Reserve reporting allows a University to sustainably carry out and adjust for changes in its missions and objectives. Reserve balances are often questioned, but they are imperative for several reasons that include:
- Bridging cash flow needs and economic cycles
- Maintaining financial solvency
- Funding expected/unexpected opportunities
- Purchasing and maintaining university assets
- Allowing for new debt capacity to fund major capital needs
Our experience shows that many institutions struggle to get a hold of their reserves and determine how they are bucketed and planned to be used. Providing clear data regarding the amount of reserves an institution has and needs is instrumental to reporting the present and planning and meeting the needs of the future. Reserves need to be transparent, trusted, and managed well. One of the best ways to do this is to leverage reserve reporting to understand your institution’s current position and appropriately plan for the future.
“Reserve reporting is a critical step in understanding how an institution can leverage funds to accomplish its strategic objectives,” says Bryan Elmore, CPA, Assistant VP of Budgets & Business Operations at Auburn University. “It also helps define the internal economy while providing insight to institutional leadership (including the Board of Trustees) as macro decisions are made.”
How Important is Reserve Reporting for Your Institution?
Many of us have been part of an association (Condo, Homeowners, Non-Profit) and had to pay assessments/dues that build a reserve for future spending, and some of us have had the unfortunate experience of using the reserve to pay for unexpected expenses. Those that have had to use reserves know how important this is and why it can be so expensive. While many of us are familiar with the concept, it is perplexing how quickly people forget the size, complications, and restrictions put on all of these funds/reserves at higher education institutions.
Properly managed reserve funds allow a university to sustainably carry out and comfortably adjust for changes in their missions and objectives in real time. Being transparent about the amount of reserves an institution has is instrumental in the reserve reporting process, but it is only helpful with context. Having this information readily available allows for an institution to be prepared and proactively work towards meeting regional accreditation standards for financial and physical resources, as well as for a proactive remediation plan to be put in place.
While reserves are often presented on readily available financial statements, they do not indicate what funds are committed or internally encumbered, which leads to most people believing these are unrestricted funds available to be spent. Nothing could be farther from the truth.
Creating processes and reports that allow for transparency and communication of an institution’s reserves helps ensure a stable financial future and ease discussions around these reserves. This, in turn, supports its ability to perform daily operations, complete internal plans, and respond to external shocks. Essentially, it is important for an institution to:
- Transparently communicate an institution’s reserves—allow for analysis, and help the institution understand reserves to help build and maintain sufficient capital for spending of these funds on operating expenses and strategically carry out mission priorities.
- Reserve “category” alignment—better communicate what reserves are and why they are essential to the institution’s financial health. This can help answer questions from board members, public officials, faculty members, and clear up confusion from internal stakeholders about which funds are available to spend.
- Consider and build reserve balances to fund future needs for strategic expenditures—such as capital and technology renewal.
- Ensure reserves will be available to meet the future needs of an institution—to keep pace with new programs, degree disciplines, and changes in student demand.
Using Frameworks to Align Systems and Reporting
Leveraging a framework that creates clear data reporting that is transparent can simplify and increase an institution’s financial standing awareness. To aid this awareness, an institution should group sources of funds into multiple allowed and relevant usage categories. Consolidating this liquid or relatively liquid assets into groupings of how they will be used, and any restrictions allows for questions to be answered quickly.
For this to be completed, an institution needs to consolidate their source systems to gather this information and align funds into various categories using a technology system. These categories are typically created and grouped by the institution themselves or with assistance from a third party, like Spaulding Ridge. The underlying balances of the funds are then mapped to these categories. Some examples of these categories may include but are not limited to the following:
These are committed funds for operation and can include daily operations, designated capital projects, maintenance, and other near-term improvements. These funds can also be held at the various units/colleges themselves for specific programs and improvements or within a central administration for expected and unexpected operating expenses.
State Funds (If applicable)
These funds are almost always allocated by the state for a specific purpose. Accurately managing and spending these annual funds is crucial since they typically need to be spent within a given year and cannot be carried forward. Whether these funds are to directly support students or specific initiatives at the institution, it is important to provide timely reporting of these funds on a periodic basis to ensure effective spending.
Capital Investment Funds
As many schools have aged or undertaken major capital expansion projects over the past 20-50 years, these buildings and assets have and will continue to age. They have to be proactively maintained, renewed, and, eventually, replaced.
Managing and incorporating the known backlog of projects needed to keep an institution’s buildings in the shape to both attract and retain students and faculty members has only become more important. If these assets are not maintained, this can lead to declining enrollment and loss of faculty members— a trend that can be difficult and costly to reverse.
Leveraging information and expected costs over the coming 10- to 20-year horizon can help an institution properly plan and ensure reserves are there to cover these necessary expenses.
Strategic Investment Funds
These are funds designated by the institution for specific initiatives such as expanding or creating new programs, funding the strategic plan/mission of the institution. These funds need to be built up over time because of the significant up-front costs that are incurred when these initiatives are undertaken.
Institutions have to manage, maintain, and leverage their existing footprint. When an opportunity arises that can include expanding and acquiring adjacent or even distant real estate to meet the needs of the institution and its stakeholders, accurate data can aid in the decision-making process. While this type of reserve fund may be the most difficult to justify, it can arguably be the most important.
Having an adequate reserve to acquire land and additional space is necessary for many landlocked institutions. Proactively managing the surrounding environment and taking advantage of opportunities, no matter what they are, when they arise, can lead to significant gains for an institution.
These funds are set aside to cover things such as uninsurable litigation risks; funds that account for abnormal or unexplained occurrences; poor performance on fundraising and/or grant-seeking activities, and other unplanned contingencies. These funds are your true rainy-day funds that can cover once in a lifetime, 100-year events. Rush Sherman, CFO of Georgetown College, encourages, “building appropriate reserves, and having a future oriented operational strategy…. Leaders are facing numerous financial challenges so building financial safety nets is imperative.”
Developing and reporting on these reserves categories provides the institution with the clarity and transparency needed to better manage and allocate for the future needs of an institution. It allows for open and candid discussions about why these reserves are needed to fund the institution’s mission and ensures alignment across all stakeholders. This categorization also allows for the funds to be drawn upon in the future related to their usage.
Reserve Planning and Forecasting
Once a framework is developed and aligned for reserve reporting, the next step is to ensure that accurate planning and future needs are accounted for wherever possible. This is primarily done by incorporating the impacts of known strategic spending, capital renewal, and other costs to your reserves on a multi-year basis. Some examples of this are:
Committed Fund Flows – Funds encumbered, held, and/or expected to be spent on a recurring basis or specific date
Planned Fund Flows – Funds planned, but not committed, but still held for a purpose or use at a future date
Discretionary Fund Flows – Funds not committed or planned but used to meet unforeseen opportunities or expenses
Contingency Fund Flows – Amounts held specifically for contingencies or statutory reserve policies
Accounting for the above buckets will help lead to proper accounting of the known expenses, set aside dollars, and fund flows, allow for scenarios to be run for possible changes and the impacts of these changes to metrics, ratios, and covenants.
The more informed discussions of the impacts to metrics and ratios can commence, including leveraging the Primary Reserves Ratio, Days Operating Cash, and Target Reserve Amounts. These are just a few metrics that allow for better transparency into where the reserves stand related to spending patterns.
For example, the Primary Reserves Ratio provides an indication of how long the institution could operate using its expendable reserves. Expendable net assets should increase at least in proportion to the growth of an institution’s expenses. If they do not, this ratio will highlight changes with this metric, issues with the trend, and allow for corrective action to be taken.
Being able to see these metrics, ratios, and covenants, as well as clearly communicate them, in a way that allows the University to proactively build reserves and anticipate future expenditures allows the institution to better manage the flow of funds and position themselves for success.
Reserves are vital for the long-term operational viability of the institution itself, so the more information an institution has, the better able it is to communicate balances and the better able it will be to ensure reserves are available to meet future needs. Proper, proactive management of these reserves, future spending, metrics, and ratios is critical to steer the university to financial stability and success.
How can Spaulding Ridge help with Reserve Reporting?
Spaulding Ridge is here to help institutionalize the reserve framework(s) you have. We do this by consuming information from your source systems (ERP and others), allowing this information to be readily distributed, and provide a clear and transparent way to view your reserve reporting through the Anaplan platform. We know this can be difficult and we are here to help with mapping and alignment as well as putting processes and models in place to increase transparency and communication of reserves.
We also help your institution align spending, understand the impacts of initiatives, and help ensure the institution stays within target ranges for past, current, and future needs. In addition to this, we can:
- Provide clean and transparent way to view reports and provide information
- To University Stakeholders
- To Ratings Agencies
- Regional Accreditors
- Align funds with expected revenues, expenses, and other funding needs
- Tuition & Auxiliary Revenue
- Gifts and Grants
- Capital Planning & Renewal
- Planned Strategic Investments
- Manage benchmark and ratio reporting ranges
- Take this past reporting and prospectively manage reserves into the future
We provide transparency in data, highlighting fund balances, as well as what their sources and uses are, allowing the university better to maintain their financial stability and positioning for the future.
Spaulding Ridge can help your institution clearly report, plan, and build reserves sustainably. Reach out to Curtis Gratz, Associate Partner at Spaulding Ridge, to transform the way you handle reserve funds and reporting today.