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Business Officer Magazine

Management of Business Operations

A checklist that includes activities in key functional areas can help you and your division cover all the bases in meeting budget and financial goals.

By Barbara Deily and Susan Tellier

Business management—operating through the budget—allocates revenue flows and financial resources to deliver on the institution's mission. While encompassing the many facets of financial management, efficient business management also provides students with customer services in the form of auxiliary activities.

(Read also "Orchestrating Change" in the July/August 2012 issue of Business Officer magazine.)

To help you identify ways in which your college or university might more efficiently use its resources, especially during challenging economic times, refer to the following checklist, which includes advice on (1) financial performance reporting, (2) annual budget, (3) cost controls, (4) cash flow, (5) debt, (6) endowments, (7) auxiliary services, and (8) internal services.

Routinely Reporting Financial Performance

 As standard practice, start by reviewing financial reports with the leadership, making sure that everyone with budgetary responsibilities understands the reports and their implications. When appropriate, include notes that explain unexpected conditions or financial problems.

 In addition:

  • Develop a consistent format for all types of financial reports. Reports prepared for the board of trustees and the president, for example, should look like the annual financial statement. Also use similar formats for reports to bondholders or other debt providers.
  • Standardize budget reports so that department heads better understand how their decisions affect the funds allocated to individual departments. Managers of revenue-generating departments, for example, need to see both the revenue and the related expenses produced during each accounting period. Include allocations of administrative expenses so departments know the full cost of their operations.
  • Further Topics for CFOs

    Read more online and in print about the role of the chief business officer:

    NACUBO is grateful to Michael Townsley for his contribution in developing this collection of articles and publications for the business office.

  • Develop a method for clearly marking budget reports to show revenue below or above budgeted expectations. This alerts nonfinancial managers that they are approaching full expenditure or overexpenditure of funds, giving them time to formulate plans for resolving any problems.
  • For all institutional and departmental budgets, include nonfinancial metrics that establish the level of performance required by revenue and expense drivers to achieve budgetary goals and financial stability. Internal metrics may include enrollment levels, average class size, cost per student, or other pertinent factors influencing revenue or expenses, such as debt covenants. External metrics may include the composite financial index (CFI), total return on the endowment fund, or peer performance measures.
  • Select key metrics to report regularly during the fiscal year, such as enrollment, sections, class size, and the yield rate for new students.
  • Revisit budgetary and financial metrics annually to determine their ongoing relevance

Building the Annual Budget

Based on the key initiatives and bottom line agreed to by the board when it approved the strategic financial plan, develop budget planning instructions for departments so they can prepare realistic requests.  

  • Ensure the budget includes these components:
  1. Projected enrollments for new and continuing students, with the required yield rates and the financial aid matrix to fill the first-year class.
  2. Percentage changes in compensation for current employees, a summary of new positions, and significant changes to fringe benefits.
  3. Changes in the cost of external service contracts.
  4. A list of major initiatives that support the strategic plan and where they can be found in the budget.
  5. A summary of major capital projects which will flow through the operating budget via depreciation.
  6. Other major changes that significantly impact the budget.
  • Test the budgets using a five-year financial model to see the effect of changes over time. Ideally, the model will generate statements of activities, financial position, and cash flows.
  • Develop an official budget format to facilitate year-to-year comparisons. Using a consistent format increases trustees' comfort level, which is particularly important for trustees who don't work in higher education.
  • Obtain the endorsement of the finance committee (or its equivalent on your board) before presenting the budget to the full board of trustees.
  • Present the budget to the board of trustees as a set of pro forma financials, to maintain focus on a high-level review and discourage concentration on details. Prepare an accompanying narrative that highlights major changes in the budget from the previous year; in some instances, the board of trustees may consider only the changes that exceed a particular dollar amount or percentage.

Demonstrating Cost Controls

Serve as a role model by being prudent and mindful of expenses. When employees see that management is serious about saving money, they will likewise look for ways to help the institution. If management's expenditures are excessive and self-serving, however, faculty and staff have little incentive to control costs.

 Here are some other recommendations:

  • Develop operating rules that specify individuals who have the spending authority for certain purchases, by type and dollar amount. For instance, only the chief financial officer (CFO) and president could jointly approve a major capital purchase. Absent such rules, unauthorized expenditures can distort the institution's financial condition.
  • Design expenditure reports to identify the amount spent by level of authority, including a brief description of the expenditure. Add to expenditure reports controls that can detect and spot inappropriate or excessive transactions.
  • Ensure that the internal controls in place prevent or detect inappropriate and excessive expenses. The business office, for example, might regularly review phone bills to identify any unusual use or abuse of the system. Daily reviews, in addition to monthly reconciliation of bank statements, can flag altered or duplicate checks. Positive pay is a control that will minimize losses.
  • Ask employees for cost-savings ideas. Often, staff have thought about ways to improve operations but have not had an easy means of proposing their ideas to senior managers.
  • Provide monetary incentives (or recognition) to employees whose suggestions are implemented, and share these success stories with the board of trustees.
  •  Work with buying consortia and outsource services where appropriate.
  • Regularly review purchasing and vendor reports to identify areas of the highest expenditures. Promote competition by contacting multiple suppliers or finding substitute products or services in those areas.
  • With existing vendors, avoid automatic increases that do not include clauses to terminate the contract—or renegotiate prices—before the contract automatically renews.

Monitor Cash Flow

Prepare an operating cash flow spreadsheet based upon the prior year's bank statement, the operating budget, and averages for cash in- and out-flows. Compensation, for example, typically represents 70 percent of expenses.

 Other ways to manage cash flow include the following:

  • Monitor cash flows so that anticipated major spikes in cash disbursements (such as for compensation and supplies during the fall and spring semesters) and low points in the cash cycle (such as the summer months) do not push the institution to short-term borrowing.
  • Track any developments that might affect disbursement of federal financial aid and student loans. The predictability of September and February in-flows from the federal government could be upset if the government delays reimbursements until the date for dropping and adding courses has passed.
  • Estimate capital purchases for construction projects or large pieces of equipment based on the expected billing schedule provided by contractors and equipment suppliers. Coordinate equipment purchases with the purchasing department to schedule the impact on cash reserves, then add these figures to the operating cash flow projection.   
  • Periodically update the cash flow projection to reflect unanticipated cash gifts, tuition and fee shortfalls, and emergency cash expenditures. Use the year-end projected cash balance to estimate cash needs over the upcoming summer until cash receipts for fall begin to arrive.

Debt Details

Ensure compliance with debt covenants by reviewing deadlines and reporting requirements (available from bond trustees or loan officers). Keep a detailed summary of the covenants at hand; they appear in the bound volumes of the original debt issue.

In addition:

  • Develop and maintain a close working relationship with the agency that rates the debt. This includes hosting rating analysts for campus tours and meetings with senior administrators, as well as promptly supplying data such as current enrollments, outlook for the upcoming recruiting season, new academic programs, fundraising initiatives, and financial reports.
  • Before taking on new debt, hire a bond rating consultant to evaluate the impact on the institution's existing bond rating and finances. When borrowing is for construction or for renovations of existing buildings that do not generate new revenues, the analysis of operating expenses and debt service payments can become complex.  

Endowments Policies and Practices

Recommend that the board of trustees establish a gift policy that:

  1. Sets a threshold for endowed gifts (small gifts may not produce sufficient income to finance the intended purpose).
  2. Establishes categories in which to assign restricted gifts so that principal aggregates and the draw from the category is large enough to be meaningful to the institution's mission.
  3. Delineates gifts the institution will not accept. For example, seriously evaluate the donation of an unbuildable lot or a former gas station with leaking fuel tanks, because they have limited value and may even carry hidden costs. Also, consider ongoing maintenance costs for works of art.

Beyond that:

  • Develop and maintain a close relationship with the senior advancement staff who work directly with donors. This helps ensure that the development office facilitates giving that is not excessively complex, restrictive, or prescriptive, as overly restrictive funds are more likely to languish.
  • Make sure that donors document and sign all temporary or permanent restrictions imposed on gifts or grants. 
  • Keep detailed records of all endowments, with subsidiary records of funds' uses, such that the institution is able to confirm with both donors and regulators that it has appropriately invested restricted gifts and used the gifts for their intended purpose.  
  • On behalf of the institution and the board of trustees, enforce restrictions on gifts and evaluate the performance of the investment manager in adhering to conditions set by the board's investment committee.   
  • Review implementation and implications of the Uniform Prudent Management of Institution Funds Act (UPMIFA) with trustees, investment managers, fundraisers, and the business office. This act provides possible relief to underwater endowments and offers some flexibility for smaller funds that have outlived their original purpose (details available at

Auxiliary Services Analysis

Conduct a cost-benefit analysis of each auxiliary service (such as food services, bookstore, and residence halls) and internal service (such as campus security and information technology) to determine whether the institution is financially better off operating the service itself or outsourcing the activity. Auxiliary services, whether outsourced or not, should cover their own expenses and payment of debt, as well as contribute to other allocated expenses of the institution.

Once you've completed that analysis:

  • Determine the nonfinancial benefits and costs associated with outsourcing versus internal management. For example, the financial benefits of outsourcing may include reduced costs for internal services and breakeven income for auxiliaries; these may be offset, however, by nonfinancial factors, such as employee retention issues. Conversely, outsourcing may carry a higher financial cost but provide additional benefits, such as renovation of dining facilities, or extra services within residence halls. 
  • If the decision is made to outsource, employ due diligence in selecting a contractor. Thoroughly check the vendor's background, business practices, reliability, problem-solving ability, legal issues, management, and personnel selection procedures. Confirm that the vendor has the financial capacity to remain in operation during the length of the proposed contract. 
  • Before signing a contract, present the cost-benefit analysis and due diligence assessment to the board, along with a forecast of the financial and reputational impact of using an outside vendor.

Evaluating Internal Services 

Conduct an institutional analysis to determine whether the services provided by each department are efficiently run or might be candidates for elimination. When tasks become entrenched, with no questions asked, they remain in place—even when the logic for their existence no longer remains.

Ask questions such as:

  1. Is the service critical to the mission of the institution? If so, how can its costs be restructured to save money?
  2. Does a regulatory or externally imposed requirement support continuation of the service or task? For example, producing W-2 and 1099 forms is not central to the mission of educating students but must be done to comply with government regulations. Is there a less costly or more efficient alternative available for providing this service?
  3. Is the product or service nice but no longer important? If a task is not required and does not support the mission, it should become a target for elimination to reduce the cost of operations.
  • For any product or service that cannot be eliminated, recalculate the true cost of providing it, including labor, capital, material, and information. Ensure that an appropriate amount is charged for the product or service.
  • Verify that each department has a mission statement, a set of objectives, and an organizational chart with a list designating which individuals are responsible for each objective. If ambiguity arises about a particular set of tasks, evaluate the particular assignment to find out whether more than one person is doing the same work.
  • Determine whether any staff run shadow systems parallel to administrative computing systems; this typically happens when staff either do not trust the information technology or lack the skills to effectively use the technology at hand.
  • If shadow systems exist, retrain staff on current technology or consolidate positions so employees are not performing redundant or unnecessary work.

In the end, business policies, procedures, controls, and reports are designed to ensure the best use of existing resources. These are challenging times: economic conditions are uncertain, demand for higher education is changing, technology is restructuring education delivery, and the expectation for greater academic and student services is expanding. Through careful business management, college and university business officers can better handle these pressures on limited resources of the institution.

BARBARA DEILY is chief audit executive, University of Virginia, Charlottesville; and SUSAN TELLIER is former vice president of administration of Nichols College, Dudley, Massachusetts.

Business Officer Plus