Business Office Basics: The Importance of Using a Long-Range Financial Model

The answer to some trustee questions should always be “Yes” — including, “Does the school have long-term financial projections?”

Jun 1, 2023  |  By Jim Pugh

financial model

A founding business officer of NBOA with 51 years of experience, Jim Pugh shares wisdom he has collected in his decades of service to independent schools. This is the 11th article in the Business Office Basics series. The series thus far includes:  entry interviews when you start at a new schooltrustee orientation in terms of school financefinancial reporting strategiesdepartment budget request formspreparing the operating budget for the boardachieving financial equilibrium; the annual annual capital budget budget; the investment committee report; and understanding your audit (two parts).

One of the responsibilities of the trustees is to exercise due diligence. The head of school and the CFO regularly field questions from trustees which are expected to have “yes” as the answer. Does the school have a whistle-blower policy? Does the school’s liability policy cover the student trip to Thailand? Is there a cash management policy? Will the school solicit competitive bids for the major roofing project? The list of these questions goes on and on.

At one time or another, a trustee on the finance committee may ask you (the CFO): “Is there a long-range financial projection?” Looking five or ten years down the road is important when considering current financial matters. The projection is especially important when your school is working on a new strategic plan. A summary of the financial model should be an appendix in the strategic plan.

Engaging a Model

There are numerous ways to go about developing a long-range financial model. NBOA has its own Excel model, which is commonly used by independent schools. Members can access it here.

It is also possible to create your own model. This Excel file is an example. Excel has excellent flexibility for designing such a model, and it is easy to make revisions as the school’s circumstances change. Another benefit of building the model yourself is that it helps you understand the flow of financial data in your school.

This model includes nine years of data:

  • three years of historical data
  • the current budget year
  • five years of projected data

Some schools take out their projection ten years or longer. I find that ten-year projections for operating and fundraising revenue are speculative and unreliable. On the other hand, projections for debt strategy and capital renewal that go out 10 years or longer are appropriate.

In this model, a school’s financial structure is divided into five major components. Small schools may not need this much detail.

  • Operating (including enrollment, tuition and financial aid)
  • Fundraising
  • Endowment
  • Plant (including construction projects)
  • Debt

Key Financial Indicators

The above Excel model includes a chart which tracks key financial indicators over the nine years. The chart serves three purposes:

  1. It helps you spot errors as you build the model.
  2. The chart lends itself to an effective presentation. You can copy screen shots of the most important charts into a PowerPoint deck.
  3. It helps you identify unintended outcomes in the school’s financial plan.

What Assumptions Will You Make?

Whatever type of long-range model you choose, you should consider the purpose for which you are using it. This will affect the assumptions and variables you use in the model.

A momentum model is based on the school’s current operations and its immediate financial plans. This model shows the outcomes if the school continues with its current way of doing business.

An aspirational model incorporates longer-range goals such as those of a strategic plan. This model is a good way to stress test the strategic plan.

There are many ways to approach the creation of a long-range financial model. The important thing is to have one that works for your school. When someone at the trustee meeting asks whether the school has such a model, it is nice to answer the question with a reassuring, “Yes.”


Net Assets Podcast

Listen to the latest episode of the Net Assets podcast.

Get Net Assets NOW

Subscribe to NBOA's free twice-monthly newsletter.