Salient Institutional Relationships for the Chief Financial Officer

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.

Take Away Points A CFO needs affirmation by the president or the board to take action, even if the CFO already has the requisite authority, in order to reduce the possibility of conflict with colleagues, faculty, or staff. The CFO and president need to form a mutually-supportive relationship. CFOs should be prepared to become the proxy naysayer for the president. The chief components of the salient relationship with the board of trustees and president are: to inform, educate, and expeditiously prepare solutions. The CFO should meet regularly with colleagues to review operational and budget performance. Key employees need to understand and agree upon the economic forces that affect the college’s student and labor markets. The CFO is responsible for preparing and distributing the primary accounting and business rules used to manage the budget and finances of the college. As part of this responsibility, the CFO must conduct training for existing and new employees who are or will be budget managers.

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.

Take Away Points A CFO needs affirmation by the president or the board to take action, even if the CFO already has the requisite authority, in order to reduce the possibility of conflict with colleagues, faculty, or staff. The CFO and president need to form a mutually-supportive relationship. CFOs should be prepared to become the proxy naysayer for the president. The chief components of the salient relationship with the board of trustees and president are: to inform, educate, and expeditiously prepare solutions. The CFO should meet regularly with colleagues to review operational and budget performance. Key employees need to understand and agree upon the economic forces that affect the college’s student and labor markets. The CFO is responsible for preparing and distributing the primary accounting and business rules used to manage the budget and finances of the college. As part of this responsibility, the CFO must conduct training for existing and new employees who are or will be budget managers.

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.

Take Away Points A CFO needs affirmation by the president or the board to take action, even if the CFO already has the requisite authority, in order to reduce the possibility of conflict with colleagues, faculty, or staff. The CFO and president need to form a mutually-supportive relationship. CFOs should be prepared to become the proxy naysayer for the president. The chief components of the salient relationship with the board of trustees and president are: to inform, educate, and expeditiously prepare solutions. The CFO should meet regularly with colleagues to review operational and budget performance. Key employees need to understand and agree upon the economic forces that affect the college’s student and labor markets. The CFO is responsible for preparing and distributing the primary accounting and business rules used to manage the budget and finances of the college. As part of this responsibility, the CFO must conduct training for existing and new employees who are or will be budget managers.

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.

Take Away Points A CFO needs affirmation by the president or the board to take action, even if the CFO already has the requisite authority, in order to reduce the possibility of conflict with colleagues, faculty, or staff. The CFO and president need to form a mutually-supportive relationship. CFOs should be prepared to become the proxy naysayer for the president. The chief components of the salient relationship with the board of trustees and president are: to inform, educate, and expeditiously prepare solutions. The CFO should meet regularly with colleagues to review operational and budget performance. Key employees need to understand and agree upon the economic forces that affect the college’s student and labor markets. The CFO is responsible for preparing and distributing the primary accounting and business rules used to manage the budget and finances of the college. As part of this responsibility, the CFO must conduct training for existing and new employees who are or will be budget managers.

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.

Take Away Points A CFO needs affirmation by the president or the board to take action, even if the CFO already has the requisite authority, in order to reduce the possibility of conflict with colleagues, faculty, or staff. The CFO and president need to form a mutually-supportive relationship. CFOs should be prepared to become the proxy naysayer for the president. The chief components of the salient relationship with the board of trustees and president are: to inform, educate, and expeditiously prepare solutions. The CFO should meet regularly with colleagues to review operational and budget performance. Key employees need to understand and agree upon the economic forces that affect the college’s student and labor markets. The CFO is responsible for preparing and distributing the primary accounting and business rules used to manage the budget and finances of the college. As part of this responsibility, the CFO must conduct training for existing and new employees who are or will be budget managers.

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.

Take Away Points A CFO needs affirmation by the president or the board to take action, even if the CFO already has the requisite authority, in order to reduce the possibility of conflict with colleagues, faculty, or staff. The CFO and president need to form a mutually-supportive relationship. CFOs should be prepared to become the proxy naysayer for the president. The chief components of the salient relationship with the board of trustees and president are: to inform, educate, and expeditiously prepare solutions. The CFO should meet regularly with colleagues to review operational and budget performance. Key employees need to understand and agree upon the economic forces that affect the college’s student and labor markets. The CFO is responsible for preparing and distributing the primary accounting and business rules used to manage the budget and finances of the college. As part of this responsibility, the CFO must conduct training for existing and new employees who are or will be budget managers.

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. ↑