I receive calls almost weekly from institutions asking if I can help them examine their cost structure and identify opportunities for reducing costs. While this is the goal, some institutions have overrun their runway and may not have enough liquidity to undertake what is likely to be a 2-5-year turnaround. Here are the quick steps I take to help them understand their options:
Determine the length of your runway:
You need at least two years of unrestricted cash equal to your annual cash flow deficit. This assumes you can move quickly with program eliminations and staff reductions. For most institutions, we need more than two years. The calculation of this liquidity should be based solely on unrestricted funds, not restricted. Borrowing from restricted funds without knowing whether you will be able to pay it back is not advised. For some institutions, selling a parcel of land or a work of art will provide liquidity. One of the hardest conversations I have is with Presidents and boards around the need to consider closure. If you are distressed, you will not be a good merger partner unless your campus is near a major urban area.
Understand why you have been losing money:
Assuming you have enough cash; you need to understand what is driving losses. For most institutions, net tuition per student is declining faster than student headcount due to discounting. If discounting is designed to get more students and the more you discount, the more students you lose, is your strategy working? Should you turn to marketing?
Expenses are generally rising faster than revenue because of inflation, so our losses are picking up pace. People make up 60-70% of our expenses and occupancy is 20-30%. It is hard to downsize our footprint without first examining our people. Mothballing a building won’t save you much. This means there is little opportunity to achieve a 10% expense reduction without most of it coming directly from people, so we are left with little choice!
Identify ways to reduce costs quickly (low hanging fruit):
You may find opportunity in:
- Minimizing faculty underloads (the difference between expected load and actual load)
- Merging or eliminating low-enrolled sections of courses and less popular electives
- Eliminating less popular clubs and activities
- Instituting hiring freezes and travel restrictions
- An examination of restricted funds may yield a one-time opportunity for covering operating expenses.
Identify longer term opportunities:
This is where you can find real savings, but it takes hard work and may exhaust political capital. Everyone looks to academic reviews, which are certainly important but instructional costs are generally only 30% of total expenses. Therefore, a $1M reduction in instruction cost should yield an additional $1.5M – $2M of non-instruction cost reductions!
Questions to consider:
- What is the margin on meals vs housing?
- What is the cost to educate a student and how do you cover the unmet gap between net tuition revenue and cost?
- Are you spending money on what matters most to the quality of education?
- Are you running low enrolled classes because you have low enrolled majors? Should you sunset the major?
- Who supports faculty? What costs should rise or lower in proportion to faculty?
- Maximize return on investment in assets – can you generate additional revenue from assets?
- Buildings: Rent space, hold events, sublease, introduce solar farms or land easement
- Curriculum: Contract teaching, professional development.
- Building & Curriculum: Summer programs, look locally for workforce needs, employer partnerships, and upskilling.
- Sale of underutilized buildings: A word of caution, if this does not contribute to long term sustainability, it is like plugging a hole in the boat with bubblegum.
Would you like to know what metrics we consider when analyzing the finances of a college or university? Download Metrics All Higher Education Institutions Should Be Looking At.
Photo by Kelly Sikkema on Unsplash