Financial Sustainability in Higher Education: How to Plan

For many UK universities, the central financial question is no longer whether budgets can be balanced for one year, but whether the institution can sustain its academic mission, investment needs, and operating model over the next three to five years.

A budget may still be approved, targets may still be met, and reporting may still appear stable, while longer-term resilience weakens underneath. This makes financial sustainability a broader leadership issue than annual performance might indicate. So, what do university finance teams need to see at an earlier stage in order to create longer term financial stability?

1. A breakeven budget does not automatically mean a sustainable model
2. Budgeting for a Long-Term Financially Sustainable Model

As in any other organisation a typical university can maintain short-term performance in several ways, including pausing discretionary spend, deferring investment, delaying maintenance, or drawing on reserves. In times of financial stress and uncertainty, these decisions can be appropriate.

The problem arises when temporary measures become a recurring practice and the issue of long-term financial sustainability is ‘swerved’. For instance, if technology and infrastructure investments are repeatedly deferred, or if reserves are used to support normal operations, the institution’s financial headroom shrinks. A university or college may therefore remain ‘paper compliant’, but their ability to sustain the scale of their existing mission shrinks while becoming less adaptable year by year. This is clearly not a good situation to be in, unless ‘reducing mission’ is the agreed strategic plan.

Long-term financial sustainability is built around a resilient strategic plan based on a clear, achievable and quantified vision, and managed risk. The problem is that across the sector financial pressures have continued to build and deepen. Key among them are:

• Reduced real-term funding and UK student tuition fee rates
• A highly competitive market for student recruitment, both domestic and international
• A high reliance and increasing uncertainty on international, premium fee-rate student recruitment
• Rapid technological change, including AI, leading to new teaching delivery options and assessments
• Increasing shifts in student expectations and choices
• High fixed and semi-fixed costs such as staff and pension costs, and traditional estates and associated costs
• ‘Heavy-hand’ regulation and changing government policy
• Political and public doubts about the current societal value-for-money delivered by the sector

So how can finance leaders help their Executives identify and manage a resilient, sustainable, strategic plan?

First, and fundamental is the ability to understand what drives performance, and modelling with these drivers to predict future performance and to measure that has been achieved.

• A university has many drivers of performance: the demand for, and income from its teaching, research and enterprise activities; and its human skills, capital, expenditure cost and success in delivering across all its activities.
  
  
• Modelling with appropriate drivers at the ‘right level of detail’ is essential: too detailed and it’s impossible to model; too aggregated and actionable meaning is lost. e.g. beneath headline student recruitment, trend metrics such as applications, offers, take-ups and clearing performance provide more understanding. Likewise, behind research contract awards, the trend rate of application numbers, value, and success rate are important future indicators.
  
  
• Modelling in this way also makes the income plan and resource plan, and overall cost structure, capital sufficiency, and drivers of cash generation both more visible and more resilient

Second, finance leaders need a driver-based model that integrates I&E, balance sheet, capital investment, loans, cashflow and key data (e.g. staff and student numbers, KPIs etc) in a single and dynamic model.

• This ‘performance model’ should be able to link to actuals in the finance system and thus be able to report performance against the adopted strategic plan.
  
  
• Being ‘integrated’ it is dynamic (I&E, B/S and C/F adjust automatically), and is an ‘assured single version of the truth’

Third, by developing the using modern FP&A technology, finance leaders can use the model to generate multiple scenarios and rolling re-forecasts. This enables:

• The model to be the repository of ‘different strategic options’, including what-if scenarios that differentiate the current operating model through, for example, shifts in target recruitment numbers, changes in portfolios and delivery methods, partnering with other institutions, campus development and TNE, or organic growth or size reduction.
  
  
• Risks of alternative scenarios to be evaluated, compared and reported alongside each other in a time and resource-efficient and transparent manner.
  
  
• It assists the Executive assess strategic choices, make choices based on risk appetite and measured ambition.
  
  
• Outturn performance to be compared with the plan and adjustments to be made

Fourth, finance leaders need a means by which accountability for delivery of the plan can be promoted and achieved. An integrated, driver-based, ‘right-level’ model helps achieve this.

• It makes strategic choices and risks clearer for decision-making by the Executive and strengthens financial governance by the Board.
  
  
• It helps create a culture of accountability with clearer buy-in and responsibility at every level.
  
  
• It enables performance against the plan to be understood, rolling re-forecasts to be updated swiftly, and future performance forecast and more assured.

Finance teams play a crucial role and by using modern FP&A software they can translate both emerging trends and sudden external change into strategic choices which can be managed to ensure financial sustainability. This includes cash and capital planning as well as I&E and staff and student numbers planning in an integrated model that covers in-year, 5-year, and 10 or 20+ year planning.

When the current financial position and future options can be modelled effectively in this manner, boards and executive teams gain a clearer basis for decision-making, strengthening governance, accountability at all levels of management and longer-term stewardship.

Find out more

In the higher education sector, long-term financial sustainability depends on understanding and modelling structural pressures before they narrow strategic choices. Get in touch today to find out how we can help you plan for a long-term financially sustainable operating model through integrated planning tools that support governance, accountability and performance.

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