxiliary plant should be developed.
6. Capital projects plans should define the purpose, scope, and timing of new projects.
7. Business Operations –review if revenue or expenses could be affected by changes in the level of student collections, requirements for cash, and reformation of operational policies and procedure.
8. Cost Management Team should formulate solutions for cutting or minimizing cost increases.

Budget and capital planning groups do not guarantee that there will be no budget errors, but these meetings can reduce the chance for errors due to inattention. Additionally, the CFO cannot act in a vacuum on revenue and expense projections. The CFO must consult with each department about its budget goals, new initiatives, staffing, and support expenses. The budgetary meetings should be seen as an opportunity to conduct an annual review of spending trends and budgetary decisions over the past several years. The impact of decisions upon the budget become apparent over time; and the CFO, in conjunction with budget managers, should assess whether past decisions represent the best allocation of resources to serve the mission of the department and, most importantly, the mission of the institution.

The relationship between the CAO and the CFO needs to be fostered by both because their mutual understanding of the connection between academic mission, programs, and budget are essential to developing a valid budget. It is imperative that the CAO have direct input into the goals and operational estimates for the budget. The CAO is the conduit for the budget process to the faculty. If the faculty perceives that the budget process is transparent and that the CFO understands the requirements and constraints of the academic mission, then most faculty will be willing to support changes in financial strategies. The importance of the CAO-CFO relationship is indicated by the annual meeting for these officers conducted by the Council for Independent Colleges (CIC) and the National Association of College and Business Officials (NACUBO).

Common Set of Economic and Financial Principles

Financial management must necessarily rest on the assumption that everyone involved in developing and managing financial strategy and budgetary plans agrees with a common set of economic and financial principles. If they do not agree, financial management will deteriorate into a continuing squabble over revenue sources, expense allocations, responsibilities, and appropriate level for financial resources. These squabbles are not just sources of heartburn for everyone involved, but they also foster chaotic conditions in managing financial operations, which could also diminish the financial stability of the institution. Too often, it is the loudest department, not the department that has a significant role in the academic strategy of the college, which receives the largest share of the budget pie. Therefore, it is imperative that managers reach an accommodation on basic economic and financial principles. How agreement is achieved will depend on the unique characteristics of a specific institution.

The basic principles that the administration of the institution agree upon should state obvious and standard practices in managing finances in an institution of higher education. Agreement about a common set of principles has several direct benefits for the business office and the institution. Principles reduce disputes over finance; they can improve the quality of financial decisions; and they can promote the financial condition of the institution. The basic principles, which are discussed below, cover these areas at a minimum: economic forces, budget policies and rules, and essential accounting rules.

Economic Forces

There are three economic forces that affect the financial condition of an institution: revenue markets (sub-divided into student, gift, and grant markets), labor markets, and price. These forces involve classic economics in which the intersection of demand (revenue markets) and supply (educational output) determine price, while the marginal labor cost (the primary cost factor in higher education often accounting for 70% of the cost) and marginal revenue determine profit^[2]. If the college plans to continue on its current economic path, senior administrators need to understand how supply and demand will affect the institution and if those forces are or are not changing. It is a useful exercise during budget planning for senior administrators to meet and review what is happening with its markets and competition and how changes could affect its financial condition. If the college wants to change its targeted student market, it is a necessary exercise that senior administrators clarify and agree upon the structure of supply, demand, and competition that will affect its plans.

Budget Policies and Rules

There is an economic principle that is often only seen as a minor element in budgetary planning in higher education; the concept is “scarce resources”. Too many involved in budgets and capital planning treat expenditures and uses of funds as an issue independent of sources of funds, as mentioned earlier. It would seem to be the case that resources are assumed to be infinitely elastic and can be expanded to whatever need is deemed important. The likelihood that scarce resources are ignored increases as planning moves down into the organization or away from positions that have to produce financial resources. This happens because either the position makes little or no contribution to the production of funds or because her/his responsibility is so small that they do not see the larger impact of their requests on the budget or the finances of the institution. CFOs must not let the belief prevail that “scarce resources” are irrelevant in their institution if they want to have a financial and budgetary system built upon accepted principles of economics and just plain good sense.

Independent institutions that operate as not-for-profit entities must work within the financial constraint that excess revenue does not accrue to managers, trustees, or other members of the college or university. It is a misconception that not-for-profits cannot generate profit or excess revenue. If this constraint was true, the institution would never be able to generate adequate resources to maintain the purchasing power of its current assets (cash); or sustain the efficient, useful, and safe operation of the plant and grounds; or keep the purchasing power and the plant in line with changes in technology, student demand, government regulations, or the labor market.

The president, CFO, CAO, other senior administrators, faculty, and staff must understand and agree that the institution must grow its financial resources if it is to achieve its mission, successfully compete in the marketplace for higher education, and deliver graduates prepared for the job market. Understanding and agreement often depends upon the ability of the CFO to convince key decision makers and important constituencies that the college must do more than break-even. Failure to agree that the college must continuously expand its financial resources means it will face the possibility that erosion of financial resources will compromise the college’s or university’s ability to deliver on its mission and its educational goals.

Essential Accounting and Business Office Rules

Few things have greater potential for upsetting the relationship between CFOs and non-financial managers than problems related to accounting rules. CFOs typically see accounting rules as a given that guide the logical and coherent activities of the business office. On the other hand, non-financial managers see accounting rules as a maniacal plan that defies common sense and imposes unworkable rules as they try to solve budget problems that confront them daily. Therefore, it is important that non-financial managers understand the rationale behind essential accounting and business office rules and have ready access to those rules so that the CFO or her/his staff does not have to devote their time (which is in short supply) answering questions that are trivial. The CFO should also prepare and educate the president about reports and business office practices. CFO’s must inform and educate non-financial managers, which may resolve issues before they become contentious.

New and current staff in the business office must also understanding these essential accounting and business office rules:

1. Structure of the budget reports
2. Definition of line account titles and numbers
3. Rules on assignment of revenue to programs, departments and line accounts
4. Restrictions on what can be expensed to a specific line account
5. Authority limits on:
   1. Dollar amounts that can be spent through petty cash
   2. Dollar amounts that each level in the institution can approve for a contract
   3. When a purchase order has to be prepared
6. Process for filing a purchase order and for requesting an invoice for payment
7. Process for requesting transfers between line accounts and limits on which accounts can be used for transfers

Misunderstandings sometimes occur around gifts and restricted funds. Established policy from the Federal Accounting Standards Board (FASB) delineates how gifts and restricted funds are to be treated in the business office. Many non-financial managers do not understand that the receipt of a pledge is not the same as the receipt of cash; nor do they understand that the use of restricted gifts is limited to the income generated by the gift. Cash received in a latter year for a prior year pledge is not posted as revenue to the fiscal year in which it is received. Therefore, budgets cannot be balanced on the back of cash received for pledge receivables. Gifts that are restricted for a particular purpose are placed in the endowment, and only the income from the gift can be used for the stated purpose. It is paramount that the CFO clearly and precisely inform everyone (the president, senior administrators, and non-financial managers) dealing with the gift how it is to be used and how regulations limit its use to its income. The proper controls, records, and assurance of the correct use of gifts and restricted funds are an essential duty of the CFO.

Obviously, these rules discussed above are not exhaustive, but they do indicate what non-financial managers need to know to effectively work with the business office. It would help if the CFO could assign a lead person on the business office staff to meet with non-financial managers to identify what questions they have and what information they need from the business office. These rules should be promulgated through short training meetings and then placed on the institution’s website for easy access to help someone quickly find an answer. As policies and procedures change, the changes should be sent out and should also be added to the website.

Summary

Salient relationships, as this chapter has noted, are critical to the success of a CFO. They cannot be ignored and should be part of a CFO’s approach to his/her strategic and operational plans. For the CFO, the task of building and maintaining successful relationships with salient positions must be founded on the following principles:

1. Inform, educate, and respond to the board and president about financial plans and operations.
2. Work with colleagues who are critical to strengthening the financial condition of the institution and include them in:
   1. Operational meetings, which involve formal and informal meetings
   2. Budgetary performance reviews to determine if budget plans are on or off course and what can be done to resolve operational problems
   3. Budget and capital requirement planning so that colleagues can provide their insight into ways of improving the allocation of resources and of identifying potential problems
   4. Establishing financial teams designed around important segments of financial or budgetary plans
   5. Reaching common agreement on economic forces that shape the financial condition of the college
   6. Work with non-financial managers so that they understand the rationale and benefits behind accounting and business office policies and procedures

Even if a CFO is a skilled communicator, which is becoming a significant requirement for this position, and a competent accountant and financial manager, this should not lead to the conclusion that all problems will be eliminated in their relationship with salient colleagues. The reality is that CFOs, presidents, chief academic officers, and other chief administrative officers have different interests because the goals and processes of their positions push them away from accepting the basic demands placed on the office of the CFO. The best that a good CFO can do under these circumstances is to see issues that salient colleagues raise as opportunities and not as tribulations to be born in disgruntlement and resentment. The latter makes for unhealthy relationships and an unhealthy life style. It is comforting to know that most problems, when viewed in the rear view mirror of time, are often much smaller than when you are next to them.

1. Economic equilibrium is a state where the institution produces sufficient resources to support its mission. See chapter XIII for more information. ↑

2. Of course, we do not call it profit in higher education; it is referred to as a positive change in net assets. ↑

A CFO’s contribution to the mission of an institution – building and sustaining its financial viability – depends upon the relationships that she/he has with salient positions within the institution. Positions are salient when they are directly involved in budgetary and financial decisions. If a CFO has the skills to work well with salient positions, then there is a good chance that the financial condition of the college will reach a state of economic equilibrium^[1], ceteris paribus. Conflict with one or more of these positions reduces the opportunity to achieve equilibrium. It is in the interest of the institution to have a CFO who can foster strong relationships with salient positions that can influence the dynamics of producing financial strategies to foster and sustain the financial viability of the institution.

Key Salient Positions – Board of Trustees and President

The board of trustees and the president are the key salient positions for the CFO because they shape the goals, responsibilities, and much of the routine activities (for example, debt, major contracts, and budgets) of the CFO and the business office. In addition, the board and the president can provide validation and affirmation for financial decisions that the CFO must carry out.

Why is validation and affirmation important? Validation may be needed prior to taking action on a decision and when statute, regulation, or requirement by another legally-constituted entity requires formal authorization by the board of trustees. These conditions are mainly present in public institutions during the submission of budgets and for private institutions in applying for grants or offering a publicly-backed bond. Without validation, the CFO does not have the authority to act and may be held liable for unauthorized actions. Affirmation is the concept that prior to a finalizing a decision that she/he has the authority to make without the direct approval from someone higher in the administrative hierarchy, the CFO goes ahead and seeks the approval of the board and/or the president to approve her/his decision anyway. Affirmation is always a useful step to take to avoid future opposition that could stall the work of the CFO and/or the college. Ideally, there are board and college policies that identify categories of decisions that require affirmation by a higher level of authority, such as dollar limits on signing contracts and the types of gifts that the college will accept from benefactors.

The president and the CFO need to establish a mutually supportive relationship because it is in their self-interest to support the decisions and plans of each other subject to legal constraints. Of course, this proposition of mutual affirmation is subject to the good sense rule that it is not judicious for either party to make a decision without first acquiring mutual affirmation for the decision. There is nothing more upsetting to a president than to discover that the CFO has taken unilateral action, even though it is within the prescribed authority of the CFO, especially when the subject is sensitive to the mission of the college and to the president. For example, even though facilities may be under the authority of the CFO, start dates, length of the project, and the scope of projects should be shared with the president. There is nothing more upsetting to a president than to hear that work on the plant is taking place with news of the work coming not from the CFO but from someone else.

The CFO also plays an important role by being the proxy naysayer for the president. The implied understanding (but not formal duty) of the CFO is to say that some actions cannot be taken because it violates policy, budgetary plans, or other authority of the business office. Even though this duty can be distasteful to the CFO, it is imperative that she/he undertake this task so that the president can remain neutral and save his/her personal relationship capital for critical issues that must affect the well-being of the college. In support of the “nay saying” task, the president should acknowledge that the CFO has the authority to say “no” and that the president supports the decision without further argument. The aim is to make the CFO, not the president, the “go-to” person on budget and financial issues, policies, procedures, and requests. This practice can help the institution maintain the value of budget and business office policies, procedures, and plans. This practice is also in keeping with the basic management theory that employees, in this case the CFO, have the appropriate authority and responsibility to perform their jobs.

The chief components of the salient relationship with the board of trustees and president are to inform, educate, and expeditiously prepare solutions. To inform is to provide immediate and clear information about the current financial conditions of the institution and describe any factors that could have a positive or negative influence on those conditions. Information is best disseminated through a simple dashboard report. To educate is to explain complex financial transactions and reports in a fashion that can be understood by a layperson. To be prepared with solutions is to be able to design financial plans that respond to issues that the board or president wish addressed, such as changes in discount rates, debt financing, or employee benefits.

Because of the important responsibilities of the CFO, it is critical that the president and CFO have an open and on-going dialog to ensure that they are on the same page. The CFO must have a firm understanding of the institution’s mission and the trustees’ and president’s vision for the future of the college or university.

Key Salient Colleagues

CFOs obviously cannot perform their duties with only the input of the board and president. They need the support from their key salient colleagues: other senior administrators, especially the chief academic officer (CAO); the registrar and the staff from admissions; buildings and grounds; information technology; financial aid, billing, purchasing, and payroll. The relationship with these colleagues is predicated on involving them in operational meetings, budgetary performance reviews, and new operational and capital plans.

Operational meetings should be subdivided between formal and informal arrangements to assure a constant flow of information about conditions that affect current budgets and shape plans for future budgets. It is essential that regular formal meetings be held because informal arrangements too often result in missed communications or forgotten and/or ignored issues. Therefore, formal meetings should have agendas, minutes, and regularly scheduled items for review. The purpose of informal meetings is for the CFO to get into the infrastructure and get a sense for what is happening with policies, procedures, and budgets as they are used by the people who are actually carrying out the work and plans of the institution. Operational meetings ensure an ongoing understanding of policies and procedures. They are also useful in planning and reviewing new initiatives, for example, a new refund policy.

Budgetary performance reviews do not entail evaluation of the budget work performed by employees, but they do involve working with colleagues to ascertain if performance fits with expectations. The purpose of the budget performance review is to determine why existing or new policies, procedures, or plans do not conform to expectations. It is meant to question if the problems are caused by errors in understanding of the task or by unanticipated glitches in the system. Once the problem is understood, colleagues and the front-line staff can develop corrective actions to redesign the policy or procedure or plan to eliminate the problem.

Operational and capital requirement plans depend upon good information so that budgets and capital plans are based upon reliable data, true assumptions, and a valid conception of need. Budget and financial data should be collected in a tightly structured manner so that there is a direct link between the data, real conditions, and plans. The CFO should work through budget planning committees with fellow administrators or with staff who have responsibilities for the following information:

1. Enrollment – work with admission manager (enrollment manager, if the position exists), registrar, and financial aid staff to establish realistic revenue numbers. Too often, institutional managers drive enrollment estimates based on their expense budget or they estimate enrollment by adding a percentage increase that has no basis in fact or in the college’s share of the student market.
2. Faculty needed to cover enrollment for the coming year.
3. Student services needed to support the expected proportion of new students who may need academic assistance or personal support.
4. Building and grounds where a comprehensive list of renovations, repair, updating, or expansion of the plant and grounds is needed.
5. Auxiliary services budget requirements commonly include estimates of the number of students who will live in residence halls, use food services, or make purchases at the bookstore. Also, a list of renovations, repairs, updating, or expansion of auxiliary plant should be developed.
6. Capital projects plans should define the purpose, scope, and timing of new projects.
7. Business Operations –review if revenue or expenses could be affected by changes in the level of student collections, requirements for cash, and reformation of operational policies and procedure.
8. Cost Management Team should formulate solutions for cutting or minimizing cost increases.

Budget and capital planning groups do not guarantee that there will be no budget errors, but these meetings can reduce the chance for errors due to inattention. Additionally, the CFO cannot act in a vacuum on revenue and expense projections. The CFO must consult with each department about its budget goals, new initiatives, staffing, and support expenses. The budgetary meetings should be seen as an opportunity to conduct an annual review of spending trends and budgetary decisions over the past several years. The impact of decisions upon the budget become apparent over time; and the CFO, in conjunction with budget managers, should assess whether past decisions represent the best allocation of resources to serve the mission of the department and, most importantly, the mission of the institution.

The relationship between the CAO and the CFO needs to be fostered by both because their mutual understanding of the connection between academic mission, programs, and budget are essential to developing a valid budget. It is imperative that the CAO have direct input into the goals and operational estimates for the budget. The CAO is the conduit for the budget process to the faculty. If the faculty perceives that the budget process is transparent and that the CFO understands the requirements and constraints of the academic mission, then most faculty will be willing to support changes in financial strategies. The importance of the CAO-CFO relationship is indicated by the annual meeting for these officers conducted by the Council for Independent Colleges (CIC) and the National Association of College and Business Officials (NACUBO).

Common Set of Economic and Financial Principles

Financial management must necessarily rest on the assumption that everyone involved in developing and managing financial strategy and budgetary plans agrees with a common set of economic and financial principles. If they do not agree, financial management will deteriorate into a continuing squabble over revenue sources, expense allocations, responsibilities, and appropriate level for financial resources. These squabbles are not just sources of heartburn for everyone involved, but they also foster chaotic conditions in managing financial operations, which could also diminish the financial stability of the institution. Too often, it is the loudest department, not the department that has a significant role in the academic strategy of the college, which receives the largest share of the budget pie. Therefore, it is imperative that managers reach an accommodation on basic economic and financial principles. How agreement is achieved will depend on the unique characteristics of a specific institution.

The basic principles that the administration of the institution agree upon should state obvious and standard practices in managing finances in an institution of higher education. Agreement about a common set of principles has several direct benefits for the business office and the institution. Principles reduce disputes over finance; they can improve the quality of financial decisions; and they can promote the financial condition of the institution. The basic principles, which are discussed below, cover these areas at a minimum: economic forces, budget policies and rules, and essential accounting rules.

Economic Forces

There are three economic forces that affect the financial condition of an institution: revenue markets (sub-divided into student, gift, and grant markets), labor markets, and price. These forces involve classic economics in which the intersection of demand (revenue markets) and supply (educational output) determine price, while the marginal labor cost (the primary cost factor in higher education often accounting for 70% of the cost) and marginal revenue determine profit^[2]. If the college plans to continue on its current economic path, senior administrators need to understand how supply and demand will affect the institution and if those forces are or are not changing. It is a useful exercise during budget planning for senior administrators to meet and review what is happening with its markets and competition and how changes could affect its financial condition. If the college wants to change its targeted student market, it is a necessary exercise that senior administrators clarify and agree upon the structure of supply, demand, and competition that will affect its plans.

Budget Policies and Rules

There is an economic principle that is often only seen as a minor element in budgetary planning in higher education; the concept is “scarce resources”. Too many involved in budgets and capital planning treat expenditures and uses of funds as an issue independent of sources of funds, as mentioned earlier. It would seem to be the case that resources are assumed to be infinitely elastic and can be expanded to whatever need is deemed important. The likelihood that scarce resources are ignored increases as planning moves down into the organization or away from positions that have to produce financial resources. This happens because either the position makes little or no contribution to the production of funds or because her/his responsibility is so small that they do not see the larger impact of their requests on the budget or the finances of the institution. CFOs must not let the belief prevail that “scarce resources” are irrelevant in their institution if they want to have a financial and budgetary system built upon accepted principles of economics and just plain good sense.

Independent institutions that operate as not-for-profit entities must work within the financial constraint that excess revenue does not accrue to managers, trustees, or other members of the college or university. It is a misconception that not-for-profits cannot generate profit or excess revenue. If this constraint was true, the institution would never be able to generate adequate resources to maintain the purchasing power of its current assets (cash); or sustain the efficient, useful, and safe operation of the plant and grounds; or keep the purchasing power and the plant in line with changes in technology, student demand, government regulations, or the labor market.

The president, CFO, CAO, other senior administrators, faculty, and staff must understand and agree that the institution must grow its financial resources if it is to achieve its mission, successfully compete in the marketplace for higher education, and deliver graduates prepared for the job market. Understanding and agreement often depends upon the ability of the CFO to convince key decision makers and important constituencies that the college must do more than break-even. Failure to agree that the college must continuously expand its financial resources means it will face the possibility that erosion of financial resources will compromise the college’s or university’s ability to deliver on its mission and its educational goals.

Essential Accounting and Business Office Rules

Few things have greater potential for upsetting the relationship between CFOs and non-financial managers than problems related to accounting rules. CFOs typically see accounting rules as a given that guide the logical and coherent activities of the business office. On the other hand, non-financial managers see accounting rules as a maniacal plan that defies common sense and imposes unworkable rules as they try to solve budget problems that confront them daily. Therefore, it is important that non-financial managers understand the rationale behind essential accounting and business office rules and have ready access to those rules so that the CFO or her/his staff does not have to devote their time (which is in short supply) answering questions that are trivial. The CFO should also prepare and educate the president about reports and business office practices. CFO’s must inform and educate non-financial managers, which may resolve issues before they become contentious.

New and current staff in the business office must also understanding these essential accounting and business office rules:

1. Structure of the budget reports
2. Definition of line account titles and numbers
3. Rules on assignment of revenue to programs, departments and line accounts
4. Restrictions on what can be expensed to a specific line account
5. Authority limits on:
   1. Dollar amounts that can be spent through petty cash
   2. Dollar amounts that each level in the institution can approve for a contract
   3. When a purchase order has to be prepared
6. Process for filing a purchase order and for requesting an invoice for payment
7. Process for requesting transfers between line accounts and limits on which accounts can be used for transfers

Misunderstandings sometimes occur around gifts and restricted funds. Established policy from the Federal Accounting Standards Board (FASB) delineates how gifts and restricted funds are to be treated in the business office. Many non-financial managers do not understand that the receipt of a pledge is not the same as the receipt of cash; nor do they understand that the use of restricted gifts is limited to the income generated by the gift. Cash received in a latter year for a prior year pledge is not posted as revenue to the fiscal year in which it is received. Therefore, budgets cannot be balanced on the back of cash received for pledge receivables. Gifts that are restricted for a particular purpose are placed in the endowment, and only the income from the gift can be used for the stated purpose. It is paramount that the CFO clearly and precisely inform everyone (the president, senior administrators, and non-financial managers) dealing with the gift how it is to be used and how regulations limit its use to its income. The proper controls, records, and assurance of the correct use of gifts and restricted funds are an essential duty of the CFO.

Obviously, these rules discussed above are not exhaustive, but they do indicate what non-financial managers need to know to effectively work with the business office. It would help if the CFO could assign a lead person on the business office staff to meet with non-financial managers to identify what questions they have and what information they need from the business office. These rules should be promulgated through short training meetings and then placed on the institution’s website for easy access to help someone quickly find an answer. As policies and procedures change, the changes should be sent out and should also be added to the website.

Summary

Salient relationships, as this chapter has noted, are critical to the success of a CFO. They cannot be ignored and should be part of a CFO’s approach to his/her strategic and operational plans. For the CFO, the task of building and maintaining successful relationships with salient positions must be founded on the following principles:

1. Inform, educate, and respond to the board and president about financial plans and operations.
2. Work with colleagues who are critical to strengthening the financial condition of the institution and include them in:
   1. Operational meetings, which involve formal and informal meetings
   2. Budgetary performance reviews to determine if budget plans are on or off course and what can be done to resolve operational problems
   3. Budget and capital requirement planning so that colleagues can provide their insight into ways of improving the allocation of resources and of identifying potential problems
   4. Establishing financial teams designed around important segments of financial or budgetary plans
   5. Reaching common agreement on economic forces that shape the financial condition of the college
   6. Work with non-financial managers so that they understand the rationale and benefits behind accounting and business office policies and procedures

Even if a CFO is a skilled communicator, which is becoming a significant requirement for this position, and a competent accountant and financial manager, this should not lead to the conclusion that all problems will be eliminated in their relationship with salient colleagues. The reality is that CFOs, presidents, chief academic officers, and other chief administrative officers have different interests because the goals and processes of their positions push them away from accepting the basic demands placed on the office of the CFO. The best that a good CFO can do under these circumstances is to see issues that salient colleagues raise as opportunities and not as tribulations to be born in disgruntlement and resentment. The latter makes for unhealthy relationships and an unhealthy life style. It is comforting to know that most problems, when viewed in the rear view mirror of time, are often much smaller than when you are next to them.

1. Economic equilibrium is a state where the institution produces sufficient resources to support its mission. See chapter XIII for more information. ↑

2. Of course, we do not call it profit in higher education; it is referred to as a positive change in net assets. ↑

Financial Strategy Paradigm

by Michael K. Townsley | May 21, 2022 | Financial Strategy and Operations

Financial Management – Foundation of the Paradigm

It is not uncommon in higher education that an institution should establish a balanced annual budget as its main strategic financial goal. There are several significant reasons why the “single year net income goal” is both outdated and even dangerous and should be replaced by strategic-driven financial management. First, it ignores liquidity (often known as cash flow) as the recent credit crunch has proven with little subtlety; liquidity is a sine qua non of financial viability. Even an institution with a balanced budget may face cash flow issues when debt service (principal and interest) exceeds non-cash charges, such as depreciation in the cash flow budget. Second, the annual budget ignores the impact of debt on the financial condition of the institution. Again, as the recent credit crisis shows, banks will impose stricter conditions that go beyond avoiding deficits.  Third, working only with the annual budget ignores the intent of Federal Accounting Standards Board (FASB) accounting rules that the financial condition of the college is measured through three financial reports: statements of activities, financial position and cash flow. FASB rules suggest that focusing solely on the statement of activities is inadequate and may in some cases be a false measure of financial condition because it ignores capital investments and cash flow. Fourth, a balanced budget can and may well be an artificial goal where revenue and expenses are manipulated to produce the needed balanced budget, rather than a well-planned and executed attempt to improve the overall financial health of the school. Cash, assets, and liabilities are constrained by the existing financial condition of the institution or by external agencies, banks, regulators, or the markets. They are less amenable to budget maneuvers that are designed to achieve a balanced budget and to pacify the boards need for appearance of financial stability. Fifth, the financial capacity of an institution is not solely dependent upon income flows from revenues through expenses. Financial capacity also depends on how debt, investments, liquid assets, and other capital resources are employed to generate new funds. Sixth, and maybe most important, annual budgeting tends to foster a piecemeal approach to strategy and fails to truly link overall financial health to the institution’s future plans. This means the budget is designed to solve financial weakness for only one year. If the weakness is systemic and chronic, i.e., the problem is not a single year event of excess expenses or loss of revenue, the problem will continue over many years. For example, chronic financial problems may arise from demographic changes in a college’s market that leads to a decline in enrollment from too many academic programs with low enrollments or from too many administrators and support service staff. Piecemeal strategies rolled out a year-at-a-time will not solve chronic problems. They tend to mask core problems until they grow so large that the college faces swift and calamitous deterioration of its financial condition.

The following case studies point out how piecemeal strategies can endanger a college with systemic financial problems. When a college ignores the totality of its financial capacity by simply focusing on a balanced operating budget, it increases the risk to the college during unpredictable financial crisis and long-term trends in its student market. 

The annual operating budget is only a forecast which can be substantively altered through internal politics, current circumstances, and unexpected events. Colleges must come to expect that financial markets will remain unpredictable, that large demographic shifts will distort student markets, and that capital plans with stringent debt covenants will increase the cost of capital projects. Gone are the days when colleges can simply focus on a balanced budget to maintain their financial viability. Colleges must have a broader vision of financial strategy, which encompasses cash balances, tangible assets, financial investments, debt, and income flows. In response to these financial conditions, the chief financial officer (CFO) must become an astute financial manager who understands how to build a robust financial strategy to optimize the financial resources needed to serve the mission of the college.  

 Optimizing financial resources rests on the proposition that budgets (income, capital, or cash budgets) are executable plans converting financial resources into resources that strengthen and expand the financial structure and support the mission of the institution.    Financial structure comprises monies reported in the statements of activities, financial position, and cash flow. The financial structure is not locked at the level of operational income. The financial structure has the capacity to provide resources to support the mission of the institution, to craft new strategies, to formulate creative turnaround plans, and to set the college on the road to financial stability.

Here are several examples of the resources available within the financial structure. First, investment assets generate income for operations. Second, debt capacity can expand revenue-generating capacity from new residence halls, new instructional programs, and cost saving investments in fixed assets. Third, a college can generate strategic reserves (funds used to take advantage of new opportunities or to create turnarounds) by monetizing the value available in net fixed assets (property, equipment, and buildings).  Strategic use of the financial structure can foster a recursive cycle where operational net revenue flows into financial reserves which channel the expanded resource base back through operations and so forth.  

Effectively using the full resources of the financial structure is only one aspect of strategic optimization of the financial management paradigm. Budgetary decisions must be driven by financial metrics that press the college to: a) evaluate the impact of short-term budgetary decisions on its institutional strategies; b) assess forecast performance upon critical financial ratios (such as debt covenant ratios and standard management ratios) to determine the long-term financial condition of the college; and c) track performance during the fiscal year to determine achievement of short- and long-term budgetary and strategic goals.

In summary, the purpose of the financial management paradigm is to formulate strategy that effectively utilizes the financial reserves embedded in the financial structure of an institution to achieve its mission, augment its financial condition, and employ a system of metrics to build and monitor its financial condition. 

Failed, Single-Focus, Piecemeal Financial Strategy

This section discusses a case illustrating a financial strategy where year-to-year survival depended on converting financial and tangible assets into cash, while ignoring the long-term metrics needed to keep the college solvent. It will become evident that this approach not only restricts strategic options but also has the potential of pushing a college over the brink into bankruptcy.

Although the case only presents financial information for the last five fiscal years, the financial condition of the college deteriorated during the past ten years with larger deficits, shrinking cash balances, and depleted net assets. During the last five years, attrition was 30%, new student enrollment fell 25%, and the tuition discount rate grew from 25% to 45%. Cash reserves were drained and off-campus real estate sold and the only result was ever larger deficits. The string of deficits meant that the college was in default of its bond covenants; however, the bondholder agreed to forego calling the balance owed because he/she had no immediate use for the property. The impact on the financial condition of the college is readily evident in the five-year summary presented in Tables I and II. 

The deficit reported for the first of the five fiscal years was relatively minor compared to the remainder of the years. Nevertheless, it represents another in a long line of deficits that eroded its net assets. By the end of the most recent fiscal year (year five), only 6% of the net assets remained from the first fiscal year. Further indication of what had happened is evident below: cash declined 43% or $1.3 million; investments lost 50% of their value or $9.8 million; and property, plant, and equipment lost 35% or $7.8 million.

Table I

Summary Statement of Activities

Table II

Summary Statement of Financial Position

By the fifth year, all the easy places to find cash to make payroll and pay vendors had disappeared. At the start of the next fiscal year, current liabilities exceeded current assets by $7.6 million. Just covering its unpaid commitments from the prior year (current liabilities) would have completely drained its cash. The college had lost its financial reserves (assets) and strategic flexibility. It no longer had off-campus property to sell, expenditures were cut to the bare minimum, and delaying payment on bills was no longer an option as vendors stood in line demanding to be paid. 

More than likely, during the sixth fiscal year, the college would slip into bankruptcy because the bondholder, who earlier had ignored violations to bond covenants, such as continuing and growing deficits, could not ignore the college’s inability to make prompt and complete debt service payments. Strategically, the college had backed itself into a corner years earlier because it had failed to develop a multi-year strategic plan to optimize its remaining financial reserves and to stem its swiftly deteriorating financial condition.

The continuing deterioration of the college over the prior ten years was not an impenetrable riddle to the board and president. Deficits were, as noted previously, a permanent fixture; and every year the chief financial officer and the president scrambled to find cash for operations and debt service. Rather than taking a long hard look at where they were going, they compounded their mistakes. For instance, even though they desperately needed cash, the board of trustees kept 70% of their investment portfolio in equities. In the year prior to the college’s demise, the investment committee of the board was forced to sell into a plunging equity market to get enough cash to survive the year.  By not foreseeing their cash needs, they depleted the investment portfolio by 45% for the cash draw for the fiscal year,  and another 30% vanished due to equity losses in the market. The remaining value of the portfolio, coupled with the sale of the last piece of off-campus property and severe decline in enrollment, meant that the college just did not have the cash to make it through another year. 

The board and president amplified the financial problems of the institution by focusing solely on balancing the annual budget and by ignoring financial metrics (debt covenants, composite financial index (CFI) and the U.S. Department of Education financial score) that would have forced them to deal with the continuing deterioration of the college’s financial condition. Amazingly, each new budget saw the same old solution to the same old problem — a piecemeal strategy to sell off real estate and investment assets to generate sufficient cash to survive to the next year. As each year passed, the college dug itself into a deeper fiscal hole, but senior administrative officers always assumed that next year would be different. By the end of the fifth year, their assumption was proven true because they faced immediate bankruptcy. They failed because early in the downward slide they ignored the possibilities that they could create a strategic reserve to climb out of their continuing slide into oblivion. Rather than managing their financial reserves for the long term, they burned through them and effectively destroyed the flexibility needed to develop strategic options.

By the sixth year, the college’s piecemeal strategy of teetering on the brink of bankruptcy had forced its regional accrediting agency to acknowledge that the college was no longer viable. The accrediting agency had warned the president over the years they would be forced to make a “termination of accreditation” decision unless the college got its finances in order immediately. Since the college no longer had any financial reserves, the accrediting agency determined that it had no other choice but to issue the dreaded “termination of accreditation.” The notice of termination from the accrediting agency triggered a letter from the U.S Department of Education, cancelling the college’s authority to distribute Title IV funds. Auditors drove another nail into the college’s coffin when they included a statement in the audit that the college was no longer a “going concern” because it was unable to make its debt service payments. This statement ended any hopes for borrowing money to survive another year. Enrollment collapsed with the withdrawal of most students as they enrolled in other colleges. When the DOE notice arrived, it was simply the last sad note in a symphony of errors that saw the closing of the college. The accreditor’s termination order, the DOE cancellation notice, and the auditors’ statement combined to end all hope for the college. It disappeared into the murky history of failed institutions.  

The board and president should have devised and implemented a strategy that involved more than simply burning through their assets. The next section will show how strategy-driven financial management could have provided more flexibility and more time to devise and implement a new strategy for survival.

A Different Outcome to the Case 

The budget process was woefully inadequate for the college in the preceding case study. While clearly an extreme example, it is not uncommon in higher education. Too often, budgets are based on rosy assumptions that disguise a slow slide into financial crisis.  Once budgetary plans are placed into operation, the real limits of these assumptions come into play, forcing the president, CFO, and others into a mid-year scramble to keep the institution’s fiscal condition above water. These budget schemes do not address the underlying issues that are shaping the long-term financial condition of the college and fail to optimize current operations and financial reserves to strengthen strategic options.  

The college in this case study could have taken another tack well before the college tumbled over the cliff into fiscal insolvency. Even though it was spawning sizeable deficits, the college did enter the five-year period with $25 million in net assets (i.e., financial reserves), which included cash, property, equipment, and buildings. The net asset position stayed fairly intact into the second fiscal year of the period. Since the college leadership was well aware, as noted in the case study, that its financial situation had deteriorated over the prior five years, prudence should have dictated that they take the condition of the college seriously. Simply put, this means that they should have started early and examined how net assets could be employed to set-up a strategic reserve. Money from a strategic reserve could have been used to develop new programs that penetrated new sectors of the student market, to increase operational efficiency (government regulations and potential legal liabilities have worked together to decrease operating efficiency by adding a protective layer of new administrators and support staff), or to look for a merger partner before the college lost most of its financial and market value.

Index of Strategic Options 

This section suggests strategic alternatives that could have produced a different outcome in the preceding case or could be employed by colleges seeking to strengthen their financial condition.

1. Change the investment mix so that most investments are in cash.
2. Explore the option of a sale-leaseback of the campus with a payoff of bonds and allocate the net from the sale to the strategic reserve.
3. Eliminate or cut-back administrative and staff positions that do not directly contribute to recruitment and marketing.
4. Cut out low priority perks, such as cars, expense allowances, conventions, or other trivial activities that do not lead to the production of income.
5. Postpone all major capital projects.
6. Create additional space by restructuring class schedules, reassigning classrooms, and reorganizing administrative departments so that the empty building space could be rented out.
7. Use employees and volunteers (for example, students, alumni, and other interested parties) for fundraising campaigns during evenings and on weekends.
8.  Package off-campus properties and offer them to real estate developers.
9. Outsource as many service functions as possible, such as administrative and academic computer systems, the bookstore, payroll department, custodial and maintenance services, and/or food services. Even specialized student support services like tutoring, counseling, and health services should be considered for outsourcing. (Some outsourced services may pass back to the institution after the crisis passes and/or as part of a larger strategic plan.)

In this case study, key leaders, such as the board of trustees and the president, had to stop dawdling while the college’s financial reserves were frittered away. The actions incorporated in the list are not difficult to understand, but they do require the wit and will to act early and decisively. Decisive action is contingent upon a chief financial officer working in consort with the president to extract every morsel from operations and its financial reserves to build a strategic reserve. They cannot waste an opportune moment because once it passes, the financial condition of the college may no longer be recoverable. 

Strategy-Driven Financial Management: General Principles of the Paradigm

The general principles of the paradigm are based on these assumptions: (1) colleges must efficiently use all sources of wealth and monitor the allocation of its scarce resources to accomplish its mission; and (2) the president and chief administrative officers must have the skills and the understanding of the dynamics of their institution and the higher education market to effectively use the principles that make-up strategy-driven financial management. 

There are several steps that an institution needs to take when operating within the paradigm. Before anything else happens, senior administrative officers need to assess the financial condition of the institution so that they can determine the financial strengths and weaknesses of the institution. Decisions about the financial actions and metrics that best serve the college will come from this assessment. Next, the president and board members must establish policies and procedures that hold all offices accountable for working within the financial boundaries of the institution.   

Strategy-Driven Financial Management Principles

Once the preceding conditions are in place, the college can build a strategy-driven financial plan with these core principles:

Principle One:  Returning from the brink of fiscal disaster requires the leadership of the board of trustees and the support of the president. This president must have the wisdom and dynamism to determine the direction and magnitude of change in consort with the administrative leadership team. The board must insist on action and if the current administrative staff cannot do the job, new administrative leadership is needed immediately. In addition, the board must be willing to pay for good leadership; mediocrity may save money, but it does not breed success.

Principle Two: The board of trustees should seriously consider the use of consultants. Too often, consultants are seen as a drain on scarce cash. However, a reputable consulting team can often speed up change and take the heat off the administration as change is tested and introduced.

Principle Three: CFOs must be grounded in accounting principles; they need financial skills to effectively deploy the full range of financial resources embodied in revenue and expense flows, the statement of financial position, and cash flows. In addition, they should be secure in the possibilities and limitations associated with all forms of debt; for example, loans, bonds, leases, or leasebacks.

Principle Four: The chief marketing and academic officers should have the skills (professional and interpersonal) and experience to employ the resources generated by this paradigm to expand existing markets and to develop programs, products, and/or services for new markets. 

Principle Five: The institution should annually produce a rigorous five-year financial forecast for the statement of activities, financial position, and cash flow that is shared and discussed in depth with the board of trustees. The forecast should establish upper- and lower-sensitivity boundaries for major revenue flows to identify what could happen if unexpected events have an adverse impact on financial performance. The college should then establish priorities on what to do if actual performance exceeds or falls below the forecast. The president and chief administrative officers should meet to discuss the implications of the forecast on the budget and other factors that the forecast may have failed to take into account.  The annual forecast is a critical element in the paradigm. 

Principle Six: Cash needs to be sufficient to support operations and to cover debt payments (such as a ratio equal to 30% of expenses plus an amount needed to cover debt payments).

Principle Seven: Operational revenue should grow at the rate of operational expenses plus several additional percentage points to provide net assets surpluses and significant additions to cash reserves.

Principle Eight: Middle administrative expenses (administration, staffing, and non-personnel expenses) should be cut significantly and should grow less than the rate of growth for instruction.

Principle Nine: A strategic initiative fund should be established to support the development of new revenue sources or major expense reductions. The fund can remain within investments but should be sufficiently liquid to permit withdrawal within thirty days of the demand for investment funds. The fund should invest in projects that generate the largest net present value among the set of project options.  

Principle Ten: The statement of financial position should be regularly reviewed to determine the best structure for assets and liabilities so that they can yield a) the greatest return for the college given the cash demands faced by the college subject to protecting their principal; b) provide for a strategic investment fund; c) employ assets to their best uses; and d) balance debt so that debt ratios either established by debt covenants or by standard ratios do not place stress on operational performance.  

Principle Eleven: The president, CFO, and other senior administrative officers should establish metrics that are used to develop and to monitor the performance of the budget. Basic revenue metrics should include yield rates, attrition rates, enrollment growth rates, rates of growth for total revenue and expenses, yield boundaries for investments, tuition discount rates, net tuition growth rates, and a proportion of revenue for net tuition, investment income, grants, gifts, auxiliary income, and other revenue. Basic expense metrics should include rate of growth for compensation, non-compensation expenses, auxiliary expenses, interest expenses, and depreciation. Expense metrics should also include rules for adding new instructional, administrative, and staff personnel. Additional metrics should include change in net asset ratio, cash ratio, net asset growth rates, and the composite financial index.

Principle Twelve:  Financial management should find a way that the revenue stream from the endowment fund becomes a reliable and predictable income source.

Summary

The twelve principles of the strategic-driven financial management paradigm are designed to change the way in which colleges and universities use and revise their current financial condition. The specific intent of this paradigm is to improve operational performance, to reduce expenses, to employ assets to their highest use, to create a strategic investment fund, to respond to strategic opportunities, to guide budget development, and to monitor budgets so that performance conforms to specific performance metrics. Keep in mind that the board of trustees is a critical and necessary element of strategy-driven financial management.

How many colleges and universities could avoid being included in the list of institutions that failed to make the threshold value of the U.S. Department of Education’s test of financial responsibility if they had operated under the principles of the strategic-driven financial management paradigm?

Supplemental Readings

Townsley, Michael K. (1991). “Brinkmanship, Planning, Smoke, and Mirrors”; Planning for Higher Education; (Summer) Volume 19: 2 pp. 7-32

Townsley, Michael K. (1993). “A Strategic Model for Enrollment-Driven Private Colleges”; Journal for Higher Education Management;  (Winter/Summer) Volume 8, Number 2

Townsley, Michael K. (1994). “Deficit Prevention: Budget Control Model for Enrollment Dependent Colleges”; Business Officer; (October) National Association of College and University Business Officers: pp. 40-44

Townsley, Michael K. (2003)   The Small College Guide to Financial Health (second edition); National Association of College and University Business Officers; Washington, DC

Townsley, Michael K. (2007). “Leveraging facilities for competitive advantage”; In Fennell, M. & Miller, S.D. (Eds.). Presidential Perspectives; Aramark; Philadelphia

Higher Education

Townsley, Michael K. (2007)   Strategic Turnaround Toolbox; National Association of College and University Business Officers; Washington, DC

Townsley, Michael K. (2009) Weathering Turbulent Times; National Association of Colleges and Business Officials: Washington D.C

Salluzzo, R. E., Tahey, P., Prager, F. J., & Cowen, C. J. (1999) Ratio Analysis in Higher Education (4th ed); KPMG & Prager, McCarthy & Sealy, Washington D.C.