4 BEST PRACTICES IN FINANCIAL PLANNING FOR HIGHER EDUCATION
PROJECT TEAM: Jason H. Sussman, Managing Director, Kaufman, Hall & Associates, LLC, and Chief Executive Officer, Axiom Software, LLC Charles Kim, Managing Director, and Director of the Higher Education division, Kaufman, Hall & Associates, LLC Tony Ard, Vice President of Software with the Higher Education division, Kaufman, Hall & Associates, LLC Nick Long, Vice President of Financial and Capital Planning with the Higher Education division, Kaufman, Hall & Associates, LLC Gavin McDermott, CFA, Assistant Vice President, Financial and Capital Planning, Kaufman, Hall & Associates, LLC Copyright 2016 by Kaufman, Hall & Associates, LLC All rights reserved. Reproduction or reuse in whole or in part is prohibited except by permission. Contact Kaufman, Hall & Associates at 5202 Old Orchard Road, Suite N700, Skokie, IL 60077. Phone 847-441-8780. www.kaufmanhall.com
Introduction Given the number and magnitude of pressures in higher education, the need for robust long-range financial planning is more critical than ever. Without a strong strategic financial and capital plan in place, and without clear and connected strategicfinancial vision, higher education institutions run a very real risk of making strategic decisions that may not be in the institutions best financial interests. When properly developed and implemented, the strategic financial and capital plan serves as a blueprint for future growth. Applying quantitative reasoning, it brings key issues into focus by mapping out available financial resources and matching those resources with strategic capital requirements. It also will highlight any gaps, allowing an institution to make proactive adjustments. In short, a strong strategic financial and capital plan provides higher education institutions with the foundation to support the execution of the strategic plan. It also provides the knowledge needed to make informed strategic and operational decisions. Revenue Pressures New Disruptive Competition Key Pressures in Higher Education Expense Pressures Increasing Strategic Imperatives 3
But We Already Prepare a Budget... A budget describes revenue and expense expectations for the forthcoming year or an increment of a year. Its time horizon reflects objectives that are achievable in the short term This time horizon is insufficient for planning purposes given the uncertainties facing institutions of higher education today Long-range plans, of five years at a minimum, are required. Integrated strategic financial plans identify where the institution wants to be in the future and how it plans to get there strategically and financially 4
Why Use an Integrated Strategic Financial Planning Process? Kaufman Hall believes that strategic planning and financial planning activities must be highly interrelated and interdependent disciplines in order to function as the cornerstones of effective organizational and financial management. Strategic and financial planning should not be separate activities that are completed through disconnected processes Achieving and maintaining competitive financial performance requires thoughtful identification and execution of strategic initiatives that will drive the institution s strategic and financial performance for decades to come 5
Why Use an Integrated Strategic Financial Planning Process? (cont.) An integrated strategic financial and capital plan helps universities and colleges to: - Link the institution s strategic mission and vision to measurable financial objectives - Identify whether strategies can be supported financially, given the institution s capital capacity - Quantify future financial risk, consider alternative scenarios, and specify sensible reactions to expected or unexpected changes - Mitigate identified risk in a proactive manner - Make better decisions grounded on solid data, and communicate those decisions to the board, throughout the institution, and to external stakeholders, as appropriate - Operate quickly and flexibly in a dynamic and complex marketplace, with improved oversight and control 6
The Integration of Strategy with Finance Discipline Creates the Required Decision-Making Framework Can the strategies be implemented within an acceptable credit context? Financial Planning alance financial a ilities to strategy over five years Build cash and debt capacity aintain single credit profile Mission Based Strategies Annual Budget Completely integrated with strategic plan, financial plan, and capital budget How much debt? Under what structure? At what cost? Under what terms? Capital Structure Support strategic implementation within single credit profile Optimize fle i ility and cost Feedback and Control How much can/should we be spending? Where are the capital dollars best deployed? Capital System-based approach Quantitative rigor, NPV Monitoring of results Accountability, credibility, and results are key 7
Four Best Practices in Financial Planning 1 2 3 4 Understand your current credit position within capital markets expectations Quantify your current capital position relative to strategic requirements Develop a realistic financial plan that supports execution of the institution s strategy Communicate and direct the plan s implementation 8
1 Understand your current credit position within capital markets expectations Why Use a Capital Markets Approach? A sound business strategy is fundamental to an institution s ability to fulfill its mission over the long term The capital markets rating agencies, banks, credit enhancers, and institutional investors are uniquely focused on having a clear picture of your current financial position and future strategy Understanding what the capital markets look for in an integrated plan provides important direction as to the issues to be addressed during your planning process 9
1 Understand your current credit position within capital markets expectations Set the Context: Your Historical Credit Profile Quantitatively assess the institution s credit ratios to compare recent financial performance to relevant national standards that serve as benchmarks Key Considerations Ratio/Statistic Moody s S&P Fitch What is the revenue mix? How have the funding sources changed over time? What risks have emerged as a result? c ca an inc i t institution generating? How does the leverage and debt burden impact our operations and balance sheet? Does the institution have the liquidity to support capital needs, and internal and external risk factors? Revenue Mix Tuition and Fees Gifts and Contributions Grants and Contracts Endowment Spending/Investment Income Other Performance Operating Margin Operating Cash Flow Margin Return on Net Assets Debt Position MADS Burden (%) Debt Service Coverage Expendable Resources to Debt Debt to Capitalization Liquidity Cash & Investments to Debt Expendable Resources to Debt Unrestricted Resources to Operations Unrestricted Cash & Invest. to Operations Expendable Resources/Operations Rating Agency Medians Compare to current median rating levels Consider a range of ratings above and below the current rating 10
1 Understand your current credit position within capital markets expectations Understand that Ratings Consider Multiple Factors Financial and non-financial factors are considered Market Strength: Student Demand & Donor Support Capital Needs, Debt and Other Liabilities Operating Performance Governance, Management, Mission/Strategy Financial Resources & Liquidity Source: Moody s Investors Service Legal Structure Convenants of Debt 11
2 Quantify your current capital position relative to strategic requirements Balance Capital Sources and Uses c ca c Cash and Investments Debt Uses of Cash Sources of Cash Strategic Capital Operations c capi al Other Sources/Uses? c p a ing a gin l a p i i i in an app p ia c i an i c n 12
2 Quantify your current capital position relative to strategic requirements Calculate the Variables #1: Quantify multiyear strategic capital requirements #2: Quantify incremental debt capacity at desired credit rating #3: Estimate growth in cash, investments, and endowments required to support operations over a five-year period Restricted Investments Unrestricted Investments Restricted Investments Unrestricted Investments Cash Cash Today Future 13
2 Quantify your current capital position relative to strategic requirements Assess Your Capital Position by Balancing Capital Sources and Uses How should these tradeoffs be optimized within an appropriate credit and risk context? An increase in operating cash flow likely will be required in order to balance capital sources and uses Capital Scale New debt Philanthropy Asset sale Investment income p atin ca Current cash & investments Debt payments Other payments Working capital Capital expenditures Cash & investment growth Sources Uses Balancing sources and uses 14
3 l p a ali tic financial plan t at pp t c ti n t in tit ti n t at Integrate the Financial Planning Framework with the Institution s Decision-Making Framework Strategies Capital investment plans Baseline operations Initial financial plan Can cash flows support the strategies? Is credit position maintained? Is ongoing access to capital optimized? Sensitivity / risk analysis Research activities, academic programs, facility plans, IT investments, enrollment management, tuition pricing, cost structure, changes in funding sources Operating changes Strategic initiatives Final plan Specific operating /credit targets Specific capital plan with project phasing Financing transactions Operating margin targets Investment decisions 15
3 l p a ali tic financial plan t at pp t c ti n t in tit ti n t at Use Initiative-Based Scenario Planning to Develop Financial Projections Base Case Given current trends, what is our financial outlook for the next 3-10 years? Initiatives As we prioritize growth and/or cost containment initiatives, what is the incremental impact? Scenarios What is the impact on our projections of alternative futures given the initiatives we ve proposed? Base Case (Conservative) Initiative #1 Initiative #3 Initiative #2 Initiative #4 Consolidated Results Key Projection Assumptions Include: Statistically-driven Non-tuition revenues modeling Capital expenditures Enrollment and Debt tuition forecasting Endowment spending Expense growth Examples: Online offering Satellite campus New residence hall Faculty recruitment New research building Analysis Contains: 1. Income statement 2. Balance sheet 3. Cash flow 4. Key ratios Athletic investments International expansion New instructional facilities 16
3 1.4% 1.2% 1.0% l p a ali tic 0.8% financial plan t at pp t c ti n t in tit ti n t at 0.6% 0.4% Conduct Ongoing 0.2% Risk and Sensitivity 0.0% Analyses as Conditions 2015 2016Change 2017 2018 2019 Plan Flat Tuition Risk and sensitivity analyses are essential to validating affordability of the plan. Key elements are: Higher Salaries Declining Research - Access to required external capital - Understanding of the sources and drivers of financial results - Definition of necessary proactive management responses to industry/market changes 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% Operating Margin 2015 2016 2017 2018 2019 Plan Flat Tuition Higher Salaries Declining Research Operating Margin 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 2015 2016 2017 2018 2019 Best Case Worst Case Moderate Case 17
3 l p a ali tic financial plan t at pp t c ti n t in tit ti n t at Ensure that the Financial Plan Answers Seven Critical Questions 1. What are the institution s strategic capital requirements? 2. How much cash and investments should the institution have on hand? 3. How much debt can the institution afford? 4. What short-term and long-term performance targets are necessary to resolve any shortfalls? 5. What level of operating change is required to meet the performance targets? 6. Where will the capital be obtained in the short and long term? 7. What transactions are required to obtain the necessary capital? 18
4 Communicate and direct the plan s implementation Integrated With Overall Decision Making, the Financial Plan Provides the Road Map To put the Financial Plan into action, Year 1 must be the Institution s budget, and updates to the Plan must occur annually or more frequently, if needed Strategic planning Long-range financal planning Short-term margin targets Baseline operating budget development Incremental impact of new initatives Capital constrant/ available capital Review Review Capital requests Finalization Review and evaluation Allocation and recommendation Capital budget Integrated operating/ capital budget Incremental operating impact of capital approvals Board approval 19
4 Communicate and direct the plan s implementation Maintain Communication and Implementation Rigor Current stresses in higher education demand rigorous, comprehensive financial planning that is visible institution-wide - Quantification of strategic initiatives - Objective definition of operating assumptions - Establishment and communication of specific Board and Administrative-level success metrics - Integration of metrics into the annual operating budget process Financial discipline is impossible without planning schedules that are meticulously followed and widely understood within the institution A long-range integrated financial plan is a must Ultimately, senior institutional leadership is accountable for successful financial performance 20
Team Profiles Jason H. Sussman, a Managing Director of Kaufman Hall, directs the firm s Strategic Financial and Capital Planning practices. He also is Chief Executive Officer of Axiom Software, LLC, a subsidiary of Kaufman Hall, and responsible for the oversight of the combined Kaufman Hall Software Division. In addition to his management responsibilities, Mr. Sussman provides financial and capital planning and financial advisory services for private, nonprofit, and public entities nationwide. His areas of expertise include strategic financial planning, capital allocation, mergers and acquisitions, financing transactions, and management software. Prior to joining Kaufman Hall, Mr. Sussman directed the Chicago Capital Finance Group of a national accounting firm s healthcare consulting practice. Mr. Sussman received an M.B.A. in Finance and Accounting from Northwestern University s J.L. Kellogg Graduate School of Management and a B.A. from the Johns Hopkins University. He holds a CPA certificate in Illinois. jsussman@kaufmanhall.com Charles Kim is a Senior Vice President of Kaufman Hall in the Financial and Capital Planning practice, and Director of the firm s Higher Education division. Mr. Kim consults on a national basis with healthcare systems, academic medical centers, and institutions of higher education nationwide. Mr. Kim s expertise includes preparing financial and capital plans, acting as financial advisor for bond issues, advising on merger, acquisition, and divestiture transactions, and providing training and support to the ENUFF Advisor software suite. Mr. Kim has more than 15 years of consulting experience and more than 20 years of financial advisory experience. Prior to joining Kaufman Hall, Mr. Kim was a Manager at Deloitte & Touche, where he specialized in financial advisory services. Mr. Kim has an M.B.A. in Finance and Accounting and a B.A. in Economics, both from the University of Chicago. ckim@kaufmanhall.com Tony Ard, is Vice President for Higher Education at Axiom Software, a Kaufman Hall company. Mr. Ard works with the firm s Higher Education clients and prospective clients to improve their financial performance. Mr. Ard s most recent experience centers on designing and delivering software solutions for enterprise performance management, including budgeting, strategic planning, capital planning, forecasting, and profitability management, and developing business intelligence and business analytic solutions. Mr. Ard has 15 years in the Enterprise Performance Management industry and is widely recognized for delivering innovative solutions with a focus on client satisfaction. Prior to Axiom Software, he worked for SAP and Business Objects, bringing industry solutions to market for education, public sector, healthcare, and other industries. He has delivered software systems for enterprise performance management processes from budgeting, strategic planning, capital planning, and forecasting. Mr. Ard holds an M.B.A in Finance from the University of Minnesota Carlson School of Management and a B.A. in Economics from Carleton College. tonyard@axiomepm.com 21
Team Profiles, continued Nick Long, is a Vice President of Kaufman Hall in the Higher Education division of the Financial Planning and Capital practice. Mr. Long has more than 20 years of experience in financial management, information technology, and investment management. This includes more than a decade of higher education experience, consulting with public and private universities and academic medical centers nationwide. Mr. Long s expertise and areas of focus include financial management, cost reduction, information technology implementations, and interim management. He has experience in senior interim management roles and also has worked with international institutions on issues related to financial management. Prior to joining Kaufman Hall, Mr. Long was a Director at Huron Consulting Group, where he worked on engagements focused on cost reduction, technology implementation, and interim management. Mr. Long has an M.B.A in Finance and Information Technology from University of California, Irvine and a B.A. in Economics from University of California, San Diego. nlong@kaufmanhall.com Gavin McDermott, CFA, is an Assistant Vice President in Kaufman Hall s Financial Advisory and Strategic Financial and Capital Planning practices. Mr. McDermott has advised borrowers on a wide range of financings, both public and private. He is experienced in a variety of financing structures. He also has done extensive work on capital structure and risk management strategy, including capital structure cataloguing, asset and liability management, and risk management process and procedure. As a member of the firm s Financial Planning practice, Mr. McDermott is responsible for developing financial and capital plans for private, nonprofit, and public entities nationwide. Prior to joining Kaufman Hall, Mr. McDermott worked at an asset and liability management firm, specializing in balance sheet optimization for notfor-profit organizations. Mr. McDermott is a CFA charterholder and has a B.A. in Economics from the University of Michigan. gmcdermott@kaufmanhall.com 22
About Kaufman Hall Since 1985, Kaufman Hall has been a leading advisor to senior management teams and boards of the nation s most distinguished institutions, helping them to incorporate proven methods into their strategic planning and financial management, quantify the financial impact of their plans and actions, and consistently achieve their goals. Our services use a rigorous, disciplined, and structured approach that is based on the principles of corporate finance. Axiom Software offers the industry s leading enterprise performance management platform for finance users. Configured for higher education solutions, Axiom Software supports long-range planning, budgeting, and forecasting, and delivers rich analytics. For more information, please contact Charles Kim (ckim@kaufmanhall.com) at 847.441.8780 or access www.kaufmanhall.com/highereducation The breadth and integration of our advisory services is unparalleled. Services encompass strategy; financial and capital planning; debt and derivativesrelated financial transactions; capital allocation and decision making; and mergers, acquisitions, real estate, and joint ventures. No other professional services firm operating in the non-profit education and healthcare sectors combines all of these services under a single corporate umbrella. With a staff of 240 professionals located in Chicago, Los Angeles, New York, and Portland, we exclusively serve higher education institutions, academic medical centers, and healthcare organizations. long-range planning budgeting & forecasting tuition planning To complement our advisory services, for more than 20 years Kaufman Hall has provided software products that support decision-making processes and sustainable strategies and plans. In 2014, Kaufman Hall acquired Axiom Software, a leading provider of planning systems to higher education. The acquisition of Axiom has provided Kaufman Hall with a world-class software platform, creating a unified company with unmatched expertise and experience in data-driven analysis to transform financial, operational, and strategic planning. capital planning grants management reporting & analytics 23
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