Best Practices in Strategic Financial Forecasting

Brett MatteoThe PFM Group

Kevin HyattUNC – Charlotte

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Session Etiquette

• Please turn off all cell phones.

• Please keep side conversations to a minimum.

• If you must leave during the presentation, please do so as quietly as possible.

• Thank you for your cooperation!

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Framework for Discussion

• Overview of the PFM Group

• Overview of the proposed engagement

• Demonstration

• The implementation process

• Illustrative pricing

• Why strategic financial forecasting?

Overview of the PFM Group

Public Financial Management, Inc.Financial advisory services

• Public Financial Management, Inc. (PFM) provides independent financial advisory services General government

States Cities Counties Local governments

Utilities Water Wastewater Power Gas

Transportation Toll roads Transit agencies Airports Ports

Healthcare institutions School districts 501c(3)’s

• #1 ranked financial advisor for debt transactions for 15 years 5

PFM Asset Management LLCInvestment management services

• Experience 33 years of asset management experience $49.9 billion of assets under management

• Specialties Fixed-income strategies Cash and short-term asset management Bond proceeds management Arbitrage rebate management Derivative products strategies and procurement Multi-asset class investments

• Success Long record of performance in excess of

benchmarks Successfully navigated the credit crisis Completely avoided defaulted credits, SIVs,

subprime mortgages, CDOs, auction-rate securities

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Higher education finance

• The PFM Group is the #1 advisor to higher education institutions All types of institutions

Colleges Universities University systems Community colleges Community college systems

Public/private Large/small

• Our financial advisor provide analysis and advice in a fiduciary capacity

Capital structure development Financial risk management Transaction structuring, pricing, and

optimization Credit management

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Overview of the Proposed Engagement

The problem

• At most colleges and universities strategic forecasting is often difficult and inefficient

Complex (multi-variable, multi-order) relationships among key variables

Data is often scattered among single-focus models, accounting systems, ERP systems

Difficult to project a Statement of Net Assets

Difficult to track Net Assets

Most institutions are resource constrained

• Mission-level questions from key stakeholders (Board, President, investors, rating agencies) take days, weeks, or even months to answer

Answers are not comprehensively determined and are often uni-dimensional

Staff is inefficient in providing the answers because there is no single institutional analytical approach

• Stakeholders should be able to get nearly immediate feedback on key strategic questions

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An institution’s strategic plan should be crossed against a reliable business plan (with supporting sensitivity analysis)

The solution

• The PFM Group provides strategic forecasting services

Comprehensive

Fully-integrated

Customized

• Permits institutional users to quantify the strategic ramifications of changing operating variables, operating initiatives, capital initiatives, and funding alternatives

10Single institutional point of view

• Future Perfect is not a software, system, platform, or tool

• Future Perfect is an ongoing Consulting Relationship

Primary deliverable is an Excel-based projection model, but the Value Proposition is NOT in the model, it’s in the service

• Future Perfect is a simple but elegant modeling architecture

Permits efficient manipulation of structural elements to mimic client business models and ongoing changes thereto

• Efficient customization

• Efficient support

• Future Perfect is a modeling discipline

Fastidious application of modeling rules mitigates risk

• Future Perfect staff add value 3 ways:

Understanding of your business (your vocabulary)

Understanding of your accounting (GASB)

Providing world-class modeling services (fast, smart, efficient advice)

The value proposition

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PFM becomes your financial modeling staff

Customized projection logic

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• Establish relationships among the hundreds of interdependent operating, capital, and financial variables, including:

Student revenues

Enrollment/retention

Pricing

Financial aid

Employees

Salaries

Benefits

Sponsored research

Appropriations

Foundation(s)

Non-personnel expenses

Capital projects

Facilities and deferred maintenance

DebtFuture Perfect is offered as an ongoing Consulting RelationshipNOT Software

Common Planning Sheet

AssumptionsDecision Variables

Financial Statementsand Other Outputs• Statement of Net Assets• SRECNA• Statement of Cash Flows• Budget Statement(s)• Ratios and Other Metrics• Overview (audit trail)

Operating InitiativesCapital Projects

New StrategiesRelated entities

Dashboard

Results Controls

• Debt• Investments (foundation)• Gifts (foundation)• Facilities• Transfers• Working Capital• Operations/capital planning

• Students• Auxiliary Enterprises• Employees• Expenses• Grants/research• Appropriations• Other

PerennialSystemic

Incremental

Sub-models

Con

trols

Dis

cret

e

Dep

ende

nt

Customized dashboard and outputs

• Projection model mimics the institution’s business model

• Customized dashboard-driven variables and assumptions

• Customized outputs GAAP-based financial statements

Statement of Net Assets SRECNA Statement of Cash flows

Cash-based budget statements (P&Ls) Institution Others (e.g., auxiliaries, research) Cross-walk to SRECNA

Financial ratios and other metrics Rating agency ratios (benchmarked) Moody’s Scorecard Composite Financial Index (CFI) Facilities Condition Index (FCI) Other in-house or mandated metrics

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0.01.02.03.04.05.0

Expendable financial resources to operations Current Base 1 Base 2

0.02.04.06.08.0

10.0Expendable financial resources to direct debt Current Base 1 Base 2

0%2%4%6%8%

10%

Annual operating margin Current Base 1 Base 2

-15%-10%-5%0%5%

10%15%

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24

Return on net assets Current Base 1 Base 2

A1-ratedAa3-rated

Calculated metric should exceedtarget comparable

Peer group

No black box

• Future Perfect becomes the projection model you would build internally if you had the time, expertise, and resources

Unlimited users (no seat licenses)

Unlimited copies

• Conduct rigorous analysis and provide immediate feedback on the short- and long-term impact of strategic choices

• Engage stakeholders in quantitatively-supported discussions, brainstorming sessions, and consensus-building exercises

14Future Perfect resides on your computer(s)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0Expendable resources to debt Current Base 1 Base 2

0M

100M

200M

300M

400M

500M

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24

Debt New money Refundings Existing debt

A1-ratedAa3-ratedPeer group

Ongoing consulting services

• PFM staff supports the institution in the use of your Future Perfect model

You define the questions of the day at your institution

You conduct the analysis needed to answer those questions using the Future Perfect model(s) residing on your computer(s)

Develop the analytical approach

Manipulate assumptions

Change data

Conduct sensitivity analysis

You interpret the results

• PFM ensures your Future Perfect model is structurally capable of supporting the analysis you define and answering the questions you pose

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PFM becomes your modeling staff

DirectionAspirations

StrategyVision

ConstraintsFinancialHumanSpace

PossibleFuture

Scenarios

Demonstration

The Implementation Process

Customization process

• The Customization Process is well-conceived and quickly results in a fully-integrated view of the institution’s prospective strategic/financial position

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Initial Assessment

Design Process

Custo

mization Process

Delivery

Ongoing

Approximate timeline

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Initial Assessment

• Preliminary analysis• Webinar I -- Assessment• Initial Assessment• Receive and pre-load requisite

data• Base Model

Design

• Meeting 1 -- Design Session (in Philadelphia)

• Webinar II – Preliminary Designer Workbook

• 1st Draft of Design Specification

• Receive requisite data• 2nd Draft of Design

Specification• Webinar III – Final Design

Custom- ization

• Build students, grants, gifts, auxiliaries

• Build employees, expenses, facilities

• Build investments, debt, covenants, ratios

• Webinar IV – Accept design to date

• Build dependencies, dashboard, projects (2)

• Webinar V – Accept Preliminary Model

Delivery

• Upload to Citrix server• Meeting 2 -- Training Session

(on campus)• Develop and complete Punch

List• Ratios update• Build remaining Projects (4)• Webinar VI -- Accept Final

Model

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Week

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Why Strategic Financial Forecasting?

Why PFM Consulting Services?

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• Better decision making Comprehensive and integrated analysis Prospective analysis (beyond immediate and impending budget year)

• Better capital budgeting Considers timing, cost, funding on integrated multi-year basis Better assessment of affordability Better allocation of scarce resources

• Better communication Within the institution With Trustees With outside stakeholders (e.g., accreditation bodies, rating agencies, investors)

• Better oversight and control Proactive management

• More transparency

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Questions & Answers

Thank You!

Brett MatteoThe PFM Group

matteob@pfm.com(215)557-1491