(Fore)Casting a Vision for Your CommunityPosted on Jan 27, 2016 12:00:00 AM
Is it worth the effort of developing a 5 year financial projection when you have little or no control of your revenue streams…especially if you are in a situation in which you have legislative requirement to operate within a balanced budget? Will there be any value generated in this type of analysis for local governments that are subject to volatile annual appropriations or uneven revenue collections?
The answer to both questions is a definitive YES!
Having the opportunity to work with local governments around the country, I have been able to observe many different revenue models and talk with public administrators about the challenges of building multi-year projections in the face of uncertain cash flows. As an advocate of forecasting, I am passionate about the value that an organization can achieve both in terms of financial and strategic planning. Additionally, I would always promote the benefits of a 5 year forecast as a stakeholder engagement and communication tool.
But, with respect to the issue of unpredictable revenues. How can we use a financial forecast in this situation? I would suggest three different ways of approaching the modeling and the best way to use the forecast output as:
- A Best and Educated Guess – in this model, you accept the fact that revenues may be uncertain, but you use the best data available to make educated projections for each revenue stream. Additionally, you use the 1-2, 3, 4-5 period approach to qualify the accuracy level of the projection through the five year period (reference my blog post titled Forecasting and the Issue of Diminishing Returns).
- A Decision Band Approach – here, you accept the volatility but you establish intelligent ranges for your key revenue assumptions and present the forecast not as a single outcome line, but rather as potential outcomes that may occur within the calculated bands. This approach will allow the organization to discuss and plan around rational “what-if” scenarios.
- A Vision Statement – this idea simultaneously embraces and ignores the lack of clarity on income. In this strategy, the 5 year forecast is used as a position statement on where the organization wants to go without regard to revenue volatility. For local governments that find themselves experiencing “death by 1,000 cuts”, this leadership-driven tactic allows the organization to take an offensive stance and vision-cast the services that it believes its constituents want and need.
I would like to drill a little deeper into the third case and discuss the value of using your projection engine to establish a scenario that represents the direction the organization would pursue without the constraint of uncertain revenues. When putting together this type of scenario, you could certainly take a “kitchen sink” approach and load the entire wish list into the expense side of the model…but, it may be better to ground the assumptions with sensible statements like, “this is what we think an excellent education will cost,” or “we need to spend $X in order to provide our community the best public safety and emergency services.”
When you have loaded in the desired expense components to support the visionary level of programming and services, you will be in a position to perform a basic financial GAP analysis. You will use the expense side of your scenario to calculate the funding level required to provide the services. The presentation and talking points around this analysis are relatively simple and might sound like this, “If we continue at this current level of funding, we will not be able to provide the types of services that our community is seeking. In order to provide this higher level of service, we need $x more funding over a 5 year period.”
The financial GAP analysis then becomes a great communication tool with stakeholders which may include taxpayers, parents of students, legislators, elected leaders, employees of the local government, etc. You may be in a situation where the likelihood of additional funding is remote…begging the question of the value of going through the exercise. But, without a clear definition of the desired state and the financial investment required, it will be very difficult to communicate and engage critical stakeholders in a way that eventually achieves these preferred outcomes.
One additional value point in producing the “visionary” forecast is that it will allow you to start to evaluate some of the organizational/HR aspects of the enhanced service platform. As you look forward, and begin to consider the potential infrastructure/staffing requirements of the scenario, you may gain strategic insights regarding the current state of your organization.
If you find you yourself stymied by lack of clarity or control of future revenues…don’t let that be the reason to not perform a 5 year forecast. In fact, your situation is almost demanding that you take the offensive position and use the forecasting process as a platform for constituent advocacy.
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Mike English is a founder and the CEO/President of Forecast5 Analytics, Inc. – a technology company focused on software development and data analytics for the public sector. Mike has spent his entire career concentrating on the development of financial and strategic solutions for schools and municipalities. Forecast5 is headquartered in Naperville, Illinois – a suburb 30 miles west of Chicago.