What is a Financial Crisis
Essentially, all financial crises are cash based. Simply put, if there is no cash, there is no college. In most cases, the crisis is cumulative, and the cause or causes have depleted cash over several years until a point is reached where there is insufficient cash for on-going operational and capital expenses. The crunch becomes evident when the chief financial officer informs the president that there is insufficient cash to make payroll, pay vendor bills, or cover debt-service expenses. The cash problem is usually magnified when the college banks no longer extend short-term loans for operating cash. When a college has depleted its cash reserves and cannot get short-term loans, its board of trustees faces an immediate financial crisis. Under these circumstances, the board has to ask two questions:
- Does the current leadership have the wherewithal to get the college out-of-the crisis
- Are there any board members who have the means to guarantee a short-term loan or to make a donation that will carry the college for at least six months.
After you have answered those questions, these should be the immediate next steps:
Understand the Cause
- Understanding the cause of the crisis requires a good chief financial officer, a cooperative auditor, and a president who can quickly fathom the cause(s) of the crisis.
- Find out why cash is being depleted; is it due to
- Falling enrollment
- Shrinking net tuition revenue
- Deficits in auxiliary services
- Too many loans and too much debt service
- Expenses-out-of-control
- Is the average class size too small?
- Are there too many majors?
- Are attrition rates growing faster than enrollment?
- Is the ratio of students to employees too low?
- Are there too many faculty?
- Are there too many administrators?
- Is the cost of academic and student support services growing faster than net tuition revenue?
Essential Factors Needed for Success:
- President who has a strong turnaround leadership team
- If not, find a turnaround expert – either to replace the current President or hire them as a Chief Administrator
- An attorney who knows all facets of education law
- Board of Trustees who willingly invest time, energy, and funds in the turnaround
- Recognition that time is short, and action must happen quickly
Immediate Action – Find Cash:
- The board needs to meet frequently to approve action and grant authority to the president to take immediate steps to save the college.
- Hire a good attorney versed in higher education law.
- When returning students arrive for Fall/Spring classes are balances paid?
- Do all students have a method for paying for upcoming semesters?
- Stop all purchases except for emergencies.
- Do not hire new employees to fill empty positions.
- Release employees who are not critical to the operation of the college.
- Meet with all third-party contractors to either end the contracts or cut the costs.
- Meet with all banks to reduce or delay debt service payments.
- Prepare a large endowment loan; this usually requires approval by the state.
- Use the endowment loan to pay-off or pay-down loans from financial institutions.
- Consolidate offices, classrooms, and other space into a central core on the campus.
- Eliminate academic programs in which direct expenses exceed revenue.
- Arrange to lease or sell any low-use or empty buildings.
- Sell any external property that is not contributing positive cash flows.
Strategic Action
- The data and information collected in the “Understanding the Cause” stage should be the basis for strategic action.
- Strategy should be designed to eliminate deep structural problems that led to the financial crisis.
- Strategy should focus on new programs that have strong payoffs for graduates.
Mistakes to Avoid as the Crisis Unfolds
- Assuming that the crisis is solely a short-term cash problem and ignore the underlying structural failures that lead to the crisis.
- Bringing in a turn-around president without giving them the authority to work on the underlying structural problems.
- Replacing the turn-around president as soon as the cash crisis is resolved and hiring a president who returns the college to an operational state that causes the structural problems to resurface.