The Revenue Portfolio - a hierarchy

In an era where our primary demographic is either declining in number or opting for alternatives to a traditional education, conversations often turn toward enhancing revenues.?Are there new ways to price our product??Can we identify alternative sources of income? Can the length of time a student is engaged with us be lengthened??Where should we put our emphasis?

In our work with over 150 institutions, we find a number of revenue sources.?I’ve attempted to rank order them from the ones that generate the lowest associated costs to those who tend to have the highest.?Indeed, some new revenue sources may actually generate expenses that far exceed the funds being drawn in.?Consider this list:

1. Government appropriations

2. Gifts, asset sales or estates that are unrestricted

3. Grants and restricted gifts supporting current activities

4. Gifts restricted for current scholarships (non-endowed)

5. Approved endowment spending released from restriction

6.??Subsidiary enterprises unrelated to the student experience

7.??Net Tuition

8.??Auxiliary revenues

9.??Gifts to the endowment

10.??Non-contributory grants and gifts

At the outset, understand that each category has some cost associated with it. Whether it is an annual outlay or funds that were spent long ago, no gift is totally free.?Let’s run down the list.

1.???????Government appropriations are often associated with public institutions and represent an operational subsidy.?These amounts are subject to change at the whim of the legislature but provide a way for students to receive an education for far less than actual cost.?Government relations is the primary cost, along with the costs of reporting. Because these funds could be adjusted downward retroactively, creating a contingency to offset the impact of such a change is beneficial.

2.??????Unrestricted gifts can be from annual fund initiatives, estates or gifts given by loyal alumni and friends. They can also be from sales of unneeded assets, A spike in these should not result in a permanent increase in the budget, particularly if a large estate or asset sale is the primary reason.?The institution and the advancement office have likely invested in gleaning these but the immediate costs tend to be a low percentage of the revenue.

3.??????Grants and gifts supporting current activities are similar to unrestricted gifts in that costs are minimal in association with the revenue. A donor may give to “Faculty Salaries in the Biology Department”, covering what would be paid anyway.?Grants of this nature are rare but do occur when the application is written carefully. Unless they will be recurring, they should not change the longer-term budget planning for the institution.

4.??????Current scholarship gifts can also be similar to unrestricted gifts unless they are given to students over and above their normal aid package.?Too often, these funds become a reward/bonus for the student, negating the bottom-line benefit for the institution.?We recommend packaging these awards, allowing them to replace unfunded discounting.

5.??????Endowment spending is a wonderful benefit from having long-term funds invested for the stability of the institution. Whether scholarships, departments or operations are supported, these funds can be put to immediate use for bottom-line benefit.?If they represent added student awards or require spending above the normal flow, their benefit is limited.

6.??????Subsidiary Enterprises - Some schools have a radio station, nursing home, cell tower, oil and gas leases or other resource that acts like a general endowment in supporting the institution. Too often, starved for revenues, schools neglect these resources to their detriment.?Feed them a little and they will feed you a lot in return.?

7.??????Notice how far down net tuition revenue (NTR) is on this list.?This is because we too often fail to recognize the costs connected with incremental revenues of this kind.?Students use admission, financial aid and student support services. Classes that are popular and near capacity may require a new course section with the addition of a couple new students. Sometimes we attempt to entice students with out-sized financial aid awards or expensive or targeted marketing efforts and lessen the benefit of incremental NTR.?Added to this are those students who don’t stay around very long, are in an expensive program or require above average remedial assistance. Adding students who will retain is critical in an era of declining demographics.

8.??????Auxiliary revenues are next on the list.?Dining revenues are typically associated with high percentage costs from the food service provider – at least two thirds of board fees in most cases.?There are incremental costs for the room component when enough students merit another RA or for utilities alone.?We estimate that at around 10%.?The caveat with this is to avoid lumping student revenues in one pot.?NTR tends to be much more beneficial than Auxiliaries from a net contribution standpoint. And, if an institution neglects to keep dorms maintained, Mom’s in particular will be less inclined to enroll a son or daughter.

9.??????Gifts to the endowment are welcomed always but their impact on the operation is longer term.?It often takes three or more years to generate income from new gifts and the annual payout is 5% or less of the original gift.?Nonetheless, the larger this is and the less it is restricted, the better off the institution will be over the long run.?These gifts also tend to require the most effort on the part of the advancement staff.?Some are cultivated over many years.

10.??Non-contributory grants - Some gifts are worth bragging rights and that is just about it. These are grants that require an institutional contribution for a new endeavor that is unlikely to ever be self-funding.?Certain “centers” are often funded in this way, with the institution picking up the whole tab after the funding period elapses. Establishing a healthy “Negotiated Overhead Rate” can lessen the net cost impact of such grants. ?Pass through gifts for the soccer team to travel to South America represent another form of this genre.?Yes, these are great experiences but the benefit to the financial performance of an institution is tangential at best. ?Some cost more than they bring in.

A final caveat is in order.?The primary purpose of your institution is to educate students within the context of your mission.?If revenues from those endeavors are materially inadequate to support the entire enterprise and these other revenue sources demonstrate high variability, a good deal of work is needed to reduce unreliability and establish long-term stability.

As always, we stand prepared to assist you in evaluating and projecting your revenue portfolio. We want you to thrive during these days of increasing demographic constraints.