What's Working, Part Six: A Sustainable Core Academic Margin

How do you know if a college or university is in financial distress and vulnerable to closure?

This ought to be easy to discern. But it isn't. The business of a university can be mind-numbingly complex. There's not one benchmark that's a failsafe way of measuring a university's financial health. 

But in our work with private, faith-based institutions, we've taken to watching one core metric that does usually signal either financial health or financial vulnerability. That is the institution's CORE ACADEMIC MARGIN.

Let me explain.

Private institutions usually get their money from four basic sources: (1) Academic tuition and fees, (2) auxiliary services like room and board/bookstores/conference services/etc., (3) gifts and grants from donors/the government, (4) income from endowments and other investments. 

The vast majority of our private faith-based institutions get the lion's share of their operational funds from academic tuition and fees. 

The difference between the cost of offering those academic programs, and the money earned from them, is what we call the institution's CORE ACADEMIC MARGIN.

Let me give you an example. Here are the numbers of a typical smaller university. (These numbers come from the institution's audited financial statement.)

Total Annual Income -- $25,500,000 (non-donor-restricted)

Income from Tuition/Fees -- $14,400,000

Academic Costs -- $11,700,000

Core Academic Margin -- $2,700,000 or 19% margin

Here's what this tells us. The university has $2.7M from its core business, plus whatever net income it can take in from donors, auxiliaries, and investments, to run its physical plant, pay for deferred maintenance, fund depreciation, and run all of its other non-academic departments and infrastructure.

We have benchmarked this margin for hundreds of private institutions. Our observation is that the most financially healthy private institutions typically have a core academic margin of 45% to 55%. 

In other words, they have about half of what they earn from their core business (plus net income from the other three sources), to operate the rest of the university.

When a private institution's core academic margin gets below about 30%, they become vulnerable financially unless they have other rock-solid sources of income from something like a large unrestricted endowment. You just can't cut enough in all those other areas to still present an attractive option to potential students. 

I'll say again, this isn't a failsafe measure of financial health. But it's proven to be a helpful signal for administrations and boards to watch.

One final point here: If your academic margin is low, it should prompt you to do two things. First, do the hard work of understanding and justifying your academic costs. Second, cutting alone will not get you a healthy margin. You must create a sustainable mix of high- and low-margin programs.