How to Create a Budget Forecast in Uncertain TimesPosted on Jul 6, 2017 9:31:08 AM
According to the “National Center for Education Statistics” February 2017 publication, over 90% of school district revenues come from local or state sources that are controlled by statutory funding formulas. With such a significant portion of revenues being subjected to political or legislative processes, school business officials often wonder, “How am I supposed to predict what the state is going to do in terms of educational funding?”
Fortunately, the school business official doesn’t have to be an economist, statistician or fortune teller to present reasonable budget projections to the school board, superintendent and community. Instead, scenario analysis and pattern recognition, can be extremely valuable analytic methods to develop “educated guesses” for unknown data points.
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Forecasting Revenue with Scenario Bands
Developing revenue scenario bands for local and state funding sources with a “Low-Mid-High” approach can help decision makers understand the key issues around revenue including:
- Which revenue sources are the most important for us to focus on?
- If revenues are in the lower end of the band, will we have to adjust expenses?
- On a multi-year basis, what will happen if revenue continues to come in on the low end?
- If revenues are at the higher end of the band, can we afford new programs or staff?
You can create your Low-Mid-High estimates for each revenue source by using historical data and then applying reasonable band-width on each side of your middle of the road estimate.
Evaluating Expenses with Pattern Recognition
In the graphic above, a pattern emerges that would make it reasonable to forecast that the 7th occurrence will be yellow. If we wanted to hedge our bets, we could cautiously predict that the 7th occurrence will be yellow, green or peach. This example is provided in the context that many school expenses follow time and allocation patterns. The trends in expense are easy to identify with visualization tools. And in fact, many school district expenses are tied to compensation costs which can be easily predicted and modeled.
How can you make estimates with confidence?
In most states, accurate projections (both short- and long-term) can be created if the school business official can estimate four key factors:
- Local property value
- State funding per student
- Salaries and benefits costs
Identifying patterns and creating multiple scenarios for the variables that are linked to these factors will allow you to present a meaningful financial forecast to your district’s stakeholders. And, it will also help to identify and communicate complex financial issues that are key to building trust in your budget.Reference: National Center for Education Statistics
Scot Ecker joined Forecast5 Analytics as a Senior Analytics Advisor in February 2016. Scot spent the last sixteen years working in school finance. Mostly recently Scot was the Vice President and Chief Financial Officer at Carthage College. Prior to that, Scot spent 13 years serving as a business manager for school districts in Wisconsin. He is a member of the Association of School Business Officials International and a past board member of the Wisconsin Association of School Business Officials (WASBO). Scot holds a Bachelors degree in business from UW-Madison, a Masters degree in school business administration from UW-Whitewater and an MBA from UW-Eau Claire.