The full impact of COVID-19 is yet to be determined, but many schools are prepared for the worst. Some are anticipating a fiscal loss. Such projections can trigger a knee-jerk reaction to cut the budget, so preparation is key.
To minimize the risks that fluctuating economic conditions bring about, schools should generate two budgets in addition to the in-effect budget that was based on previous market conditions. These will be the "worst-case scenario budget" and the "best-case scenario budget."
While we’re in the thick of COVID-19’s impact now, continuing to use this process will provide stability in the future.
Your Worst-Case Scenario Budget
Your "worst-case scenario budget" lists every cut that can be made. Your list should double the amount of the predicted shortfall. If you see a $500,000 deficit, your list of cuts should cover $1 million.
You must prioritize your cuts to avoid decreasing the value of your school’s program, as that will only result in further enrollment decline.
You must weigh the financial impact of budget cuts versus the disruption cuts may cause. Reducing employee benefits, eliminating salary increases, or decreasing the number of sections in some grade levels would have a positive impact on your finances, but would be very disruptive.
Postponing the introduction of a new program, especially if it requires an increase in staff, has a moderate impact on finances but does not disrupt the school community. Eliminating nonteaching positions provides financial relief and little disruption.
Though providing for this worse-case scenario is part of the budget process, this document needs to be confidential. The School Head and CFO, as well as any Leadership Team members who provided input, should be aware of the contingency plan, but it should not be made public or shared with faculty.
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Your Best-Case Scenario Budget
You may, at times, find yourself in the opposite situation, where a one-time surplus puts revenue far above projections. This may become a sustained surplus, which results from fortuitous changes in the community, such as a large company opening a branch or headquarters, or a long-term trend of mission supportive families moving into the area.
The weakening or closing of a competitor can also bring about a sustained budget surplus with additional enrollment opportunities.
Your "best-case scenario budget" will prepare you for these situations. Have a plan that prioritizes where a windfall or a sustained increase in revenue would best support your school’s mission.
In the event of a one-time surplus, ISM recommends using the extra revenue for a one-time expenditure, such as small or medium capital improvements, a special event, purchasing new equipment, or infrastructure like sidewalks or repaving the parking lot.
If you are projecting a sustained surplus, your priorities can include long-term adjustments like lowering your tuition gradient or increasing your salary gradients. Annual budget items like maintenance can benefit from increased funding. Or you could increase your cash reserves or pay down any debt you may have.
Should you launch a new academic or cocurricular program, ensure the programs directly support the mission and can be easily marketed. These kinds of programs increase the value of your school to current and prospective families.
ISM recommends that you document a best- and worst-case scenario every year. This should become a habit, preparing your school for sudden changes in the economy.
Budget for the Future
Having a contingency budget, a budget based on current market conditions, and a best-case scenario budget for spending projected surplus ensures that your school is prepared for every eventuality.
Weigh the financial impact of cuts against the disruption they would cause for students, faculty, and families. Do everything in your power to avoid negatively affecting your school’s value proposition.
Preparing for changing economic conditions protects your school community from adverse effects of declining revenue, puts the school in a position of strength, and designates in advance where dollars can best be used to support the school’s mission.
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Strategic Financial Planning: A Comprehensive Approach
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