Strategic Financial Planning with the NBOA Heat Map

When Chad Stacy created his financial sustainability heat map in 2010, the Dunn School was, like most other independent schools, reeling from the effects of the Great Recession. Enrollment, budget and balance sheet were, in Stacy’s words, “wobbly.” He had just joined the Southern California grades 6-12 boarding and day school with 250 students as its CFO, and was working hard to pull levers that would bring the school to a place of greater stability.

While he was reasonably confident in his efforts, he struggled to find a way to relay what he was doing clearly to the board and senior leadership who were not neck-deep in school finances. They needed to learn in a succinct, digestible way where the areas of greatest need were and to understand the plan to improve. Thus was born the heat map, which has helped Dunn not only move forward on many of its initial metrics and goals, but also manage through the pandemic with much more financial confidence and flexibility than the school had in 2008-9, while setting new targets for improved financial health.

It's important to note that Dunn is a smaller, low-demand school, as Stacy puts it. It doesn’t have an enormous endowment or excess enrollment. But the easy-to-use, no-cost heat map tool has made a significant difference in Dunn’s financial outlook coming out of a second period of stress — the pandemic — and going into yet another potentially tumultuous financial period, dependent on the health of the global economy in 2023.

A Familiar Tool Made New

Since Stacy shared his work in a 2016 Net Assets article, schools around the country have picked up the heat map and made it their own, to drive strategic conversations. And building on Stacy’s work, NBOA’s Business Intelligence for Independent Schools (BIIS) data platform now has a new tool — the Financial Sustainability Heat Map. It is available to NBOA member schools that submitted DASL-BIIS financial operations data in fall 2022. 

The NBOA Heat Map uses BIIS data to populate a color-coded visualization of an independent school’s movement toward or away from meeting financial goals explained NBOA's director, research and data analysis, Elizabeth Dabney. This fully customizable tool allows a school to select indicators, set targets and track progress. The Financial Sustainability Heat Map includes many of the indicators and their calculations, developed by Stacy that were critical in understanding and improving Dunn’s financial position, but are also applicable to other schools. By tracking indicators such as the equity to debt ratio, liquidity ratio and sustainability ratio, among others, schools can answer financial questions such as “Does our school have financial leverage?,” “Does our school have financial flexibility?” and "Is our school on a path to financial sustainability?”

Every school that entered financial operations data during the DASL-BIIS collection period will be able to access the NBOA Financial Sustainability Heat Map and put it into the context of their own school’s financials by setting the targets that make the most sense for them and moving the targets as financial goals are met.

Dabney further explained that the Heat Map can be downloaded as a PDF for easy presentation to school leadership or the Board of Trustees to provide an at-a-glance understanding of the financial areas where a school is improving and areas that are still a challenge. This tool is unique because it helps schools take a long-term, forward-looking view of their financial health.

Clear Communication

Grady Hazel became CFO at Dunham School in Baton Rouge, Louisiana, in 2015, at a time when the school was in a period of transition. A new head had joined shortly before him, and the board knew financial improvement was imperative. Shortly after, the heat map article came out, and Hazel put it to use almost immediately. “Instead of reinventing the wheel, I thought, shoot, I’ll just do this,” said Hazel. “It’s got the metrics, it’s visual, and it tells you what you want to know.” Hazel has used it ever since.

Like the other schools interviewed for this article, Hazel updates the heat map each once a year, after he receives the annual audit. Then he brings the updated map to his finance committee to assess what’s improved or declined. (Going forward, BIIS users will find the data they input in the fall imported directly into the heat map tool when reporting opens for the year, and it will be easily exportable for presentations.) With key points in “one nice, clean sheet,” the heat map “doesn’t overwhelm a non-numbers person,” Hazel said. It has helped board members ask questions about school finances and how the school might work toward a better place.

Linda Dennison used the heat map when she served as deputy head of school and chief financial officer at Indian Creek School in Crownsville, Maryland, to similar effect: “For the non-financial people, I think [the heat map] is incredibly helpful for them to ask a question,” she said. “If I see something is in red, I can ask, ‘Why is that red?’ ‘Help me understand why is that yellow.’ And even, “Why is that green? You know, that's great but I don't get why.’ People might understand the math behind the numbers, but they might wonder why the benchmark exists in the first place.”

For Bill Petchauer, CFO at Sacramento Country Day School (SCDS) in California, the heat map has been a more effective communication tool than sharing the annual audit. “It’s easier to understand,” he said. And it’s easy for him to pull together. Board members have a clear vision of priorities when they see the color-coded metrics, and when indicators move from red to green, the board feels good about the progress the school has made.

Clear Financial Focus

Hazel is honest about the Dunham map: “There was a lot of red. But we have used the heat map to make strategic decisions to improve the areas that required attention.” That’s to say it helped them clarify financial priorities and spur action. One of the few areas that was green when Hazel first joined the school was age of plant, which measures how well facilities are maintained. Recently that metric slipped into red, as the school deferred maintenance to cover pandemic-related costs. The color change was a wake-up call to focus on that area.

One metric that has improved is the debt coverage ratio. “It’s been a goal to improve that, and now I can say we’re in the green,” Hazel explained. “We’ve used the heat map to reinforce our belief that we should reduce our debt significantly… It’s very clear what you need to work on and how far you have to go to get there.”

In line with Stacy’s original intent, Hazel notes that schools need not use all the default metrics. At the present time, for example, Dunham’s endowment is not large enough to warrant the use of the endowment metric. “Dunn’s metrics aren’t necessarily going to be another school’s metrics,” affirmed Stacy. “Our pressure points and opportunities aren’t necessarily going to be yours.”

For SCDS, net assets growth has been a particular achievement. Before the heat map, goals were geared toward smaller increases, but with the heat map, they’ve made more significant progress because it’s clear how far the school needs to go. It is useful both to convey an overall picture of the school’s financial health and as a way to drill down into specific metrics and areas of focus, Petchauer said.

The Board and the Budget

Stacy similarly presents the heat map in its entirety to the board on an annual basis and also highlights two or three metrics each year that he thinks merit special focus. “It's almost like a board education tool,” he said. It helps him consider what the board needs to know at any given time.

“The heat map is a visual tool, akin to a dashboard we look to in board meetings as we plan strategically for the future, but what makes it powerful is that it’s a longitudinal tool that tracks our ‘heat’ over time.”
—Kalyan Balaven, Dunn School

Stacy also cited age of plant as something Dunn has focused on. “It’s a bit esoteric, but board members get that concept in 30 seconds because [the heat map] is an easy communication tool,” Stacy said. Dunn started with an age of plant of 24 and set a goal of 14. The number has slowly ticked down to 19, but school leaders know they still have a way to go until they can feel comfortable. Thus the heat map can be simultaneously affirming of good work as well as a push to keep moving.

During the pandemic, the age of plant goal took a back seat, and now they are focused on it again, as short- and long-term priorities shift. “[The heat map] helps you build the budget, it helps you stick to that number,” he said. And it’s deeply appreciated by leadership across the board. In the words of Dunn’s Head of School, Kalyan Balaven, “The heat map is a visual tool, akin to a dashboard we look to in board meetings as we plan strategically for the future, but what makes it powerful is that it’s a longitudinal tool that tracks our ‘heat’ over time.”

Scenario Planning

Dennison has also used the heat map to inform strategic decision making. The original heat map article came out when Indian Creek was developing a strategic plan. Enrollment was fluctuating and leadership was trying to determine what optimal enrolment size would be. Financial indicators were being discussed, and the heat map provided an easy starting point for making assessments. Dennison added two additional metrics that were key for the school and linked the heat map to budget drivers through an Excel workbook.

More specifically, the school was considering a “flexible” or affordable tuition model and wanted to understand the impact of enrolling certain numbers of students at certain tuition levels. “We wanted to make sure that however many seats we had at each [tuition] range, it would still help us achieve the [financial] sustainability goals that we had set and meet our debt coverage ratios,” Dennison explained. Important to Indian Creek at the time were the debt coverage ratio and balance sheet growth. Stacy’s sustainability ratio was also key, as well as deferred revenue coverage, because the school had a goal to move away from using future receipts to pay for current expenses.

By linking the heat map with other drivers, school leaders could see the broad potential impact of different scenarios. “As we were evaluating each driver’s impact on net income, the model would automatically update cash flow and show the impact from each driver,” Dennison explained. “I just did it as a formula. It was not perfect.” But it was sufficient to inform key decisions.

A critical question for the school was ideal size. Leaders were planning to consolidate two campuses into one to cut down on fixed costs. Considering the amount of financial aid that was being distributed, they wondered if becoming a smaller school that gave out less financial aid might be more financially sustainable. Would moving enrollment from roughly 600 students to 350 full-pay families, for example, be financially healthy?

“The heat map indicators all went red,” said Dennison. “It couldn't have glared worse. It was nice to have that support instead of making a guess. And honestly, it wasn’t the answer I was expecting.” What she realized was that the fixed costs, even with moving to one campus, were high enough that Indian Creek needed a broader enrollment. It helped move the school to a net tuition revenue model and flexible tuition along with it.

School leaders tied in market research, which showed that most of the full-pay, “older money” families were going to another local independent school, while Indian Creek families were largely two-income families, with parents that were tight on time. It became clear that Indian Creek was losing families through the traditional lengthy application and financial aid process. The heat map had shown school leaders that they couldn’t afford to lose families on financial aid, so they made the admissions and aid application processes easier and faster. Many families that were at risk of leaving stayed.

Dennison left Indian Creek in 2019 for Phillips Academy, Andover, and in 2022, joined Glenelg Country School in Howard County, Maryland, where she will use the heat map again to work on different goals.

Moving Targets

“When we first started with the heat map, we used, ‘let's-keep-the-lights-on’ metrics,” said Stacy. Following the Great Recession, the balance sheet was small, and funds were almost entirely restricted. Dunn leaders wanted to balance the budget and improve cash flow. “If you don't have financial flexibility, any change in the annual budget is scary and painful,” Stacy recounted. “You have to immediately adjust, and if revenues go down, you have one option, and that's to reduce expenses.”

“As you achieve metrics, don't just celebrate that the heat map is turning green, but add some more red. If the heat map is to be a live document that will motivate you and move you forward, then you need to keep putting forward more opportunities to improve.”
—Chad Stacy, Dunn School

When you think of school finance, “everyone talks about the budget,” he continued. “No one thinks about the balance sheet. The heat map initially was really focused on the balance sheet. Even many board members don’t have a great understanding of the balance sheet. It really helped point out our vulnerabilities.”

As recounted in the first heat map article, Dunn was able to move into a period of greater financial health, thanks to clear focus on priorities and understanding of what it would take to change financial position. Since that time, targets have shifted, as have metrics. Relatively new metrics like planned giving percent and endowment growth are “forward looking and exciting,” said Stacy, and will help Dunn think ahead to 10 years out or more.

“As you achieve metrics, don't just celebrate that the heat map is turning green, but add some more red,” Stacy advised. “If the heat map is to be a live document that will motivate you and move you forward, then you need to keep putting forward more opportunities to improve.”

Better Prepared

2020 brought challenges for Dunn and all other schools like none seen before. Like many economically sensitive schools, the COVID-19 pandemic hit Dunn hard. The school applied for “every source of federal funding” for which they were eligible and still experienced “significant financial challenges.” But they were able to keep faculty and staff employed, which wouldn’t have been an option without their improved financial position, and have maintained liquidity.

Dunn had run a capital campaign to support a new building, and the funds had been collected in full by early 2020, as the building came online. Just as the school was about to pay back the bridge loan, the pandemic struck, and Stacy knew holding onto the funds would provide desperately needed liquidity at a challenging time. “Maybe 10 years ago we wouldn't have had the confidence to make that decision,” Stacy said. “Because debt is a big, scary word, but right now we've got the unrestricted liquidity that we needed as a backstop.”

Stacy has recently stepped into the role of director of The Robert W. Jurgensen Entrepreneurship Program and has handed over the role of CFO to Amy Grenier. He knows the school is in a better place regardless of what the future holds. “What the heat map has been really good at is building trust,” he said. “There's just a deep level of trust [among the board members and senior leadership] with our finances. And a lot of it has to do with the way that we've communicated with them over the years and the way we've committed to improving, and proving that commitment through the heat map.”

Stacy has been clearly communicating challenges throughout his time at the school, so when a time of stress such as the pandemic comes along, the board is not balking at challenges that may be exacerbated. “It’s like that Warren Buffet quote — you find out who’s swimming naked when the tide goes out,” he said. Dunn trustees didn’t have to wait for the tide. They’d been in the know for years.

With the financial sustainability heat map now available in BIIS, it’s never been easier to access and start using it in the business office and with leadership. Stacy has tapped other tools to track the school’s financial outlook over the longer term, but it’s the heat map he keeps bringing back to the board as the best one for ease of communication and strategic decision-making.