Recent economic turmoil has made it clear that banks and credit unions must use agile budget processes that are proactive rather than reactive. Accurate planning depends on the ability to not only develop and execute plans, but also to shift those plans as circumstances change.

As you prepare your institution for the upcoming budget cycle, use these tips to improve the speed, accuracy, and agility of your budget process.

#1 — Leverage Workflow Capabilities

Your budget software should ideally include workflow capabilities that allow you to define the steps in the budgeting and planning process, establish the owners of each step, and set automated alerts and notifications. This allows the finance and accounting teams to see where the budget process is at any point in time and, ultimately, keep that process on track.

#2 — Provide Instruction

Provide educational materials on the budget process, such as instructional videos or end-user training, especially if your approach or budgeting tools have changed. The goal is to make the process as easy as possible for everyone involved, create a better user experience, and set up the team and institution for success.

#3 — Assign a Finance Team Liaison

If you require input from various teams or departments, consider assigning a finance team member as a liaison for each manager. Using liaisons can help you get better information, reduce the number of iterations, and allow the budget process to move more quickly and efficiently.

#4 — Seed the Budget, Then Allow Adjustments

To expedite the budget process, seed the budget centrally with targets and financial goals for your managers, and then allow them to make adjustments. Giving them the ability to provide input and make changes helps managers understand expectations and garners buy-in.

#5 — Create Reporting Efficiencies

Where possible, start with standardized reporting templates that allow your institution to produce repeatable, consistent reports you can use for the month-end process, including balance sheet, income statement, comparative analysis, rate volume, yield trends, and more. From there, you can create new, more tailored reports specific to your line of business.

#6 — Rely on a Single Source of Truth

Institutions benefit from a unified budget platform that serves as a single source of truth. You can improve budget process accuracy by setting up automated daily general ledger, monthly payroll, and loan deposit imports into the central platform. This process lessens the need for data to move among multiple systems and reduces manual entry that can result in errors. A unified platform also makes it easier to produce reports and dashboards that reflect up-to-date data from all systems.

#7 — Make Historical Data Available

Make historical data available to your managers so they can compare last year’s actuals to the budget as a starting point reference. This provides the information they need to build a more accurate budget for next year.

#8 — Set Up Data Alerts and Warnings

Set up limits, data alerts, and warnings so managers know if they are missing data or have values outside of norms or targets.

#9 — Provide Comprehensive Variance Reporting

Providing comprehensive variance reporting throughout the year equips leaders to manage their budget and performance. Variance reporting also encourages managers to see budgeting as an ongoing activity — providing monthly, weekly, or even daily analyses — rather than a once-a-year activity.

#10 — Allow Comments and File Attachments

To improve data visibility, enable managers to enter comments and attach files (for example, a pricing proposal from a vendor) that help explain or justify expense items, and allow their superiors and the finance team to see that information. This reduces the need for follow-up questions and additional iterations.

#11 — Use a Cash Flow-Based Forecast for Balance Sheet and Margin Planning

A cash flow-based forecast provides increased accuracy for line of business, regional, or branch-level projections. Performing cash-flow analysis within your budgeting and planning system also enables more efficient scenario analysis because all planning is consolidated in one system.

In general terms, cash flow-based forecasting involves generating instrument-level cash flows for the current book of business and cash flows for projected new volumes each month, using the results to derive forecasted balances, income expense, yields, and other KPIs. Following this process allows you to effectively analyze your budget and provide specific goals and targets for above-the-margin and below-the-margin items.

#12 — Project Net Interest Margins at Lower Levels of the Institution

Given the importance of balance sheet and margin planning, we recommend projecting net interest margins at lower levels of the institution as part of the overall budgeting and planning process. You will need to project funds transfer pricing (FTP) rates and the corresponding transfer credits and charges. This helps establish net interest margin targets and goals for your business leaders, ensuring they're focused on the same goals as the institution. The process helps your institution plan for profitability versus volume and yield/cost of funds and allows you to track budget variances at a more granular level of detail and align incentive plans to institution goals.

#13 — Take a Sound Approach to Capital Planning

Focus on projecting your capital position and ratios as part of the planning process. Make sure you have targeted capital levels, including both regulatory and internal targets. Start with projected earnings, which include dividends and retained earnings. Ensure you have a sound approach for modeling allowance for loan and lease loss (ALLL), which may include projections for charge offs and coverage of recovery ratios for different lines and portfolios. These calculations will result in projected capital ratios and positions to determine whether you're hitting your targets.

Ultimately, you need to understand the capital impact of your plan and whether you need additional capital to support your planned growth.

#14 — Prepare for Multiple Scenarios

Create a baseline forecast based on your market and business expectations. In addition, run multiple scenarios, including best case and worst case, to assess potential financial impacts (e.g., earnings and capital) and operational impacts (e.g., staffing, projects, and process changes). Then, develop a plan for each scenario around your balance sheet strategy, liquidity options, and operational changes, testing those plans to ensure they have the desired impact.

While your institution may not be able to predict what will happen next year, you can create an agile budget process that equips you to quickly respond to an ever-changing environment. Axiom™ Planning helps financial institutions deliver timely and accurate information while adapting to changing market and business conditions. Learn more about Axiom Planning or schedule a demo.

Learn other budgeting tips for your bank