Some common themes and recommendations have emerged through conversations with impacted university clients about their operating models and revenue profiles during the global pandemic. Here are some of the most actionable ones:

Cash Forecasting Gets More Frequent, but Not More Granular

As the crisis unfolded and revenue sources were disrupted and uncertain, treasurers expressed a near universal need for more frequent cash flow forecasts and scenario planning in order to determine potential liquidity needs.

Generally, cash forecasting occurs, at most, once a month, utilizing the capabilities of a treasury workstation. However, these systems have limited scenario model capabilities and lack the ability to quickly or easily change the near-term forecast based on changing assumptions.

During the crisis, most treasurers turned to Microsoft Excel to build daily and weekly cash forecasts, model a variety of stress scenarios and adjust the forecast as actuals came in. These simple spreadsheets were used not only to understand potential liquidity needs, but were also utilized in budget analysis, balance sheet forecasting, long term projections and risk analysis.

While stress testing and shorter run cash forecasts were helpful, we heard repeatedly that it was not necessary to get too granular on any of the inputs. For stress testing, four scenarios with various shocks (i.e., 10%, 20%, 30%, 40% revenue declines) were helpful to understand potential forward-looking paths and high level estimates of cash needs at a department basis were much more usable than individual line items.

In times of crisis, knowing how much cash you could potentially need helped guide longer term funding and operating decisions.

It Doesn’t Matter What You Have If You Don’t Know How to Use It

Oftentimes, organizations build out credit then put them on the shelf for a rainy day. But when that rainy day comes, will anyone in your organization know how to use it?

We heard this repeatedly around lines of credit, commercial paper programs, VRDNs and other bank facilities. Organizations had liquidity options, but weren’t sure how to use them or underestimated how much time it would take to get them up and running. Others were caught paying higher facilities fees or renewed at higher rates as markets seized in March 2020. When attempting to tap lines of credit, some schools thought it would take a day, but their financial institutions advised it could take a week or longer to get access to cash.

Practice using these programs and facilities before you need them. In changing market conditions, you may find you have the capacity but not the flexibility you are hoping for. Make operational preparedness a core part of your liquidity program.

The pandemic also forced universities to abandon paper intensive processes — like cutting checks. For many, the move to remote work suddenly moved their organizations to paperless payments, introducing opportunities for reduced costs and efficiencies. Continually look for the chance to allow technology to create faster, safer more efficient workflows

Build Liquidity Management Guidelines That Can Serve in Any Economic Condition

A formal set of liquidity guidelines combines cash forecasts, long-range budget commitments, stress testing and credit considerations into benchmarks that can be used to better guide liquidity decisions.

Typically, these guidelines target a specific days cash on hand or threshold balance based on the timing of cash flows into and out of your organization. Perhaps they balance the asset/liability matching to minimize need to borrow or are used for specific bond covenants or credit rating targets.

The guidelines should consider all sources of liquidity: Bank balances, investments, lending arrangements and debt. Liquidity guidelines are an important part of your investment policy statement and the day-to-day management of liquidity across the university.

Liquidity Structure Can and Should Change as Conditions Dictate

Standard liquidity structures include three tiers: 

  • Tier 1: Operating Cash
  • Tier 2: Working Capital, typically 1-3-year duration
  • Tier 3: Long-term Fixed Income, Equities, Co-Invest with Endowment

As the pandemic took root, many universities liquidated portions of their Tier III liquidity and moved to a more conservative posture — not to market time, but rather to fund a potential budget deficit and avoid borrowing. Others used their weekly cash forecasts (see above) to open a more frequent dialogue with their cash managers, shortening durations and making more cash available sooner.

On the opposite end of the spectrum, universities with very large pools of excess cash found themselves funding their endowment, or at the very least, pushing off cash distributions to allow the endowment to take advantage of market selloffs, remain invested, or meet cash calls in their private equity portfolio. Adjustments to liquidity allocations can be used to reach the liquidity benchmarks you set forth for your organization.

Optimizing Liquidity Across a University is Difficult, but Getting Easier

When we asked customers to define what an optimized liquidity looks like, we got a range of responses:

  • “Having as little as you need”
  • “Knowing where your money is and how much you need”
  • “Understanding what to do with your cash on hand and what can be executed in the bond and debt markets”’
  • “Finding the highest and best use of cash”

Having too little liquidity presents major challenges —your focus is going to be on getting through daily tasks and long-term strategic growth efforts will suffer. That said, having too much liquidity, or liquidity that isn’t allocated effectively or is sourced too expensively, will also have a negative impact.

The key to optimizing liquidity is a strong treasury function. Leveraging some of the new tools coming out of the crisis — such as cash and balance sheet forecasting, budget analysis and liquidity metrics — treasury can work across the university to determine the priorities, face inefficiencies, and find ways to maximize cash utility.

The pandemic created the necessity for more frequent conversations across facilities teams, academic planning, capital improvements, budget, finance, and investment functions. These conversations should continue in more normalized times to help universities take the next steps forward in a rapidly evolving environment when COVID-19 has accelerated major challenges facing colleges across the country.