Business Office Basics: Preparing Next Year’s Operating Budget for the January Board Meeting

Former long-time business officer, recent interim CFO, and founding member of NBOA Jim Pugh shares wisdom he has collected in his decades of service to independent schools. This is the fifth article in the series. The series thus far includes the following: entry interviews when you start at a new school, trustee orientation in terms of school finance financial reporting strategies and department budget request forms.

The “January board meeting” is my term for the meeting at which the board of trustees votes to set the parameters of next year’s operating budget. This typically determines next year’s tuition, the salary pool, and either the financial aid pool or net tuition revenue. These parameters allow the school to set in motion the admission and re-enrollment of students.

This January budget is usually the product of several months of work by the administration and the finance committee. In October/November they started with a “conceptual budget,” which agreed upon enrollment, tuition and salary increases as a starting point for budget planning. These are not final at this early stage, but give the administration an idea of the income and expense structure it needs to work with in shaping the budget lines for the year ahead.

This Excel file is a budget model which includes two tools, a sensitivity analysis and a waterfall chart, in addition to worksheets with various levels of budget detail. It is my “go to” file for work on next year’s budget with the head of school, the finance committee, and the full board of trustees.

Sensitivity Analysis

As every school business officer knows, there are a considerable number of moving parts in the operating budget. One of the challenges of the job is to communicate these parts to the finance committee. I have found that sensitivity analysis is an effective tool to achieve this. This is especially true in the finance committee’s work in December and early January, in the lead-up to the January board meeting.

The sensitivity worksheet looks at the eight major levers in the operating budget of “Fictional Academy.” These levers include: enrollment, tuition, financial aid, endowment draw, annual giving, salaries, departments and transfer to the plant fund. Not all schools have all of these components in their operation. These eight levers are representative of the choices schools face in their financial planning.

The eight levers are dynamic. That is, if you change one or more of the variables, the change will ripple through the other worksheets. You will see the new net surplus/(deficit) at the bottom of the sensitivity page.

For example, the Excel file shows:

• each 1.0% increase in tuition in the Upper School increases revenue by $79,800;
• each 1.0% increase in financial aid reduces revenue by $117,300;
• each 1.0% increase in salaries and wages increases expenses by $62,400;
• each 1.0% increase in department budgets increases operating expenses by $29,700.

Sensitivity analysis looks at the budget with a broad brush. The “average” salary increase does not mean every employee will receive the same increase. Working out the finer details of next year’s budget will continue well into the spring.

The eight levers are dynamic. That is, if you change one or more of the variables, the change will ripple through the other worksheets. You will see the new net surplus/(deficit) at the bottom of the sensitivity page.

The biggest benefit of the sensitivity page is that it teaches the finance committee that the different components of the operating budget need to be in balance with each other. Some trustees come to a meeting with the intention of increasing or decreasing just one component in the budget, such as tuition or the endowment draw. The sensitivity page quickly shows this trustee that other changes usually need to be made to achieve a balanced budget.

The sensitivity page lays out the choices. This enables a full discussion between members of the finance committee, the head of school and yourself (the CFO). This discussion is educational for everyone. It helps to build consensus. It leads to better decisions.

From my point of view, another benefit of the sensitivity page is that it makes the math perfectly clear. Important budget discussions won’t be interrupted by different and often speculative calculations about the effect of five more students on the bottom line.

Waterfall Chart

For these newcomers to the discussion, I find value in providing a simple waterfall chart. It supplements the traditional schedules which are included in the board packet.

For the January Board meeting, I like to throw in a different tool. This meeting includes trustees who have not been involved in the previous work in developing next year’s budget. For these newcomers to the discussion, I find value in providing a simple waterfall chart. It supplements the traditional schedules which are included in the board packet.

The waterfall chart (also known as “flying bricks”) is an excellent way to give the full board an overview of the changes and assumptions in the budget.

In the Excel file, the waterfall chart starts with a balanced budget in FY23 and ends with a balanced budget for FY24. From left to right, it shows the increases in net revenue from the FY23 budget to the FY 24 budget with ascending green bars. Then it shows the decreases in net revenue with descending red bars. For example:

• the largest green bar shows the tuition increase of 3.6% will increase revenue by $408,000,
• the largest red bar shows the salary increase of 4.0% will increase costs by $290,000.

Excel's waterfall chart is a bit clunky. There are apps available for sale which offer this kind of chart, and which are more user-friendly and provide a nicer presentation.

Either way, the waterfall chart can be dynamic. The chart in the Excel file pulls its values from the other worksheets. Any changes of the variables in the sensitivity page are instantly reflected the bars of the chart.

To Each Their Own Tool

The purpose of reports to the board is to educate, and also to provide information for discussion and decision making. 

Some trustees have an affinity for rows and columns of numbers. They are often on the finance committee. Sensitivity analysis in budget planning will help them to do their job. Some trustees process numerical information better with a graphic. The waterfall chart is a good way to give them an overview of the operating budget.