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Financial Planning When the Only Constant is Change

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Financial planning for schools has never been easy, and the COVID-19 crisis has added a whole new layer of complexity to the process. Uncertainty surrounding school funding and the economic impact of the pandemic has created many unknowns for school administrators. The impact will be felt for some time to come, whether it is addressing learning gaps, improving air quality in buildings, or providing mental health services and supports to address the mental health toll of the pandemic on students. How will your district use your Elementary and Secondary School Emergency Relief (ESSER) funding, and what will the district’s financial position be when these funds are no longer available? Even though there are many unknowns as we head into the future, data can still help provide a strong foundation for decision making and communicating those decisions in a transparent way. Let’s explore a few ways data can help you navigate these uncertain times.

Multi-year Projections

The importance of using data to create multi-year financial projections is critical, as it can provide insight into the sustainability of today’s decisions and help your district avoid adverse surprises in the future. While budgets are key planning tools, a multi-year projection is crucial since many decisions—such as salary increases—have longer-term ramifications. Communicating the longer-term impact of decisions in a clear, concise way is important, particularly as districts receive an influx of ESSER funding over the next few years. Getting a clear picture of what your district’s financial position will be when these one-time funds are gone is critical for ensuring new initiatives and programs paid for with ESSER funds will not create a long-term structural deficit once ESSER funding is no longer available.

Projections formulated based on logical assumptions can still provide guidance as you make your decisions, even if you know those assumptions are subject to change. Communicating your assumptions and how they were derived is an essential component of transparency. Take the time to explain not just the projected ending fund balance, but how you arrived at that number. Projection models work best as a financial management tool to guide decision making when you continuously revisit them and update them with new information.

While historical data trends may not be as useful during this global pandemic, you can still use data to make logical, rational assumptions. If you know that your historical cost trends in a given area will not be a relevant indicator of future costs, approach your cost estimates like you would when budgeting for a new program. Think about the key cost drivers. For example, you may have smaller class sizes due to the pandemic; however, you still need to make assumptions about enrollment, student-teacher ratios, teacher aids, etc. Develop new ratios that make sense based on the current learning environment. And once you make your key cost estimates, don’t stop there. Documenting your assumptions and presenting your financial plan in a transparent way is critical for maintaining trust with your board and your community. 

Developing What-if Scenarios

Using financial data to develop various what-if scenarios is critical when there are so many unknowns. Developing best, worst, and middle-case scenarios, for example, can help decision makers understand if revenues will be lower than planned, if program expenses need to be adjusted, or if revenues that come in higher than planned will enable the district to add new programs.

To analyze the impact of a single variable, such as salary increases, keep your revenue constant, and see what happens to your projected fund balance in future years when low, medium, and high salary increases are applied. This will give you a better feel for the magnitude of the potential impact on your fund balances.

ASBR Fund Balance

Use the 80/20 rule to focus on key revenue and expense drivers. Typically, enrollment, local property taxes, state funding per student, and salaries and benefit costs account for the majority of a district’s revenues and expenses. Don’t get caught up in the smaller items that are immaterial and won’t have a big impact on fund balance. Use your time working on your financial projections to focus on these key items so you can efficiently generate more accurate projections.

Variance Analysis

The ability to explain variances between actuals and financial projections in a transparent manner is crucial for building trust with your board and your community. Take accountability for these variances. Demonstrating accountability doesn’t mean you have to predict everything correctly—it means using data to provide explanations for variances in a rational and logical manner. When things don’t go as anticipated, you can stand behind the data and remind everyone of how the assumptions were developed and what variables changed along the way. Dashboards and charts are a great way to provide transparency at-a-glance to show how you are tracking with your projections through the year. Using easy to understand, relevant, and up-to-date data will go a long way toward building confidence and trust with both your board and community.

Conclusion

In our current reality, where there are more questions than answers, use data to guide your decisions. Focusing on multi-year projections, in addition to an annual budget, will provide you with a clearer picture of how decisions today can affect your district’s financial future. Acknowledge that you don’t have all of the answers and present a range of possible financial outcomes that are continuously updated as new information becomes available. When outcomes vary from what you projected, don’t despair. Use data to explain why the financial outcomes are different than what was anticipated. Having a multi-year financial plan based on sound data that is easy to update will allow you to pivot as needed in these uncertain times.

 

For more information, please contact:

Jeff Carew
Managing Director
Forecast5 Analytics, Inc.
770 North Jefferson, Suite 200
Milwaukee, Wisconsin 53202
csmith@forecast5analytics.com
630-955-7615 (direct)