Five Indicators of Financial Health for Higher Eds
Successful business officers should maintain a detailed and holistic view of their university’s academic and financial operations. It’s easy to lose sight of the larger picture while focusing on details, which can lead to disaster. Those with fiduciary responsibility for an institution look to business officers for perspective and insights. Tracking the following five indicators is critical for a university’s financial health. Each item is important.
1. Composite Financial Index (CFI) of Three or Higher
A CFI that’s either trending upward or with a three-year average above three is a sign of health. The index consists of four ratios: primary reserve, viability, net income, and return on net assets. Each ratio is multiplied by a strength factor and a weighted factor to obtain an overall score.
A particularly important ratio within the CFI is the net income ratio, which measures whether an institution is “living within its available resources.” Institutions with a net income ratio trending at 3 to 4 percent are in a strong financial position.
2. New Student Enrollment Stable
Recent demographic shifts created enrollment stress for many institutions across the country. Watch for new student enrollment trends. If this indicator is decreasing 10 percent year-over-year, the university may not be replacing graduating seniors with normal attrition. The institution should consider its value propositions and the relevance of its academic programs to meet student and employer demand.
3. Salary & Benefits Less than 90 Percent Net Tuition
Many institutions have too many faculty and staff in relation to student enrollment. The institution is struggling financially if its overall salary and benefits exceed 90 percent of net tuition.
4. Net Tuition Is Flat or Growing
Flat or growing net tuition per full-time equivalent student is a positive indication for financial health. Even if enrollment is stable or rising, flat tuition rates and stable discount rates mean the university is not “purchasing” enrollment through net tuition. If the institution maintains enrollment while decreasing net tuition, it must find a way to address its operating costs.
5. Student-to-Faculty Ratio Above 13:1
A low student-to-faculty ratio can cripple an institution’s financial future. Despite the appeal to be academically elite, a 13-to-1 ratio indicates an unsustainable financial model. By analyzing the enrollment at the course/section level, an institution may learn it’s offering too many courses for its overall enrollment.