The "Missing Link" in Higher Ed Finance: Defining a Meaningful Operating Measure
Most Board members and Presidents look at the bottom line of the Statement of Activities to determine if the institution had a "good year." However, in the world of non-profit accounting, that final number can be incredibly deceptive.
A significant surplus might be driven by a one-time restricted gift or a market spike in the endowment, while a deficit might be driven by one-time expenditures or market declines. Without a clearly defined Operating Measure, leadership is effectively flying blind.
Why an Operating Measure is Essential
Best-in-class institutions implement a "Measure of Operations" to separate recurring, controllable activities from non-operating volatility.
Clarity in Performance: It allows the Board to see if the core mission—teaching and student services—is actually paying for itself.
Informed Decision Making: It prevents leadership from using one-time "windfalls" (like an unusual net asset release) to justify permanent increases in operating expenses.
Consistency: It aligns the audited financial statements with the internal budget, making it easier to explain variances to stakeholders.
The Process: How to Develop Your Measure
Developing an operating measure isn't just an accounting exercise; it’s a policy decision. It requires a consensus on what "counts" as daily operations.
1. Define the "Inclusions"
Typically, this includes tuition and fees, auxiliary revenues, normal grants, annual fund and restricted gifts, and the annual draw from the endowment. On the expense side, it includes all natural classifications: salaries, benefits, operating expenses, and depreciation.
2. Segregate "Non-Operating" Items
To get to a true operating measure, you must move volatile or non-recurring items "below the line." These often include:
Realized and unrealized gains/losses on investments.
Large, restricted capital gifts.
One-time restructuring costs or legal settlements.
Changes in the value of interest rate swaps.
3. Formalize the Policy
Once defined, this measure should be presented consistently in the Statement of Activities. This transparency builds immense credibility with accreditors and bond rating agencies, as it shows the institution has a disciplined way of measuring its own success.
The Strategic Payoff
When you have a reliable operating measure, the conversation in the Boardroom changes. Instead of debating the nuances of GAAP accounting, you are discussing institutional sustainability. You can clearly see the results of your controllable operations and begin using those results to ensure that the institution serves future generations of students.
This article is produced by Kairos Higher Ed Partners. Please visit www.kairoshigheredpartners.com for more articles and to learn how we can help you improve your business model and recover your strategic advantage.