Higher education finance: A new approach to planning

Budgeting: can HE planning processes keep up? 

What are our spending commitments for the coming year(s)? What are our institution-wide and department-specific priorities? How should those priorities be balanced?

A financial strategy typically requires multi-stakeholder input, from the vice chancellor, chief operating officer, research, business engagement and learning heads, HR, departmental deans and others. Drawing up the budget involves consultation, collaboration - along with a certain element of negotiation.

But as David Lefevre of Imperial College recently highlighted in the Times Higher Education Supplement, in the current climate, “Traditional university planning processes cannot keep up”. Once they have been drawn up, it is no longer possible nor desirable to regard strategies as set-in-stone blueprints. Talk of a financial plan being “finalised” seems positively last century!

As a simple example, your plan envisages refurbishment of part of the university estate for 2021/22. In large part, this will be funded through a series of conferences and other commercial tie-ins scheduled for 2020/21. But what happens in the event of a temporary local lockdown forcing cancellation of some or all of that events programme? As Lefevre puts it, “Requirements can be turned on their heads in the time it takes one committee to pass a paper to the next”.

Whether it is catering or webinar access, demand for a particular service may blow up or disappear completely, with almost no warning.

Takeaway:

To thrive, HE institutions require agility, including the ability to alter their inputs, to calculate and recalculate their budgets on what is effectively a rolling basis.

Forecasts: preparing for an array of scenarios

HE Finance directors will be looking closely at sector forecasts for clues on what’s around the corner. For instance, recently, we’ve had an IFS study, in which the researchers note, “We estimate that long-run losses could come in anywhere between £3 billion and £19 billion.”

The numbers are big - and so are the uncertainties. In fact, Nick Hillman, Director at the Higher Education Policy Institute (HEPI) calls into question the usefulness of sector projections at this time, making the point that student behaviour polls in the run-up to the £9k fee hike turned out to be way off the mark.

Deferment is a case in point. As Hillman points out, “there are too many reports around at the moment that take old opinion polls of how students might behave as the gospel truth”. Yes, some may seek to defer come September. But then again, “Who would choose to have a gap year at the moment when travel and job opportunities are so limited?”

How many deferment requests will we be faced with? How will our international student enrollment figures be impacted? How will the crisis affect churn rates?

The answer to these, and many more questions, is we simply do not know. So how do you plan in the meantime? In practical terms, to be of any real value, your forecasts are almost certainly going to have to include multiple models to factor in an array of scenarios.

Takeaway:

• Now is the time to take stock of your forecast modeling capabilities.
• From enrollment projections and drop-out rates through to commercial revenue, the university finance team needs the ability to build models that can take into account various scenarios (e.g. best and worst case and multiple iterations in between).
• Base models should be capable of being amended with ease, allowing you to instantly see the financial impact of various events, trends and proposed courses of action.

Planning challenges

Here are just a handful of the factors that are likely to impact HE financial planning over the next 12 months.

Market volatility.

Income from investments (index-linked funds for example) may be substantially lower than anticipated. On the more positive side, however, falls in property value may increase the viability of, for instance, faculty extension projects. It’s not unrealistic to anticipate that some institutions will be embarking on long-term capital projects, at the same time as cutting back on short-term revenue expenditure. Both demand robust planning.  

Value perception.

HEPI survey data from February to April suggests that students are somewhat less likely this year to feel they have received good value for money. Covid has played an obvious part in this, but so too has interruption through industrial action earlier in the academic year. The 2020/21 student experience will certainly be ‘different’. But does this mean it will be perceived as less valuable? What changes will need to be made to reduce the loss of value perception? What will be the financial impact of these changes?

Research and commercial partnerships.

The R&D requirements of industry and the public sector have not disappeared, but priorities have certainly shifted. Projects that were being mooted a year ago may not have materialised, but new opportunities may open up. Bidding for a project may involve up-front costs and possible re-allocation of funds from elsewhere in the institution. The finance department will have a key role to play in modeling and analysing the viability of such projects.

Ancillary income.

Donations may have dwindled and the usual programme of alumni events may have fizzled out. So, what is the optimum response? Do you put fundraising initiatives on ice - or do you recalibrate and double-up on marketing spend in the hope of realising a return on investment? These are tough choices. By modeling the various options, the finance team can provide decision makers with the data they need to make the right decisions.  

Government-backed relief.

There was some good news on the fiscal front, when the VAT zero-rating of e-publications was brought forward from December to May 2020. Finance departments should look closely at their offerings to ensure that the zero-rate is being applied where it can.

Funding-wise, universities were not top of the chancellor’s mind when he rolled out the various initiatives designed to help businesses through the crisis. Speculation abounds over whether a specific HE-focused package will be forthcoming, and if so, what form it will take. That said, hand-outs are unlikely: relief is much more likely to take the form of a system of government-backed lending. Even with partial government guarantees in place, institutions can expect their applications to be thoroughly stress-tested. Evidence-backed projections, sound budgets and realistic modeling will be crucial for securing funding, with HE finance departments in the driving seat for delivering this.

Reviewing your planning capabilities

It’s not easy delivering an outstanding student experience and planning for the future, when faced with uncertainty in all areas.

MHR Analytics has already helped a range of institutions - including Queen’s University Belfast, Loughborough University and Teesside University - overcome precisely this challenge.

Covering budgeting, financial planning, student planning, salary & compensation and workforce planning, we can help you centralise your data, model with ease, respond appropriately to sudden jolts and make the right decisions.

To review your current capabilities and to futureproof your institution for what’s ahead, speak to MHR analytics today.