How to Promote Financial Literacy Within Your Institution

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In last month’s blog, we introduced the concept of institutional financial literacy: the ability of faculty and staff across the institution to understand where the institution stands at any given time with respect to key elements of its financial position as measured on its balance sheet and income statement. Financial literacy cultivates a common understanding of financial health that provides context for leadership’s decisions and a common language to address issues. It is also an essential tool for cultivating the next generation of campus leaders, who must understand that academic growth and strategic initiatives cannot succeed without sufficient financial resources to support them.

Given the importance of institutional financial literacy, why is it uncommon to find it on most college and university campuses? The answer often lies in assumptions on both the financial and academic sides of the institution. These assumptions can be summarized in two simple questions. On the financial side, the question is, “Why do I need to share?” On the academic side, the question is, “Why do I need to care?”

The need to share—and care—about financial information

Finance officers may be reluctant to share financial data for several reasons. Finance is by its nature risk adverse; sharing financial information opens the possibility for misinterpretation of that information. Finance officers may also believe that faculty and staff are simply not interested in the information, especially if it conveys the need to limit spending. Faculty may, in fact, have the mindset that finance officers want to keep them from spending (just as finance officers may have the mindset that faculty do not want to hear about financial limitations).

To move beyond these mindsets—which reinforce the “why do I need to share” and “why do I need to care” questions—requires a leap of faith on both sides. Finance officers need to understand that without transparency around financial information, and a frank assessment of where the institution stands financially, faculty members cannot be expected to think about their role in ensuring the institution’s long-term sustainability. And faculty members must understand that financial information is not meant to block their ideas for growth or new strategic initiatives, but to demonstrate why those ideas must be supported by sufficient resources to enable them to become a reality.

The need to overcome a resistance to sharing and caring about financial information is particularly acute if the institution is facing a gap between its expenses and available resources. If finance does not share the existence of that gap, the gap is likely to become even wider. And if faculty do not understand the need to take action to help to close the gap, their programs and positions may become even more vulnerable to reductions or elimination.

Promoting financial literacy

Although finance is the source of the information that promotes financial literacy, it does not have sole responsibility for the success of a financial literacy initiative. Other members of the leadership team (including the president and provost), the board of trustees, and department heads must also be committed to promoting the effort.

Last month’s blog identified five financial “vital signs” that should be the focus of a financial literacy effort: unrestricted cash, revenue, expenses, debt, and risk. Not all the metrics used to report on these vital signs will be purely financial: enrollment and retention numbers, for example, will be key metrics to describe revenue and risk. The most important thing is to use the same metrics consistently, report on them regularly, and explain whether movement in the metrics is good or bad for the institution.

For finance officers, a simplified version of a rating action report from one of the rating agencies can serve as a template for financial literacy reporting. These reports draw upon key metrics to support the rationale for the rating, and then identify factors that could lead to a rating upgrade or a rating downgrade. Similarly, a financial literacy report can describe the key metrics for each of the institution’s vital signs, indicate whether there has been a positive or negative change in these metrics from the last report, and use these metrics and trends to define a current state of financial health (e.g., declining, stable, or improving). It can then identify what factors, over the long term, could improve or impair the institution’s financial health. In the simplest terms, the report could identify which long-term trends would make the institution happy, and which would make it sad.

Most importantly, a financial literacy report should identify which actions could make long-term trends more likely to result in a happy outcome for the institution. Ideally, these actions will link back to the institution’s strategic plan. And the report should also identify what financial results will be required from these actions—again, ideally linked back to the institution’s financial plan—to make the strategic plan a reality.

Promoting financial literacy thus serves two important purposes. It makes everyone aware of the institution’s current financial health, and whether that health is holding stable, improving, or declining. And it makes everyone aware of what will be required to ensure the institution’s financial health over the long term.

The worst possible outcome is for awareness of an institution’s financial health to come only when it is too late for a recovery. No matter what an institution’s financial health is today, promoting financial literacy helps to ensure that changes to that health will be known to all and addressed in a timely and effective manner.