Just a few months ago, no one could have predicted the personal, societal, and industry changes that an event like the COVID-19 outbreak would bring.
Individuals and organizations alike are looking closely at revenues and expenditures while contemplating an unknown future state. Colleges and universities are no exception. The first priority has been standing up online learning options and stabilizing cash flow, higher education finance leaders say, followed closely by tracking expenses related to the pandemic.
Now come the hardest parts — adjusting the current budget to take the institution through the academic year and forecasting for the year ahead with no precedent to guide you amid significant headwinds limiting speed and agility. Consider this data from a recent Kaufman Hall Higher Education Financial Trends report:
- Only 14% of finance leaders were “very confident” in their institution’s ability to quickly and easily adjust strategies and plans should business circumstances change suddenly. Two-thirds were “somewhat confident.”
- Reacting to these findings, finance leaders said that confidence depended on the type of change and whether they had the tools and information they needed to pivot.
- Budget cycles are getting longer, with 43% of institutions reporting cycles lasting more than six months, compared with 34% in 2018.
- Of those institutions with longer budget cycles, nearly 20% do not reforecast, which can hamper data-based decision making as financial conditions change.
Reforecasting is required this year due to COVID-19 campus shutdowns because it supports more informed financial and operational decisions in times of volatility, but it’s also beneficial in normal circumstances.
When, why, and how often to reforecast
By looking at the budget numbers more than once a year, finance leaders can uncover and resolve issues quickly, improving the accuracy of the budget over time. Reforecasting engages stakeholders in a more proactive, transparent, and apolitical planning process. And when combined with forecasts of capital expenditures (CAPEX) and financing, reforecasting allows detailed tracking of the health of cash flows and the balance sheet.
Determining how often an institution should reforecast depends on how much revenue is derived from student tuition and fees. If three-quarters or more of institutional revenue comes from student tuition, reforecasting two to three times per year as enrollment numbers are finalized for the semester is likely sufficient.
Larger universities and those with a greater range of revenue sources can benefit from more frequent forecasts. Because different revenue sources likely peak at different times (think year-end endowment revenue or grants funding), monthly reforecasting will provide better insight into the natural budgetary fluctuations that can occur.
In times of crisis, such as the current pandemic, focus on aligning the budget re-forecast process with the strategic decision-making processes of the institution. Many institutions are thinking of budgets over three key time horizons: now through the end of the fiscal year (June 30), summer, and the remainder of the 2020-21 fiscal year. This allows the organization to develop plans that are supported by the information that is readily available at the time and to support the key decisions that leaders need to make.
5 tips to get you started on reforecasting
Periodic reforecasting may sound like an incredibly complex undertaking, but the right tools can ease the process and provide valuable budget insights. Here are five best practices to consider when reforecasting:
#1 - Automate the process
Institutions can accelerate and streamline reforecasting by loading actuals alongside budgets and historical data, calculating and highlighting key variances. Doing the heavy lifting on the front end will mean less work during subsequent forecasts.
#2 - Include operational drivers where possible or relevant
Key revenue and expense categories should be re-forecasted using the underlying driver data, like enrollment information for tuition, room and board, and employee FTEs for salary and benefits expense. You may need to make certain assumptions to forecast a range of potential outcomes, but the more information you can include, the more accurate the forecast becomes.
#3 - Use defined formulas to project other line items
Start the forecast with calculation methods that have been consistent over time. Examples include:
- Forecast total = actuals to date + remaining budget months; or
- Forecast total = actuals to date + prior year actuals in remaining months
#4 - Allow users to make adjustments and comments
A budget should be a living document, shared widely with the people who have the information and can influence the eventual outcome. Certain departments or specialties may have unique funding challenges or opportunities that aren’t reflected in the forecast. Including them in the conversation will provide a fuller picture of the budget.
#5 - Test the results
Reforecasting never takes place in a vacuum. Test the results of the forecast over time to ensure it’s effective and drives organizational changes. Once the process is established, each reforecast should be easier to make and more meaningful to the relevant stakeholders.
Reforecasting may seem impossible right now, with so many unknowns related to the coronavirus. But think of each bit of financial information as the piece to a puzzle. With enough pieces, reforecasting can complete the picture with a great deal of accuracy so mission-critical decisions can be made with more confidence.