Each year I look ahead and consider what the top finance priorities will be for the coming year.
The fall of 2025 brought us the first year of the demographic cliff. This played out differently across institutions. While overall enrollments declined, there were winners and losers in this mix. The data is not out yet, but I predict we will see a continued shift toward lower priced institutions with good outcomes. This is a result of families seeking “value” over reputation. Value is a simple formula, Value = Price x Outcomes. This pricing pressure is on families in the 2 highest income brackets. Families with incomes between $75,000-$100,000 are opting out of education at the highest rates. I suspect we will see more of a shift in price sensitivity in families with incomes above $110,000 as they pay 2.5 times more than the families in the two lowest income brackets.
As fewer students graduate high school and even fewer attend college, why are many institutions predicting increases or flat enrollments? The math just does not work. Unless you have a compelling value equation, you may be caught off guard.
This highlights the need to have responsive forecasts and 5-year models to allow quick insights into rapid changes.
Of course, the most prestigious institutions generally have the largest endowments and the largest price. However their heavy reliance on international students may pose a big risk with the current administration’s stance on immigration. Also, the decreases in the PLUS (Parent Loan for Undergraduate Students) and PLUS Graduate loan limits may make those highly selective institutions susceptible to this pressure. Of course, they will be able to increase their discounts to be more competitive with the next tier of institutions. This will have a cascading effect throughout all institutions.
The least selective will get hit the hardest by all these factors. Since many of them are already financially fragile, they may face unprecedented challenges. We will also see closures increase over the next few years, as well. It will be 2028-2029 before we see the real impact of closures.
While I do not wish for closures, the institutions who face this reality have been struggling for years. Their folding is not as sudden as the public believes. Those of us working in higher education could see this building for a decade.
These closures will make small numbers of students available to other schools, but not enough to stave off further struggles.
Because of this, institutions should focus on timely, accurate, and meaningful financial reporting to provide clarity and insight for the board, president, and leadership team. This will also include forecasting to year’s end to facilitate more responsive decision making.
It’s essential to construct a responsive 5-year model to monitor the impact of every change and maintain control of the institution’s future financial health.
Using data to understand key financial drivers will continue to help. Days cash on hand and debt service coverage numbers can hide problems by allowing restricted funds to cloud the picture. This new reliance on data can sound less like a university and more like a manufacturing company. But having data like per student margin on instruction, athletics, auxiliaries, and fundraising will make a huge difference. They will be overlaid with sales metrics like conversion of inquiries to enrollments and provide a deeper dive into retention measures and discount rates.
The focus for the year will be clarifying market position and striving for financial sustainability. I have been surprised by how few institutions have really been taking an honest look in the mirror and comparing themselves to peers to understand market positions and their value equation.
Yes, there will be mergers of various types this year, but I still do not believe they will be as prevalent as they should be given the struggles of some institutions.
I suspect we will see an increase in presidential retirements and institutional changes as they face the challenges of the decline. This will continue to cause a shift in provost positions as I believe most presidential replacements will still come from the academic side rather than finance and administration.
How does this shape the priorities of the finance department for the coming year?
Priority #1:
Financial modeling rises above cost restructuring
Surprisingly, few institutions forecast to year end or have 5-year projections tied to cash flow. As CFOs, we can often see the future without these tools, but a president, cabinet and board cannot. Without projections, you will have a hard time helping leadership understand the scale of the problem or whether there is one at all. You’ll be flying blind. As I said above, if you are running deficits now, they will likely increase over the next few years.
My advice to all presidents and boards; demand to have projections in the first quarter, before you finalize your budget for the next year. It takes about 40 hours to put together, so make it a priority.
Learn more about scenario planning and forecasting.
Priority #2:
Cost restructuring and benchmarking analysis remains in the top 3
We have heard a lot about academic restructuring this past year, but we spend only about 30-40% of our budget on academics. That means we need to take a holistic look at how our institutions spend money. If you are running a deficit now, it will continue to grow as you face the mounting pressure of inflation and the impact of the demographic cliff and shift in family value equation.
It is imperative to understand the margin on education and room & board as well as other metrics, like how much you spend per athlete or per student on activities and wellness. Further, benchmarking your net tuition and staffing structures against your peers will help you to understand if there are areas where you may be able to find revenue or cost savings.
Many institutions are still reflecting enrollment increases. Given the market pressure, this is not likely unless you are a highly selective school with compelling outcomes and a moderate price.
Some institutions are planning to launch new academic programs to draw new enrollments. They need to understand how many students are necessary to make each program financially sustainable. Each new program should aim for at least 100 students. This means recruiting 30-40 new first-year students and graduating 20 per year (depending on your retention rates).
We still have significant opportunities to save money by sunsetting or modifying existing low enrolled programs, sports and activities. Generally, if you graduate less than 20 students per year in any program, it is low enrolled.
Learn more about benchmarking.
Priority #3:
Strategic planning and storytelling
Whether we start new programs, eliminate old ones, offer micro-credentials, increase our online presence, or downsize our physical campus, we need to know whether these changes will make or at least save money. Projections are a critical tool for understanding the financial impact of our strategic plans.
The financial headwinds we face inspire conversations around strategic planning. These essential talks allow us to understand the financial impact of our decisions and determine whether we can afford to make changes. Combining strategic plans and financial projections enables us to tell the important story of our future.
Priority #4:
Automation (especially for reporting & budgeting) slips from #3 last year
The one purpose for financial statements is to use them to make data-informed decisions. The longer it takes to get timely, accurate and meaningful financial information, the slower the pace of decisions. That’s why I’m surprised by the number of institutions that still create financial reports using Excel. We cannot afford to lag, especially when it already takes us two years to effect real change.
How can we hold budget managers accountable for a budget when all they see is a long list of accounts across multiple departments showing small dollar amounts? If a VP oversees 15 cost centers, they need an aggregation of all 15 that shows the impact of each small decision. I’ve often said that if you want to prevent someone from knowing what’s going on, give them lots of data. They will be so overwhelmed by the weeds they will not see the forest.
Why don’t people automate reports? Generally, they lack understanding on how to get started. There are many tools available, even tools that combine budgeting and reporting. In the next few years, you will see more pressure from presidents, boards, and VPs for meaningful and timely financial information.
If we cannot generate timely financial reports, projection modeling exercises will become more difficult. Further, understanding the interplay between all funds is critical. Many of us think only of unrestricted operations, which is not a complete picture. We must spend all the restricted funds available, rather than allowing budget managers to hold them for a rainy day.
Of course, reporting is only one aspect of automation. Consider tools that automate expense entry and workflow of approvals or reconciliation of accounts. Time-saving AI tools like CoPilot can analyze your reports and create summaries for the board.
Learn more about automation and reporting.
Stay tuned throughout the year as we bring you more real-time insights into the work we do every day with institutions like yours!
Photo by Tom Parkes on Unsplash