Why Financial Modeling Is Important

The COVID-19 crisis has engaged higher education institutions across the country in delivering remote, distance education. Given the high degree of uncertainty surrounding the pandemic—when it will recede, whether it will return again in a second wave, progress on a vaccine or effective treatment for the disease—colleges and universities are already considering the prospect that courses may need to remain remote for all or part of the fall term, and perhaps beyond.

Students, their parents or guardians, and faculty have been for the most part willing to adjust to the realities and inevitable rough spots of a rapid movement to remote learning. But this tolerance for the current situation may wear thin by the fall, even though the time is in fact short for institutions to prepare for an online curriculum in the coming year. In normal times, approximately nine months would be devoted to development and design of a three-credit online course. This timing already is an impossibility for the fall term.

Even if institutions cannot afford the time that would typically be devoted to planning for an online initiative, it is critical that they engage in some degree of financial modeling to inform their decision-making and understand the financial implications of the decisions they must make as the fall term approaches.

 

Adapting Financial Modeling to Short-Term Planning Needs

The basic parts of a financial model are inputs customized to each institution and program, including the program’s lifespan, number of students expected each year, amount of tuition charged, number of courses offered, number of faculty required to produce and teach courses, faculty pay, and fees for marketing, licensing, or online project management (OPM) vendors.

When an institution can develop a comprehensive financial model for an online initiative, the result is an accurate reflection of the initiative’s many pieces, both within and outside the institution, that must work together like cogs in a machine to ensure the initiative’s long-term success. This is a process of both definition and discovery: Seeking to define one unit’s inputs will often result in the discovery of additional inputs that must also be included in the model. For example, the planning team working on the financial model may discover that the financial aid office will be inundated by processing requests for new online students at certain times of year, requiring the addition of a new input into the model; here, an FTE to process the requests. This in turn raises the question of which unit will be responsible for funding the FTE.

Institutions simply will not have the time to pursue all questions raised in financial modeling for the fall term. Instead, they should be prepared to prioritize those inputs that will have the biggest impacts on the financial model (and be prepared to change priorities if, within the time that is available, an unexpected, significant input is discovered).

For virtually all institutions planning for a fully or partially online fall term, key inputs will include the following. Even these few inputs will generate a multitude of questions that the planning team will need to try to answer, some examples of which are provided below.

 

The number of students enrolled for the term

Sample related questions:

  • How will enrollment numbers differ if we are fully online vs. starting with on-campus instruction?
  • What impact do we think a likely recession will have on our enrollment numbers for fall?
  • Do we anticipate significant declines in out-of-state or international enrollments if students are less willing to travel?

 

The academic course/program/modality mix

Sample related questions:

  • Do we have any courses that have already been designed for online instruction?
  • Do we want to continue to offer “remote” courses if they have not been through an online design process? If so, do we risk reputational harm for the quality of the courses?
  • What are the accreditation implications? Do we expect regulatory changes over the next months from our accreditation organization?
  • If we start the term on-campus, do we want to offer the typical full range of courses, knowing that there is a possibility that we will have to switch to distance learning sometime during the term?
  • What are the implications for our already-published fall course catalog?

 

The number of faculty required to teach

Sample related questions:

  • Will we try to continue to offer a “high touch” experience for small or upper-level courses, with synchronous instruction and small class sizes?
  • If we limit online course offerings, will we need to make changes in faculty course load?

 

The tuition that will be charged (per course or per term)

Sample related questions:

  • If we are fully online, will we discount tuition, or do we believe that the courses we offer will be of sufficient quality to merit full tuition?
  • If we begin on-campus but must move online, will we reimburse any portion of tuition or offer credit for future terms?
  • Will we allow students to enroll in a reduced course schedule if they opt not to return to campus for the fall but wish to continue some courses online? Will tuition be the same for these students (assuming we are able to offer the course in dual modalities)?
  • What are the financial implications of offering a course in dual modalities (note that the implications may be more significant than first indicated because of process impacts)?

When modeling efforts begin, as they should soon, institutions should start with realistic, informed estimates for modeling inputs along a range of “worst case” to “best case” scenarios. These scenarios can be tightened as the fall approaches, and a clearer sense of numbers emerges, but institutions should strive to get a sense of worst-case possiblities early on so they begin planning for how they would address them.

 

Laying Groundwork for the Future

Financial modeling is a tool too often overlooked by higher education leaders. Online learning in particular requires modeling because of its campus-wide implications, which transcend traditional school and college silos. Successful online learning depends on many parts of an institution working together; financial modeling can give an accurate reflection of the multiple efforts required and transparently identify sticking points that may require adjustment. Modeling also can provide clear evidence of progress and strategic intentionality to accreditors and rating agencies alike. These efforts contribute to higher education not only surviving during the current health emergency, but also thriving in the years ahead.

Even though financial modeling work for the fall will be imperfect because of the complexity of the task, we recommend not letting the perfect be the enemy of the good. Consider bringing in an experienced, trusted advisor to help guide and accelerate the process. Beginning modeling now will lay the groundwork for future, more refined modeling that will help the institution understand its long-term path forward.

Meet the Author
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Larenda Mielke

Larenda Mielke

Vice President
Larenda Mielke is a Vice President in the Higher Education division of Kaufman Hall’s Strategic and Financial Planning practice. She has extensive leadership experience in higher education in the areas of strategy, curriculum and program development, and more.
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