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The Impact of Positive Operating Results on Higher Education Institutions
Nonprofit and state colleges and universities, like for-profit competitors, strive for positive financial results to position themselves for long-term success and sustainability. Various constituents use an institution’s financial information to evaluate the viability of the organization.
The perception of strength or weakness can have a powerful impact on everything from the cost of borrowing money to the ability to attract quality students and highly regarded educators. Because financial performance influences so many different aspects of an institution, positive financial performance is key to overall success. The following interrelated issues highlight several areas impacted by financial results.
The composite score
The U.S. Department of Education uses a fiscal score when determining if an institution is financially healthy or unstable. While the score is partially based on the health of the current year’s unrestricted assets, overall operational results do figure into the federal government’s assessment of whether the college is fiscally responsible. If the college scores poorly, it could face additional costs when providing federal student financial aid.
Similar to the Education Department’s evaluation, Moody’s and other rating agencies scour financial reports to understand whether a college can meet its debt obligations. If a school does not perform well in a given year, the risk of being downgraded increases , and downgrading increases the cost of borrowing money. However, if the school has done well, bond ratings may go up, which could save the institution money.
Solid financial performance is also rewarded with stronger contributions from donors. Whether funds are given for operations, facilities, athletic programs, or in some other way, positive financial results prompt donors to get on board and be part of a vibrant, positive institution.
Colleges and universities can be significant clients for vendors’ products and services, but vendors tend to grade prospects based on their financial health. In some cases, vendors will offer lower fees to have a healthy school be part of their client portfolio. Vendors may also adjust allowances on credit terms, lengthening or shortening payment periods depending on a school’s financial standing. In the worst case scenario, some vendors will refuse to work with struggling schools for fear of not getting paid.
Students and parents are ultimately the consumers of higher education, and as consumers, they are becoming more sophisticated about where they are investing their resources. A school’s fiscal health can be an important consideration. When the “word is out” about a failing school, prospective students turn away, and current students transfer out.
But when a college has built a tradition of investing in education and its infrastructure, it is typically rewarded. It’s no coincidence that the most affluent colleges, in terms of endowments, also charge the most for tuition. And when it comes to financial aid, students often benefit from the financial strength of a college. Positive financial results — though separate from the endowment — contribute to a school’s perceived ability to invest in the future and continue to provide a top level education.
College board members contribute valuable time and effort on behalf of the institution, and strong board members do not typically join institutions that are doing poorly. Most would rather figure out how to improve operations so the school doesn’t have to raise tuition, rather than presiding over the reduction of services and layoffs. No one wants to step onto a sinking ship.
Many schools have endured setbacks due to investment volatility, causing them to dip into unrestricted reserves to ensure students and others receive proper services. The availability of a rainy day fund depends on positive investment results and operations. Without good reserves, tough times often mean cuts.
Investing in the future
Every college professor, researcher, cabinet member, and athletic department leader wants to have the resources to expand, improve, or invest in the future. Asking a donor to buy into a person or group’s dreams or enticing the board to leverage the college with debt to invest in larger projects is easier when the college can demonstrate financial strength and fiscal responsibility. A positive bottom line allows the institution to dream bigger and to say yes in situations that could be out of reach if they were perceived as too risky.
When a school shows consecutive losses in operations, the competition uses it to their advantage. Weak financial performance may mean losing out on high-profile professors, top students, and other staff. Strong finances help safeguard against that and put a school at a competitive advantage.
Many institutions have not been able to give raises to faculty members for several years. Compensation that is perceived as less competitive than similar institutions impacts morale and staff retention, as well as the ability to attract the best instructors and researchers. Furthermore, healthy finances allow an institution to pay its faculty in the upper quartile.
The efficient management of yearly financial obligations should be balanced with an investment in a vision of the future. Whether it’s actual financial investment or an investment in the right people, equipment, and campus structures, the ability to reach future goals depends on the financial decisions — and results — in this year’s budget.