Every institution strives to achieve economic equilibrium, which in general terms is the state where it has sufficient resources to operate while preserving its assets for future generations of students. The challenge is how to define the concept so that plans can be developed to reach equilibrium. Richard Cyert, a noted economist, statistician, and former president of Carnegie Mellon University, suggested a definition of equilibrium that could guide financial strategies, budgets, and monitoring systems.
Cyert’s model states that equilibrium occurs when a college has adequate resources in quality and quantity to support its mission. Equilibrium is achieved by maintaining the purchasing power of liquid assets and by maintaining the quality of fixed assets.
Preserving the purchasing power of liquid assets requires that cash and other assets that are easily converted to cash grow over time at the rate of inflation. This condition necessitates that:
- Operational deficits are eliminated.
- Operations generate cash flows and that these flows grow at the rate of inflation.
- Investing and financing activities do not negate the value of operational cash.
Maintaining the quality of fixed assets stipulates that fixed assets are preserved at their replacement value and not just at their rate of depreciation. Depreciation simply represents the write down of the original cost and in most cases fixed assets are not replaceable at their original value. In other words, sufficient income is needed to sustain and permit constant upgrading of fixed assets while avoiding a buildup of deferred maintenance – an all too common challenge in higher education.
The Cyert model can be converted into a planning grid to identify the gap between the current financial condition of a college and the Cyert equilibrium condition. The grid identifies the gaps for liquid assets and fixed assets, which need to be eliminated to reach equilibrium. The gaps become the basic planks for short- and long-term budget plans.
You can request a copy of the Cyert Equilibrium Planning Grid from Stevens Strategy by emailing Michael Townsley.
Originally posted April 20, 2010