C. Myblog

Elevate Your Budgeting Process

November 29, 2017

The following article was written by c. myers and originally published by CUES on November 20, 2017.

The credit union budgeting processMore and more credit unions are recognizing the value of elevating budgeting to expand strategic thinking and drive better business decisions.  The strategic budgeting process is an ideal avenue for connecting strategy, desired financial performance and risk appetite.

To do budgeting well, a CU needs to build its base financial case on a solid foundation—and then consider that budget in strategic ways.

As an example, many credit unions have invested heavily in technology over the past few years, and a number of them are continuing to do so.  It is important that the strategic reasons for those investments are represented in the financial forecasts.  Perhaps there is an initiative to make it easier to do business with the credit union, and part of that initiative involves technology investments intended to increase loan volumes.  Is the budget showing the expected boost in loan balances and income?

Executives are also recognizing that the time between making an initial investment and reaping the benefits—such as funding more loans or making systems and processes more efficient for employees—can be measured in years rather than months.  It is important for boards to understand the expected timing of the benefits along with the expected financial results of the initial cost.  To accommodate this, the budgeting forecast period is being expanded by many organizations to at least three years and, in many cases, five years.

A detailed budget for year 1 combined with a longer-term forecast is designed to provide a high-level directional view, not to be exactly “right” for years 2-5.  It’s hard enough to be right for one year!

It’s worthy to note that the answers to some of your strategic budgeting questions may not be obvious by looking at the budget, so you may have to ask senior management.  What’s important is that you ask those relevant strategic questions.

One of the greatest values for the board is in the discussion with senior management and gaining more clarity on what the team is doing in the short term to drive toward the longer-term strategic goals set by the board.  This can help with the order of priorities and speed of implementation at both the strategic and operational levels.

Key Questions

Here are just a few questions to consider as you elevate your budgeting process:

  1. How is our strategy reflected in the budget and forecast?
  2. To link our credit union’s strategy with desired financial performance, how far out does our credit union need to forecast?
  3. As things become more complex, should the board ask for a range of likely financial performance versus committing to one set of financial outcomes?
  4. What key forces could upset our forecast?
  5. How does the budget and forecast align with our appetite for risk?
  6. Each credit union faces unique issues.  What other key internal and external headwinds and tailwinds are we facing that should be reflected in our budget and forecast?

A very important piece of the strategic budget is the documentation of rationale for the most important assumptions, especially those that drive results, and how those assumptions relate to strategic initiatives.  If higher lending volumes are assumed in the budget as a result of new technology, that should be noted.  If lower deposit growth is projected due to the economic forecast, that should be noted as well.  Good documentation will make it much easier to answer questions that are sure to come up later.

It is critical that leaders have a clear-eyed view of how strategy and the forces affecting it can impact their financial performance.  This view could result in changes to the order and speed with which priorities are implemented.  But, it’s far better to adjust for what is seen through the windshield than to react once it’s in the rearview mirror.

c. myers corporation, Phoenix, has partnered with credit unions since 1991.  The company’s philosophy is based on helping clients ask the right, and often tough, questions in order to create a solid foundation that links strategy and desired financial performance.

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