Understanding University Finances
... a very short guide
Very few people seem to understand university finances and, distressingly, this includes many academics and most policymakers. This is an attempt to condense the key points you need to know.
Universities are big and complex organisations, with large turnovers and very thin margins, often close to break-even.
Though universities are classified as 'public bodies', they are operated as independent charities with trustees that hold fiduciary duties. Universities are not part of the public sector.
Government is now substantially a minority funder of UK universities.
Universities plan to achieve surpluses. These surpluses are reinvested to maintain estates, enhance capabilities and infrastructure, and provide a buffer against sector volatility.
As it stands, both research and the teaching of UK undergraduate students lose money. Other core activities of UK universities, including civic engagement, widening participation, and business collaboration, are generally unfunded and delivered on a best-efforts basis. Only 'unregulated' fees (postgraduate and overseas) yield net income.
Universities differ very significantly. Though their core business model is more or less the same, the resources and strategic advantages they can deploy vary greatly. Generalisations about the sector are rarely useful (other that those that follow).
Universities negotiate salaries collectively, independently of public sector agreements, and operate (alongside others) a very large employer-sponsored trust occupational pension scheme. Staff pay is by a long-way the single largest expense category.
To maintain their mission, university finance is built upon a complex edifice of cross-subsidies realised through management accounting models that specify the allocation of resources. To understand how universities work, it is essential to understand how these models operate in practice.
Much of what universities spend a great deal of time discussing - such as global strategy, impact and innovation, development and philanthropy - even research which is mostly 'money-in, money-out' - has for the largest part very little effect on the bottom line.
University financial statements are a poor reflection of the real state of the institutions. Deficits can be embedded in estates, facilities, infrastructure and operating models. It is very difficult to assess financial performance from the outside.
Universities access capital for investment through private borrowing, and are becoming increasingly leveraged. Such borrowing often comes with covenants, meaning contractual terms that impose financial or operational restrictions, limit flexibility, and affect the institution’s balance sheet.
Because it takes at least three years for a cohort to graduate, and as much as two years to get a course to market, universities can sustain some shorter-term fluctuations, for example in student demand. They take however, a significant time to adapt to structural change. Universities have a 'long time constant'.
Most academics (and policymakers) are familiar with 'spreadsheet' budgeting and annual static planning. Universities however, must also manage their cash and cash flow in a dynamic and competitive market with significant overseas exposure. They operate more like businesses, requiring real-time financial oversight and a focus on liquidity.
Universities operate in a competitive and resource-constrained environment with high variability in reputation and associated reward. External targets tend to override mission-driven objectives in this setting. This means that even small financial incentives can drive significant behavioural changes, sometimes creating distortions.
The functions of a university are complex and intertwined. Academics are substantially autonomous and operate within federated structures, often varied by subject. Very few universities understand their cost base at a reasonable level of granularity, and most have great difficulty controlling it except through headcount.
With this in mind I hope you will be able to avoid any responsibility for running a university.
[this article was inspired by @clauswilke https://substack.com/@clauswilke/p-166551372 thanks!]
I can't remember who it was who said that the most reliable estimate of the number of active students in a university came from the number of sausages consumed in the canteens.
A very useful and helpful summary of the financial context of U.K. higher education, Anthony. Many thanks for writing and sharing this.
One observation is that alongside staff costs being the most significant element of university expenditure, staff time is also the most valuable resource. However, I question whether our systems and approaches for academic workload planning are working effectively.