Financial Risk Planning
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What is risk management?
What is risk management?
Risk management is the process of identifying, assessing, and controlling risks that may impact an organization's objectives. It involves analyzing potential risks, evaluating their likelihood and potential impact, and developing strategies to mitigate or avoid those risks.
There are some types of risks that may affect the higher education institutions:
Grant and contract risk: Higher education institutions may receive funding from external sources such as grants and contracts. These funding sources may be subject to risks such as changes in government policies or funding priorities, delays in payments, or failure to meet grant or contract requirements. Institutions may need to carefully manage their grant and contract funding to ensure that they comply with funding requirements and use the funds effectively.
Endowment risk: Higher education institutions typically hold endowments, which are long-term investments that are intended to support the institution's mission and operations. Endowments are subject to market risk, credit risk, and liquidity risk, and the returns on endowments can fluctuate significantly. Institutions may need to carefully manage their endowments to ensure that they generate sufficient returns to support the institution's needs.
Student aid risk: Many higher education institutions offer financial aid to students in the form of grants, scholarships, and loans. Institutions may face financial risk if they offer more financial aid than they can afford, if student loan defaults increase, or if changes in government policies impact student aid programs.
Reputation risk: Higher education institutions are subject to reputation risk, which can arise from various factors such as scandals, public controversies, or negative media coverage. Reputation risk can impact enrollment, fundraising, and donor support, which can have financial implications for the institution.
Regulatory risk: Higher education institutions are subject to various regulations and compliance requirements, which can be complex and costly to implement. Changes in regulations or noncompliance can result in financial penalties or other consequences, which can impact the institution's financial health.
In summary, higher education institutions face various financial risks that are unique to the sector. Effective risk management requires careful monitoring of these risks and implementation of appropriate risk mitigation strategies. By effectively managing financial risks, institutions can ensure financial stability and sustainability and continue to provide quality education to students.
Financial risks
Financial risks
Financial risk in higher education refers to the possibility that a university or college may experience financial losses or difficulties due to factors such as market volatility, changes in demographic trends, declining enrollment, or mismanagement of funds. Financial risks can have a significant impact on the financial health and sustainability of higher education institutions, as they rely on various sources of revenue, such as tuition, endowments, grants, and donations, to fund their operations and programs.
Risk management process
Risk management process
The risk management process is a framework for the actions that need to be taken. There are four basic steps that are taken to manage risk; these steps are referred to as the risk management process. It begins with awareness and identify risks, goes on to analyze risks, then responds and control, and finally, the risk is monitored and reported. The risk management process is an ongoing and iterative process that requires ongoing attention and effort to ensure that risks are effectively managed and minimized.
The risk management process is a framework for the actions that need to be taken. There are four basic steps that are taken to manage risk; these steps are referred to as the risk management process. It begins with awareness and identify risks, goes on to analyze risks, then responds and control, and finally, the risk is monitored and reported. The risk management process is an ongoing and iterative process that requires ongoing attention and effort to ensure that risks are effectively managed and minimized.
Risk management process
Step 1: Risk awareness and identification
Risk awareness is partly a state of mind, but it is also dependent on how well the matter under consideration is understood.
Risk identification: Identifying the whole range of possible risks and the likelihood of losses occurring as a result of these risks.
Step 2: Risk analysis
For each risk its nature is considered, and the implications it might have for the business achieving its objectives; an initial judgement is then made about the seriousness of the risk.
This step will include 2 parts:
Risk measurement: Identifying the probability of the risk occurring and the consequences (impact) of it.
Risk measurement: Gross risk = Impact x Probability
Step 3: Risk response and control
After risks have been assessed, strategies can be developed to mitigate or avoid them. This may involve implementing controls, transferring risks through insurance or contracts, or simply accepting the risks.
Step 4: Risk monitor and report
Once risk mitigation strategies have been implemented, it is important to monitor the risks to ensure that they are being effectively managed. This may involve ongoing assessments, audits, or other monitoring activities.
Risk matrix
Case study
Case study
The situation occurred at the University of California, Berkeley (UC Berkeley) in 2016.
UC Berkeley experienced a significant budget shortfall that year, and the university had to implement various measures to address the financial risk. The university faced several challenges, including declining state funding, rising pension costs, and a decrease in the number of international students.
To address the budget shortfall, UC Berkeley had to make some difficult decisions, such as reducing the number of courses offered, laying off staff members, and cutting certain programs. The university also implemented a hiring freeze, reduced travel expenses, and delayed some infrastructure projects.
In addition, the university had to increase tuition and fees for both in-state and out-of-state students. This decision was met with significant opposition from students and community members who argued that the increased costs would make it harder for low-income students to attend UC Berkeley.
UC Berkeley's situation highlights the financial risks that universities face, particularly when they are heavily reliant on state funding or tuition revenue. It also underscores the importance of financial planning and risk management in higher education institutions to ensure long-term financial sustainability.
References
References
Deloitte. (2017). Managing financial risk in higher education: A practical guide. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/finance/us-fa-managing-financial-risk-in-higher-education.pdf
KPMG. (2018). Financial risk management for higher education institutions. https://assets.kpmg/content/dam/kpmg/xx/pdf/2018/10/financial-risk-management-for-higher-education-institutions.pdf
Krupnick, M. (2017). When a university's finances come under strain. The Atlantic. Retrieved from https://www.theatlantic.com/education/archive/2017/04/when-a-universitys-finances-come-under-strain/524833/
Mangan, K. (2016). University of California at Berkeley's budget woes deepen. The Chronicle of Higher Education. Retrieved from https://www.chronicle.com/article/university-of-california-at-berkeleys-budget-woes-deepen/
University of California, Berkeley. (2016). Campus budget update: Immediate steps to address current-year deficit. Retrieved from https://news.berkeley.edu/2016/08/03/campus-budget-update-immediate-steps-to-address-current-year-deficit/
Institute of Risk Management. (2018). Risk management standard. https://www.theirm.org/media/3103/irm_risk_management_standard_2018.pdf
ISO. (2018). ISO 31000:2018 Risk management - Guidelines. https://www.iso.org/standard/65694.html
Interactive question
Interactive question
What is an example of financial risk that a higher education institution may face?
A) Increased competition from other universities
B) Decreased enrollment due to demographic changes
C) Expansion of academic programs to attract more students
D) Successful fundraising campaigns
The correct answer is B) Decreased enrollment due to demographic changes. Changes in demographic trends, such as a decline in the number of college-aged students, can significantly impact the financial health of higher education institutions, as they rely on tuition revenue to fund their operations. This can lead to budget deficits, decreased investment in academic programs and facilities, and ultimately, decreased competitiveness in the higher education market. While successful fundraising campaigns and expansion of academic programs can help mitigate financial risks, they may also introduce additional financial risks if not managed effectively.
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