Private colleges setting on the brink of deep financial distress need to be very careful when the build their budgets. The traditional way of budgeting will not work under those circumstances, especially when faced by the demographic cliff. Rather, the college needs to take the following precautionary recommendations seriously.
- The major focus of the budget has to be cash. Net income in secondary. Therefore, the cash budget for operations, investing and financing should be estimated.
- Do not use marketing forecasts that project increases in enrollment. Market managers want to push higher enrollments, but colleges on the brink of financial distress cannot afford overestimating budgets that typically lead to larger expenditures.
- The budget should be constructed around two enrollment forecasts:
- Stable forecast that assumes that enrollment for the next fiscal year will be the same as the current year.
- Demographic cliff forecasts that take into account the estimated decline in enrollment in the college’s student market.
- A single year budget is inadequate given the compounding dangers of the demographic crash It is too risky to assume that budget decisions in the coming year will not adversely affect the budget in the following year.
- The budget should become a major part of a strategic turnaround. There is mounting evidence that financial distress cannot be solved in a single year. Therefore, the college should turn to the Cyert Model to compute scale of its financial disequilibrium. The Data sources are data in the audits.
Computing the Cyert Disequilibrium Gap
|
Gap Category |
Gap |
|
Operational Deficit |
$ |
|
Credit Line (total amount borrowed) |
$ |
|
Accumulated Deferred Maintenance Infrastructure |
$ |
|
Accumulated Deferred Maintenance Buildings |
$ |
|
Accumulated Deferred Maintenance IT |
$ |
|
Total Disequilibrium Gap |
$ |