See out latest blog post here: https://www.linkedin.com/pulse/so-what-do-we-jeff-spear
Archives for category: forecasting in higher education
“It doesn’t mean a thing, but even so, after twenty-five years; it’s nice to know.”
The words from the song, “Do you Love Me?” are sung by Tevye and his dear wife Golda in “Fiddler on the Roof” as they grapple with yet another generation of would-be husbands and wives, each testing tradition in uncomfortable ways. The idea is that, though Tevye and Golda were introduced on their wedding day a quarter century ago, they have adapted to each other to the point where each “supposes” they love the other.
Some things we just have to adjust to.
Bringing this closer to home, “We can’t seem to budget for depreciation,” is a common refrain we hear in our visits to over fifty institutions. Rather than cow-tow to the FASB-mandated enterprise form of accounting, some capital spending and principal on debt are inserted into the operating budget, hoping that, by some miracle, the audit will show a positive result.
Twenty-five years ago, we were preparing for the FASB-mandated forced marriage between a new form of accounting and non-profit organizations. Prior to that, a widely-variable application of fund accounting made comparisons and gauges of health difficult. Today, we stand at the threshold of of yet another change, albeit evolutionary. Higher education can be slow to adopt new practices – but twenty-five years? I’m not feelin’ the love.
In defense of those who continue to act as if the mid-nineties never occurred, if what is spent on debt principal and capital items exceeds depreciation, it really doesn’t matter. But that tends to be mere coincidence. Too often, when cuts are needed, capital spending is put on the block, as if it will help in “balancing” the budget. In those cases, an internal operating budget can show a surplus while the board hears from the auditors that the college had a deficit. You might get away with, “The audit doesn’t matter,” with an unsophisticated board but the DOE and your bank …
Because depreciation expense is the ratable allocation of an asset’s historic cost, it makes sense that the eventual replacement of that asset will be more expensive. This is particularly true of facilities. For this reason, the CFO Colleague standard for capital spending and principal on debt stands at 120% of annual depreciation expense. If you are not spending more than depreciation expense, you are not keeping up. If you are spending less, deferred maintenance will eventually consume you.
Incorporation of depreciation expense is but the beginning, however. Step two is a contingency of at least two percent so that changes in demand, unanticipated increases in costs or one-time opportunities for investment can be covered. Then, there is the Standard and Poor’s expectation of a three percent surplus.
But wait, there’s more.
What will the DOE financial responsibility ratio be at the end of next year? What are the required debt service coverage ratios or cash balances by our bond trustee? Are our revenue-driving activities supportable and owned? All of this enters into a well-crafted budget that benefits a college for years to come.
We call this the “budget performance matrix.” Rather than a false sense of security brought on by cash-based plans, a comprehensive approach of this kind ensures that the budget accomplishes the primary expectations of each evaluator/stakeholder.
Our COMP4cast model incorporates each of these measures, generating in real time the projected surplus or deficit, cash position, debt service coverage and DOE ratios. The leadership team interacts with this model while sitting around the table, conversing about various “what-ifs.”
And it’s available for free from our website: cfocolleague.com/free-downloads
After twenty-five years, it’s nice to know.
I posted a blog on LinkedIn about the University of Akron doing a poor job of attempting a turnaround. My main points deal with the substance of their approach but I will add that their communications and collaboration leave much to be desired. The link to my posting is found here:
https://www.linkedin.com/pulse/university-akron-gets-wrong-jeff-spear?trk=prof-post
Thanks for reading.
Jeff
The first week of August is upon us and whatever will betide the fall is becoming more clear. What are some of my clients doing around this time?
Well, first of all, the deadline for finalizing payment for the fall often occurs this week. I have suggested a deadline of August 5th through 9th as what some call the confirmation date. A Wednesday is a good deadline; either the first or second one of August. This allows a little cushion for those who are late in their arrangements. By the close of business on Friday, everyone who has not yet confirmed will be assessed a late fee of $100. I can tell you that it works. If you are lax about such items, be prepared to have about three times the normal staffing for the first two weeks of school.
Second, those who have put in a mechanism to track financial aid by class are getting a clearer picture of fall’s revenues. Track the net tuition for all of those who have deposited for the fall and then for those who have confirmed (agreed to the charges and the method of paying them.) If your system doesn’t allow for this kind of analysis, create a work around. Census day is somewhere around six weeks from now and may deliver an unpleasant surprise. Better to know now. You’ll need the tools to do so.
Third is related to the second and involves gleaning more information off the invoice for room and board. Look at billed R and B and the same charges for those who are confirmed. This is typically the second largest source of revenue for most institutions. You want to be on top of it and should be able to produce a projection even now.
Fourth, under the assumption that the second and third considerations are well in hand, a projection of the second semester is appropriate. Most use a general retention rate. A better approach is to track the difference in populations for each class between the semesters. This is a little different from retention in that there will be some who earn enough credit before the spring to be classified in a higher class. Others will stop out and some will transfer in. By merely comparing the raw data for fall and spring by class, it will yield a better approximation of the total year’s pro-forma than a general retention rate.
Finally, CFOs and enrollment people are looking at where non-traditional activities are heading. For most programs, students who carry over from one year to the next represent between 65% and 75% of the new year’s revenue. This is true in part because the carry-over student is paying tuition from the beginning of the fiscal year, with many paying for the entire year (52 weeks worth.) Some of my clients are using my Non-Traditional Revenue Projection Model (RPM) to provide projections. It is available, free of charge, just for asking.
When the turnstiles stop and your audit is complete, please consider adopting the COMP4cast budgeting and forecasting tool, also available free to those who ask. The ideal time to deploy this is in late September. By October 15, you will have a good sense for the current year and a preliminary look at next year’s revenues. This has been very well received by every adopter. Oh, and I tend to assist with implementations in the fall, if doing it on your own doesn’t get you there. My involvement will set you back two days and about three grand. Most see it as a great way to fast track the process and deliver a pretty impressive series of reports to the board at the fall meeting. I’d love to chat with you about this.
I’m wishing you all great success this fall as the new class arrives and students return. You are doing important work, my friends. Keep it up.
cfocolleague 