3 Signs of Financial Difficulty

(From Inside Higher Ed) Accreditation cannot be taken as a signal of long-term financial health because accreditors often do not indicate financial trouble in their reports until a year or two before a college or university closes, argues David P. Haney, a higher education consultant. Institutions dependent on tuition would do well to head these early warnings of financial difficulty so they can correct course before it's too late:

• Cash issues. With accrual-based accounting systems, which commingle cash and noncash assets in various ways, even a balanced budget can hide serious cash-based problems.
• Long-term implications of financial decisions. Too many educational institutions rely on short-term trends or on a snapshot of current finances when budgeting. An asset-rich and temporarily cash-rich institution can get a better long-term picture using the Composite Financial Index (CFI), which identifies long-term trends that may indicate trouble.
• A culture of denial in the accreditation process. Even if an institution recognizes problems, it has an incentive to put the best face on every aspect of its operations. Presidents and CFOs should look for anomalies in trends in cash revenue and expenses and operational cash positions each year. 

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