Scenario planning in universities give a way to examine how today’s assumptions could change tomorrow’s position. It is a necessary tool, both to plan and manage strategic change, but also crucial in today’s uncertain times, to identify and manage financial viability and sustainability risk. By the time financial risk manifests itself in the monthly numbers many choices are already gone. Scenario planning provides foresight of risk and potential contingent actions.
In this article, we’ll look at how better modelling can help finance leaders identify risk sooner and act with greater confidence.
Universities manage complex financial models with significant fixed and semi-fixed costs and long decision lead times. Teaching portfolios are defined and student recruitment campaigns begin well before enrolment is confirmed. Staffing costs are committed in advance, estates and capital projects can run across multiple financial periods, and research income may depend on funding cycles outside the institution’s control. The list goes on.
Overshadowing this, a long list of strong strategic forces of change, disrupting plans, and exerting themselves for several years. They include:
Reduced real-term funding and tuition fee rates
Removal of number caps resulting in competition between institutions for students
Opportunities for growth, especially in premium fee markets
Changes and new options in teaching delivery, triggered initially by Covid
Technological change, especially AI
As the same time that these strategic forces have squeezed operating margins and liquidity, operating conditions have become much more volatile, including:
Uncertainty / reductions in overseas student recruitment
Government policy to the sector and post-18 education
Cost price inflation and tighter money rates and lending
This means that financial sustainability and risk is now significantly higher at almost all institutions. If university finance teams rely on traditional forecasting methods, or make overly optimistic assumptions in their financial forecasts, they will be ‘behind the curve’ in mitigating risk and taking corrective action. The high proportion of fixed and ‘semi-fixed’ costs in a university exacerbates the problem. Scenario planning changes this dynamic by testing the various ways that current indicators and credible future events can affect future outcomes.
Not every uncertainty needs a complex scenario planning model, but several risks justify active monitoring across higher education. Student fee income is for most universities the most significant source of income, and typically a large multiple of annual financial surplus. Domestic demand, international recruitment, visa policy changes, deferrals, and retention rates can all move tuition income materially and wipe out planned future surplus and put pressure on liquidity.
Rapid structural change pressures create risks that need to be modelled. They include, for example: risks resulting from developments and investment needed in technology and AI; changes in government policy (e.g. towards post-18 education and its funding, research funding priorities, and defence industry needs) and regulation; new market competitive pressures; and the opportunity for new partnerships.
Cost pressures are another recurring issue and source of risk. Staff numbers and costs, support services and overhead costs, and the size, suitability and cost of the current estate and utilities, represent a large proportion of total costs.
Overlaying this, will be the future strategic ambitions of the institution. Together, they play into the future need and scope available for financial investment. Operating cashflow is an important enabler but so too is the availability and cost of capital etc. Likewise, liquidity risk demands close attention. With many universities either through choice or force of circumstances, operating today with lower cash reserves, liquidity is key indicator of both short-term viability and longer-term sustainability.
Modern scenario planning can model all these risks effectively and systematically. It is, therefore, a vital tool in modelling both operational risks, financing requirements, and liquidity and longer term strategic ambitions and acceptance of risk.
Strong scenario planning in universities should be broad in scope, practical, repeatable, transparent, and tied to live assumptions. Finance leaders should be able to adjust key drivers quickly and understand the effect on surplus, reserves, and cash position without rebuilding spreadsheets.
This is achieved better in an integrated model where a changes in figures and assumptions feed through ‘dynamically’ to the end result, without having to run update routines, or to switch between different models. To achieve this:
‘Everything material’ (drivers, calculations, reports etc) needs to be in a single model.
Modelling needs to be at the ‘right level of detail’ (too much, and the detail swamps the understanding; too little, and the key drivers of resource and the performance outputs lose visibility and actionable meaning).
There needs to be transparency from the input assumptions (eg applications, conversion rates, research contracts bid and won, staff and capital requirements and cost, debtor & creditor terms etc), all the way through to forecast financial performance (I&E, cashflow, liquidity, capital requirements, borrowings, financial headroom. This gives confidence in the integrity of the scenario. The ‘dynamic’ and integrated nature of the model helps risk and sensitivities to be understood and communicated to senior decision makers.
The model simultaneously needs to hold ‘actual and historic and in-year data’ on a rolling basis, as well as a rolling re-forecast and multiple scenarios. Without this it becomes difficult and time-consuming to compare scenarios and risks.
Together, the above helps the executive to understand current performance, and how it will change under a range of scenarios. It helps the range and magnitude of risks of each scenario to be assessed and the credibility of options to be considered, along with the accuracy of previous forecasts. In short:
It provides a basis for the discussion of alternative strategic futures, and for operational
adjustments.
A quantitative basis for the understanding and acceptance of risks.
A structured process for ambition within a framework of financial sustainability, risk
management and modern standards financial governance and accountability.
Universities face significantly greater inherent financial risk from the current operating and strategic environment and especially when plans fail to match the inherent assumptions. This may because they were tested too narrowly and the risks not sufficiently enumerated. It is clear that in the short to medium term at least, universities will continue to operate in a challenging environment. Faced with low margins, pressure on liquidity and volatile threats to income, the importance of accurate forecasting and integrated comprehensive scenario planning and risk evaluation has never been greater.
At Account-Ability, we help universities and higher education providers use planning technology to model scenarios the integrated, modern way, required. If your university wants stronger scenario planning and modelled performance, better understanding of risk, more effective support to operational and strategic decision making, and a tool to support good financial governance, please message one of our team.
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