The Private Commuter College

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1 By Thomas E. Rhine, CPA, CGMA CFO Perspectives

2 Additional Perspectives CFO Perspectives: The Private Commuter College is one in a series of white papers that looks at the role of the CFO within different institutional or operational settings. Each white paper, available free from NACUBO and released during 2012, the 50th anniversary, focuses on the unique demands of a particular type of institution and how to manage strategy and business operations within that distinctive context. Written by authors with extensive experience in financial operations, the white paper series offer insights that may prove helpful to new CFOs or board members, presidents, senior administrators, faculty, and staff. For a list of the other titles available in this CFO Perspectives series, please visit Acknowledgement A special thank you to Michael Townsley: for his contributions in developing publications for the business office. NACUBO would like to recognize his leadership in bringing together a collection of articles that cover key topics and issues that will resonate with NACUBO members for years to come by NACUBO

3 Private commuter colleges a rare breed within higher education operate like community colleges but offer undergraduate and graduate degrees. These colleges typically have multiple sites, tiered tuition prices, and flexible class schedules and academic periods. They are fast-paced and aggressively competitive, reacting quickly to changes in student markets and to changes in their competitive environment. To survive, a private commuter college must marshal its resources to conduct aggressive marketing campaigns. If it succeeds at recruiting students perhaps even attaining double-digit growth rates it offers a quality education at a reasonable price. In some cases, a degree from a private commuter college may cost no more than a public education and may total even less if the degree is combined with a two-year community college degree. Five Strategic Elements Financial stability at this type of college usually depends upon the following strategic elements: 1. High annual rate of enrollment growth. If a commuter college does not excel at growing enrollment, it will always find itself on the brink of survival. It will have inadequate financial resources to provide students with instructional programs that are acceptable in the marketplace or to accrediting agencies. Enrollment growth enables the college to keep pace with external inflation and internal inflation rates. The external rates of inflation affect all institutions: utilities, benefits, instructional materials, and maintenance supplies. Internal inflationary rates necessarily result from the inherent structure of an institution: the number and quality of its administrators, staff, and faculty; its method of instructional delivery; the age and size of its plant; and its tuition discounting. 2. Low net tuition. Typically, commuter colleges do not offer tuition discounts because they believe the posted price influences how their student market chooses a college. In fact, low net tuition is the primary and most visible tool of competition. The posted price is chosen carefully, taking into account both tangible and intangible factors, such as competitors rates and a consumer tendency to equate price with quality. 3. A flat administrative hierarchy. As Robert Zemsky pointed out in Policy Perspectives (Pew Higher Education Research Program, June 1990), several forces can exert power to expand the number and range of administrative offices in higher education. Unchecked growth of the administrative hierarchy can increase the pace of internal inflationary rates; this forces the college to increase tuition more rapidly than it would prefer or to expand enrollment faster than the size of its markets warrants. 4. Diversification of tuition revenue sources. By designing programs that attract students from different age ranges, work settings, income levels, and geographic areas, the private commuter college avoids reliance on a single sector of its student market. As new programs are developed, they should become part of the existing enrollment base rather than treated as catch-as-you-can operations. Otherwise, the base may begin eroding faster than the growth rate from new markets. Any enrollment slippage, no matter how small as well as unanticipated large increases in enrollment can have a devastating impact. To protect its base, a commuter college must continuously improve existing programs in response to demands in the student and job markets. 5. Continual development of new programs and markets. Commuter colleges must continually find new student markets by underpricing the competition, moving into new geographic areas, locating new sources of students, and developing new programs to fit changes in the job market. They must be dynamic. Otherwise, competitors, costs, and student markets will change, leaving the institution teetering on the edge of failure. CFOs at commuter colleges may find themselves subjected to high levels of stress because they must keep everyone especially the president from buckling when confronted by internal interests that would raise tuition to cover higher costs or from acceding to higher costs without considering the impact on financial strategies. Markets, enrollments, financial management, and cost controls are mutually dependent factors for private commuter colleges that wish to remain financially viable while offering quality academic programs. 1

4 Operating Principles These five strategic elements must be supported by operational principles that effectively guide and control the institution s finances. Those principles include: Flexible Budgeting. Although enrollment and faculty expenses rarely match budgetary goals, the budget establishes the basic reference point for operational performance. At a commuter college, the goal is not to match budgeted net income but to exceed it by a wide margin. Unlike most private institutions, a commuter college will fail quickly if it simply matches the net income set by the budget. Rather, net income must be large enough to provide sufficient surplus to maintain buildings, expand programs, add new markets, and act as a springboard to cover external and internal inflation for the following fiscal year. A flexible budget simply means that the budget can accommodate changes that occur during the fiscal year. This sounds simple, but it requires the CFO to understand in detail the economic, financial, and operating conditions that drive revenue and expenses. Then, the CFO must construct a budget structure that takes into account the scale and timing of those conditions. Budgets and performance must be monitored according to the academic schedule, which determines the timing of critical financial and operational decisions and of new flows of revenue and expenses. Exacting Financial Management and Controls. Financial management enables the institution to use its total financial capacity to support its mission, accomplish strategic goals, and implement operational plans. It rests on the following concepts: Assets must yield positive income results. Because commuter colleges have small or no endowments, their investments in physical assets unless supported by gifts must yield positive returns. A portion of the cash from net income should be designated for capital projects, such as renovations, replacement, and repairs. Assets should be cataloged and regularly revised to protect, control, and monitor whether they are being used effectively. Concepts of Flexibility A flexible budget is what a budget is supposed to be an objective reference for actual performance. It calls upon the CFO to: Track tuition revenue and enrollment by academic level, price structure, site or campus, and academic schedule. Avoid using projected enrollments to estimate revenue; doing so could act as an incentive to unnecessarily increase fixed expenses. Make sure budget units, such as departments, are clearly defined, fit within the college s organizational structure, and have the appropriate authority and responsibility for their budget. Provide all departments with a common set of expense line items so they all understand performance in the same way. Avoid creating budget line accounts for small, inconsequential expenditures; this simply complicates management of critical expenditures. Not allow excess revenues to inure to the departments that produced them. Excess revenues should default to the authority of the president, who is ultimately responsible for strategic decisions and, therefore, should determine the most appropriate use of surplus funds. Ensure discretionary funding remains at the highest administrative levels and aligns with strategic goals. Given its dependence on enrollment for revenue, a commuter college needs an infrastructure that can be easily expanded or contracted. This can be done through space rental, online programs, use of part-time faculty, or contracted student services. Financial controls refer to how the institution uses current resources, revenue, expenses, cash, and shortterm debt to accomplish operational plans and goals. Recommended controls include: 2

5 During and immediately following an enrollment period, check enrollment and part-time instructor expenses against the relevant budgets for the period. Authorize expenditures before they occur. (This implies a tight rein on petty cash and non-purchase order expenditures.) Provide department heads with timely reports and budget warnings of excess expenditures or of revenue flows that fall below plans. Take immediate action to stem the loss on net revenue to excess expenditure. In addition, the CFO needs to prepare short-term budgets for emergency expenditures. Restrict the movement of funds between accounts to the CFO s office. Provide summary budget and financial reports (dashboards) to the president, cabinet, and board of trustees during the year. Present an annual review within six weeks of the close of the fiscal year. Begin budget management and financial controls on the first day of a fiscal year and continue them through the sign-off date for the fiscal year. Quality financial systems enable the financial affairs function to perform this juggling act. Require cabinet members to review all situations where employees fail to follow policy or procedures. The CFO must ensure that everyone on the chief administrative team and in the organization understands the policies and processes that flow from financial management and controls. Each team member must know all levels of his or her responsibilities and the conditions that can make or break the college s plans. Equally important, team members must recognize how their work fits into the larger picture and know how to support one another s work. In addition, the team must ensure that staff members are competent and can reliably carry out departmental responsibilities. Sometimes, college administrators, faculty, and staff overlook the fact that the performance of each employee is fundamental to the institution s viability. Because many commuter colleges are tuitiondependent with 90 percent or more of their revenue coming from students they live on the margin of survivability and cannot tolerate incompetence or people working against the system. Therefore, the president and the administrative team must build esprit de corps so all college personnel and offices are compatible, supportive of one another, extremely competent, and hard working. Unless chief administrators act as a team to vigorously support the CFO s work, for example, financial performance and budgetary control may loosen, and decisions which should be made for the best interest of the college may be replaced by arbitrary, self-serving choices. Constant Monitoring of Cash Flows. Cash is king for commuter colleges because of their high levels of tuition dependency. Significant deviations between cash flow budgets and actual cash flows can be costly. At all times, the CFO must know the state of cash flows and any factors that might negatively alter cash balances. He or she should also follow these principles regarding cash controls: Monitor receivables monthly. Receivables, especially late and uncollectible receivables, undermine cash. Track third-party receivables for example, contracts with organizations making tuition payments for their employees. Assign a member of the business office to cut checks, but do not give that person direct access to the ledgers. Check cash balances. Prepare a monthly cash flow budget and compare it to actual cash flow. Deviations may indicate market influences that necessitate budget or operational modifications. Maintain close working relationships with bankers. Hold cash in interest-bearing accounts. Ensure accounts payable staff adhere to the discounts and due dates of invoices. Use courier services, bank drops or on-site electronic check deposit software to quickly move cash into college accounts. (This is also an excellent internal control procedure.) 3

6 Minimal Uses of Debt for Capital Financing. Debt puts commuter colleges at considerable risk; these institutions often lack the reserves to offset unexpected variations in net revenue, which is necessary to pay the interest and principal for debt obligations. At tuitionand fee-dependent colleges, the first priority should be using excess revenue to pay down debt principal; this minimizes the risks of unforeseen events reducing the college s capacity to cover its debt service. The decision to employ debt to fund a project is subject to its use and the project s potential to generate revenue that can offset debt service payments. When a commuter college decides to make major capital investments, it should use debt for those capital projects that will generate income. Alternatively, it should use gifts and net asset reserves for non-income or non-recurring, income-generating projects. In general, the watchwords at a commuter college must be prudent aggressiveness. That approach will enable the college to overwhelm less flexible competitors while providing a marketable degree to its students. Takeaway Points As the CFO of a commuter college, you should expect to: Husband cash. Minimize debt. Offer degrees at low net-tuition prices. Aggressively compete in student markets. Generally limit tuition increases to less than the rate of inflation. Carefully manage additions to administration and support services. Use part-time faculty to reduce the cost of delivering a degree and to provide flexibility when reacting to enrollment variations. Find new ways of delivering a degree. Monitor cash flows and keep receivables current and at an acceptable level. (Cash is king!) Use known enrollment data, not projections, to forecast revenue. Thomas E. Rhine, CPA, CGMA, now semi-retired with his own consulting practice, is former controller and chief financial officer at Wilmington College (now University). 4