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Business Officer Magazine

Orchestrating Change

Proactive leadership starts in the business office, where the forces of change converge.

By Kent John Chabotar

*Increased student expectations, rising labor costs, a growing variety of instructional delivery systems, more stringent government regulations: If your college or university hasn't already encountered these forces shaping higher education, it will soon. And the way your institution responds will determine its financial condition not only now but also in the future.

These major forces, together with some lesser ones, point to the inevitability of change and the need for proactive leadership. They all converge in the business office, where the CFO is expected to understand, categorize, elucidate, and address them. In short, the work of the CFO boils down to participating actively in the content and process of change.

Responding to change within higher education falls into four main categories:  institutional strategy, budgeting, technology, and the political environment. Outlined below are recommendations for exercising leadership in each area.

Institutional Strategy

To have value, strategy must reflect the long-term perspective of producing financial reserves to serve the college's or university's mission. To lead change in this area:

Understand the student market. According to the U.S. Department of Education's National Center for Education Statistics, total enrollment in American colleges and universities is projected to increase 13 percent, to 20.6 million, between 2007 and 2018. Most notably:

  • Regional differences will be significant. Between 2005–06 and 2018–19, the number of public high school graduates is projected to increase 23 percent in the South (including the Southeast), increase 16 percent in the West, and increase 2 percent in the Midwest. For the same period, the Northeast will experience a 3 percent decrease.
  • Women already constitute 57 percent of college students in the nation; their enrollment rates are projected to increase at almost twice the rate for men through 2018.
  • Between 2007 and 2018, enrollment is projected to increase 4 percent for white students, 26 percent for black students, 38 percent for Hispanic students, 29 percent for Asian/Pacific Islander students, 32 percent for Native American students, and 14 percent for nonresident aliens.

How these demographics play out in each region and within individual institutions will depend on whether employment rises or falls, government support increases or shrinks, and financial aid packages at private institutions expand or contract. Typically—especially for adult students—enrollment has an inverse relationship with employment: If employment rises, enrollment should fall, and vice versa. Also, in general, public institutions increase their tuition and fees when a state government reduces its support.

Read An Online Extra

For budgetary pitfalls to avoid when change brings a campus crisis, see Kent John Chabotar's "Common Errors During Financial Emergencies,"in Business Officer Plus at

Enrollment declines in some regions may put the budgets of tuition-dependent institutions at risk. To shore up enrollment, they may have to offer larger, unfunded financial aid packages; of course, this decreases net revenues.

In addition, as documented by the College Board, entering first-year students increasingly exhibit deteriorating academic skills in reading, writing, and mathematics. Many private and public institutions have already added expensive remediation centers to improve the probability that students with weak academic skills will graduate.

Understand labor markets. Most colleges and universities are heavily stocked with faculty and staff from the baby boom generation, who are reaching traditional retirement age. Given federal laws banning forced retirement, institutions may be forced to fund early retirement plans—especially if their enrollments diminish.

Conversely, some institutions may need to hire replacements or add positions to support student demand for programs and services. While new employees should have a lower pay rate, their hiring cost could soar if they have highly desired technical skills that are in short supply.

Reduce operational costs. If costs continue their inexorable increase, as suggested by the figure, they may push tuition rates beyond the means of most parents and students. To minimize tuition increases—especially in light of federal public reporting requirements—every CFO should adopt this mantra: The college or university must cut costs of administering and delivering the services of its mission.

How do you cut operational costs? The approaches could include these options:

  • Develop strategically focused contingency plans for personnel and operational cost reductions that can be phased in, depending on the circumstances; these could range from something like "easier and least mission-critical" to "harder and most mission-critical." Substitute administrative software for personnel. For example: Replace administrative offices, registrar, academic counseling, student payments, and other student-related offices with Web-based solutions and electronic stations while ensuring that students with special circumstances have ready access to live staff help.
  • Analyze costs of all major activities to identify where to eliminate, merge, or reconfigure tasks.
  • Outsource as many activities as feasible that are not directly related to instruction or research, while ensuring that the new arrangements actually do save money and provide as good, if not better, service.
  • Eliminate unnecessary secretarial support; expect everyone to do word processing, printing, and spreadsheets, assisted by a help desk.
  • Form consortia to cut administrative costs or to add essential new programs and services jointly that your institution cannot afford on its own. Combine departments with related functions; for example, merge financial aid and student accounts.
  • Allow small increases in average class size to reduce faculty needs, and increase use of lower-paid adjuncts. An increase in average class size from 20 to 22, for instance, gains 10 percent in productivity without turning seminars into large lectures.

Figure: Inflation-Adjusted Published Tuition and Fees

Never make decisions about program creation, expansion, and elimination without knowing costs and net contribution (the difference between revenue and costs). This does not mean that financial considerations will govern, but that their consequences are important. At Guilford College, for example, we determined that our adult program had the highest net contribution: Although their tuition rate was low, these students received minimal services. The lowest net contribution was our traditional program (undergraduates under 23) when students lived off campus and we did not benefit from room and board revenue. This information helped to frame enrollment planning while keeping in mind that our strategic plan called for us to remain an undergraduate institution with adults and traditional students, and that allowing some students to live off campus might reduce revenue, but boost satisfaction and retention.

Further Topics For CFOs

Read more online about the role of the higher education chief financial officer. Two articles, "Management of Business Operations" by Susan Tellier and Barbara Deily, and "Critical External Relationships of the Chief Financial Officer" by Mary Jo Maydew and Richard Staisloff, are available in Business Officer Plus at Additional topics are covered in the online CFO Perspectives series, which can be found in Online Publications under the Products tab at

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

Exercise strategic financial management. To manage the financial condition of your institution over the long term, incorporate all components of the financial structure—net income, cash flow, and the balance sheet—into a single budgetary document. The reasoning is simple: Institutions need to take the broadest perspective on how they deploy financial resources. Budgets founded solely upon net income are too narrowly focused to ensure that financial resources are effectively employed over the long term.

Strategic financial management cannot occur without financial modeling. Tools such as Future Perfect help to forecast revenues and expenses five or more years to detect the future implications of the current budget. Based on the forecasting assumptions-such as inflation, annual fund and capital campaign expectations, levels of state appropriations, and formula funding-the models reveal how even small percentage increases compound quickly over time.

The model can confirm or discourage ambitions before the institution commits scarce resources, by addressing such specific issues as:

  • Effects on total compensation of faculty appointment and promotion rates.
  • Endowment growth given varying rates of return on investment and new gifts.
  • Long-term costs of new program initiatives—or long-term savings for program elimination.
  • Total financial aid costs and discount rates at varying rates of increase in tuition and fees.
  • Effects on tuition and fees if state appropriations decline and a balanced budget must be maintained.


An annual budget represents little more than a snapshot of the institution's operational condition six or more months before the next fiscal year starts. Economic and financial conditions can change dramatically in the short interlude between designing and implementing the budget—and the speed of that change can nullify the assumptions on which the budget is based.

Given the likelihood of change during a fiscal year, how can you ensure that the budget serves as a useful tool for decision making? Here are five recommendations.

Every CFO should adopt this mantra: The college or university must cut costs of administering and delivering the services of its mission.

Seek agreement on factors shaping the budget. According to an old adage, two simple facts influence a budget the most: last year's budget and the amount of available revenue. Too often, the campus community sees budgets as static documents that set the bounds for action.

An effective budget structure depends upon nonfinancial managers who understand the flows and relationships within the budget's components. CFOs need to educate nonfinancial managers about revenue, expense, cash, investment yields, and debt service—and how changes in these components can either strengthen or diminish the institution's financial condition.

Institutional managers should be familiar with the budget's language and mathematics so they can readily understand the powerful—and, in some cases, unanticipated—results that may occur when performance deviates from the budgetary plan. Say, for example, the institution experiences a significant drop in tuition revenue.  Assuming a constant financial aid rate, this drop implies that enrollment fell short of predictions. Consequently, residence hall and bookstore revenue will be less than expected, dormitories will not generate sufficient revenue to cover their debt service, and student services may be overstaffed.

Understanding budgetary interactions becomes particularly important during the development of new initiatives. If the initiative arises outside the administrative area, the manager may require an introduction to a new program's ripple effect-how it  influences costs and operations far beyond the individual department or unit.

Don't confine budgetary training to new and current nonfinancial managers; extend it to everyone with responsibility for developing, managing, recording, or monitoring the budget.

Modify the budget process. Many CFOs feel comfortable with a "top-down" approach in which the administration and board prepare the budget. Yet members of a campus community are more likely to understand—and accept—a budget they helped develop.

Three approaches engage the community to varying degrees:

  • An informational approach shares data about the budget with the community but does not solicit feedback.
  • A consultative approach actively seeks feedback about budget priorities.
  • In the participative approach, faculty and staff draft the budget, typically by forming a committee and holding hearings, and recommend the budget to the president and trustees.

Maintain budget flexibility. Restrictive policies and procedures can inhibit strategic initiatives. In contrast, budgets with flexibility enable the institution to encourage new initiatives and respond to unanticipated changes.

To achieve flexibility, you might set aside a pool to cover one-time expenses, such as travel or equipment, and encourage departments with ideas to apply for funding. Another idea is to prepare alternative budgets—which have different details or justifications than the "official" budget—to use if revenues or expenses fluctuate markedly and unexpectedly. At Guilford College, for example, we base our initial budget on a worst-case scenario for enrollment but also plan to add back funds if the "better case" scenario is closer to actual results.

Flashback ... 25 Years Ago

In the July 1987 Business Officer issue celebrating NACUBO's 25th anniversary, in an article about the changing role of the chief business officer ...

"The business officer must not only possess technical competence in his field, but also have a working knowledge of all aspects of the institution so he can properly function as a member of the executive team."

FRED S. VORSANGER, executive director of the University of Arkansas Foundation and a former NACUBO Board of Directors president

Budget flexibility also requires a "sensitivity analysis"—calculating the fiscal effects of small changes on major budget drivers. For example, what are the effects on the budget of 1 percent increases or decreases in student fees (net of financial aid), endowment spending, faculty and staff salary pools, and departmental operating budgets?

One way to achieve consensus among members of a campus budget advisory committee is to give each one a list of these 1 percent changes and ask everyone to find increased revenues and/or decreased costs sufficient to balance the budget. This exercise not only helps to achieve the goal but also educates the committee and community about a budget's complexity.

Use decision analytics. Take advantage of the tools that will help support budget assumptions:

The Composite Financial Index (CFI), as described in Strategic Financial Analysis for Higher Education, 7th edition (Prager, Sealy & Co. LLC; KPMG LLP; and Attain LLC, 2010), is based on four ratios:

  • Primary reserve ratio (expendable net assets to expenses)—measures operational risk.
  • Net income ratio (net operating income to operating revenue)—measures short-term risk.
  • Return on net assets ratio (change in net assets to total assets)—measures risk to production of wealth.
  • Viability ratio (expendable net assets to long-term debt)-measures long-term debt risk.

After being adjusted by strength and weight factors, the ratio values are combined to produce the CFI score. Scores range from -4 to +10, with a score of 7 or better indicating excellent financial health. A score greater than 3 indicates financial strength, while a score less than 1 suggests a college with fragile finances.

The U.S. Department of Education (DOE) financial responsibility test determines whether an institution has adequate financial resources to make federal financial aid awards. It uses three ratios:

  • Primary reserve (similar to CFI ratio).
  • Net worth (net assets/total assets).
  • Net income (unrestricted net income/unrestricted revenue).

The resulting composite score ranges from -1.0 to 3.0. A score greater than 1.5 indicates the institution is "financially responsible," while a score between 1.0 and 1.5 falls into the warning zone and results in a letter of warning and possibly new constraints on financial aid reimbursements. A score less than 1.0 requires a line of credit for 50 percent of the financial aid amount available to be awarded by the college.

The trade-off analysis computes the net benefits for each option being considered, estimated over the life of the option and discounted for inflation. Trade-off analysis can help answer such questions as: Is it more valuable to add the net revenue from 50 new students or to hire two development officers? Is it more valuable to keep the current IT system or purchase a new one? Is it more valuable to outsource food services or keep them in-house? The analysis depends upon meticulous collection of data; any errors can distort estimated outcomes.

The budget is the primary instrument that converts strategic plans into resource allocation decisions. Without maintaining a strong link between the two, a college will have trouble reacting to change.

Variance analysis shows where original budget estimates were in error. Volume changes, such as the number of students or employees, can cause variance. So, too, can price when the institution charges or pays more (or less) than budgeted. Other variance factors include mix (fewer or more students paying less or more than expected), efficiency (typically measured with ratios such as students-to-faculty), and timing (revenues and expenses occurring sooner or later than budgeted).

Variance management does not stop with the CFO; make variance reports a main point of discussion with the president and other chief administrative officers so they can take action to eliminate the cause. If the problem will continue two or more fiscal years, the board should review the plans.

Link the budget to the strategic plan. The budget is the primary instrument that converts strategic plans into resource allocation decisions. Without maintaining a strong link between the two, a college will have trouble reacting to change.

A truly strategic budget:

  • Demonstrates factual awareness of current circumstances and needs.
  • Benchmarks with competitors, peers, and aspirants.
  • Identifies strategic priorities and goals.
  • Specifies objectives, action steps, assignments, and a long-range financial plan.
  • Measures progress with strategic indicators.
  • Undergoes annual assessment and updating, with the results made public.
  • Contains "what if" scenarios.
  • Includes plan achievement as an indicator of the CEO's (and perhaps others') performance.


Technology promises productive benefits for the institution, and the CFO plays a role in creating a seamless interface between business operations and information technology (IT). Business practices are governed by the rule makers: the Financial Accounting Standards Board (FASB), federal and state regulatory agencies, financial agencies, rules of law, and the board of trustees of the institution.

Presidents and boards of trustees rely on CFOs to comply with an ever-growing list of rules on depreciation, presentation of financial statements, treatment of gifts, categorization of restricted endowment funds, tax statements to students on financial aid, and reports on rates of tuition change. Ironically, some of these rules imposed by outside agencies have increased the CFO's workload, even though they were intended to push colleges and universities toward greater efficiency.

At the same time, institutional leaders turn to the CFO to figure out how to lower the costs of operations, thereby reducing the pressure to raise tuition and fee rates. This responsibility places the CFO between different expectations of faculty and administration for how the institution should deliver and support the services defined by the mission statement.

The following steps can help better employ technology for improving service delivery and producing fact-based financial analysis.

Revise policies and procedures. Inevitably, a new IT system brings new ways of doing business. If current processes drive selection of new technology, the institution's productivity may not improve. It makes little sense, for example, to install a new student records system if the registrar continues using paper forms.

As another example, IT systems enable institutions to offer continuous instructional delivery, in which students can enter courses at any time and any place. In most institutions, however, continuous enrollment would encounter the roadblock of student payment procedures that align with a traditional fall/spring registration schedule. The existing system becomes a bottleneck because enrollment is split across several offices-admissions, academic counseling, registrar, financial aid, and bursar. The software can create one-stop enrollment services, thereby eliminating the need for and cost of these multiple offices.

Process redesigns require more than revised procedures; they demand reconfiguring the mind-set of everyone involved in the process. The most effective process redesigns:

  • Require a sense of urgency to get started and good communication to maintain momentum.
  • Demand leadership and commitment from the CFO and the CEO.
  • Solicit input from customers and users.
  • Map the current process before beginning redesign, building a "beta" version
    of the new process, and validating it with users.
  • Incorporate continuous performance measurement and feedback to participants.

Introduce new systems. New IT administrative systems can dramatically modify the way business offices operate. Implementation is costly, however; converting a legacy system requires massive amounts of time and labor to ensure that the new system delivers on its promise. But continuing to use out-of-date software and hardware may put the institution far behind its competition.

The CFO needs to convincingly explain why a new system is needed—and the answer has to be more than "Everyone else is doing it" or "It's time." Involve users and other stakeholders in identifying a wide range of options. Most likely, a comprehensive package—with applications ranging from accounting to student records—will please some users and not others. Finance might like the accounting application in Package A, while the registrar advocates for the student records application in Package B. So be prepared to provide extensive training, in addition to backup personnel to carry on operations while others are busy with the conversion.

To reduce the cost of implementation, consider working within an IT consortium; you gain the cost advantages of a joint learning curve, while also spreading the cost of implementation over many institutions. Or, you might contract with IT vendors that sell implementation support.

Manage the data. The first requirement of any IT system is to produce reliable and valid data—in particular, historic data needed for trend analysis. Yet, data inconsistencies often constrain a system's performance.

Data management involves converting raw data into information that supports analysis which, in turn, undergirds budget decisions. Too often, budgetary data are distorted by how budget managers record transactions. Typically, the budget manager does not understand budgetary rules or wants to shoehorn something into the wrong budget category.

Business offices may compound the problem by ignoring a budget manager's error. Most budget errors are easy to spot: for example, when adjunct lines are used to purchase equipment. If the data remain riddled with uncorrected errors, budget analysis becomes useless. Moreover, the older the information, the harder fixing it becomes as staff turns over and memories fade.

Link technology to the strategic plan. A strategic plan determines the relative importance of technology and other functions. In other words: How vital is technology to institutional success? Employing new technology, for example, may be essential to determining the curriculum and student learning outcomes on which an institution builds its "brand promise."

Remember, the financial effects of spending on technology may differ from other programs and services. The costs of technology—like buildings, grounds, and other long-term physical assets—are spread over the years of its useful life via depreciation.

Political Environment

The internal political environment comprises all constituencies within the institution that have an interest in a decision's outcome. The external political environment embraces all governmental agencies, legislators, governors, alumni, and others who have a direct interest in how the institution carries out its mission or is funded.

Building political relationships requires skills that are increasingly important to the modern view of the CFO in higher education. Here are three suggestions for addressing the political dimension of change.

Translate financial decisions into meaningful points for discussion. More than simply defining complex financial terms, this requires working with the college community—especially the faculty—so they understand how their financial needs affect all aspects of the institution's financial condition. The faculty, for example, should be aware that allocating restricted endowment funds for a purpose inconsistent with the restriction is not just bad policy but also violates the CFO's fiduciary responsibility.

Engage with peers. By forming cordial relationships with other chief administrators who make most major budgetary decisions, you can dispel the common misperception that the CFO has a "hidden bucket of money" that will solve all problems. To that end, foster dialogues with peers on critical issues (don't lecture!), develop working relationships that are not thwarted by poor communications, and help other administrators understand the context and consequences of their budgetary proposals and decisions.

Foster trust with government entities. At public institutions, the CFO presents the college's case for new and continued funding to legislative committees; heads of government agencies; and local, state, and federal legislators. Working directly with the government and its agencies requires the development of relationships in which mutual trust builds over the long term. In competing for scarce tax dollars, the CFO must know when and how to advocate effectively, as well as compromise without giving up the institution's principles or mission.

External relationships with regulatory agencies take a different tone. Building trust with regulators is less about persuasion and more about information. Regulators need to know:

  • The impact of regulations on the institution.
  • Conditions in the institution that may not comply with regulations.
  • How the institution intends to return to a state of compliance (such as engaging the assistance of auditors).

As economic, demographic, geographic, and cultural forces continue reshaping financial conditions, focusing on these four areas will help you guide your colleagues to a better understanding of what change specifically means to your institution. And taking charge of that change will enable the college or university to continue delivering on its mission.

KENT JOHN CHABOTAR is president of Guilford College, Greensboro, North Carolina; previously, he was vice president and treasurer at Bowdoin College, Brunswick, Maine.

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Nine Pressure Points for Institutions

Over the next 10 years, these issues appear most likely to affect the CFO's work:

  • Economic uncertainty, related to lingering effects of the 2008 recession, may impede strategic thinking, planning, and budgeting by emphasizing short-term actions to strengthen finances.
  • Government reporting requirements on tuition increases will prompt closer management of the cost increases that drive up tuition rates.
  • Investment risks-including the increasing variance and frequency of sharp turns in investment returns-may force endowment-driven colleges to revisit investment mixes.
  • The introduction of new technologies will continue to reshape instructional delivery-and, by extension, the way business offices account for admissions, registration, financial aid, billing, and revenue.
  • Competition will intensify for a smaller set of qualified high school graduates. This can adversely affect enrollments, cost of marketing, and the quality-price choice matrix by which students typically determine their enrollment preferences. A substantial change in price or quality could place a college or university outside its traditional location on the matrix.
  • As the baby boom generation retires, the instructors who replace them will need a broader set of instructional and research skills to deal with a student population having fewer academic skills or less motivation to do the work to earn a degree.
  • Government health initiatives may lead to higher costs and new regulations, in addition to the inflationary costs of health benefits.
  • New reporting rules from Congress will increase the overall workload of business officers and their staff.
  • Tax-free debt market regulations and credit ratings could make debt financing more costly.
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