Cash from Operations

Cash from operations varies according to the health of the business cycle. Levels of revenue from HBSP and Executive Education, income from investment returns on the endowment, and unrestricted giving all reflect short-term economic trends. Nevertheless, HBS plans its operations on a long-term strategic basis—for example, adding faculty, broadening and deepening its research activity, and investing in its revenue-generating businesses and campus infrastructure. The School's expenses track this growth. As a result, cash from operations can fluctuate widely from year to year.

Looking back to the beginning of this decade, cash from operations remained stable for several years following the recession in 2001. The subsequent launch of The Campaign for Harvard Business School coincided with the start of an economic recovery, producing strong growth in revenue from gifts, HBSP, and Executive Education.

The School's operating cash flow nearly doubled year-over-year in fiscal 2004 to $15 million, and reached a plateau of $24 million and $23 million in fiscal 2005 and 2006, respectively. Cash from operations increased by $7 million, or 30.4 percent, in fiscal 2007 to $30 million, primarily as a result of the larger endowment distribution and income from unrestricted current use gifts.

Use of Endowment Principal and Appreciation

HBS regularly funds key initiatives with principal and related capital appreciation of gifts made in prior years intended for these purposes. These funds vary from year to year depending on the type of gifts available, the purposes for which these gifts were given, the status of the School's initiatives related to these purposes, and the available appreciation. Amounting to $14 million in fiscal 2007, use of endowment principal and appreciation has remained essentially level for the past three years.

Cash Available for Capital Activities

HBS must generate sufficient cash flow to cover capital expenses and any related debt service over the long term. Cash generated before capital activities closely tracks operating cash flow. After remaining stable from fiscal 2001 through fiscal 2003, cash before capital activities grew to a $37 million plateau in fiscal 2005 and 2006. Mirroring the increase in cash from operations, cash available for capital activities rose by $7 million in fiscal 2007 to $44 million.

Cash flow exceeded net capital expenses in fiscal 2007, reversing the trend of the past few years. The School anticipated the possibility of this reversal, given that fiscal 2007 was planned as a comparatively soft year for capital spending. Looking forward, HBS expects to see a return to the previous pattern of cash from operations falling short of net capital expenses. As in the past, HBS will ensure through its financial planning that sufficient resources are available to service the School's debt and execute on its long-term capital plan.

Capital Expenses

Marking the peak in a five-year period of significant investment in the HBS campus, capital expenses reached $79 million in fiscal 2005. As the major projects initiated earlier in the decade reached and neared completion, capital expenses declined to $49 million in fiscal 2006, and declined further in fiscal 2007 to $20 million. This past year's $29 million decline reflected the completion of the Baker Library project, as well as the winding down of the renovation work on Aldrich Hall and Hamilton Hall.

Large capital projects in fiscal 2007 included the renewal of classroom space for executive programs in McCollum Hall, and the final stages of the Aldrich Hall and Wyss House renewal projects. The School's investment in these projects totaled approximately $7.2 million—significantly less than the aggregate $12.8 million spent on renewal and maintenance of buildings, facilities, and IT infrastructure across the campus.

In addition to the myriad small projects necessary to protect the long-term value of the School's physical plant, the major maintenance projects in fiscal 2007 included an upgrading of the Technology Operations Center and replacement of outdated and inefficient HVAC systems. In addition, HBS made the final payment in a multiyear commitment to support the School's role in the earliest phases of the University's development in Allston.

The $20 million in fiscal 2007 capital expenses was funded with $10 million in internally generated cash, substantially all of the School's $7 million in new borrowings, and $3 million in gifts for capital projects. The new borrowings were used primarily to fund classroom renovations at McCollum Hall. In fiscal 2006, sources of funding for capital expenditures included gift payments for specific capital projects totaling $12 million and new borrowings of $38 million, as well as internally generated cash.