Put Data in the Driver's Seat
With minimal resources, Saint Michael’s College completely redesigned its financial system. Now, more accurate and timely statements point leaders to priority action areas.
By Mary Jane Russell
"Just-in-time" manufacturing is considered an efficient way to do business, but the concept is not so positive when applied to financial reporting. In today's volatile times, leaders at Saint Michael's College, Colchester, Vermont, need access to real-time information in order to make prompt, data-based decisions. Earlier software and process upgrades had allowed the business office to produce interim reports for quarterly trustees' meetings. The automated system could also produce monthly financial statements, which were a great improvement, but the information wasn't necessarily being used regularly by the president's cabinet in its daily management of the college.
By 2006, we knew we needed to come up with an even more effective system that allowed access to current financial data and created a culture that encouraged data-informed decision making.
Using elements of NACUBO's Building Organizational Capacity model as a framework, we redesigned our financial management processes. (See sidebar, "Advice on Capacity Building" for details of the NACUBO model and a description of a new book on the topic.) These improvements have put Saint Michael's back in the driver's seat by enhancing senior leadership's expertise in financial matters, producing more regular interim financial statements, and creating data-based forecasts that point quickly to issues requiring swift action.
Earlier Repairs and Upgrades
We'd already made significant progress with some earlier efforts. In 2000, we implemented Hyperion Essbase and related software that enabled the automation of financial statements, and we developed procedures to create interim accrual-basis, generally accepted accounting principles (GAAP) financial statements. The availability of timely, collegewide financial statements was a vast improvement over our previous business practices, and facilitated more meaningful budget management, managerial reporting, and analysis during the year.
We'd also implemented a Web-based real-time budget inquiry system that made for the timely presentation of actual financial results measured against budget, at the departmental or managerial level. However, the allocation of our annual budget into monthly amounts for institutional trustee-level reporting had been performed by the finance department "behind the scenes," using historical trends. This made midyear budget variance discussions with managers difficult, since they were unfamiliar with the concept of monthly budgets, and had not contributed to the periodic updates of their annual budget.
Neal Robinson, vice president of finance from 1999 to 2007, recently rejoined the college. He had also contributed significant enhancements to the college's financial planning model. He initially expanded this one-year, high-level Microsof Excel model to include five-year longitudinal data as well as balance-sheet projections and financial statement ratios. This enhanced model was credited with the college's ability to analyze "what if" scenarios with respect to construction projects, bond issues, and other strategic initiatives. But the model still did not easily interface with our most recent forecasts or other core financial data.
Our institution's leaders were well aware of the need for improved systems. Five years ago, the Saint Michael's College "Vision 2010" statement included fiscal responsibility as one of the organization's top five focal points, and that long-range strategic plan specifically called for improving our budgeting, forecasting, and management reporting capabilities.
We recognized the need for a comprehensive redesign of our financial management systems—especially with regard to more timely and accurate midyear balance sheets and income statements, and more precise forecasting of fiscal year results. Such a system would also require collaborative budget development and full integration of long-range plans with our most current actual and projected financial information.
The need for further changes was soon accelerated by unexpected, unfavorable budget variances in financial aid and utilities expense. This situation provided the final impetus for reviewing and reinventing our financial management practices. After all, once a budget year begins, we have limited flexibility to make changes in response to emergent trends. Therefore, it was, and still is, imperative that Saint Michael's begin each year with a budget that closely predicts the actual results we anticipate for the upcoming year—and includes the ability to immediately access data at any point during that year.
Selecting a Path to Our Destination
In 2005, I was drawn to the then-current literature about a model that emphasized the complexity of college campuses and focused on a holistic approach to organizational change. We looked into elements proposed in NACUBO's Building Organizational Capacity (BOC) project when redesigning our financial management processes. The team realized that we could easily apply the eight elements of the BOC framework to the work we were initiating, as follows:
- Purpose. Financial management was key to our purpose or mission, being one of five core strategies in the President's 2010 Vision Statement.
- Governance. The financial management workflow changes involved elements of governance in that some required cabinet or trustee approvals.
- Structure. The college's organizational chart informed the structure for the report design and access levels within our reporting system.
- Policies. We used this as an opportunity to clarify and redefine certain budgetary policies and to develop some new accounting policies.
- Processes. Specific changes to our processes would result in more timely, detailed financial reporting.
- Culture. All changes would be made with consideration of the overall campus culture.
- Infrastructure. Planned changes would be supported by the features and functionality of both new and existing software tools.
- Information. Of course, the ultimate product of the changes to our financial management structure would be information-timely relevant data provided in a format that enabled campus leaders to make informed decisions and take management action in response to emergent trends.
We engaged the support of the president and trustee finance committee for the proposed changes in accounting, budgeting, and long-range planning processes. At the same time, the chief information officer supported the software we originally proposed as part of the new project by a modest reallocation of that year's technology capital budget. With these endorsements, the financial management process redesign project originally began early in FY07 and the project has moved forward since then—despite several roadblocks and detours.
Developing a Matrix
As we began inventorying the various needs and changes being made, it was helpful to organize the project into a matrix (see figure) that emphasized four key elements of our annual financial management process, with data-informed decision making as a central theme. We begin planning for any given fiscal year using our financial planning model, which is informed by our long-range endowment projections and the strategic plan. We then develop detailed capital and operating budgets for the year.
During the fiscal year we produce interim financial statements as well as operating forecasts and cash-flow projections. And when the year is over, we produce annual financial statements as well as various cost accounting and managerial analysis reports for key programs.
As we discussed improvements and new ideas in the context of this matrix, we evaluated each against the key elements of the BOC model. For example, as we considered a change to our forecasting procedures, we used the model as a checklist to help identify the infrastructure requirements and possible governance or cultural considerations.
The key elements of this financial management project (which are reflected in the Matrix for Financial Management) included:
A five-year financial plan. An Excel model includes detailed enrollment, compensation, and financial aid projections, strategic plan initiatives, and capital budgets. The operating and capital initiatives are detailed by income statement classification, and each capital project includes pro forma depreciation expense calculations for each of the five years. Each initiative can be turned on or off such that we can determine the budgetary impact of various scenarios.
An endowment liquidity model and asset allocation monitoring tool. These link to the long-range financial plan and enable us to reflect projected endowment spending allocations. This model also includes graphic dashboards showing long-range projections of our total portfolio value, alternative investment commitments, asset allocation trends, and comparison to policy targets by asset class.
Budget development tools. These included standardized templates for vice presidents and budget managers to reallocate funds among departments and lines, and to spread annual budgets across each month of the fiscal year. This monthly allocation process was originally done by the finance office alone, but collaboration with budget managers now enables more meaningful budget management conversations with department representatives during the year, and more accurate predictions of our quarterly cash flow requirements.
For example, while our original allocation of monthly budgets was based on solid data and historical trends, we were able to work with our institutional advancement department to fine-tune cash flow forecasts of our annual fund revenue that were more closely synchronized with their current fundraising initiatives.
Streamlined monthly and annual general ledger closing processes. We use activity-based costing methodology to identify critical success factors, measures, and key performance indicators, and classify monthly close activities into three tiers of priority. For each stage, we establish a standard closing timeline in order to develop a shorter and more efficient closing process.
Collegewide forecasts and operating cash-flow projections. These are based on structured input from budget managers. We post the data to our Essbase system at the department and account level, for ease of variance analysis versus budget and for later assessment of the forecast's accuracy. This enables us to identify areas where our forecasting technique needs improvement, and helps to identify situations in which midyear management action might be required to respond to unfavorable budget variances (or take advantage of favorable opportunities, as the case may be). For example, when midyear results indicated rising utilities or health-care expense, we were able to modify our spending in other areas for the remainder of the fiscal year to address the unfavorable budget variance and avoid an operating deficit.
Side-by-side analyses of variances (actual versus prior year, actual versus budget, and actual versus forecast). These can be calculated for each key income statement category, supported by detailed comparison at the department and account level and supporting measures such as enrollment counts, discount rate, and so forth.
Cost accounting reports and profitability analyses. The system allows us to prepare these for key functional areas and programs, enabling Saint Michael's to make decisions about underperforming programs, and to educate the community about the fiscal realities and operational highlights of selected programs, such as summer conference events, community theatre, study abroad programs, and other auxiliary services and departments. The cabinet recently decided to change the financial aid and travel reimbursement policies of our study abroad programs based on such an analysis.
Key financial metrics. These include standard ratios and the Composite Financial Index, which aids the college's cabinet in monitoring fiscal results in relation to a variety of nonfinancial indicia. Anne Conaway Peters, former director of marketing at Saint Michael's, praised the periodic metrics and key performance indicators report as being thorough yet easily understood by managers from disciplines other than finance.
Management discussion and analysis. The financial reports feature easily updated graphs and charts developed using the features of Excel 2007, including VLookup and other functions, filters, conditional formatting, eye-catching charts, tables, pivot tables, external data, and data mining.
A coordinated business intelligence program. This includes biweekly, quarterly, and annual publications of key institutional metrics. John Kulhowvick, director of institutional research at Saint Michael's, works closely with the finance office to ensure integration of financial data with the collegewide quarterly scorecard and annual fact book.
Balanced scorecard for the finance office. We've developed a scorecard that tracks objectives, measures, and targets in three areas (customer reporting, business process improvements, and staff development) as well as measurable key performance indicators, such as the number of days to achieve key goals and the number of core transactions processed by type.
Process management software (PIEmatrix). We recently began using this Web-based "software as a service" to document key steps in the financial planning, budget development, and financial reporting processes, and as a project management reporting and monitoring tool.
Looking Back, Planning Ahead
It has now been several years since the finance department at Saint Michael's began this initiative, and overall results have been positive. Expenses were low: Other than the modest cost of visual query software (less than $2,000) used in selected managerial analyses, the primary costs of our financial systems upgrade have been related to staff time. Since these were activities that management agreed should be done, there was little incremental time spent on the project. The primary change was a shift in focus, which empowered the finance team to meet monthly project deadlines first before undertaking other discretionary projects.
And problems were few. Turnover in several key positions both within the cabinet and the finance department meant that the project suffered some setbacks, detours, and changes in direction over time. But, overall, the project has met most of its original objectives and contributed to a more collaborative cabinet-level budgeting and planning process.
We have noted success in several important areas. These include:
- Receiving more detailed input from cabinet members during the financial planning and budget preparation cycle led to more realistic annual budgets.
- Development of monthly budgets based on the knowledge and experience of these constituents created more accurate monthly budgets, so the college's year-to-date budget versus actual reports have been more informative.
- More active participation in the budget process created more ownership on the part of nonfinancial management team members.
These improvements have enhanced senior college leadership's expertise in financial matters, and more regular interim financial statements and forecasts have enabled them to more quickly identify issues of concern and take appropriate action when required. For example, the decision of whether or not to relax the college's policy cap on spring study abroad enrollments can now be made with precise data about the revenue and expense impact, in the full context of overall undergraduate enrollment predictions, and the overall college operating forecasts for the current fiscal year.
Some processes are new to the college; others were merely reinforced or refined. Overall, a back-to-basics approach helped us fill in gaps and ensure that all key financial functions and processes were being adequately addressed. The key success factors were the willingness of staff members to participate in an honest assessment of their current activities and to embrace new ways of doing things, and the support of the president, vice president of finance, and key cabinet members for shifting to a culture of data-informed decision making.
The system is also based on a culture of continuous improvement, as the team works to refine each process on an annual basis. In doing so, the finance leaders at Saint Michael's College continue the drive for real improvements to processes, not merely empty moves toward change for the sake of change.
MARY JANE RUSSELL, a certified public accountant, is director of finance at Saint Michael's College in Colchester, Vermont.