With financial markets reporting strong returns recently, many colleges that received the dreaded Department of Education letter will breathe easier because their scores will rise above the warning level. However, this does not necessarily mean that all is well if the underlying financial structure of the institution remains weak. What is the underlying financial structure? It is net income that remains after unrealized and realized gains or losses are removed. This net shows if the college has sufficient revenue flows from normal operations to cover its expenses and debt obligations. Presidents should ask their chief financial officer (CFO) to compute net income for the underlying financial structure after the fiscal year closes.
Here are several other measures that are warning signs of problems:
- Tuition discount is increasing while enrollment and SAT average scores are declining.
- Attrition is increasing faster for the past several years when compared to earlier attrition patterns.
- Operations are not generating cash and the only positive cash flows are coming from either financing or investing activities in which the cash is restricted for endowment re-investment or capital projects.
- Composite Financial Indicator (CFI) scores are below 3.0 and have turned negative.
- Academic programs are proliferating, and you do not know if they are contributing excess income for student and administrative services.
Presidents should expect their CFO to produce annual reports on these five warning signs and on the net income from the underlying financial structure. If the reports show growing weakness, the president should take immediate action to initiate a financial turnaround. A turnaround requires more than tweaking the budget; it requires a thorough analysis of student markets, academic programs, and the cost of operations.
Originally posted December 31, 2010