Private commuter colleges are a rare breed in higher education. They operate like a community college but offer undergraduate and graduate degrees. These colleges typically operate with multiple sites, tuition prices, and academic periods. They are fast-paced and aggressively competitive, reacting quickly to changes in student markets and to changes in their competitive environment. Financial stability at these colleges usually rests on these strategic elements: high enrollment growth rates, low net tuition, a flat administrative hierarchy, diversification of tuition revenue sources, and continual development of new programs and markets. Diversification of tuition revenue sources means that the college avoids reliance on a single sector of the student market. Programs are designed to attract students from different age ranges, work settings, income levels, and geographic areas. The intent of diversified tuition revenue sources is to avoid being trapped by unexpected and harmful changes in one segment of their student market. A commuter college program offers its students the best education for their money by applying accepted academic standards to the design, delivery, and assessment of courses and programs of instruction.
Strategic Elements
The first strategic element is a high annual rate of enrollment growth, which is necessary for the college to keep pace with external inflation and internal inflation rates. The external rates of inflation are the usual sorts that affect all institutions: utilities, benefits, instructional materials, and maintenance supplies. Internal inflationary rates necessarily result from the inherent structure of an institution: the number and quality of its administrators, staff, and faculty; its method of instructional delivery; the age and size of its plant; and its tuition discounting.
Low net tuition is a necessity because it is a primary and visible tool of competition. It is not unusual to find that commuter colleges do not offer tuition discounts because they believe that the posted price is how their student market chooses a college. They choose their posted price carefully, giving effect to, among other things, competitors’ rates and intangible factors such as consumer tendency to equate price to quality.
A flat administrative hierarchy is an important strategic element in a low-tuition strategy because, as Zemsky pointed out, there are powerful forces to expand the number and range of administrative offices in higher education[1]. Unchecked growth of the administrative hierarchy can increase the pace of internal inflationary rates, which forces the college to increase tuition more rapidly than it would prefer or to expand enrollment faster than is warranted by the size of its markets.
Diversification of tuition revenue sources requires that as new programs are developed they should become part of the existing enrollment base so that new programs are not treated as fly-by-night operations. Solidifying the enrollment base is as important at these schools as at any other institution of higher education. They cannot have a base that is eroding faster than the growth rate from new markets. Any enrollment slippage (no matter how small) and any unanticipated large increases in enrollment can have a devastating impact on these colleges. To protect the base, commuter colleges need to continuously improve existing programs in response to demands in the student and job markets.
In addition, these colleges must continually find new student markets by under pricing the competition, moving into new geographic areas, locating new sources of students, and developing new programs to fit changes in the job market. Commuter colleges must be dynamic; They cannot remain static or competitors, costs, and student markets will change, leaving the institution teetering on the edge of failure. CFOs at these colleges may find themselves subjected to a high level of stress because they must keep everyone, especially the president, from buckling when confronted by internal interests that would raise tuition to cover higher costs or accede to higher costs without considering the impact on financial strategies. Markets, enrollments, financial management, and cost controls are mutually dependent factors for private commuter colleges if they are to remain financially viable and to offer quality academic programs to their students.
Operating Principles
The preceding strategies will only work if the financial manager has an effective set of operational principles to guide and control the finances of the institution. These principles are flexible budgets, exacting financial controls, constant monitoring of cash flows, and minimal use of debt for capital financing. The balance of this chapter will discuss how these principles are applied in practice.
Flexible Budgeting
Budgets are critical for the success of commuter colleges, despite the fact that enrollment and faculty expenses rarely match budgetary goals. The budget is a benchmark, which establishes the basic reference point for operational performance because the goal is not to match budgeted net income but to exceed it by a wide margin. A commuter college will fail quickly if its goal is to simply match the net income set by the budget, as is the case at most private institutions.
As will become evident, enrollment and actual expenses for the current fiscal year will become the basis for the following year’s budget. The reason that matching the net income goal is not good enough is that net income must be large enough to provide sufficient surplus to maintain buildings, to expand programs, to add new markets, and to act as a springboard to cover external and internal inflation for the following fiscal year.
A flexible budget simply means that the budget can accommodate changes that occur during the fiscal year. This sounds simpler than it is because the CFO must understand in detail the economic, financial, and operating conditions that drive revenue and expenses. Then, the CFO must construct a budget structure that takes into account the scale and timing of those conditions. A flexible budget is what budgets are supposed to be – objective references for actual performance. Budgets and performance must be monitored according to the academic schedule because that is when critical financial and operational decisions are made and when new flows of revenue and expenses are evident.
Flexible budgeting is based on the following concepts:
- Tuition revenue and enrollment are tracked by academic level, price structure, site or campus, and academic schedule.
- Projected enrollments are not used to estimate revenue because they would act as an incentive to unnecessarily increase fixed expenses.
- Departments are budget units that are clearly defined, fit within the organizational structure of the college, and have the appropriate authority and responsibility for their budget.
- All departments should have a common set of expense line items so that performance can be understood across departments.
- Budget line accounts for small inconsequential expenditures should not be created because it complicates management of critical expenditures.
- Excess revenues for a department should not inure to the department but default to the authority of the president. The presumption is that the president, who is ultimately responsible for strategic decisions, should have the authority to determine the appropriate use of surplus funds.
- Discretionary funding should remain at the highest administrative levels rather than frittering these funds away at lower levels and should align with strategic goals.
Budget Management and Financial Controls
Budget management and financial controls are where the metal of the chief administrative team is tested at fast-paced commuter colleges. The team must be a team in all senses of the word. Team members must be compatible, supportive, extremely competent, and hard working. The budget is only a starting point; it is the work that the chief administrative team does with the budget that makes a commuter college successful. Each team member must know all levels of her/his responsibilities and conditions that can make or break the college’s plans. As important as it is to know their job, team members must also recognize how their work fits into the larger picture and what they must do to support the work of the other members of the chief administrative team. In addition, the team must assure that their staff is competent and reliably carries out departmental responsibilities. Sometimes, college administrators, faculty, and staff either ignore or do not understand that the performance of each employee is fundamental to the viability of the institution. Since many commuter colleges are tuition-dependent (90% or more of its revenue coming from students), they live on the margin of survivability and cannot tolerate staff incompetence or working against the system. Therefore the president and the administrative team must build esprit de corp to assure that all personnel and offices in the college work together. If this can be done, budget management and financial controls can increase the likelihood that the college can grow and achieve its mission.
The CFO is critical to the success of a commuter college because it is her/his responsibility to see that financial performance is guided by budgetary plans and kept on course by rigorous financial controls. Given the condition that chief administrators must act as a team, they must vigorously support the work of the CFO. Otherwise, financial performance and budgetary control may loosen, and decisions which should be made for the best interest of the college may be replaced by arbitrary, self-serving decisions. Commuter colleges that are heavily dependent on student revenue and budget controls cannot violate for a moment the principal that administrative teams can only achieve their goals if they subsume their personal interests to the mutual requirement to serve the best interest of the college and its mission.
The purpose of financial management is to use the total financial capacity of the institution to support the mission, to accomplish strategic goals, and to implement operational plans.[2] On the other hand, financial controls refer to the management of current resources, revenue, expenses, cash, and short-term debt to accomplish operational plans and goals. It is the CFO who is responsible for financial management and controls, and it is the duty of the CFO to see that everyone on the team and in the organization understands the necessity and the policies and processes of financial management and controls.
Financial management and financial controls rest on the following concepts:
- Financial Management
- Assets must yield positive income results for the college. Since these colleges have small or no endowments, investment in physical assets must yield positive returns unless the investment is supported by gifts.
- A portion of the cash from net income should be designated for capital projects, such as renovations, replacement, and repairs.
- Assets should be cataloged and regularly revised to protect, control, and monitor whether or not they are being used effectively.
- These colleges, given their dependence on enrollment for revenue, should have infrastructure that can be easily expanded or contracted. This can be done through space rental, online programs, use of part-time faculty, or contracted student services.
- Financial Controls
- During and immediately following an enrollment period, enrollment and part-time instructor expenses should be checked against the relevant budgets for the period.
- Authorization of expenditures should take place before the expenditure is made. This control implies that petty cash and non-purchase order expenditures must be tightly controlled.
- Department heads should receive timely reports with budget warnings of excess expenditures or of revenue flows that fall below plans.
- The CFO must take immediate action to stem the loss on net revenue to excess expenditure. In addition, the CFO needs to prepare short-term budgets for emergency expenditures.
- Only the office of the CFO can move funds between accounts.
- Summary budget and financial reports (dashboards) should be provided to the President, cabinet, and board of trustees during the year. An annual review should be given within six weeks of the close of the fiscal year.
- The CFO must begin Budget Management and Financial Controls on the very first day of a fiscal year and continue them through the “sign-off date” for the fiscal year. Quality financial systems enable the financial affairs function to perform this juggling act.
- Cabinet members must review all situations where employees fail to follow policy or procedures.
Cash Controls
Cash is where the CFO does heavy lifting because cash is king for commuter colleges due to their high levels of tuition dependency. Significant deviations between cash flow budgets and actual cash flows can be costly to the college. At all times, the CFO must know the state of cash flows and any factors that might negatively alter cash balances.
Cash controls should follow these principles:
- Receivables, especially late and uncollectible receivables, undermine cash. Receivables should be monitored monthly.
- The CFO must track third-party receivables, for example, contracts with organizations making tuition payments for their employees.
- Only an assigned member of the business office should cut checks and that person cannot have direct access to the ledgers.
- The CFO should check cash balances.
- The CFO should prepare a monthly cash flow budget and compare it to actual cash flow. Deviations may indicate market influences necessitating budget or operational modifications.
- The CFO must maintain close working relationships with bankers.
- Cash should be held in interest-bearing accounts.
- The accounts payable staff must adhere to the discounts and due dates of invoices.
- Use courier services or bank drops to quickly move cash into college accounts. (This is also an excellent internal control procedure.)
Minimizing Debt
If there is one factor other than enrollment that is critical to commuter colleges, it is debt. Debt can destroy these institutions if it is done without care. Debt puts commuter colleges at considerable risk because they often lack the reserves to offset unexpected variations in the production of net revenue, which is necessary to pay the interest and principal for debt obligations. The decision to employ debt to fund a project is subject to its use and the potential of the project to generate revenue that offsets debt service payments.
Minimizing the impact of debt on the financial structure of commuter colleges is determined by these circumstances:
- Major capital investments should follow these rules:
- Debt is used for income-generating capital projects.
- Gifts and net asset reserves should be used for non-income or non-recurring generating projects.
- The first priority at tuition- and fee-dependent colleges should be to use excess revenue to pay down debt principal to minimize risks that the college will have unforeseen events that reduce its capacity to cover its debt service.
Summary
Commuter colleges are a unique breed of private higher education institutions. They are in the unenviable position of having to husband their resources to conduct aggressive marketing campaigns to survive. If they are good at recruiting students, in some cases at double-digit growth rates, they offer a quality education at a reasonable price. At some commuter colleges, a degree may cost no more than a public education and may even be less if the degree is combined with a two-year community college degree. If a commuter college is not good at growing enrollment, the college will find that it is always on the brink of demise. It will have inadequate financial resources to provide its students with instructional programs that are acceptable in the marketplace or to accrediting agencies. The watchword at these colleges must be prudent aggressiveness that can overwhelm less flexible competitors while providing a marketable degree to its students.
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Take Away Points
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Endnotes