0.9 Financial analyses  (Page 5/5)

Financial sensitivity analyses and stress tests

Projecting the financial performance of a new online edition of a journal will be subject to multiple cost and income variables.These variables, and the inherent nature of projections, render precise financial estimates impossible, even when reliable market information isavailable.

The best a society can do is to test the sensitivity of its financial projections to ensure that the society is not unduly exposed inthe event that the society’s costs and/or income projections vary more than anticipated. To better understand the risk caused by this uncertainty, a societycan test the sensitivity of the financial projection for several key variables— including operating costs, institutional subscription adoption rate, andindividual member retention—to identify critical performance benchmarks that the society should monitor.

Operating cost sensitivity

A society can test its cost scenarios—for both development and ongoing operating costs—to determine the cost over-runs that thesociety could sustain before the journal’s net income would drop below an acceptable level. (The financial baseline described in “Establishing a FinancialPerformance Baseline,” above, provides a basis for determining an acceptable performance threshold.)

If such a stress test indicates that a society could incur one-time development and/or annual operating costs substantiallyhigher than those estimated for an online edition before falling below an acceptable financial performance threshold, then the society should have asufficient margin of error from a cost perspective. On the other hand, if a relatively slight cost overrun would lead to an unacceptable financial result,the society may need to reduce its development or operating costs, or adjust its pricing to provide a greater operating cushion.

Institutional subscription adoption rate sensitivity

While it is safe to predict that academic libraries will continue to prefer online-only subscription options, it is far moredifficult to determine specific uptake rates by medium for any given field or discipline, let alone for a specific title. It follows, therefore, thatprojecting revenue by format option after the launch of an online edition will be inherently imprecise.

If a society adopts a pricing approach (such as those described in Chapter Five’s “Member Publication Benefits” and“Institutional Subscription Format Options”) that renders it largely indifferent to the adoption rate of an online edition, even substantial fluctuations inuptake scenarios should have little effect on net income from subscriptions. However, a simple way to test income sensitivity by medium would be to run thejournal’s financial projection assuming a worst-case scenario wherein all institutional subscribers opt for the version of the service providing thelowest revenue contribution (see “Revenue Contribution,” above).

Individual member retention sensitivity

Chapter Three’s “Assessing Exposure to Online Licenses” describes how a society can estimate its exposure to potential riskposed by institutional online site licenses. Once a society has assessed the approximate risk to individual memberships it might face, it would be prudent todetermine the potential effect on net dues income were the society’s members to demonstrate less-than-anticipated commitment to the organization.

A society can project the net dues income that it would forgo (that is, member dues less the cost of providing all memberbenefits) were its membership base to decline n percent more than anticipated. The loss threshold that the society tests will depend on its confidence in its risk analysis. Ifthe society is confident in its estimate, it might use a lower percentage. Obviously, for most societies, any significant loss of membership would be moreimportant than the foregone dues income.