Capital Needs & Financial Accountability of UPs

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The AAUP Business Handbook >> Part Two: Accounting, Budgeting, and Financial Management >> Working Capital Management


Capital Needs of University Presses

In 1978, when the Johns Hopkins University Press was observing its 100th anniversary, the editors of Library Journal put a series of questions to the press director, Jack Goellner. To the question "What is the single biggest problem confronting university presses today?" he answered, "In a word, money—or in a few more words, uncertainty about where the money is going to come from." I believe this remains the number one problem today.

Like any business, a university press with an active publishing program needs ongoing resources that will provide adequate funds to support it. The parent university, as the sole owner, must provide the infusion of what I choose to call "equity capital."

Equity Capital

Equity capital is the investment required to create, develop, and sustain a publishing program. A commitment is principally based on an understanding of its financial implications. The size and mix of the publishing program should be the product of a consultive editorial policy, which in turn forms the basis of a financial policy addressing the question of how much fiscal support is needed. In addition to being the sole owner, the parent university is also a press's sole banker, and in that role it must provide a continuing line of credit as "working capital."

Working Capital

The need for working capital is both constant and seasonal. It is constant in that it must cover the investment in inventory and accounts receivable; it is seasonal in that it must cover production costs and royalties. I hold the view that there should be a distinction between a) the working capital invested and secured by salable inventory and collectible receivables; and b) the working capital borrowed for a short term to meet seasonal needs for production costs and royalties. I consider the former to be part of the equity investment free of interest, while the latter is to be repaid with interest.


Operating Subsidy

Typically, a university press is an integral part of its parent university and should be treated as an academic unit, not as an auxiliary enterprise. Most university presses need to be subsidized by their parent universities. They need operating financial support until such time as their sales and other income exceeds their costs and expenses. This is an annual operating subsidy to cover the excess of operating expenses over operating income.

In the university accounts a distinction needs to be drawn between operating subsidy, which funds a deficit, and equity/working capital, which is an investment in tangible assets. Presses can help by making the appropriate distinctions on their balance sheets.

Title Subsidies

Title subsidies are essential to presses of all sizes. They are the underpinning for many of the specialized monograph and capital-intensive projects. Securing these subsidies is increasingly more difficult, and it should be a shared responsibility between an author and a press. In the past, the National Endowment for the Humanities was one of the principal sources of funds for university presses; however, in the mid-1990s its budget has been significantly reduced as part of the federal deficit-reduction program. Too often, title subsidies are used simply to reduce the published price, thus passing the benefit to the consumer rather than helping the press defray publishing expenses.

Foundation Grant, Endowment, and Friends of Press Funds

In the '60s and '70s, Ford and Mellon grants gave presses large and significant infusions of capital. The Ford Foundation grant was an incentive grant designed to raise middle-sized presses to larger and more critical size. The Mellon grant was made to selected presses to enable them to increase the number of publications by young scholars writing chiefly in the humanities and to experiment with technological improvements to reduce publication costs. No source of grant income of this magnitude has surfaced in the '80s or '90s. Presses have turned their efforts toward seeking funds from individual patrons or donors—the so-called Friends of the Press support groups. Some are trying to raise endowment funds earmarked for specific projects. To be effective, these efforts need an in-house designated person to seek out potential donors.

Financial Accountability of University Presses

"The first requirement is for presses to demonstrate that they are using their resources efficiently," according to the National Enquiry Report. The inference is that presses have their primary obligation to those who provide them with funds. In fact, presses have another responsibility of equal importance. As the publishing arm of their parent universities, presses must demonstrate through their publishing programs that they are carrying out their mission in a professional and effective manner at costs within acceptable parameters. They also have a responsibility to themselves to realistically assess their needs in human and financial resources, and then to use them in a professional and cost-effective manner. After all, it takes as much business acumen to work within a rigidly mandated budget deficit as it does to operate at a budgeted profit.

How does a press measure its performance and financial responsibility? It should start with the publishing program, which can be measured by the overall quality and balance of the list and the salability of individual publications. Sales are the source of the lion's share of the income needed to cover costs and expenses. In a 1995 AAUP survey in which 64 presses participated, sales accounted for approximately 88% of the total income earned; the balance of support consisted of operating subsidies from parent institutions and funds from other sources.

Next, a press should measure its overall operation by comparing and analyzing its financial statements in terms of trends and percentages. This comparison should be internal as well as external. Internally, a press should measure its performance against its annual budget, long-term forecasts as well as prior years' activity. Externally, a press should compare itself to presses of similar size as reported in the annual AAUP survey.

Budget forecasts and financial statements will be covered separately in the handbook, but as they relate to determining capital needs and measuring financial accountability, it is necessary to link them into a coherent whole. The annual budget is an essential tool for the allocation and control of money. When it looks ahead over several years, it be comes a forecast for strategic planning. The operating statement reflects the results over a period of time, while the balance sheet reflects the condition of a press at a specific point in time. A cash-flow projection is the dynamic link between the two that enables a press to plan its cash needs.

Historically, the focus has been on the operating statement. Far less attention has been paid to the balance sheet, where investment in two key assets—accounts receivable and inventory—measures to a large extent the working capital needed. Even less attention has been given to the preparation of a cash-flow projection, which estimates a press's cash needs in a seasonal pattern. A comprehensive financial policy calls for a three-legged approach and a clear understanding of the interaction of these three parts.

The AAUP Business Handbook >> Part Two: Accounting, Budgeting, and Financial Management >> Working Capital Management

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