This article is part of a series on the financial challenges facing colleges and universities amid the coronavirus pandemic and the need for proactive strategies.

Reality is setting in: Covid-19 is here to stay. We have shut down campuses, keeping our communities as healthy as possible, and are close to finishing the semester online. The financial impact of these changes is just being calculated, but the losses from room-and-board refunds and decreased revenue from executive education, the spring sports season, and auxiliary services will be considerable.

While the $14 billion for higher education from the Cares Act is helping to cushion the blow, most chief financial officers I talk to say that their allocated amounts are not covering the short-term losses associated with this crisis. For example, the University of Wisconsin recently announced that it will lose $170 million from refunds of housing, dining, and parking fees to students, and other unexpected expenses. At the University of Michigan, president Mark S. Schlissel anticipates losses of $400 million to $1 billion through the end of the calendar year. As bad as it may seem right now, it is about to get worse.

College leaders must now turn their attention to next year’s budget. While academic budgeting has heavily relied on prior-year numbers, incremental changes, and investments in new strategic initiatives, this year’s budgeting process will be very different. Any work done through March of this year will be generally useless for the creation of the fiscal ‘21 budget, as the new one will be so heavily dependent upon the path and consequences of the Covid-19 virus.

Here are three steps for managing your budget process and data and for creating a plan that will guide your institution through one of the most challenging years ever to hit higher education.

Step 1: Conduct Scenario Planning

The first step in a strategic approach to crafting your budget involves scenario planning. The two most important considerations that will affect your finances next year include the degree to which students physically return to campus and the overall anticipated effect on revenue.

Both involve uncertainty. Many universities are delaying final budget decisions until May, when we should have more clarity about national guidelines for handling Covid-19, with May 31 being a target date for making decisions about the fall.

Here is a matrix to help campus leaders sort through their individual situations and the anticipated big-picture financial scenarios for next year. Each quadrant offers drastically different financial and operational scenarios that will lead to unique priorities and action plans for your institution.

Leaders should identify a base case for the next year, as well a contingency plan for the worst case, at least on a high level. Some key actions, such as cutting expenses or tapping endowments, will vary based upon the unique mission, culture, and conditions at each institution.

The decision to reopen residential classes in the fall is a major one, paralleling the national dialogue about returning closed businesses to operational mode. Given that the purpose of scenario planning is to add structure to deal with such ambiguity, it is important campus leaders work together to make the best prediction they can and plan accordingly. Again, consider a worst-case scenario to be prepared for a different reality as well.

As part of the scenario planning, consider likely drops in enrollments. In a survey conducted in late March of presidents who are members of the Association of American Colleges & Universities, 64 percent leaned toward a “moderate” scenario of students returning to campus but with modifications to operations including social distancing, fewer major events, and more online offerings. That leaves 36 percent who feel that students might not return until the spring or at all next year. Having no students on campus and no college football season would have significant ramifications for finances and operations. Eighty-four percent of the surveyed presidents also anticipate enrollment drops, while the American Council on Education recently estimated a drop of 15 percent of traditional students and 25 percent of international students. Some institutions will face even more drastic drops in enrollments without in-person classes.

Also take a look at potential decreases in state support, federal support, philanthropy, research grants, endowment returns, and auxiliary revenues. Each university has a unique mix of revenue streams, but I continue to maintain that all universities will be negatively affected. McKinsey & Company estimates that even under a controlled virus scenario and return to operations in the fall, 25 percent of public colleges and universities and almost half of private institutions will experience a budget shortfall of at least 5 percent.

If classes remain online for most of next year, McKinsey says those estimates will increase to 57 percent for publics and 77 percent for privates, with more than 800 institutions experiencing a 20 percent or greater shortfall in next year’s budget. Given the financial impact of the Great Recession on revenues at the University of North Carolina at Chapel Hill that suggested a revenue decrease today of approximately 25 percent, many of our colleges and universities may take an even larger hit this time, given the unusual circumstances related to the on-campus interactions and culture. We need to be prepared for significant shifts in operations, academic offerings, delivery, and finances.

Step 2: Develop Assumptions

The next step is to translate assumptions about big-picture scenarios into detailed projections for your budget. From a process perspective, this crisis may offer a unique opportunity for universities to work even more collaboratively than usual – between centralized and decentralized units as well as across schools.

Be sure to establish guidelines for such discussions and decision-making criteria, which can be challenging to enact across multiple units on a campus or universities within a system. Laura Hubbard, vice president for finance and administration at the University at Buffalo, for example, says her office is in “constant communication” with the Buffalo campus and other universities in the 64-institution SUNY system. “We decided to articulate specific guidelines for financial decision-making,” she says. “They include a focus to protect the health and well-being of faculty, staff, and students, to maintain flexibility based upon a unique university mission, to consider the short-term as well as long-term, obey laws, and be prudent with our resources.”

Coronavirus Hits Campus

As colleges and universities have struggled to devise policies to respond to the quickly evolving situation, here are links to The Chronicle’s key coverage of how this worldwide health crisis is affecting campuses.

• Here’s Our List of Colleges’ Reopening Models
• Fall-Enrollment Trends in Distance Education: a Snapshot
• Why Is Gettysburg College Giving Up on ‘The Gettysburg Review’?

As always, projections and decisions should be made on a data-informed basis. Sources of data for budgeting would of course include past spending levels, but over-reliance on past spending could be an inhibitor of adequate change and assumes that past investment levels were strategically designed. Universities are infamous for creating programs and positions and never eliminating them, and this could be time for a fresh review of everything on a campus.

Let’s examine the key financial line-items of a university’s budget through the lens of a hypothetical medium-sized public institution in the Midwest that we will call “Winston Jerome University” (for realism, I created the starting financials for WJU by averaging three regional public universities using fiscal year 2019 data). “WJU” was founded in 1949 after World War II ended. With a solid reputation in business and engineering, the university’s 10,500 students are heavily oriented to undergraduate studies, with only 15 percent of its enrollment in graduate programs. Over the past three years, the university’s enrollment has dropped 1, 2, and 4 percent, respectively.

The relationship with the state has been solid, but contributions to higher education dropped after the last recession and have not yet recovered to 2008 levels, consistent with the rest of the country. The university had just concluded a $500-million capital campaign (tagline: “WJU – the Highest ROI in Higher Education”) and had planned to launch a new agricultural and veterinary school next year. WJU’s endowment has risen to $105 million as a result of its recent campaign and the strong success of its basketball team, which reached the NCAA tournament for the first time in 2018.

The starting point for assumption building is revenue. Despite WJU’s young life and competition in the state for funding, state appropriations had risen to $63 million, or 21 percent of its revenues, slightly above the 17 percent national average for public universities. Rumors were circulating that the state was planning an enormous cut to higher-ed funding, as estimates for health-care costs associated with Covid-19, unemployment expenses, and a loss of tax revenue from closed manufacturing and farming entities were changing the entire landscape. Nearby, Missouri had already announced $76 million in cuts to higher ed, and farther away, New Jersey cut higher education funding by $122 million, with more reductions likely to come. The university also had a small affiliated academic hospital and very modest research activity of $5 million.

Of high concern was enrollment, representing 37 percent of the university’s total revenue. Although most students came from in-state and very few were international, the university estimated that enrollment would drop 10 percent to 25 percent due to dissatisfaction with online education, which was likely for at least the fall semester. The mitigating factor may be students from the state who decide to transfer closer to home from more distant universities.

While WJU had been considering a major move into online learning, the university had only one small online program, a master’s in journalism. The university also anticipated a significant drop in philanthropy as it just concluded a campaign, and potential donors were suffering from the worst drop in stock market value since the Great Depression.

See the base and worst-case revenue estimates below.

The WJU Covid-19 Finance Response team used the estimated expenses for fiscal 2020 as a base to gauge the potential budget shortfall for fiscal ‘21, given the revenue estimates above. The team also sought national benchmarking data for all public universities but planned to continue to revise such data based upon a more specific peer set over the coming weeks.

A few key insights were generated by this analysis. First, the anticipated budget shortfall, assuming consistent expenses, was $26 million and $93 million, for base case and worst case respectively. While alarming to the cabinet, it was not necessarily surprising since peer universities had been reporting similar estimates. The trustees had already met several times and communicated a clear message that they did not want to use endowment funds to handle the crisis and asked campus leaders to use this opportunity to tighten up costs, especially administrative ones.

High-level benchmark data suggest that there may be opportunities for savings, especially in administrative expenses. As shown below, WJU administrative expenses are at 65 percent of operating expenses, while the national average is 56 percent. If WJU were able to operate its administrative expenses at the national average, the university would spend $27 million less. If it could cut even more than that, it could free up funds to invest in the academic side of the house and advance strategic goals of increasing research, launching the new agricultural and veterinary school, and rising in national rankings.

Step 3: Launch Actions

The final step is to use assumptions and scenario planning to inform actions. A common approach in dire times is to adopt across-the-board cuts – whether by administrative areas (such as technology, finance, facilities) or by school or unit. In fact, the recent survey of college presidents suggests that the majority, 55 percent, are considering such cuts. While this approach appears fair and is faster to implement, it is not strategic as it punishes high-value areas that potentially deserve additional investment while rewarding other areas that may present opportunities to scale back.

So what would be a more strategic approach? The starting point, not surprisingly, involves data. The best way to identify where you may be under- or over-invested is reliable benchmark data. For example, if WJU wanted to find opportunities to cut administrative spending, it should seek data from peers about full-time equivalents and spending. By doing so, the university can compare its investments and identify areas for decreasing investment or perhaps increasing, according to the mission and priorities of the institution.

ABC Insights recently concluded a research study of potential administrative efficiencies at its member universities. Nine administrative activities and 54 subactivities were analyzed by comparing the number of employees and labor spend for a university versus the benchmark average. That analysis generated a total savings opportunity of more than $1 billion for 32 members of the consortium, with the average amount per institution of $29 million. The top three areas for efficiency gains were information technology, general administration, and ironically, finance.

Once you determine primary focus areas for efficiency gains, drill down into subactivities to understand areas that may be over-staffed and opportunities for furloughs or layoffs. You may also identify strategic priority areas, such as career services and student mental health, that are under-invested and deserve additional funds.

Next you will want to identify specific initiatives to generate potential savings. This crisis affords a rare chance to make personnel changes that have historically been resisted by strong campus cultures of inertia or by union agreements. Many leaders have long recognized that increasing efficiencies is a priority but have not achieved the changes they desire. It is important to remember that the goal of generating efficiencies is not the end-game but rather the re-investment in more strategic priority areas, such as academic programs.

Jason Wright, a partner with McKinsey and a member of its Covid-19 strategic-response team, agrees. “The choice of actions is critical at this very moment,” he says. “Leaders will want to make data-driven decisions but also incorporate scenario-planning assumptions into the process. Most importantly, every action should tie to strategy. Consider long-term consequences and balance cuts with strategic investments.”

See the chart below for suggestions for how to pursue efficiencies in administrative spending, academic prioritization, and revenue growth.

Unprecedented times require unprecedented strategies and actions. And budgets. The goal should be to continue with planning even during ambiguity, as this will help your entire campus. Don’t forget how important it is for this to be an inclusive process, especially involving faculty, staff, and students. Dedicate adequate resources to the process given the magnitude of the situation facing higher education, which is shaping up to have even more impact than the Great Recession.

We know that furloughs, early retirements, and layoffs are coming. Best practices suggest that this should be targeted, rather than across-the-board, and for that focus you need data. Create an internal data and analytics team to support other Covid-19 task forces on your campus. Gather benchmarking data to determine areas of over- and underinvestment — using third parties, consortiums, and consulting firms as appropriate.

Be prepared for big-change efforts and major cost-cutting (both administrative and academic), and invest in strategic differentiation to advance your college’s long-term health as well as survive this short-term crisis. In general, you will want to strive to cut more rather than less, and if things turn positive, you will be in a position to re-invest according to your strategy. Consider partnerships with other universities, in complementary areas such as online education, shared services, and academic-program offerings.

I want to end on how important it is to pursue high quality in all that we do – in academics and administration. Our goal should be to find ways to increase the effectiveness of higher education, particularly in student outcomes in learning, growing, and becoming value-adding citizens in our world.

Paul N. Friga is a clinical associate professor at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. He leads numerous strategic-planning initiatives and co-founded ABC Insights, a consortium of universities working to make higher education more efficient and effective. Visit the website for articles, slide decks, and additional material related to budgeting and benchmarking.