The Royal Scottish Academy for Music and Drama may have to make compulsory redundancies to meet a £600,000 budget shortfall in the coming year.
The conservatoire, whose alumni include Dr Who actor David Tennant and comedian Ruby Wax, has warned staff that it faces two significant financial challenges over and above meeting standard pay rises.
It must raise pay levels to attract the best practitioners as part-time teachers, and the money it receives from the Scottish Funding Council for drama students covers only half the cost of teaching them, it said.
The RSAMD has launched a consultation process, expected to finish in mid-May, and has set up a voluntary severance scheme. It is also reviewing the need for all full-time posts, warning that some staff may be offered a shift to part-time work.
"The academy may need to consider a small number of compulsory redundancies where the requirements for certain posts have either ceased or diminished," said a message to all staff.
The SFC gave the RSAMD small specialist college status in 1998, providing funding premiums to help meet the costs of specialist teaching, which is often one on one.
But the academy said it was using additional funds provided for its music students to subsidise the teaching of its drama students, who receive lower funding levels, as well as using up a "substantial proportion" of donations from the Associated Board of the Royal Schools of Music.
The academy will receive £7 million from the SFC in the coming year, an increase of 4.8 per cent.