Affordability is the hot topic creating pressure on enrollment and net tuition revenue. As a result, most institutions need to evaluate their economic model. This may involve discussions related to sticker price, discount rates, marketing efforts, telling “your unique story,” or rightsizing the institution. This also may involve discussions about collaborations with industries that hire graduates and neighboring schools. Often the cost to deliver education is ignored during these affordability conversations. The actual cost structure of instruction and instructional support is often a black hole. The appropriate size, shape, and type of academic delivery systems tend to follow a philosophy that leads to doing exactly what has been done plus a little more each year.
Annual budget cycles are built upon a percentage increase or decrease. As enrollment declines—based on fewer high school graduates and a bearish adult student market—institutional leadership must have the tools to address the question of affordability and the specific costs to deliver individual courses and programs. Without the net revenues, cash flow and margins can all suffer.
Higher education appears to be losing the battle on affordability. The value of a degree is questioned. Student loans remain an albatross that prevents prospective students from finding a pathway to a better future. Board members and campus leaders often ask questions such as: Does the institution know the cost to educate a student? What does it cost to deliver a nursing degree? Are the online programs as profitable as we think? What percentage of operational costs are covered from cash received through tuition and fee payments? Are annual tuition and fee increases based on the cost of delivering a degree? Do we have sufficient margins to sustain the operations of the institution over the long term (including those nasty downturns that come along periodically)?
The financial team will often attempt to answer these questions through a spreadsheet analysis. This could involve the use of pro forma financial projections with enrollment, salary, and department expense assumptions. A breakeven analysis, based on the relationship between fixed costs, variable costs, and enrollment (units sold as either full-time equivalent or credit hours), is another option sometimes used. Due to the simplicity of the breakeven analysis and lack of application to higher education, institutions could develop a variable cost approach to address the cost-to-student relationship. The approach is based on the concept that the school can function at various cost levels for a certain range of student enrollment. This can be visualized with a line graph with step increases as compared to a smooth line.
While trendline projections and breakeven analysis have been used, the preferred method is margin analysis. Conducting a margin analysis can establish a cost baseline for a budgetary unit like a department or school and provide the medium for moving forward toward sustainability and affordability, making a margin analysis the better solution to manage academia’s economic model. Conducting a good academic margin analysis considers the direct relationship of individual students in a classroom and the related direct instructional costs required to deliver educational services. In addition, it provides the flexibility to also incorporate indirect instruction costs and overhead.
The margin analysis must be detailed enough to account for student billing and financial aid activity along with specific faculty salary and benefit costs. This practice requires deep access into the student and payroll information systems. Without this granular approach, the university is only able to use generic tuition and cost patterns derived from averages and related assumptions. Margin analysis should not rely on anecdotal information when it comes to revenues and expenses at department level, degree level, or even the course subject levels. Therefore, a proper analysis should rely upon the detailed information available within the student information system, general ledger, payroll, and other key data sets across the institution.
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