Boost Your Institution’s Viability With an Effective Financial Model

The financial models of higher education institutions have become a significantly prominent topic of discussion. Shifting demographics, increasing student demands, and changing public and private support have put great strain on financial models within the higher education industry.

Your institution’s financial model is key to its operations and viability, and having a good understanding of the model can help reduce risk. Learn key steps and common pitfalls to avoid when developing a sound financial model.

Common pitfalls in financial modeling

When creating and understanding a financial model, these common pitfalls are often seen in higher education:

One-year budget

A one-year budget where revenue matches expenses is called a financial model. This approach lacks strategy and doesn’t allow your institution to plan for its future. Creating a one-year budget may put your institution in a difficult situation if enrollment numbers are lower than anticipated or unexpected expenses arise.

Created in a vacuum

Sometimes a financial model is developed by a single person or department with little to no consultation with others. This lack of collaboration can result in a lack of “buy-in” from the broader community. A financial model should drive your institution’s mission and vision forward. If it’s created in isolation, it may not be widely used or understood, thus having minimal impact.

Too much detail

Accountants often love details and may think each general ledger account should have its own place in the financial model. When an overly detail-oriented accountant is tasked with creating the model, the result may be something too complex for your institution to understand. It lacks the big picture and cannot be used effectively to communicate with the board and other leaders for decision-making.

Business as usual

It can be tempting to simply roll forward an existing financial model and hope for the best. Unfortunately, this approach is unlikely to succeed. Higher education is not operating under “business as usual” conditions. Demographic shifts are causing rapid declines in enrollment, and many institutions are experiencing significant increases in salary and benefit expenses. The financial model that worked in the past is unlikely to be effective in the future.

How to create an effective financial model

A financial model should be impactful and purposeful, with the ability to inform decisions and drive change. Practically, your institution should develop a long-range financial model that can incorporate various scenarios and measure financial outcomes in real time.

Here are key steps to follow when creating a financial model for your college or university.

Consider strategic initiatives

The first step in creating your financial model is to consider strategic initiatives, which will vary for each institution. Examples include:

• Investing in new programs
• Increasing enrollment
• Offering online programs
• Generating unrelated income
• Creating a new discounting strategy

These initiatives should align with your institution’s vision and reflect where it hopes to be in the future. Strategic initiatives should be determined by various leaders across campus and are often informed by other analyses, such as program profitability.

Understand costs

The next step is to understand costs. At the simplest level, a financial model has two choices: increase revenue or decrease expenses.

It’s vital for your institution to understand its costs, especially as external factors are driving up expenses. Additionally, many institutions are incurring costs at traditional rates despite significant decreases in enrollment.

When creating a financial model, start with a baseline of expenses and create assumptions about how these amounts may change in the future.

Test assumptions

Once strategic initiatives are identified and costs are understood, it’s time to test assumptions in an interactive model. Asking “what-if” questions can be useful.

For example, if an institution plans to start a new data science program and hopes to enroll 50 students by year five, a successful program could generate $4.9 million in the first five years.

An effective model can determine the outcome on both revenue and expenses if the program is only 75% successful, enrolling 37 students by year five. Testing assumptions allows users to quickly visualize future scenarios.

Communicate and make decisions

The most important feature of any financial model is that it can be used to communicate and make decisions. Your institution’s financial model should be easily understood by the board and other key leaders, enabling them to make strategic and well-informed plans.

Institutions must develop a robust and strategic financial model to deal with shifting demographics, increasing demands from students, and changing support structures.

How CLA can help with financial modeling

At CLA, we use a tool called CLA Intuition. CLA Intuition is a planning process that identifies and models key financial performance drivers. It draws on higher education insights, a deep understanding of your institution’s perspective, and a collection of interactive modeling tools.

CLA Intuition allows institutions to explore the long-range financial implications of today’s decisions by viewing financial performance projections under a variety of scenarios projected over time.

Our process helps you focus on issues that can strengthen financial performance. Our tools enhance the understanding of key financial drivers and facilitate communication between management teams and board members.

To highlight new opportunities and risks, we examine how various factors may influence your future. Each engagement is customized to provide insights into financial performance. When interpreted and discussed, our models can help you explore various options, enabling leaders and management teams to react and respond in real time to opportunities and challenges on the horizon.

Ultimately, a well-crafted financial model not only supports your institution’s mission and vision but also contributes to its long-term viability and success.

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Get the tools and insights you need to develop an impactful financial model for your higher education institution. Complete the form below to connect with CLA.