Universities face various financial pressures from funding gaps, continued inflation, volatile cash flows, and large capital projects. With over 40% of universities running budget deficits, effective treasury management is more important than ever to enable the educational mandate and implementation of strategic initiatives.
Beyond the headline deficits, universities face challenges in managing liquidity. Tuition payments typically arrive in large instalments at the beginning of the term, while expenditures are consistent throughout the year. This timing mismatch can create short-term cash flow shortfalls, especially for institutions with constrained reserves or unpredictable ancillary income. Such pressures are further exacerbated by changing student composition, constrained tuition receipts, and the growing burdens of capital projects. However, this timing asymmetry also presents opportunities in short-term investments, which, when carefully managed, allow institutions to preserve capital while modestly enhancing returns and maintaining access to liquidity.
Informed cash flow forecasting is, therefore, a critical first step in effective treasury management. Assessing the cash requirements over various time horizons is essential, not only to ensure operational continuity but also to inform broader decisions pertaining to debt, investment, and project planning. In this capacity, Arlingclose draws on its experience in cash flow forecasting for charities, local authorities, and other organisations, combining this with rigorous economic monitoring to develop robust models.
Universities may additionally benefit from adopting liquidity stress testing to assess resilience under adverse scenarios, such as a drop in tuition income or delayed grants. Such testing can help inform the sizing of the liquidity buffer and the structure of credit facilities. Arlingclose can support universities in developing tailored liquidity risk assessments to enhance resilience and planning.
Combined with the above forecasting, short-term cash investment strategies allow universities to preserve liquidity while generating appropriately risk-adjusted returns on surplus balances. Informed by the university’s unique investment horizon, risk appetite, and liquidity needs, surplus cash may be invested across a mix of bills, money market funds, short-term (cash plus) funds, secured deposits, and other instruments. Arlingclose advises on structuring these portfolios, including providing a list of counterparties for unsecured and secured (reverse repo) deposits, based on thorough due diligence and credit assessments.
Many universities elect to establish revolving credit facilities (RCFs) to provide a liquidity buffer or help finance large capital expenditures. An RCF is a flexible loan agreement that allows the university to borrow, repay, and reborrow funds up to a set limit, with a commitment fee on unused amounts and interest charged on the borrowed funds. These facilities can be used to smooth cash flow volatility, act as a backup for unexpected costs, or bridge funding for capital projects. Arlingclose has advised on the sizing, structuring, and negotiation of RCFs with both bank and non-bank lenders to ensure alignment with the needs of clients.
In addition to liquidity facilities such as RCFs, universities may find it fruitful to review their wider debt portfolios in response to changing interest rates and evolving conditions. Such reviews may include evaluating opportunities for refinancing, optimising the maturity profile of outstanding debt, and ensuring compliance with all covenants. The current yield curve, with a notable drop in short-term yields compared to 6-12 months ago, combined with forward market pricing that points to a faster rate-cutting cycle than previously anticipated, creates a backdrop of opportunity for refinancing that may continue throughout the year. Regular debt portfolio reviews can also help mitigate refinancing risk and optimise borrowing. Arlingclose has extensive experience negotiating debt refinancing and restructuring with banks and optimising borrowing portfolios for our clients, and the current steep yield curve further provides interesting opportunities.
Furthermore, many universities face financial risks arising from movements in interest rates and exchange rates. Interest rate risk can affect both sides of the balance sheet. Increasing rates can raise the cost of borrowing, while falling rates can reduce returns on cash investments. Universities must manage these exposures carefully to contain costs, protect revenues, and maintain the security of invested funds. Similarly, foreign exchange risk arises when universities receive income or incur costs in non-sterling currencies, thereby exposing budgets to fluctuations in exchange rates.
To manage these risks, universities commonly rely on non-derivative approaches. For interest rate risk, opting for fixed-rate borrowing to fund long-term capital projects provides certainty and insulates budgets from elevated rates, though it may involve missing out on interest savings if rates decline. In managing currency risk, establishing foreign currency holdings to match expected inflows and outflows is a common approach. In addition to these methods, many universities’ treasury management policies allow for the use of derivatives such as interest rate swaps and foreign exchange forwards or options. While usage across the sector is limited, these instruments can provide a flexible means of hedging risk exposures. Interest rate swaps are used to convert floating-rate debt into fixed-rate obligations, or vice versa, depending on the desired hedging. Similarly, FX derivatives allow universities to hedge non-sterling income by locking in the exchange rate for future purchases. Whereas certain derivatives, such as options, provide flexibility to lock in rates while retaining the ability to benefit from favourable market movements, FX forwards commit universities to the agreed terms regardless of how the markets change.
These instruments, however, carry risks. Interest rate swaps require alignment with loan terms and introduce counterparty exposure, while FX derivatives may introduce mark-to-market volatility and result in over- or under-hedging if not managed appropriately. Crucially, the use of derivatives should be governed by an explicit framework and integrated with the wider aims of the treasury function, ensuring all activity is appropriate and policy-aligned. Arlingclose advises on the design and implementation of derivative strategies and aims to ensure that hedging tools are tailored to the needs of your institution.
In an increasingly challenging financial environment, effective treasury management is essential in enabling long-term strategic goals and safeguarding the educational mission of universities. With deep experience in treasury management, Arlingclose is well-positioned to support universities in navigating this complexity with confidence.
If you would like more information, please visit our website for more on University Treasury Services, or contact us at nkeeling@arlingclose.com or 08448 808 200.
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