There are numerous myths regarding the basics of managing an academic enterprise. Through them all shines one inexorable truth, “Curriculum drives enrollment, enrollment drives revenue, revenues drive everything else!” Because the curriculum generates the primary source of revenue, the relationship between revenue and expenditure per unit is the primary area of concern. In the case example below revenue are tallied by course section (as the primary unit of accounting), expenditures include direct section costs and the section share of overall institutional costs to sum to expenditure. The condition where revenue meets or exceeds expenditures, the difference between revenue and expenditure is called a margin. The difference is called a deficit when expenditures exceed revenue. When the average section size is lower than the break-even section size, the deficit is said to be structural.
This case example of the margin is a highly distilled illustrative study from a client engagement. It shows that the actual revenue for the 5,000 enrollment institution was $44.3 million and could support for example 1,443 sections averaging 20.68 students per section. The actual expenditures for the institution were $57.4 million, the institution offered 1,871 sections and enrolled on average 15.96 students per section. This real scenario generated a structural deficit of $13.1 million offset by deferred maintenance, a suspension of non-essential travel, a hold on new hires, a reduction in staff, a reduction in benefits, the sale of real estate, increased cost recovery from grants and contracts, and creative cash management.
The curious element in this case study was a report to the Board of Trustees that mentioned a positive cycle developing in the economy and the potential for more favorable economic circumstances ahead. I offer Bill Gates observation on the subject,
…the second biggest pot of money, which is the education pot, both K-12 and higher ed, gets raided. And, so, on a per student basis, that money has gone down, and there’s no likely prospect that it will go back up. Some people have thought of it as cyclical, but, in fact, if you look at the last several cycles, it goes down in the cycle and then, during the good years, it stays at that level, and then, as the next cycle is hit, it’s gone down again. – Bill Gates, on The Future of College, NACUBO, August 8, 2014
Managing the margin requires massage of several variables including tuition, enrollment, the number of sections offered and average enrollment in each section. Every institution should calculate and know what their break-even sections size is given their other variables. Every academic should understand these basic relationships and the concepts of margin and structural deficit. Each institution is different in how revenues and expenditures are managed so talk to your Chief Financial Officer and get the facts.