BEST PRACTICES FOR FINANCIALLY STRESSED COLLEGES AND UNIVERSITIES

Introduction

The higher education landscape is evolving rapidly, with colleges facing unprecedented challenges.  In recent years, many colleges and universities have grappled with financial stress exacerbated by the COVID-19 pandemic, declining enrollment, rising operational costs, changes in the job market, and increasing competition.  As a result, many colleges, particularly tuition dependent, small, private and regional public institutions, have seen their financial viability come under threat, forcing institutions to focus on immediate actions to secure their future. This paper outlines best practices that colleges and universities can implement to enhance short-term viability, enabling colleges to navigate current challenges effectively, while setting a foundation for long-term sustainability.

Best Practices for Financially Distressed Colleges

1. Understand the Long-Term Cash Flow Runway

Given the highly regulated and complex nature of higher education, undertaking any major transformative initiatives – curriculum revamp, merger, restructuring – requires at least three years of cash flow runway for the initiative to be completed and bear fruit.  Therefore, having a firm grasp of the institution’s long-term viability is essential for go forward planning.  If the cash flow runway is determined to be shorter than three years, immediate steps must be taken (e.g., capital raising, negotiating with lenders and bondholders, fundraising, unrestricting restricted assets, sale of assets, etc.), if possible, to extend the runway to allow the initiative to have a chance to succeed.

2. Establish Weekly and Monthly Cash Flow Forecasts

Given the increasingly unpredictable nature of cash inflows, higher operating costs and constrained liquidity, financially distressed institutions must understand their near-term cash flow.  Creating a 13-week direct cash flow forecast summarizing cash collections and disbursements, and updating it weekly, will ensure that financial officers have a firm grasp on their short-term liquidity needs and can plan for unforeseen events.  The 13-week cash flow forecast, coupled with a monthly cash flow forecast for the subsequent 9 months, provides an institution with a comprehensive view of its liquidity.

3. Improve Working Capital Management

• Accounts receivable: For financially stressed colleges, taking immediate steps to improve near-term liquidity is critical.  According to a recent survey of more than 150 higher education leaders by ECSI and Higher Ed Dive, the majority of institutions are managing past-due accounts for tuition and fees in excess of $1 million, with one-third managing an amount that exceeds $5 million.  Resetting registration and sports participation policies for students with outstanding balances, improving communication with students who have outstanding balances, developing and closely monitoring payment plans, and regularly outsourcing collections are some of the tactics colleges can employ to improve collections.
• Vendor Payments: Despite intense financial pressures, many distressed colleges pay their vendors before invoices come due.  However, paying vendors within a reasonable period of time beyond the due date is a feasible and often overlooked potential opportunity to improve cash flow.
• Unrestrict restricted assets – contacting donors to request they unrestrict their donations, though not palatable for many institutions, can be an effective means of accessing additional liquidity.

4. Communicate with Creditors

For institutions that either anticipate violating a loan covenant in the future, or have already done so, communication with their bondholders and/or bank lenders is very important.  In such situations engagement with creditors as soon as possible, supported by legal counsel and a financial advisor, is recommended.  A college’s creditors are eager to understand the issues the school is facing and the plan that the board and leadership have, or are putting in place, going forward.  Regular, open communication fosters an environment where both parties can work together to reach an agreement without conflict, which can be expensive and time-consuming, and can provide the college with breathing room to execute its remediation plan.

5. Reduce Costs

The biggest issue that colleges are contending with today, and the most difficult to rectify, is the reduction of revenue due to declining enrollment, tuition discounting, and declining government support.  However, aligning the cost structure with lower revenues is no easy task either.  Since payroll is the largest component of cost, it is the first place to look to reduce costs. 

Many schools increased headcount leading up to the COVID-19 pandemic when enrollment was higher, and have not rightsized either staff or faculty levels.  Comparing today’s headcount by department to 2018-2019 levels, and factoring in enrollment, is eye-opening and provides direction for implementation.

One alternative for reducing costs is outsourcing overhead activities.  Outsourcing can encompass any or all of janitorial services and facilities management, dining services, student housing, and IT services.  Conducting an objective analysis, with multiple bids from potential vendors, will help determine whether outsourcing certain functions is appropriate and cost-effective.

Reducing payroll is the most difficult for colleges to implement, given the potential disruption, publicity, morale and emotional issues that accompany such decisions, as well as the fact that the savings are not immediate due to severance and other payouts upon termination.  However, the board and leadership of distressed colleges must summon the will to make such decisions  to ensure viability and sustainability.

6. Develop a Contingency Plan

Schools facing an uncertain future should be prepared for the possibility that they may not be able to survive, or survive independently.  There are several recent examples of colleges that shut down suddenly (e.g., University of the Arts), creating havoc among students, faculty, staff, alumni, regulators and the community, resulting in potential liability for the officers and trustees.  This outcome can be easily avoided by developing a contingency plan, such as a teach-out, which can be deployed should the appropriate time arise.  A contingency plan with a longer timeline, such as a merger, should be pursued in parallel with a college’s current course of action.

7. Understand Your Core Competencies

A pre-requisite for many of the best practices described here is that an institution possess an in-depth understanding of its core competencies.  Identifying and leveraging strengths and unique attributes, such as programs, location, facilities, educational approach, and athletics is critical to effectively allocate scarce resources, drive enrollment, and investigate strategic partnerships, among other things.  An objective assessment of core competencies encompassing a variety of perspectives (guidance counselors, prospective students and parents, current students, alumni, etc.) could surface unique characteristics that a school had never previously considered or promoted. 

8. Investigate Strategic Partnerships

Collaborating with other institutions and organizations can provide much-needed resources and operational efficiencies without requiring a loss of institutional identity.  Even in an acquisition scenario an agreement can be structured whereby the acquired school’s identity can be maintained within the acquiring school.  Options include:

• Forming consortia with nearby institutions to share resources such as faculty, libraries, and technology services, reducing operational costs.
• Developing partnerships with corporations or local governments for joint programs, shared infrastructure, or workforce development initiatives.
• Establishing a relationship with one or more institutions to broaden, or even replace, program offerings, reducing costs and potentially expanding student options.
• Merging or being acquired by a stronger institution.

A college that is interested in investigating potential strategic partnerships must first examine whether it has the time, cash flow runway and buy-in from its key constituents to establish strategic partnerships, as well do an honest assessment of what it has to offer other institutions.  Further, given the complexity of these arrangements, boards should retain experts to guide them through the process.

9. Realign Academic Programs

Academic programs are the core of a college’s mission, but maintaining a wide array of programs can be costly. Institutions must reassess their academic offerings to ensure they align with student demand, job market trends, and institutional strengths,  The goals are to ensure that resources are reallocated to high-demand, high-impact programs that attract students and align with workforce needs, and program offerings are reduced to cut costs while ensuring the institution remains competitive and mission-driven.  Colleges should:

• Conduct a program-by-program review to assess enrollment trends, operating costs/profitability, and job market alignment for each academic offering.
• Consider consolidating or eliminating underperforming programs that have high costs and low enrollment.
• Expand high-demand programs (e.g., STEM, healthcare, business) and explore new offerings like interdisciplinary programs, certificates, or micro-credentials.
• Encourage shared faculty positions across departments to reduce costs without compromising academic quality.

10. Drive Net Tuition Revenue

Declining enrollment, coupled with increasing discounts to attract students, have been two of the most difficult issues for financially stressed colleges.  While there is no silver bullet, there are a number of tactics that institutions should focus on, including:

Employ targeted recruitment strategies:

• Focus efforts on potential students within 500 miles of campus (the typical choice for most students).
• Messaging should emphasize the school’s core competencies and points of differentiation.
• Grassroots marketing such as visiting high school guidance counselors, community college campuses and college fairs can be very effective in establishing long-term relationships with the important people who will be making college recommendations to prospective students.
• Digital marketing allows schools to cost-effectively customize messaging to specific target audiences, measure their success, and quickly change tactics.
  
  Enhance retention efforts:
  
• Minimize attrition rates and enhance student success by bolstering and publicizing student support services (e.g., academic advising, mental health resources) and implement early alert systems to identify at-risk students and intervene proactively. 
• Review internal data regarding why students do not return, to assist in targeting the root causes and increase retention rates.
  
  Revisit discounting strategies:
  
• It is critical to have an objective view of the competitive set and their “list” prices – for tuition, fees, and ancillary services - as well as the extent to which they are providing institutional aid, and under which circumstances.
• Examine whether the institutional aid policy align with the school’s core competencies.  For example, if a school’s strength is its equestrian program, does significant institutional aid need to be provided to draw them in?
• When realigning academic programs and non-academic offerings, the cost of institutional aid should be factored in when determining contribution margins.  For example, in evaluating athletic program offerings, net tuition for participating students should be factored into contribution margin analysis.

11. Strengthen Fundraising Efforts

Donors can provide critical financial support during difficult times.  Targeted fundraising efforts focused on scholarships, program development, or infrastructure improvements can be effective.  Though some leaders fear that donors will spurn fundraising efforts due to their college’s financial condition, developing and communicating the college’s plan and vision for how it will overcome the immediate financial challenges and be financially viable are integral to winning over skeptics.

12. Retain Professionals

Colleges and universities are complex organizations that require strong, capable leadership to run effectively under ordinary circumstances.  However, successfully operating an institution that is financially stressed is much more difficult to navigate without outside help.  Retaining experienced legal and financial advisors to provide objective information about the financial condition of the institution and guide the board and leadership in taking the appropriate actions to fulfill their fiduciary obligations while balancing the duty of mission is a best practice.  And bringing in advisors earlier, rather than later, is highly recommended.

Conclusion

To navigate the current challenges facing higher education, colleges must adopt proactive strategies that ensure short-term viability. By focusing on areas such as cash flow, cost reduction, academic program realignment, strategic partnerships, and driving net tuition revenue institutions can stabilize their operations and financial condition and position themselves for future success.

Implementing these best practices requires strong leadership, effective communication, and a commitment to continuous improvement. In doing so, colleges can not only survive current challenges but thrive in a rapidly evolving educational landscape.