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Mike English
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Mike English

Business Intelligence, Forecasting, Technology

Multiyear Financial Projections: An Essential Undertaking

Posted on Oct 17, 2016 12:00:00 AM

In this era of limited resources and continued financial strain, school business officials need to combine accounting and analysis, along with compelling communication skills, to meet the present and future needs of their organizations.

The multiyear projection (MYP) is one of the most critical working documents the school business office produces. When done well, the MYP becomes a living instrument that speaks with numbers and pictures and focuses internal and external stakeholders on the key opportunities and issues facing the district.

Operational or Strategic?

A well-constructed MYP should serve both operational and strategic functions.

From an operational perspective, the MYP should include enough detail to be useful for budgeting and cash flow planning. If you manage your district’s investment portfolio, the MYP will help define the long-term investment opportunities or, in some cases, short-term borrowing needs. You should be able to use data from the MYP in internal or external reports or as a foundational support document for your bond ratings or continuing disclosure obligations.

How to Effectively Communicate Your Budget to Stakeholders

From a strategic perspective, the MYP should be a centerpiece for financial and budget decisions related to future educational services and infrastructure improvements.

It is important to consider how internal and external stakeholders will engage with the output of your MYP. When setting up your MYP model or evaluating a third-party application, consider the kinds of reports you need. You will be using your MYP as a communications vehicle, so your reports must “speak” to a wide range of audiences on both operational and strategic issues.

Elective or Required?

Maintaining an MYP may be an elective task within your state; however, some states require school districts to submit a financial forecast as a scheduled compliance task. In those states, the required projection period is generally three to five years. Even when optional, local governments commonly use a five-year period for their projections.

In states that require an MYP, districts typically submit their projection using a specific state-developed form. Many of those state forms are unsuitable for use in strategic discussions with your board or community, as they have limited strategic or communications value. In fact, presenting a compliance document with 100 or more pages may confuse more people than it engages.

Take the time to produce an executive summary of the data with useful charts and dashboards. Your report will more likely be understood if it is delivered in a graphics-rich format.

How to Use the MYP

The MYP forecast becomes the central tool in financial discussions with governance boards. After the governance board members become familiar with the mechanics of the forecast and have access to their preferred data views, they will likely ask the question, “How does this affect our MYP?” By extending the financial forecast further into the future, boards focus more on growth and sustainability. The MYP can provide boards with more insight and certainty in decisions and subsequently increase the community’s confidence in those decisions—and in them.

The best forecasting models allow you to simulate “what-if” scenarios on demand and quickly and confidently answer questions about new investments and other affordability issues with a longer-term perspective. Additionally, you can use scenario comparisons and data visualization to engage decision makers and stakeholders with graphics that increase their understanding and accelerate their decisions. The ability to answer difficult financial questions quickly and confidently is an invaluable feature.

The Critical Components

As you develop your MYP, focus your effort in four key areas:

  • The source and structure of the foundational data.  If you are using your budget structure for the projection, determine the level of granularity that you want to use to support decision making.
  • The assumptions and variables that will drive future revenues and expenses.  Understanding the key variables and their relative impact on financial outcomes is critical.
  • The reporting output that people can understand.  Your audience may represent a wide spectrum of experience and analytical perspectives. Supporting your projection with both tabular and graphical data is important to improve understanding and engagement.
  • The ability to simulate and track changes. In addition to being able to create what-if scenarios, you will need an airtight process of cataloguing the changes that have been introduced to each simulation so you have a clean audit trail for each scenario.

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When Revenues Are Volatile

You may be in a position where your revenues are subject to volatile political swings, or your revenues may be under pressure because of local tax constraints. In such cases of revenue uncertainty, you can still benefit from an MYP.

Focus on the expense side of the forecast. When you have loaded the desired expense components to support a required or the visionary level of programming, you will be in a position to perform a basic financial gap analysis. Use the expense side of your MYP to calculate the funding level required to provide the services. The presentation and the talking points for this analysis are relatively simple and might sound like this: “If we continue at this current level of funding, we will be unable to provide the types of services that our community is seeking. To provide this higher level of service, we need X dollars more in funding over a five-year period.”

The financial gap analysis then becomes a great communication tool with stakeholders, including taxpayers, parents of students, legislators, elected leaders, and employees of the local government.

You may be in a situation where the likelihood of additional funding is remote, begging the question of the value of the exercise. But without a clear definition of the preferred level of programming, it will be difficult to communicate and engage critical stakeholders in a way that eventually achieves your goals. Additionally, as you look forward and begin to consider the potential infrastructure and staffing requirements of the MYP, you may gain other strategic insights regarding the current state of your organization.

New Concepts in Financial Projections

Twenty years ago, Excel spreadsheets revolutionized the forecasting process. Spreadsheets remain a valuable financial analysis tool today, but high-performing public- and private-sector entities are now using database technology to create and manage their forecasts.

Databases can be used to manage large file structures and easily compare multiple complex budget scenarios. Additionally, the increased processing capacity allows you to use your entire general ledger with the ability to aggregate and work with the data at different levels and in different views. Applications with “in-memory” data processing can convert your financial history and your projection into a giant pivot table that is much faster and easier to use than an Excel spreadsheet.

By capturing the entire general ledger in the system, you can create projections down to the lowest level of detail in your chart of accounts. This expanded processing capacity may allow you to consolidate your budgeting and forecasting projects into a single project. In other words, if your MYP includes all of the accounts in your general ledger, you will be creating next year’s budget as you finalize your forecast. In contrast, when you execute the MYP with aggregated annual financial report data, you may lose the details that you need for your budgeting process.

The Long-Term Impact

Many school districts use an MYP as a focal point for their strategic planning. A well-constructed and documented forecast not only assists in the planning and decision making, but also can establish a professional brand for the district that provides significant value over time. School business officials who lead this charge and demonstrate command over their district’s financial data enjoy increased levels of internal and external support and can serve their communities at the highest level possible.

 

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