This issue discusses several approaches to financial modeling and how the right model can inform institutional planning. I hope you find this discussion helpful.

Sincerely,

Tracy Filosa

By definition, a financial planning model is forward looking. It is based on current and prior institutional performance and incorporates economic and strategic assumptions to project future results. Within this definition, there are numerous approaches to modeling that can inform and advance a school's goals. A model can focus on a specific business issue, or be as encompassing as an enterprise-wide simulation. Below we explore some of the options that are often applied to meet the specific planning needs of educational institutions.

Specific Conditions
Some models are built to answer questions about a very specific business scenario. For example, a model might be developed to outline the conditions of endowment spending, debt financing or capital projects. These models are by no means simple, but they focus on the specific business conditions that impact the area of study. An endowment spending model incorporates data regarding endowment spending policy, portfolio asset allocation, investment returns and levels of giving to project and anticipate the future health of the endowment. A debt model may look at interest rates, years and terms of financing, the cost of the project and the rate of return to project the impact of different economic scenarios and capital decisions.

The purpose of the focused model is to answer specific questions: What spending rule will preserve the purchasing power of the endowment if our investment portfolio underperforms? Should we incur debt at a fixed rate or a variable rate? What if we finance the project over 15 years? What if the new dorm has vacancies in its second year of operation? While management decisions regarding the endowment and debt financing radiate to other areas of the enterprise, these models are critical, because they inform the decisions about a specific subject area.

Multiple Relationships
There are times when an institution wants to explore the relationship between two or more interdependent business factors. A relational model isolates specific relationships and dependencies within the institution. For example, a multiple relationship model may assess the relationship between teaching, research and service components of the faculty workload and compensation, tenure, course offerings or research rewards. Student enrollment patterns may be evaluated alongside tuition and fee revenue, financial aid awards or dormitory capacity. Research revenue and expenditures could be studied with equipment modernization and laboratory space requirements. A relational model is vital to understanding correlations within the university. This type of model emphasizes the significant connections on campus and the ripple effects that business decisions may have.

When I was a financial analyst at an urban research university, we maintained a model that evaluated the relationship between student enrollment, faculty workloads and revenues. This model incorporated student credit hours, financial aid, faculty teaching loads and programmatic growth. We used the model to predict and best understand the financial results of the academic enterprise. It was a helpful tool for the Chief Financial Officer and the Provost.

Enterprise Planning
An enterprise-wide planning model attempts to collect all of the ripples within the institution and assess their impact across the enterprise. It cannot effectively incorporate some of the details of the models discussed above; it summarizes the impact of those details to inform many policy and programmatic initiatives of the entire enterprise.

Most often the comprehensive financial planning model is implemented before, or as a result of, a strategic planning process to predict how sweeping programmatic decisions will relate and impact the organization as a whole. An enterprise-wide model integrates enrollment, operating, investment, advancement and capital activities in a unified framework. The power of the comprehensive model is that it enables decision makers to incorporate several related business factors in one integrated model. At a higher level of detail, you can test what-ifs that radiate throughout the institution. For example: what-if we raise the money to increase our faculty levels and quality? Because so many facets of the enterprise (such as research, indirect cost reimbursement, class sizes, student quality, financial aid awards, classroom and research space requirements) are incorporated in the model it enables the users to test a number of scenarios.

Before investing in a financial planning model a school must consider its institutional priorities and upcoming decisions. What kinds of answers do decision makers need to accomplish those priorities? What type of model will best inform those decisions?

If your goal is to prioritize the action items outlined in the Strategic Plan, a comprehensive model will probably best suit your needs. If the Investment Committee is rewriting the endowment spending policy, a focused endowment model will provide the necessary information.

Priorities that fulfill the institutional mission should drive the analytical tools and management reporting that are implemented for decision makers.

If you have questions about implementing a financial model, email TAF at intheknow@ tafconsulting.com.

TAF CONSULTING works with administrative leaders at colleges, universities and independent schools to deliver essential business analysis and training to stakeholders.

TAF participates in a range of business projects at schools including: organizational planning, issues briefings to chief executives and trustees, financial and management reporting, administrative system implementations, policy and procedure documentation and faculty and staff training.

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