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Best Practices in Strategic Financial Forecasting
Brett MatteoThe PFM Group
Kevin HyattUNC – Charlotte
2
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!
3
Framework for Discussion
• Overview of the PFM Group
• Overview of the proposed engagement
• Demonstration
• The implementation process
• Illustrative pricing
• Why strategic financial forecasting?
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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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
trol
s
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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0.0
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Expendable financial resources to operations Current Base 1 Base 2
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10.0
Expendable 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%
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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)
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Expendable resources to debt Current Base 1 Base 2
0M
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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
15
PFM becomes your modeling staff
DirectionAspirations
StrategyVision
ConstraintsFinancialHumanSpace
PossibleFuture
Scenarios
Customization process
• The Customization Process is well-conceived and quickly results in a fully-integrated view of the institution’s prospective strategic/financial position
18
Initial Assessment
Design Process
Custo
mization Process
Delivery
Ongoing
Approximate timeline
19
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 PFM Consulting Services?
21
• 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