Financially Speaking

Creating the best mix of programs with less money to work with

By Chris Austin

It seems like a no-brainer to predict that most school-district budgets are going to take a big hit because of the effects of COVID-19 on the economy. How much less money is anybody’s guess at this point, but cuts and belt-tightening seem inevitable. Cities are facing much the same scenario: local tax revenues are plummeting, and budget cuts are the order of the day.

Photo: © Can Stock Photo / rfcansole

Thus, the two big questions facing community education and recreation programs now are:

1. How many people will show up when “live” programs and services are offered again?

2. How much will a department’s budget be cut?

These questions are related since departments depend, to some degree, on fees to fund programming; if participation drops, so will fee revenue.

Defining Events

In this time of uncertainty, it’s more important than ever to understand a budget’s impact on each event and activity. This will help create the mix of programs that best carry out a department’s mission, even when there’s less money to work with.

To begin, there are three different types of events (or activities or programs):

1. A budget drainer. This event doesn’t generate enough revenue to cover its costs. Every event doesn’t and shouldn’t have to be a “money maker.” However, it’s critical to remember the difference between an event’s fee revenue and that its cost has to be made up somewhere else.

2. A budget re-charger. This event generates just enough revenue to cover its costs and replenish financial resources.

3. A budget booster. This event generates more revenue than it costs. Budget boosters increase the financial resources and allow a department to serve more people and serve them better. For example, the more budget boosters you have, the more budget drainers you can carry.

Photo: © Can Stock Photo / 4774344sean

This is a good place to acknowledge there are two cases of budget drainers where appearances can be deceiving. These events can stretch a budget much like budget re-chargers or budget boosters.

The first case is an event that was once offered for free, but now charges participants a modest fee. Even if the new revenue covers only a fraction of the event’s costs, that still frees up budget dollars for other uses.

The second case is an event that pays for itself by the amount of subsequent revenue it generates. These events stimulate registration and participation in other fee-generating events. Such an event can act like a loss-leader that boosts financial resources over time.

Thus, in cases where registration for one event increases registration for other events, the financial impact should be examined collectively. A word of caution here: the profit-generating ability of loss-leaders is often overestimated in the for-profit world. Don’t make the same mistake and assume you’re making up the lost fee income on “back-end” registrations. Examine the connections carefully.

Making Decisions

To achieve the greatest mission impact with the financial resources available, answer these questions:

1. What are the direct, avoidable costs to run a particular event or provide a particular service? The direct, avoidable costs are those that can be traced directly to a specific activity—and just that activity. Furthermore, these costs would disappear if an activity stopped.

2. How much revenue does an event generate in relation to its direct, avoidable costs?

Not knowing the answers to these questions, one runs the risk of making costly mistakes about which programs to continue, add, or drop. One may drop an event that was actually stretching a budget. Or one may continue offering an event that’s eating up more money than a budget can afford. These kinds of mistakes reduce the financial resources one has to work with and the ability to serve the community.

For example, a community recreation program offers an archery class. The program director calculates the direct, avoidable costs of the class are $160 every time it’s offered. The program’s common costs (e.g., overhead) aren’t included because those costs would exist whether the archery class was offered again or discontinued. The class generates about $300 in revenue per offering. Thus, this event is a budget booster because it generates a revenue surplus of $140 per offering. That surplus can be used to either help pay the recreation program’s overhead costs or subsidize a budget drainer. So, dropping the archery class would make the community recreation program worse off.

An event or activity that doesn’t pay for itself isn’t necessarily bad. Not every program needs to be a budget re-charger or a budget booster. However, without correctly classifying each event, you won’t know if you’re offering a mix of programs and services that best balances the needs of the community with the need to pay the bills.

Mark Nagel, Assistant City Administrator for the city of Elko New Market, Minn., and Brenda Dickinson, Dean of Continuing Education and Customized Training at Normandale Community College in Minneapolis, Minn., contributed to this article.

Chris Austin is a profit-growth pricing expert and a former economics professor at Normandale Community College in Minneapolis, Minn.