The Importance of Being Financially Savvy

Article Icon Article
Wednesday, June 29, 2022
By Jacqueline Reck
Photo by iStock/PeopleImages
Academic administrators must understand budgeting and finance if they are to make strategic choices that benefit their universities.
  • Administrators with a basic understanding of budgeting will understand how to allocate scarce resources.
  • Budget officers can help, but they aren’t always informed about how financial choices can affect program goals.
  • Academic leaders must know if their programs are contributing positively to the university’s bottom line.

 
Many business faculty members decide to step into administrative roles because they’re interested in advancing the missions and visions of their departments, colleges, and universities. Very few become department chairs, associate deans, or deans because they want to participate in the budget process or grapple with the financial aspects of operating their institutions.

However, today’s colleges and universities face many challenges that relate to finances, such as declining enrollments, shrinking budgetary support from nontuition sources, and ongoing questions about the value proposition of a college degree. Administrators often must weigh the tradeoffs between the costs and the benefits of implementing, expanding, or cutting programs or services. An administrator who has a basic understanding of budgeting and financial reporting will be in a stronger position when it comes to making decisions about how to allocate scarce resources while ensuring the maximum return on investment.

In my role as associate dean, I frequently encounter individuals who are asked to make important financial choices but do not have a solid understanding of why they need to make these decisions or how their decisions will impact the department, the college, and the university. Financially savvy leaders can help their schools remain competitive in an increasingly challenging higher education environment. No one expects all leaders to be budget and finance gurus, but a little knowledge can go a long way!

The Advantage of Financial Acumen

To some extent, when faced with tough choices, academic leaders can rely on the guidance of budget and finance officers. But administrators really need to understand what the budget and finance officers are proposing and why. Budget officers are primarily focused on the numbers; they aren’t always completely informed about how financial choices can affect academic programs and goals.

For example, a university’s net tuition is what remains after certain items—such as tuition waivers—are subtracted. Perhaps a finance officer has suggested increasing net revenue by decreasing the number of tuition waivers allowed to students. However, unless school leaders strategically target which waivers to cut, this could be a poor decision. Some waivers are used to attract high-achieving students, and others are used to recruit students into new degree programs. Therefore, keeping these waivers would be an important part of a school’s strategic goals.

Without a firm understanding of their budget and finance goals, leaders will find it difficult to evaluate any changes that are being proposed. They also will find it difficult to make strong arguments for or against an action that might affect a college’s goals and objectives.

Without a firm understanding of their budget and finance goals, leaders will find it difficult to make strong arguments for or against an action that might affect a college’s goals and objectives.

It’s even more important for administrators to have financial acumen if the university operates under an increasingly popular form of budgeting called responsibility-centered management (RCM). Under this model, leaders are responsible for managing the bottom lines of their units, ensuring that the resources of their units can cover their costs.

RCM has the advantage of giving department and college leaders greater control over the budget and allowing them to make more entrepreneurial choices. However, to make sure any entrepreneurial investment will be a net benefit, leaders must be able to analyze the budgetary and financial implications.

Five Questions to Test Financial Savvy

Faculty members who want to move to administrative roles can gauge the extent of their budget and financial knowledge by answering the following questions:

Can they look at financial statements and determine whether the university has a strong history of liquidity? This information could be important if the university leadership is looking at freezing access to cash balances or requiring that the school keep a certain level of cash on hand.

Can they tell how the distribution of the university’s revenue sources has changed over time? If state appropriations are falling or grant funding is drying up, academic leaders might need to find alternative sources of revenue.

Do they know how to respond when they hear the argument that budget cuts are needed to maintain the university’s credit rating? To be able to participate in this discussion, they also need to understand where the university stands in terms of unrestricted net assets or net position.

Do administrators know if their college or program is contributing positively to the university’s bottom line and what factors are affecting its contribution?

Do they know if their college or program is contributing positively to the university’s bottom line and what factors are affecting its contribution? To answer this question, they must understand not only revenue behavior, but also expense behavior.

Do they have a firm understanding of how the budget is allocated and what variances in the budget reveal?

If faculty can answer all these questions in the affirmative, they will be well-prepared to deal with the financial aspects of academic leadership.

Resources for Learning

While time is an extremely valuable commodity for administrators, they would do well to invest the hours necessary to learn about budgeting and finance so that their choices benefit their colleges and universities. There are many online courses that allow academic leaders to develop knowledge at their own pace and to the level where they feel comfortable making decisions based on sound financial reasoning.

Several books provide valuable insights to academics, including Budgets and Financial Management in Higher Education (Third Edition) by Margaret Barr and George McClellan and University Finances: Accounting and Budgeting Principles for Higher Education by Dean Smith.

Organizations such as the National Association of College and University Business Officers (NACUBO) also provide publications and resources related to budgeting and finance. One example is NACUBO’s self-study course called the Essentials of College and University Accounting.

AACSB has recently developed a self-study course called Finance and Accounting for Higher Education Administrators. The course explains basic accounting terminology to help users understand the financial reports prepared by public and private colleges and universities. Administrators also learn how they can derive performance indicators from these financial reports. In addition, the course walks users through the development of a simple budget.

In the increasingly competitive higher education environment, the demands on leadership are even greater than before. When academic leaders are financially savvy and have a deep understanding of budgets, they can make sure their colleges or departments contribute to the financial performance of the university.

Authors
Jacqueline Reck
Robert Keith Professor, Lynn Pippenger School of Accountancy, University of South Florida
Subscribe to LINK, AACSB's weekly newsletter!
AACSB LINK—Leading Insights, News, and Knowledge—is an email newsletter that brings members and subscribers the newest, most relevant information in global business education.