Overcoming Budget Season Challenges – Tips You Can Take to the Bank

By Ken Levey, Vice President, Financial Institutions Software, Kaufman Hall, and Bryan Ridgway, Senior Solutions Engineer, Financial Institutions Software, Kaufman Hall

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

1. Effective Balance Sheet and Margin Planning

Challenge: Financial institutions spend too much time planning for non-interest income and expense items (e.g. operating expenses, capital expenditures, and salaries), and too little time on balance sheet growth, rates, and spreads — the items that generate over two-thirds of net interest income.*

Strategies to improve forecasting of net interest income drivers:

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. Taking this step 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. Working Efficiently

Challenge: In a 2019 CFO Outlook survey, 70% of respondents said their institution’s budgeting process takes three months or longer to complete, and more importantly, 36% said their budget cycles don’t leave ample time for value-added analysis to inform strategic decisions.

Strategies to make budgeting and planning more efficient:

Automate wherever possible, especially around data imports, aggregation of inputs, and reporting creation and distribution
Use simple, customizable templates to streamline the end-user process and improve understanding
Enable 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
Implement workflow processes that easily define and track steps, notifications, reminders, and statuses

3. Ensuring Consistency

Challenge: Inconsistency creates inaccurate reporting and undermines your institution’s ability to achieve its goals.

Strategies to improve consistency:

• Create a balance scorecard

To align objectives and behaviors, develop a balance scorecard for your institution:

1. Create a strategy map with goals from four perspectives: financial, customer, internal, and employee learning and growth
2. Assign KPIs and create a success measure for each goal
3. Align goals and build sub-goals across departments

• Make strategic planning, budgeting and forecasting a single, cyclical process

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

1. Develop strategic plan – Provide a high-level roadmap of where you want to go as an organization
2. Create operating budget – Develop a detailed tactical plan of how you will achieve the first year of your strategic plan
3. Execute plans – Communicate plans across the organization, including success metrics, and ensure each team has the resources to achieve its goals
4. 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. Establishing Buy-In and Ownership

Challenge: Inadequate communication of goals, transparency, and input from department managers limits buy-in, prevents managers from adequately understanding and explaining reporting variances, and leads to distaste for budgeting, inaccuracy, and little ownership over results.

Strategies and opportunities to gain buy-in and create ownership:

Share information on a regular cadence
Assign Finance team members as advocates for each department
Leverage a collaborative planning approach, asking for inputs where needed
Utilize driver-based planning, tying together related items where dependencies make sense, to increase both buy-in and efficiency
Provide end-user training for new employees and when systems and processes change
Implement comprehensive variance reporting, requiring explanation inputs, to enhance understanding of what is driving 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.

*Bankregdata.com. Net Interest Income as Percentage of Total Income. (2019).

Ken Levey, Vice President, Financial Institutions Software, Kaufman Hall

Bryan Ridgway, Senior Solutions Engineer, Financial Institutions Software, Kaufman Hall