Common Errors During Financial Emergencies
Budget flexibility is key for the chief financial officer when the unexpected occurs. Here are common pitfalls to avoid in dealing with emergencies.
By Kent John Chabotar
Responding to change within higher education falls into four main categories: technology, budgeting, institutional strategy, and the political environment (see "Orchestrating Change" in the July-August 2012 issue of Business Officer.) In the dimension of budgeting, flexibility is a requirement when faced with a financial crisis. Budgetary reactions to emergencies should be built around a decision statement describing the conditions of the emergency, how it will be funded, the account or accounts used to fund the plan, and how the emergency will affect the current operating and capital budgets.
However, colleges and universities often make these mistakes:
Ignoring the danger signs. Many CFOs use a "dashboard" of strategic indicators to monitor academic and financial health. Certain indicators should immediately get people's attention. At Guilford College, for example, our red flags include fewer than 400 traditional, first-year students; fees above the average of our competitors; financial aid discounts above 40 percent; an increase in expenditures that exceeds increases in revenue or enrollment; graduation rates below six-year averages; and an alumni giving rate less than 20 percent.
Thinking that bigger always means better. If student fees, fundraising, and endowment do not supply sufficient resources, institutions often turn to enrollment growth. As a short-term measure, more students can boost revenue if financial aid is controlled and related increases in faculty and staff are contained. But new academic programs are not an economical way to attract more students-especially if the lack of resources diminishes course quality, advising, programming, and placement in graduate schools or jobs.
Not managing the crisis. Instead of panicking, use a variety of media and methods to communicate with the campus, discuss problems, and propose solutions. It helps to have a strategic plan to guide actions. In advance, prepare for the possibility that community members may not support major budget reductions that upset the status quo.
Leaving the board out of the loop. Given its fiduciary responsibility, the governing board must remain informed and involved when a financial crisis occurs. Use the executive committee or other leadership team to work with the president and CFO.
Confusing strategy and tactics. Strategy is about the basic direction of the institution and its mission, priorities, and role in the world. Tactics are the means used to achieve a strategy. For example, a strategic response to unfavorable economic circumstances might involve adding a new student population (such as working adults), transforming the business model from low tuition/low financial aid to high tuition/high financial aid, and dropping major programs in liberal arts to focus on preprofessional programs.
Not asking the right questions. Even during an economic crisis, focus on fundamental questions, such as:
- How does the economy affect our strategic plan and priorities?
- How much of our revenue is at risk?
- What would we do if the budget had to be reduced by 20 percent?
- Who are the people most critical to our success?
- What does our community know, and when/how do they know it?
Ideally, budgetary reactions to financial emergencies should start with a decision statement that describes the conditions of the emergency, how the emergency will be funded, the account or accounts used to fund the plan, and how the emergency will affect the current operating and capital budgets.
KENT JOHN CHABOTAR is president of Guilford College, Greensboro, North Carolina; previously, he was vice president and treasurer of Bowdoin College, Brunswick, Maine.