This is the sixth in a series of articles on red flags and this week's article focuses on financial forecasts. Red flags may represent subtle or somewhat more obvious vignettes that "something is wrong with this picture" that can be sometimes overlooked by executive management or supervisors. Accordingly, an essential aspect of internal controls is to train appropriate staff to increase their awareness of and to be monitoring for various red flags that are relevant to various control areas.
Red flags associated with financial forecasts include:
- Is the district lacking a multi-year financial plan ranging up to five years?
- Is the district lacking a sufficiently robust multi-year financial planning tool?
- Is there a pattern of overly optimistic revenue projections in financial forecasts and in original adopted budgets (pattern of budgeted revenues exceeding actual revenues)?
- Is there a pattern of overly conservative expenditure projections in financial forecasts and in original adopted budgets (pattern of actual expenditures exceeding budgeted amounts)?
- Do financial forecasts lack a sufficiently robust level of analysis of data and trends supporting key business assumptions?
- Is sufficient monitoring lacking for select business assumptions during the fiscal year in connection with primarily drivers of projected revenue and expenditure levels? For example, are average daily attendance and student measures entered in the Texas Education Agency state aid template after each six-week period during the school year?
- Are sufficient adjustments lacking during the fiscal year to projected revenue and expenditure amounts in connection with variances between projected and actual measures for select business assumptions?
- Does the district lack multiple versions of financial forecasts for different scenarios for select business assumptions, including economic, taxable property value, student, staff, programmatic service levels, and operational trends?
- Does the district lack contingent plans to mitigate potential unintended consequences that would result from abrupt changes to activities, programs and services, if significant variances are observed between projected and actual measures for select business assumptions?
- Are select financial forecasts prepared by qualified personnel or consultants for more complex financial areas, including Foundation School Program revenue projections?
- Are financial forecasts supported by documentation of processes that were followed to develop them?
- Are processes for developing financial forecasts modified, as appropriate, based upon the level of variances between financial forecasts and attained results?
Any indications or observed red flags should be promptly evaluated and consideration be made for prompt follow-up. In most instances, red flags are signs that relevant processes and key controls should be reviewed and modified, as needed, and staff should receive additional relevant training to improve their skills and expertise. Management and administration of school district financial and operational activities, programs and services are inherently complex. Accordingly, financial forecasts need to be supported by a tool that is more robust than a relatively simple spreadsheet-supported process.
TASBO, TASA and TASB have partnered with Forecast5 to provide an array of analytic tools to assist your school district in analyzing business assumptions and developing financial forecasts. For more information, click on the link below.
http://www.tasbo.org/resource/forecast-5