Every so often, one of the classic movies I enjoy has a scene from a horse race. Here are women dressed in the most amazing outfits one could dream up, with hats the size of snow saucers, accompanied by tuxedo-wearing gentlemen who arrive at the last minute, receipts in hand, ready to cheer on their new-found favorite ride.
Then, throwing away all pretense, these otherwise refined individuals begin screaming and carrying on while their horse and its jockey make a round of the oval. Unless the famous Mr. Ed is on the track (and he has exceptional hearing abilities), neither the animal nor its rider will hear much of anything. Nonetheless the two humans strain and scream, in the belief that such actions will cause their horse to triumph. In the end, ecstatic winners of the human variety are a clear minority, with most of the losers dropping their receipts on the ground and sneering at the gloating winners. I think you get the picture.
So, what does this have to do with higher education finance? I will stop short of calling the leadership team a bunch of gamblers who wear hats the size of saucers but the analogy is not totally off. A budget is prepared in the spring and adopted at some point before the end of the fiscal year. Then, the summer months roll along, with no small amount of yearning to see recruitment, retention and discount numbers. When all three are in line with budget expectations (a trifecta of sorts), a collective sigh of relief is registered and life moves on as planned.
Regrettably, the three major components underwriting a tuition-driven institution are often not in line with budget benchmarks; and I am not suggesting that they exceed expectations. Depending on how much they are off, a mid-course correction might be announced as soon as late September. These comprise the worse sort of budget cuts. And, if this manner of operation is experienced during numerous Septembers, confidence in the administration erodes and morale plummets.
While a number of reasons contribute to mid-cycle reductions, the most common is a dearth of rigorous forecasting tools. Even worse is possessing a system but ignoring its insights. Higher education is actually one of the easiest industries to forecast, believe it or not. When the turnstiles stop in September, the entire year can be predicted, with reasonable accuracy, and an early preview of next year becomes available. Even non-traditional operations can be projected with some precision. For most institutions, over two thirds of non-traditional revenue for any given year comes from cohorts that were underway before the fiscal year began. New starts are important but will impact future years more than the current one.
In other words, the basis for the budget should be grounded in solid, proven data relationships and not the best wishes of a longshot win.
There are other benefits from using a comprehensive forecasting model. The board appreciates seeing this kind of rigor, as does the various participants in the budget process. It may mean that budget preparation will require more difficult expense reductions prior to the budget being finalized. That is a small price to pay when compared with the upheaval of mid-year cuts; ones that tend to fall disproportionately on staff and are made after a good deal of spending has already occurred.
And, it beats screaming loudly at enrollment reports, yearning for overly optimistic assumptions to become reality.
Do you need a comprehensive forecast model or a non-traditional revenue projection model? Email me and I’ll send you mine, free of charge.