Impacts of financial decisions
Financial Modeling Measures Success or Failure of Higher Education Programs
Higher education institutions are under intense pressure to do more with less. As they are called upon to reduce tuition rates, resist federal and state aid, and decrease health care and other costs, important things like new academic programs, employee salary and benefit increases, and rainy-day reserve funds are all too often put on the shelf.
But not at all schools. Some accommodate the pressure to reduce while continuing to develop programs, compensate faculty and staff, and pad their reserves. They adapt to student demands and add subsidized programs, turning them into contributors to the college or university as a whole. Financial modeling is the tool that makes this possible by helping you cull the money-suckers and nurture the revenue generators.
Financial modeling distinguishes successful programs from those that drain funds
Your institution can use financial modeling to showcase different key performance indicators (KPIs) for the present and create scenarios that project financial results over an established period of time. These indicators will tell you which of your programs are succeeding and which are struggling. It’s really as simple as that. It’s true that many variables go into identifying program costs, but a truly effective financial model plainly shows you the success or failure of each of your programs.
You can create a financial model at any time and for virtually any purpose, but it’s most insightful when done in connection with your strategic planning process or when you have programs that consistently fall short of financial expectations. Financial modeling can help you identify the easy targets that are consuming resources without adding back to your school’s financial wellbeing or mission.
To get the clearest, most useful information into the hands of your institution’s decision makers, follow these five essential financial modeling tips.
1. Limit key performance indicators
Your institution is a complex entity, so it’s tempting to toss a near-endless number of variables into one financial model. Resist that temptation; too much detail can obscure the big picture and doesn’t necessarily strengthen your financial model. If you can limit the variables to a few KPIs, you’ll generate a more succinct, user-friendly result. KPIs such as revenue/cost margins, costs per student, and enrollment trends are good starting points.
2. Use high quality data
“Junk in, junk out” is particularly relevant for financial modeling. The input data serve as the baseline for every toggle (a mechanism imbedded within a model’s dashboard) to quickly change variables and see the related impact. Those data should be reliably sourced, either from your audited accounting system or your institutional research department. It is acceptable to average or trend the input data over a period of time to get a starting point that does not exclusively reflect the best or the worst financial results from prior periods.
3. Compensate for lack of prior data
If high quality data from prior years are not available, use current figures for costs of payroll and benefits for a program, revenue per student, class sizes, and other KPIs. These are solid numbers that will help determine the direct revenue and costs for a program. The one drawback of this approach is that management may tend to show best case scenarios that your institution has yet to attain. A check with total payroll after all allocations are completed is usually a good way to keep from under-costing a particular program.
4. Use volume toggles
Direct revenue and direct expense toggles (e.g., tuition increases per course or labor expense percentage reductions) are easiest to understand, but a strong financial model will also incorporate volume toggles. A volume toggle is best comprehended as a percentage increase in students, but it could also be useful in a scenario where the volume of courses (perhaps noncredit courses), is variable during a specified time.
5. Include a dashboard presentation
While it is an added benefit for a financial model to display pro-forma financial statements, this type of information could be viewed as too detailed for many managers and decision-makers. A highly useful financial model will incorporate a dashboard display with summary graphs and charts of the most critical information needed to make a decision.
How we can help
CLA’s industry-specialized professionals can help you design a reliable financial model customized for higher education institutions that predicts and compares multiple program scenarios and facilitates clear communication with your school’s leaders and governance. We can help your school’s decision-makers understand critical financial data, analyze program performance, and make best use of all available resources.