C. Myblog

What-Ifs Help the Budget Process

August 25, 2016

Testing ideas and running what-ifs is a powerful way for decision-makers to understand the impact of decisions under consideration in real-time (for more on this, please refer to our blog, Has your ALM technology Emerged from the Dark Ages?).  The power of what-ifs can also be applied to the budgeting process, and help link decisions made in the budget to the impact on a credit union’s risk by answering three risk-related business questions:

  1. How much could current earnings change if decisions under consideration are implemented?
  2. What are the profitability and risk trade-offs of decisions under consideration if rates change?
  3. What is the break-even point of decisions under consideration?

Budgets help answer the first question and don’t address the next two questions. The answers to these two questions could impact the credit union’s ability to deliver on its strategy.

Credit unions should create a target financial structure by running their budget through their risk model to understand the overall risk of the budget coming true (for more on this, please refer to our blog, Testing the Budget’s Interest Rate Risk). What-ifs help decision-makers evaluate the risk trade-offs of key decisions and forecasts during the budgeting process.

Not all decisions need to be run through the risk model during the budget process – this is how the target financial structure is helpful. Rather, decision-makers can test three or four of the key decisions or expectations that are driving the budget, both for revenue and expenses, and run a what-if to quickly understand the risk impact.

An example might be that the lending department believes they can generate a high amount of growth in mortgages in the coming year. This would be a key driver of revenue for the credit union. Decision-makers can run a what-if on this expectation and determine if they are comfortable with the risk/return trade-off.

Using what-ifs allow decision-makers to be more nimble during the budgeting process, and make changes along the way if they determine the risk/return trade-offs of key initiatives are out of their comfort zone.

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