Horse racing and mid-year cuts

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 inaginable, 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 round the oval.  Unless the famous Mr. Ed is on the track (and presuming 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, though the analogy is not far fetched.  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?), a collective sigh of relief is registered and life moves on as planned.

Regrettably, the three major components comprising the revenue of a tuition-driven institution (enrollment, financial aid and giving) don’t always align with the budget, and I am not suggesting that they exceed expectations.  Depending on how much the driving activities are off, a mid-course correction might be announced as soon as the summertime through late September.  These events make for the worse sort of budget cuts.  And, if the practice of mid-year cuts is experienced more often than not, 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.  My visits to over thirty campuses bear that out. A much worse scenario, however, is possessing tried and true predictors and ignoring them.  On some campuses, it is considered normal for the giving and enrollment goals to be overly optimistic.  Perhaps it is easier to blame the non-achievement of unrealistic goals on the recruiting and fundraising teams than to do the hard work when the budget is initially prepared. I don’t want to believe that the heavy lifting is delayed on purpose but experience suggests otherwise.

Having spent a couple of decades in the world of private business, let me make a bold but defensible statement; Higher education is one of the easiest industries to forecast.  Student deposit numbers provide a pretty solid preview from about February forward, based on historic relationships.  Then, when the turnstiles stop in September, an entire year of revenues can be predicted with reasonable accuracy, provided second semester retention is calculated with some discipline.  And even at that early date, a preview of next year becomes available, simply because the majority of students who will be with us then are in our classes and dorms now. A few months later, well before the budget is finalized, 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 tend to impact year two more than the one being projected.

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. The data is there.  We just have to learn from it. The price of not doing so is quite steep.

There are other benefits from using a proven, comprehensive forecasting model.  The board learns from a comprehensive view that looks at each contributing area, as do the various participants in the budget process. And banks, after being exposed to such models require an equivalent approach as they assess the institution’s condition and prospects. Adopting a system that meets these objectives may prompt more difficult expense reduction activity 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 the enrollment horse race, yearning for overly optimistic assumptions to become reality.

Do you need a comprehensive forecast model or a non-traditional revenue projection model?  Email me at jeff@cfocolleague.com and I’ll send you mine, free of charge. Or head to my website and download them directly.

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