Redefining capital resources in a new planning era
This series aims to help leaders of U.S. colleges and universities with the financially based planning and management needed to navigate a rapidly changing business environment. As described in the first article, a form of capital resource planning is currently in place in many institutions, but it often has limitations and problems. The second article highlighted a way for leaders to overcome these challenges by advancing to a more highly developed and integrated planning process that better aligns institutional strategy with long-term financial realities.
In this third article, we describe the breadth of investments you and other leaders can and should include in a contemporary definition of capital resources for improved, more evolved resource planning and allocation in your institutions.
Do you have an integrated strategic-financial planning process, and does that process include consideration of new programs, new buildings, online learning, and other initiatives that may require significant resource investment?
Often, the answer we hear from finance leaders in colleges and universities is, “No and no.”
This response is of concern given the fact that nearly 90 percent of recently surveyed senior financial professionals in higher education say that their institutions are diversifying or changing program offerings. Because an integrated planning process is not in place at many institutions, new offerings and ventures may be receiving consideration and funding in many different ways, through diverse, and often disconnected, decision-making structures.
In some institutions, for example, planning for new initiatives occurs through the annual budgeting process. In other institutions, new-initiative planning occurs through the capital budgeting process, but in both instances, the annual budgeting and capital budgeting processes often are disconnected.
The result? New initiatives may not be congruent with institutional strategy and/or long-term financial feasibility.
Leadership teams must ensure that the planning, allocation, and management of all capital resource spending occurs within the institution’s integrated planning and management processes.
Given competing demands for scarce capital resources, an organization’s long-term success and sustainability hinge on making smart, strategic investment decisions today. As illustrated by the effects of the recent volatility in the equity markets, leaders cannot rely upon a capital markets investment “safety net” to mitigate the effect of poor investment decisions in the strategy and operating domains. The impact of bad resource-allocation decisions has both immediate and long-term implications.
A thoughtful and comprehensive resource planning and allocation process helps ensure that the institution’s application of capital resources aligns with its evolving needs and its ability to absorb risk in a rapidly changing business environment.
Increasingly, colleges and universities are pursuing strategic investments in areas beyond traditional operations to meet the dynamics of the industry.
These investments add new risk, but they can be vital to protecting and/or improving an institution’s strategic and financial position. For example, to remain competitive, many institutions require new programs or technology, involving institutional and business partnerships, all of which require significant resources.
As the breadth of strategic investments expands to capture the institution’s changing direction and competitive responses, so, too, should the definition of capital resources. Rather than think of the application of capital in terms of physical, depreciable assets, management should consider all calls on institutional cash, including initiatives that encompass all types of proposed project investments.
In today’s environment, higher education leaders can and should define capital resources in an expansive way that includes:
• Facilities, property, and equipment
• Information technology
• New operating entities/programs
• Satellite campuses
• Online program offering(s)
• Program start-up subsidies/expansion
• Faculty recruitment/arrangements
• New businesses/ventures/partnerships/equity investments
• The balance sheet (i.e., cash reserves to fund a competitive liquidity and credit position)
By expanding the definition of capital resources, these and other investments become subject to the policies and structure of an overall institutional resource-allocation process. This creates a platform for direct integration of strategy development with project evaluation, and ultimately the allocation of capital resources. The approach more consistently captures the breadth of initiatives contemplated throughout the institution and consolidates into a singular process the decision-making for capital resource allocation institution-wide.
In our next article, we will provide more depth on the capital resource planning process and its fit within the institution’s overall strategic-financial-capital management cycle.