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Business model and today's economy – a warning for universities and investors


As we come to spring, this is the Danish and higher-level vice presidents who are on the ground in their annual budgets. Due to the wage, job reports, and the rosy economic scenario that has been made to improve corporate profits, it would not be appropriate to start dreaming about expanding its own small circles, suggesting higher renting budgets and larger units – which Warren Buffett calls institutional needs. Warning: beware!

As an academician, I have often heard high-ranking officials to support how state universities should operate through a business model. My university president is a strong supporter of the idea. The problem is that universities face challenges, most companies do not have to deal with. For example, suppose the company's demand for its products is reduced. In order to make the company viable and responsible for its shareholders, it will reduce its production. Less sales means that fewer staff will be needed, leading to a reduction in the workforce. Despite the lower revenue, the bottom line keeps on keeping material and personnel costs down.

Let's see what's happening at a university. Suppose the demand for a product or classes is low – that is, fewer students are enrolled. The cost of running classes is minimal compared to personal and physical costs. It is not possible to stop buildings, so only the staff reduction. Here's a problem, no companies have. There is never a case where few remaining customers demand that the company issue the same products as before reducing demand. But if a class falls from 40 to 30 or 20, then the university can not dismiss it. These students were well pre-registered in the class even before the semester. Timetables and even maturity are based. If the class does not, the students are upset and there are no troubles in the day to know the world – online. As the news becomes virulent, the university will become a bad reputation. This will affect future enrollment. The whisper of lower enrollment shakes the back of the high administrator.

Here is another difference between companies and higher education providers. Company recordings can be better applied. If you let go of someone you need, it's within weeks. It's not for science. Such staff may be released, but teachers are engaged in a one-year contract. University directors may decide not to renew a contract for a non-professional instructor after the academic year, but they will not be able to complete it during the academic year. This means that leasing and budget decisions need to be made well in advance.

In 2007 I was in the middle of the dilemma. I was the founder and chairman of the Budget Committee of Idaho State University. Our mandate, as I have seen, was to keep up with economic developments, so we can give the best advice to the administrators of the "couch", which leads to the reduction of state aid in higher education. As soon as this was done, we provided advice on the budget appropriations for programs and rental. Academic hiring needs to be done months before, so your current income is anticipated for at least six months. In this time frame, I warned of the next economic downturn and real estate problems in higher education in the epicenter of the financial crisis. This was not busy during the message, so over the next few years our committee was overwhelmed by the disruption of the administration through declining budgets.

In my 2007 alert, the unemployment rate was 4.4%, wages rose by 0.3% per month and 4.4% per year, while S & P 500 gains grew by 16% during the year. GDP growth was set at 3%. Familiar? There were plenty of reasons to be optimistic and the future did not play that way. The same will happen this year, though the main factors behind the economic base will be different.

Financial storm is developing. This time, the low pressure front will be due to demographic forces, which will lead to a reduction in the age of 46-50. Consumer spending will be a prolonged and significant decline resulting in a sustained economic downturn starting this year and by 2023.

Public finance accounts are declining while revenues from sales tax have decreased and rising unemployment has lower personal income tax. These are the two main columns that fill the state funds. The other two are real estate and corporation tax. While property tax revenue remains stable, corporate income tax reflects corporate profits. The point is that State aid to public universities will decline and again these institutions will have a difficult task of managing their budgets by reducing staff. Consequently, there is no time to dream of extending the departments, but rather the time for planning the rebound.

Administrators need to eliminate the temptation to pass on the dollar and use university reserves to meet the immediate challenge. The next year will not be better. In fact, this downward trend continues to deteriorate and, as mentioned above, it will continue until 2023. University officials will be forced to face music at some point in time to think about it and have a 5- or 6-year plan to treat the discomfort.

The warning is double for stock market investors. Within the public finances, the same workforce forces will shake our economy and cause damage to corporate profits and prices. Inventory portfolios will achieve a significant hit. I advise you to take into account the current stock market alert. We only made corrections, but these are just the foreseen financial births of the financial storm. The sages use every opportunity to strike the flocks. There will be many who are seduced, but when the threat is overwhelmed, you want to avoid the stock market completely.

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