To prepare for tight margins and an uncertain economic climate, U.S. banks, credit unions, and other financial institutions need strategic, long-range plans that align with tactical budgets and regular reforecasts. Now that budget season is upon us, it’s a great time to take a close look at four common planning challenges and proven best practices to address them:

1. Effective Balance Sheet and Margin Planning

Banks, credit unions, and other financial institutions spend too much time planning for non-interest income and expense items — such as operating expenses, capital expenditures, and salaries. Yet, they also spend too little time on balance sheet growth, rates, and spread — the items that generate over two-thirds of net interest income.

Institutions can overcome these challenges by improving forecasting of net interest income drivers. Here are some helpful strategies:

  • Employ cash flow-based forecasting at the instrument level. This increases accuracy by accounting for optionality and instrument characteristics, focuses line-of-business managers on the amount and spread of new business they need to generate, improves accountability and collaboration, increases transparency, and streamlines scenario analysis and reforecasting
  • Project FTP rates and resulting transfer credits and charges. Include forecasted FTP curves and rate indexes in rate forecasts, apply the forecasted FTP rate to new volumes and repricing events, and aggregate net interest margin (NIM) to any level. This lets you establish NIM goals for business leaders, track to more detailed budget and variances, and align incentive plans with organizational objectives
  • Link non-interest income and expense projects to balance sheet projections. This improves the accuracy of projections, allowing you to efficiently change projections when the balance sheet changes, and improving understanding and buy-in from the field

2. Work Efficiently

Seventy percent of financial institutions’ budgeting processes take three months or longer to complete, according to a 2019 CFO Outlook survey. Perhaps more importantly, 36% have budget cycles that don’t leave ample time for value-added analysis to inform strategic decisions. This tells us that inefficiency is standing in the way of more meaningful planning.

Here are some strategies proven to improve budget and planning efficiency:

  • Automate data imports, aggregation of inputs, and creation and distribution of reports
  • Use simple, customizable templates to streamline the end-user process and improve understanding
  • Facilitate real-time updates to quickly reveal the impact of assumptions as they are entered or changed
  • Integrate software solutions to share data and utilize one input source, which reduces work effort, errors, and manual maintenance
  • Design workflow processes that easily define and track steps, notifications, reminders, and statuses

3. Prioritize Consistency

Inconsistency at any level can jeopardize reporting accuracy and undermine an institution’s ability to achieve its goals.

Creating a balance scorecard and making strategic planning, budgeting, and forecasting a single, cyclical process can dramatically improve institutional consistency. Here’s how to put those processes in place:

Develop a balance scorecard for your institution that aligns objectives and behaviors by:

  • Creating a strategy map with goals from four perspectives: financial, customer, internal, and employee learning and growth
  • Assigning KPIs and creating a success measure for each goal
  • Aligning goals and sub-goals across departments

Streamlining strategic planning, budgeting, and forecasting processes makes it easier to assess performance and improve alignment, consistency, efficiency, and transparency. Consider this planning cycle:

  • Develop a strategic plan – Provide a high-level roadmap of where you want to go as an organization
  • Create an operating budget – Develop a detailed tactical plan outlining how you will achieve the first year of your strategic plan
  • Execute plans – Communicate plans across the organization, including success metrics, and ensure each team has the resources to achieve goals
  • Measure and assess performance – Analyze your financial and operational results on a monthly, quarterly, and year-to-date basis, reforecasting and modifying your strategic plan as warranted

4. Establish Ownership and Gain Buy-In

Insufficient communication of goals, transparency, and input from department managers limits buy-in, prevents managers from adequately understanding and explaining reporting variances, and leads to a distaste for budgeting, inaccuracy, and little ownership over results. Here’s how to get your whole team on board and invested in success:

  • Share information on a regular cadence
  • Assign Finance team members as advocates for each department
  • Leverage a collaborative planning approach and request inputs where needed
  • Utilize driver-based planning, tying together related items where dependencies make sense, to increase both buy-in and efficiency
  • Train new employees and end-users on key systems, especially when systems and processes change
  • Implement comprehensive variance reporting, requiring explanation inputs, to enhance understanding of what drives the variances and their impacts

By leveraging the appropriate financial and operational data, processes, and tools, finance leaders can improve planning efficiency and accuracy, empower strategic decision making, and grow profitability - benefits that will extend well beyond this budget season.

 

Learn More About Budgeting for Your Institution