Doors to Academia

Chief Financial Officer

by | May 22, 2022 | Financial Strategy and Operations | 0 comments

Chief financial officers (CFO) are gatekeepers for the financial resources that fund the mission of the institution. CFOs are more than a necessary evil to keep the money straight. They have a keystone role in the institution because their education, experience, and responsibilities give them unique insight into the quality and quantity of resources needed to support the mission. Their fundamental obligation is the management of the financial resources of the institution. How CFOs carry out this responsibility is the theme of this blog.

The chief financial officer and the president have complementary authority and responsibilities that reach into every corner and touch every person in the institution. While the president leads the institution to accomplish its mission, the CFO is charged by the president and the board with supporting the institution’s mission by judiciously allocating its scarce financial resources[1]. This charge expresses a duty that the CFO is responsible for assuring that funds are used for their intended purpose as designated by donors, or as required by governmental regulations, or as directed by the board of trustees. The CFO also has a fiduciary duty to maintain the integrity of the institution’s financial resources so that current and future generations of students can attain the benefits promised in the mission statement. Due to the CFOs’ fiduciary duty and certain governmental regulations, he/she may be held responsible for any wrongdoing in how government funds are expended or reported.

The CFO is seen by some as a miracle worker, who has secret treasures where money can be brought forth to save the college. Others see this person during a financial crisis as the expert who can explain exactly what happened as though it was his/her decisions that led to the crisis. Then there is the deep wonderment of colleagues who see accounting as an arcane science designed to confuse laypersons, which in turn makes the CFO a high priest of financial magic. Obviously, these are flawed conceptions of the position of the chief financial officer. Nevertheless, “… there is a real values tension between the business function, with its emphasis on pragmatic accountability, and the academic function, with its emphasis on knowing, teaching, and learning[; ]… the CFO must learn to manage this dynamic tension…[to perform her/his duties] [2] . As will be seen throughout this blog, CFOs have a significant role with the board of trustees, president, the academic community, and other chief administrative officers in negotiating, allocating, administering, monitoring, and developing strategic plans and financial resources.

Readers will find that while the work of the CFO is arduous and has a jargon of its own, it is worth the time to learn how the chief financial officer works because it builds a common understanding of the possibilities and constraints of the institution’s financial capacity, which shapes strategic and management plans. This understanding is especially important when colleges and universities confront perilous financial times and as new challenges emerge from government regulations, demographics, technology, and the markets.

The significance of the chief financial officer’s position to an institution is also evident by the fact that regulators, lenders, and accreditors require that the monetary transactions and practices of the business office be audited annually. No other area (administrative or academic function) of a college or university has its decisions audited annually. When serious problems occur, a CFO often finds that the board, president, and others expect him/her to take responsibility for the failure and explain why it happened, even though the CFO may not have had authority or responsibility for the problem.

Annual audits and the burden of managing the financial resources of a college may explain why a CFO is sometimes seen as the designated “naysayer and grumpiest” person on campus. Yet many CFOs have a remarkable ability to say no and do it in a fashion that carries the respect of the campus community without eliciting recriminations or distrust. The latter are the paragon that all CFOs aspire to be.

As the preceding suggests, the CFO is not a trivial position given the range of decisions for which they have the authority to act, the responsibility to comply with statutes and regulations, and the task to carry out the mission of the institution. This chapter will briefly examine how a CFO supports the mission, strategy, and management of her/his institution, and why and how she/he seeks financial equilibrium.

CFO – Where They Work

The next two tables show the distribution of CFOs by type and size of colleges. It is interesting to note that when the distribution is by size, the order is from large institutions (greater than 2,000 students), to medium (between 1,000 and 2,000 students), to small (less than 1,000 students). When institutions are classified by degree levels of institution, the order of distribution for CFO is first at baccalaureate institutions, then doctoral institutions, and lastly at masters institutions.

Table I

Chief Financial Officers

Count by Degree Level and Size of College[3]

 

Table II

Chief Financial Officers

Distribution by Degree Level and Size of College[4]

The ordering by degree level and size is probably linked to the career path of most CFOs. It is probable that 61% of them will spend their careers in a baccalaureate college where the main financial issue is likely to be accounting for the flow of revenue from tuition revenue or endowments to expenditures and on to the assets or liabilities. For those who work at a small college, these CFOs will spend most of their career worrying about enrollment trends and student revenues.

CFOs working at large institutions, given the likely progression of responsibilities, probably started within the business operation of a large institution and moved up the ladder to CFO. This progression is valuable to the institution because the CFO learned business operations where tuition, endowments, gifts, grants, and investments are almost certainly several dimensions more complex than at a baccalaureate college. The trend in higher education is to apply the title chief business officer (CBO) rather than CFO. However, the title is not critical to understanding the work of the CFO/CBO. Nevertheless, as will be seen immediately below, the two titles are valued differently in terms of compensation.

If there is a difference in real economic value of CFOs among the different degree-level institutions, it should be reflected in compensation. Table III (source: College and University Personnel Association (CUPA)[5] suggests that chief business officers are more valuable than chief financial officers and that CBOs are more valuable if they are employed at a doctoral institution rather than at a master’s or bachelor’s college. One reason for the difference in values of the two positions is that the chief business officer has broader responsibilities than the chief financial officer as defined in the CUPA survey. A CBO, according to CUPA, has responsibility for financial and administrative functions, while a CFO has responsibility for the financial function[6]. If the relationship between economic value and complexity of work responsibilities are valid in the case of business or financial officials, then it would make sense that compensation would be greater at a doctoral institution. Chief business/financial officers at these institutions deal with multi-faceted revenue and expense flows that carry stringent regulations and require intricate operating systems to plan, manage, and monitor to assure efficient and correct receipt and use of funds.

Table III

Chief Financial Officers

Compensation[7]

While financial issues at large institutions are at a greater scale than other levels, it is not necessarily true that the problems of masters and baccalaureate institutions are easier to solve. In fact, the latter colleges may be tuition-driven and exist in a world of very limited resources where financial stability is uncertain and where long-term planning is secondary to yearly survival[8].

CFOs – Competencies, Characteristics, and Preparation

CFOs are one of the few chief administrative officers that do not come up the ranks of the faculty to achieve their position. They may come from auditing firms, accounting departments in public businesses, or business offices in other colleges. This path to the position of the CFO can be a source of conflict with the faculty and other administrators because the person holding the position is not familiar with the intricacies, conflicts, and traditions of academic governance. As a result, the CFO may be viewed as ill-suited to discuss matters of institutional strategy, academic budgets, and other items that do not directly concern the accounting function. In some instances, even their accounting responsibilities are under question within the realm of academia.

The CFO in most circumstances is expected to possess a very specific set of competencies. If they do not bring these competencies to their job, not only are they and their job at risk but so also is the college. This list of competencies covers these areas:

  1. General accounting practice
  2. Accounting and financial reporting
  3. Accounting rules from the Federal Accounting Standards Board (FASB) or Government Accounting Standards Board (GASB)
  4. Preparation and management of budgets
  5. Tax rules applicable to higher education and tax reports
  6. Supervision of business and financial office functions
  7. Procedures and practices of debt financing
  8. Oversight of investments.

The characteristics of a particular CFO will depend on the type and size of their corresponding institution. Commonly, the large private and public institutions expect their CFOs to be well-versed in their field and are to have broad work experience in business and financial offices within comparable institutions of higher education. Medium-sized private and public institutions may be the stepping stone toward a larger institution. However, the institution may still expect the CFO to have enough business office experience so that she/he understands the expectations and constraints that shape her/his business operations. Smaller institutions, because they often cannot afford the top dollar costs of CFOs with long experience in business management or in higher education, will take larger risks than large- or medium-sized institutions and will hire a CFO with little experience or one just out of auditing practice.

The background of a CFO usually follows a familiar pattern – bachelor’s degree in accounting, maybe a master’s degree in business or accounting, and a Certified Public Accountant (CPA) license. These particular educational experiences for the CFO are not fancy wrapping but are essential to doing their work. Their educational training can be long (up to five years) and expensive, all before they can even sit for the CPA examination. A future CFO’s first job is usually low-paying and is in an auditing firm or a business office, as time in these types of jobs is typically required to earn a CPA license

CFO Job Description – Just What Do They Do?

CFOs in most institutions have authority and responsibility over accounting systems[9], budgets, budget controls, purchasing, cash management, debt management, internal and external financial reporting, tax reports, and financial analysis[10]. In some instances, they may be in charge of investments, or, if not directly in charge, they at least have the duty to accurately record investment transactions. A CFO is also an advisor to the president, board, and other chief administrative officers on financial strategy and budgets and the impact of revenue and expense decisions on short- and long-term financial viability.

The basic function of the CFO is to manage every financial transaction of the institution no matter the size, which is circumscribed by the chart of accounts, internal standards, practices, and policies, and by the budget structure, which is then subject to Generally Accepted Accounting Practices (GAAP). It is the resulting flow from transactions that either expand or deplete the financial resources of the institution.

Transactional records provide the infrastructure on which the financial statements, financial management, and financial strategies rest. When transactions are consistently and accurately recorded, financial reports will reliably reflect the current financial condition of the institution, both its weaknesses and its strengths. Financial reports are critically important to the president, board of trustees, and chief administrative officers because these reports underpin financial decisions related to long-term strategies and operational plans. Accurate and reliable financial records and reports are the very essence of the work of a CFO.

CFOs – Why They Are Held Accountable?

CFOs are held responsible for their decisions[11] by tough accounting standards, by regulations, and by the expectations and oversight of the board of trustees and presidents. Accountability is established through annual audits by a neutral third party, i.e., a certified public accountant (CPA), who conducts a rigorous review based on GAAP principles of financial transactions, decisions, and reports. The purpose of accountability is to assure users of financial data (such as boards of trustees, presidents, banks, debt holders, government agencies, and accrediting commissions) that the data are reliable, are accurate, and are in compliance with accounting standards.

The reason for harsh sanctions and for rigorous monitoring of the financial operation is that the CFO has the sole responsibility for maintaining the financial resources of the institution given that the board and other chief administrators have made prudent and reasonable plans to employ those resources. The CFO’s singular duty is to husband the scarce financial reserves of the institution to finance the survival, reputation, and quality of the institution for current students, for future generations of students, and for the alumni. If not caught in time, reckless inept, or misfeasance in financial operations can devastate an institution’s financial reserves that may have taken decades to accumulate and could take decades to rebuild.

Two simple anecdotes[12] will suffice to show what happens when a CFO has the misfortune of making a glaring and costly error or when a CFO, working with the president, has the perspicacity to solve a historically-knotty financial problem. The first case will show how a CFO vainly tried to grow the endowment using a risky investment strategy. The second case is about a college where deficits slowly burned away its financial reserves, and the college was rebuilt through the wisdom of a new CFO and a new President.

The first case involves a small college where the CFO had responsibility for investing the college’s endowment funds. In 2000, when the technology bubble was expanding geometrically, the CFO placed the college’s endowment in a high-flying technology mutual fund. She/he made a classic mistake made by naïve investors – she/he bought high and sold low – very low. Within one year, the mutual fund lost 80% of its value, effectively wiping out the endowment. An annual audit might have caught this problem, but the error played out within a single fiscal year.

The second story relates how a new CFO discovered that the previous CFO and president had masked deficits for many years while consuming its cash reserves. The board of trustees had abrogated their fiduciary responsibilities and had accepted financial reports that had created an illusion of financial stability. The CFO and the new president had the unwelcome task of telling the board that the wonderland world of finance was untrue and that the college was near financial collapse.

The CFO and the new president realized that they had to quickly put into place a financial strategy which would quickly end the college’s long history of deficits. The first year of the new financial strategy explicitly forecast a deficit, but the plan was based on new enrollment strategies, expense cuts, and budget controls. Within five years, their efforts were rewarded because the college rebuilt its cash reserves, which permitted the college to begin renovating its infrastructure and investing in existing and new academic programs.

The first tale is a horror story, while the second seems too good to be true. However, happily for most colleges, the second story is typical of the contribution that a good CFO, working closely with the president, can make to restore financial viability by providing financial resources so that the president can implement his/her vision of how to turn the college’s mission into reality.

CFO’s Contribution to Mission, Strategy, and Management

Good colleges and universities use the mission as a compass that guides strategy and management within the constraints of their financial resources. This guiding principle requires good CFOs, who assist the president, board of trustees, and chief administrators in finding the right application of financial resources in order to achieve the mission of the institution. The right direction in financial management requires the right balance between expanding and using financial resources to develop and produce credible educational programs that serve the college’s mission but do not deplete its financial reserves. Getting direction and balance right requires a CFO who has the financial, management, and personal skills to support a college to provide the right services to enhance the lives of its students without sapping its strength with petty rules and demands.

Expanded Role of CFOs

Most CFOs do more than sit at their desk like Dicken’s Bob Marley in a green eyeshade with quill in hand noting dollars in foot-high ledger books. Of course, this statement is an exaggerated description of the modern CFO, who usually is responsible for more than finance. The typical CFO is titled as Vice President for Administration (VPA), which takes in finance, building and grounds, auxiliary services, outsourced services, security, human resources, and whatever else the president and/or board of trustees assign to them. The degree of aggregation of the CFO’s responsibilities is usually related to the size of the institution and historical nature of the function at the institution.

When a CFO is also a VPA, their workload may divert them from their main task of financial strategy and management[13]. The result is that in some cases the main job – finance – is given short shrift or squeezed while problems are addressed in residence halls, dining halls, security incidents, maintenance problems, and contractual issues. It is an especially gifted person who can take on the duties of a CFO cum VPA. That is why colleges and universities, when replacing a CFO/VPA, should pay for the best. Buying cheap is a false economy because lackluster leaders can have long learning curves resulting in a delay in introducing change or making sure that financial management stays on course.

The premise of paying for the best CFO also applies to staffing the business or financial office. While the college may save a few dollars hiring untrained people to do basic work in those offices, too often lack of training and ability leads to egregious and costly errors. Errors, when they are not eliminated and are large, may result in a loss of confidence in the business office and the reports that it produces. Credibility is a continuing and elementary prerequisite of every CFO and the business office that she/he supervises.

CFOs as Agents of Financial Equilibrium
 The primary economic goal of the CFO is to find the point of equilibrium for the operational income flows of the institution given that its financial resources cannot remain static over time. The importance of this goal lies in the need for institutions to continually add income in response to inflation and to build reserves to maintain facilities and to respond to unforeseen events.

There is a misconception that not-for-profit colleges and universities operate under a zero net income constraint in which they can only generate enough revenue to cover their immediate expenses. If net income is zero, they would be like many small businesses that quickly fail because they are undercapitalized. Undercapitalization simply means that they would not have sufficient working or long-term capital to protect them against unexpected turns in the economy, changes in student markets, and tougher competition. Moreover, zero net income would continue to limit instructional efficiency to the size of the average classroom. A classroom of twenty to thirty students is not an efficient way of distributing the high costs of faculty. Colleges need to reach an equilibrium level where net income flows are large enough to maintain instructional operations while allowing for technological changes, higher demand for highly skilled workers, or shifts in demand by parents and students for comfortable habitation, athletic facilities, and other expensive amenities.

The main point is that equilibrium is not static but dynamic; changing in response to student demand, flow of gifts and income from endowments, internal costs, competition, financial markets, governmental regulation, accreditors, and other forces that dictate the financial condition of an institution. Dynamic equilibrium suggests that the CFO will not find a single point in which growth of costs cease, financial resources stay vibrant, and external forces have no impact on the institution. Given the fallacy of this premise, a CFO must seek an equilibrium strategy that dynamically responds to continuous changes from internal and external economic and financial forces that wreak havoc with the status quo. Developing and managing an equilibrium strategy is the most difficult challenge faced by most CFOs because they must work closely with the president to convince the board of trustees of the importance of reaching a state of equilibrium. Then, the CFO and the president must work with all sectors of the institution to develop and follow-through on a feasible and dynamic equilibrium strategy[14]. Equilibrium will be discussed in further detail in a later chapter.

Final Comment

The chief financial officer’s position cannot be fully described within the limits of this blog because the importance of a CFO for a particular institution depends upon the characteristics of the institution, its unique place in the market for higher education, and the full set of responsibilities assigned to the position[15]. As noted earlier in this blog, in many instances, the CFO is more than a finance officer; she/he may also have responsibilities for building and grounds, auxiliaries, security, parking, copying and printing, and whatever else others either do not want to do or a president feels that the CFO is best fitted to do. Nevertheless, you will find in the balance of this blog a nicely drawn picture of the work of the typical chief financial officer as it pertains to the finances of an institution of higher education.

Endnotes

  1. West, Richard P. (2001); The Role of the Chief Financial and Business Officer; College University Business Administration; National Association of College and University Business Officials; Washington, DC; p. 1 ↑

  2. West, Richard P. (2001); The Role of the Chief Financial and Business Officer; College University Business Administration; National Association of College and University Business Officials; Washington, DC; p. 2 ↑

  3. Minter, John (2010) Private CFO.xlsx; John Minter Associates; Oregon ↑

  4. Minter, John (2010) Private CFO.xlsx; John Minter Associates; Oregon ↑

  5. 2009-10 CUPA – HR Administrative Compensation Survey; Unweighted Median Salary by Carnegie Classification; CUPA – HR Surveys; College and University Professional Association for Human Resource Resources; Knoxville, TN; (May 14, 2010); http://www.cupahr.org/surveys/adcomp_surveydata10.asp ↑

  6. 2009-10 Administrative Compensation Positions; CUPA – HR Administrative Compensation Survey; College and University Professional Association for Human Resource Resources; Knoxville, TN; (Retrieved May 14, 2010); http://www.cupahr.org/surveys/participate.asp ↑

  7. 2009-10 CUPA – HR Administrative Compensation Survey; Unweighted Median Salary by Carnegie Classification; CUPA – HR Surveys; College and University Professional Association for Human Resource Resources; Knoxville, TN; (Retrieved May 14, 2010); http://www.cupahr.org/surveys/adcomp_surveydata10.asp ↑

  8. Townsley, Michael (1991) Brinksmanship, Planning, Smoke and Mirrors; Planning for Higher Education; 19(4): pp. 27–32. ↑

  9. Accounting systems usually include journals, ledgers, payables, receivables, payroll, and other basic accounting functions. ↑

  10. West, Richard P. (2001); The Role of the Chief Financial and Business Officer; College University Business Administration; National Association of College and University Business Officials; Washington, DC; pp. 10-14 ↑

  11. CFOs can be held accountable for malfeasance, misfeasance and non-feasance. In other words, if they purposely did wrong, they failed to do the right thing, or they failed to do what was required. ↑

  12. Both anecdotes are based on actual cases, but names are not revealed so that the particular situation does not cloud the general proposition noted here. ↑

  13. West, Richard P. (2001); The Role of the Chief Financial and Business Officer; College University Business Administration; National Association of College and University Business Officials; Washington, DC; p. 17 ↑

  14. It would take another blog to describe various methods that have been used to convince, cajole, and press divergent and conflicting sectors of an institution that it is in their interest to help develop and support an equilibrium strategy. ↑

  15. The best general reference for business officer procedures, policies, and major responsibilities is College and University Business Administration published by the National Association of College and University Business Officials. The 7th edition is in development and sections are available on-line as they become available. The last complete edition is the 6th edition. ↑

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