How painful was your last budgeting cycle? Now that budgeting season is behind you, it’s a great time to reflect on improvements you could make to the budgeting process.
Let’s take a close look at four common planning challenges and proven best practices to address each:
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 — and too little time on balance sheet growth, rates, and spreads — the items that generate over two-thirds of net interest income.
Institutions can overcome these challenges by improving the 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 Funds Transfer Pricing 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, which can improve understanding and buy-in from the field
2. Work Efficiently
More than 80% of financial institutions’ budgeting processes take three months or longer to complete, according to our 2020 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 report creation and distribution
- 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 time, 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 goals.
Creating a balance scorecard and making strategic planning, budgeting, and forecasting a single, cyclical process can dramatically improve institutional consistency. To do this, you must first 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 key performance indicators (KPIs) and creating a success measure for each goal
- Aligning goals and sub-goals across departments.
Then you’ll need to streamline strategic planning, budgeting, and forecasting processes 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, a lack of transparency, and little input from department managers limit buy-in, preventing managers from adequately understanding and explaining reporting variances. These issues can lead to a distaste for budgeting, inaccuracies, 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 and require explanation inputs to enhance understanding of what drives 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 your next budget season.