Use our three-step process to build a revenue model for your community.
In the wake of COVID-19, local government leaders rightly are focused on managing the unique needs of their communities. Now more than ever, community leaders must prepare for the near- and long-term effects that this pandemic might have on financials, in order to continue to deliver vital community services despite the potential for decreased revenues. Assessing the impact on revenues and effectively modeling scenarios will be essential going forward.
Building a financial revenue model might seem overwhelming, and it might be difficult to determine the best place to start. We have designed a three-step process to help you navigate through the current COVID-19 pandemic and to use for years to come.
The three steps include:
1. Gather your data
Gather historical revenues from the past three to five years, at minimum, and pre-COVID-19 budgets and revenue projections. These inputs will help you identify significant trends with your revenues, such as seasonality with collections, and also allow you to assess how past events might inform the current situation.
2. Break down revenue by type
Consider using the following categories, knowing that all types will not apply to each community:
- Sales and use tax. Identify the industry mix in your community and the impact the various sectors have on sales and use tax collections. Break it down by type to understand how collections might vary based on impacts to each industry segment. Most states classify sales tax collections using either the Standard Industrial Classification (SIC) or the North American Industry Classification System (NAICS). If data isn’t easily available by these types, estimate the percent of revenue in each category.
- Property tax. Break down the percentage of property taxes into the categories of personal, residential real estate, commercial real estate, agricultural real estate, and other, or base the breakdown on your jurisdiction’s unique categorization.
- Income tax. Determine the mix of individual and corporate income taxes. Consider how income taxes have varied historically based on employment rates and other economic factors.
- Intergovernmental transfers. Categorize funding received from federal, state, and other local units of government in terms of grants and other aid.
- Charges and fees. Try to separate various types of fees such as parking, permits, licenses, parks and recreation, utility, and others.
- Other sources. Each community is unique, so it is important to include all other revenue streams for your jurisdiction. Some examples include special taxes, fines, forfeitures, and investment income.
3. Apply scenario levers
Once you have gathered your historical revenues and future budgets and have broken down your revenue streams into subcategories, you can model your financials. Here’s how:
- Use your revenue category breakdowns as a starting point, assuming 100% of expected collections for each category based on budget.
- Next, estimate potential impact to expected revenue (such as budget revenues), on a percentage basis, by revenue type and subcategorization. For example, you might estimate that your community will collect 85% of originally budgeted revenue in retail sales tax for calendar months four through seven of 2020. You might apply these “levers” on a percentage basis to each month or year by revenue type and subcategory. You also might adjust your levers based on information you learn from industry associations and as you receive actual revenues.
