By Emily Cook, CPA, Partner, SST Accountants & Consultants
Emily Cook, CPA,
SST Accountants & Consultants
Budgeting and forecasting are crucial for managing school financials. However, they often rely on one set of assumptions for a fixed period, typically 12 months. Today’s uncertain, ever-changing environment requires schools to be more nimble and respond quickly to unanticipated challenges. Financial scenario planning allows your organization to be flexible and ensure it is set up for success, no matter what comes your way.
Scenario planning anticipates potential or even likely events that would most impact your organization’s financial health. Specific actions are outlined to guide response if, and when, the scenario occurs. Scenario planning includes four key steps:
- Identify critical uncertainties
- Define leading indicators
- Assess potential impacts
- Prepare mitigating actions
While scenario planning can become quite complex, introductory plans start with three scenarios. A tiered financial strategy is then developed with specific actions based on the occurrence of certain events.
For example, consider a school that recently shifted to a hybrid learning model and could experience a decline in enrollment. Also assume the school’s primary fundraiser, a “casino night” that takes place every winter, is budgeted to provide 30% of annual fundraising revenue. Due to the current COVID-19 pandemic, significant uncertainty surrounds both financial drivers. Below are several scenarios for how things could play out.
- Scenario A: Enrollment declines by 35% from original budget
- Scenario B: Enrollment declines by 20% from original budget
- Scenario C: Enrollment remains at budgeted levels
Each of these scenarios will have different impacts on the organization’s financial results for the year, all of which will vary from the original budget. School administrators must make decisions related to other aspects of their financial operations based on each scenario. In this case, enrollment is the leading driver of future decisions, including changes in anticipated technology needs and staffing.
- Scenario A: Budgeted technology expenses increase by 10% in order to accommodate the hybrid teaching model, and staffing is reduced by 30%
- Scenario B: Budgeted technology expenses increase by 25% in order to accommodate the hybrid teaching model, and staffing is reduced by 10%
- Scenario C: Budgeted technology expenses increase by 35% in order to accommodate the hybrid teaching model, and staffing levels are maintained
As you can see, even the most basic scenario plan will provide defined next steps based on potential future events, while also allowing for ongoing customization based on changing circumstances.
For a more comprehensive plan, layer additional scenarios onto the original leading driver. For instance, in addition to the scenario plans for enrollment levels, the school also needs to consider how the current pandemic will affect its fundraising event.
- Scenario D: Shift to a virtual event, reducing expected income by 50% and event expenses by 90%
- Scenario E: Capacity limited to 50%, reducing expected income by 25% and event expenses by 50%
- Scenario F: No limitations on capacity and no changes to the original fundraising budget
By combining scenarios D through F with scenarios A through C and creating custom plans for each resulting combination, the school would be prepared for a total of nine potential scenarios that could be easily adjusted as the situation unfolds.
- Scenario 1 = A + D
- Scenario 2 = A + E
- Scenario 3 = A + F
- Scenario 4 = B + D
- Scenario 5 = B + E
- Scenario 6 = B + F
- Scenario 7 = C + D
- Scenario 8 = C + E
- Scenario 9 = C + F
Scenario planning is a great tool to practice proactive strategic thinking and preparation, especially in today’s uncertain environment. Traditional spreadsheets and manual analysis can be used to navigate the scenario planning process, and schools may also consider cloud-based solutions that may require less time and provide more opportunity to change and layer scenario drivers.
While creating a strategic financial scenario analysis should be top-of-mind, it’s difficult to determine where to start – especially since school leaders are often pulled in myriad directions with constantly changing priorities. To kickstart the process, consider appointing a financially minded point person, whether internally or an outsourced expert, to lead the scenario planning effort. Another helpful first step is to pre-identify the best tools and processes for your organization to monitor results and action items. Having these tactics in place will help the entire scenario planning process run smoothly and efficiently.
