Budgeting Without a Rearview Mirror

For most organizations, budgeting begins with history.

You pull up last year's actuals. You look at where you came in over or under budget. You adjust salaries, account for inflation, make assumptions about revenue and expenses, and somewhere along the way, last year's numbers become the starting point for next year's plan.

But what happens when there is no last year?

When we were building the Jewish Leadership Academy, we had no historical financial statements to analyze. No established enrollment patterns. No staffing ratios tested in practice. No utility bills, insurance history, maintenance costs, financial aid experience, or operating trends.

We had a vision for a school that did not yet exist.

And we needed to build a budget for it.

Actually, we needed to build much more than that.

Early in the process, we developed a nine-year projection model intended to carry us from the years before opening through what we imagined a more mature operating organization might look like.

Years later, those early projections were nearly unrecognizable.

That doesn't mean the exercise failed.

It means we learned what a forecast is really for.

Start with drivers, not line items

When historical information is available, it is easy to become anchored to it.

Office supplies were $40,000 last year, so perhaps we budget $42,000 this year. Insurance increased 8 percent, so we assume another increase. Salaries are adjusted based on raises and anticipated hires.

Without that history, you have to think differently.

You have to ask what actually causes the numbers.

For a school, enrollment drives tuition revenue. But enrollment also influences staffing, classroom utilization, financial aid, technology, transportation, facilities, and dozens of other expenses.

Staffing isn't simply a line on a spreadsheet. It is a function of the program you intend to offer, the number of students you expect to serve, class sizes, course offerings, administrative needs, and the level of service you are promising.

Net tuition revenue depends not only on published tuition, but on who actually enrolls and what those families ultimately pay.

When you can't look backward, you have to understand the relationships underneath the numbers.

You aren't simply budgeting expenses.

You are trying to model an organization.

Assumptions are not facts

Every driver requires an assumption.

How many students will enroll?

How quickly will enrollment grow?

How many employees will we need?

What will families actually pay?

What programs will we offer?

Which expenses will grow with enrollment, and which will remain relatively fixed?

We had answers to all of those questions.

Then we learned more.

And the answers changed.

"An assumption should be treated as an assumption, not disguised as a fact simply because it appears in a spreadsheet."

The goal isn't to pretend that you know precisely what will happen.

The goal is to make your assumptions visible enough that you can understand what happens when they don't.

When the assumptions start interacting

One of the most important things we learned was that assumptions rarely change in isolation.

Our early projections anticipated more students than ultimately enrolled. That happened before opening and continued through the first several operating years.

You might expect lower enrollment to lead naturally to lower expenses.

It didn't.

Even with fewer students than projected, we needed more employees than we had originally modeled.

Some positions had simply been overlooked in the earliest planning. Others became necessary as programs were added and the academic model developed. Even before opening, our leadership structure had changed from the original vision as positions we had not initially contemplated became necessary.

Course offerings and class sizes created another complication.

The schedule we envisioned on paper did not work exactly as expected once real students, teachers, and programs had to fit into it. Smaller-than-anticipated enrollment did not allow staffing to decline proportionately. A class still needs a teacher whether there are 12 students sitting in it or 18.

Then those staffing and programming decisions affected something else:

Space.

Despite having fewer students than projected, we needed additional offices, classrooms, and program spaces. We modified plans and spaces repeatedly and ultimately accelerated another phase of construction to accommodate an organization that had become operationally larger and more complex than its enrollment alone would have suggested.

The original model might have implied a relatively straightforward relationship:

More students → more staff → more space.

Reality was considerably messier.

Enrollment was lower, staffing was higher, programming had expanded, and space needs were greater.

A single assumption had moved through nearly the entire organization.

Sometimes the organization changes. Sometimes the world does.

Not every assumption changed because we learned something about the school.

Some changed because the environment around us changed.

Salary ranges are a good example.

Our earliest projections included assumptions about what different positions would cost. But the labor market and inflationary environment of 2021-2024 changed those numbers materially.

Even if we had perfectly predicted every position we would eventually need, we still would not have perfectly predicted the cost of filling them.

That's a different kind of forecasting miss.

If an expense is higher because you misunderstood what the organization requires, you need to revisit the operating assumption.

If it is higher because the market price changed, you need to revisit the pricing assumption.

The number on the spreadsheet may be wrong in both cases.

The reason it is wrong tells you what to do next.

And sometimes an expense didn't exist at all

Busing was not part of our original plan.

As we began meeting with prospective families and listening to community feedback, it became clear that transportation was something we needed to consider. Much of what eventually became part of our program developed through those conversations.

So we added busing.

That meant building an entirely new set of assumptions: participation, routes, vendor pricing, family contributions, the administrative burden, and the amount the school would subsidize.

We modeled it as best we could.

Then we opened.

The first year cost more than we anticipated, and the financial assistance we provided for transportation was greater than we had projected, even after we had revised the budget to include the program.

The original forecast wasn't wrong about the cost of busing.

There was no busing forecast to be wrong about.

The organization had changed.

And once it changed, our first attempt at modeling the new reality still needed refinement.

Some costs reveal themselves only after you begin

Other expenses emerged only after programs were actually operating.

New offerings brought costs that had not been obvious when they were conceived. The schedule behaved differently with actual students and teachers than it had on paper. Systems that seemed straightforward took longer and required more resources to implement than anticipated. One implementation we expected to be relatively simple took months longer and required additional spending.

And then there were contingencies.

Our campus was not fully completed in time for the beginning of our first year with students.

That created costs we had never intended to incur: alternate facilities, additional logistics, and other contingency arrangements.

But some consequences couldn't easily be captured in a spreadsheet.

Disruption has a cost.

So does uncertainty.

So does the effect on student and faculty morale when the operating environment isn't what everyone expected it to be.

A financial model can quantify many things.

It cannot quantify everything that matters.

Revision isn't failure

Years later, I described those first versions of our nine-year projection as nearly unrecognizable.

The scope changed. The program changed. Staffing changed. Costs changed. Opportunities emerged that we had not anticipated.

There can be a temptation to view repeated budget revisions as evidence that the original planning was poor.

I came to see almost the opposite.

When you're building something new, refusing to revise the budget as your knowledge improves is far more dangerous than admitting that an earlier assumption no longer makes sense.

Our projections went through iteration after iteration.

Enrollment assumptions changed.

Staffing changed.

Compensation changed.

Programs changed.

Space needs changed.

Timelines moved.

Some contingencies needed contingencies of their own.

The spreadsheet had to keep moving with the organization.

Each revision forced us to confront what had changed, why it had changed, and what else would be affected by it.

That is one of the most valuable things a budget can do.

A budget is a decision-making tool

We sometimes talk about budgets as though their primary purpose is prediction.

I don't think that's quite right.

A budget is a framework for making decisions.

If enrollment grows more slowly, which expenses actually change?

If we add a program, what happens to staffing?

If we add those positions, what happens to space?

If salary ranges move by 10 percent, what happens to the rest of the model?

If families need more financial assistance than expected, what happens to net tuition revenue?

If we introduce transportation, how much are we willing to subsidize?

These questions are useful even when the numbers answering them will change.

In fact, they may be most useful when uncertainty is highest.

The original model gave us something against which to test decisions. Every time reality changed, we could see the effect of that change on the larger picture.

That was the value of having a budget on paper even when we knew it would go through endless revisions: it established goals and allowed us to see the impact of individual decisions along the way.

Eventually, you get a rearview mirror

Something interesting happens as a new organization matures.

You slowly acquire history.

Actual enrollment.

Actual payroll.

Actual financial assistance.

Actual operating expenses.

Actual experience.

By our second operating year, the budget had been revised countless times, but its fundamental categories of income and expense were beginning to resemble what we expected the organization to look like for the foreseeable future.

The rearview mirror had finally appeared.

History began replacing assumptions.

But I wouldn't abandon the discipline that comes from budgeting without it.

Once organizations have several years of financial statements, it becomes very easy to take last year's budget and adjust it.

Three percent more here.

Five percent less there.

Add a position.

Remove a one-time expense.

Done.

But history has its own danger.

It can tell you what something costs without forcing you to ask why you are doing it.

It can preserve staffing structures long after circumstances have changed.

It can perpetuate programs because they already exist.

It can make yesterday's decisions look like tomorrow's requirements.

The discipline we were forced to develop when there was no history at all remains useful even when there are years of financial statements available:

Understand the drivers.

Challenge the assumptions.

Model the relationships.

Test the consequences.

Keep revisiting the plan as reality changes.

Because last year's numbers can tell you where you've been.

They cannot tell you where you're trying to go.

And the best budget isn't the one that predicts the future perfectly.

It's the one that helps you make better decisions as the future reveals itself.