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Strategic Budgeting/Forecasting Questions: Consider Key Forces

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This is the third entry in our 6 blog series about Strategic Budgeting/Forecasting Questions.

Question 3 – What key forces could impact our forecast?

Every good forecast should have a sound rationale and basis for the assumptions. If the current forecasting approach involves simply taking last year’s growth rates and assuming they continue, that will not be good enough going forward. A better approach is to identify key forces that could impact the budget/forecast and use this discussion as the rationale for the forecast assumptions.

It is important to understand that both internal and external forces have the ability to impact the forecast. Internal forces are largely driven by the strategic plan and initiatives set forth by the credit union, as well as the ability to execute (see the first and second blogs in this series for more).

Then there are external forces that have the ability to act as headwinds, which put pressure on the strategy, or tailwinds, which help move the strategy forward. The focus here will be on external forces. What is going on in the world around the credit union that could impact the forecast?

Start by getting decision-makers into a room and brainstorming different external forces that could impact the forecast. The list of forces can be quite extensive, so go through a process of prioritization. Group the ideas into two separate categories, headwinds and tailwinds as seen in the table below.

External Forces

The value is always in the discussion.  Take the top headwinds and tailwinds, study recent trends, and use this business intelligence to inform your forecast assumptions.  Take the potential auto sales headwind as an example.

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Source: macrotrends

Study historical data and discuss as a group. Auto sales have accelerated from 2010 to 2016. More recently, they have slowed. This trend should be incorporated into the forecast, especially on how it might impact the credit union’s strategic initiatives.

What about real estate? Are home values a key force that could impact your real estate lending and ultimately the forecast? Using the S&P CoreLogic Case-Shiller or another market source, decision-makers can understand what property values are doing in the area. If your area has experienced price increases well above national averages and prices are now above previous peaks, maybe that leads the group to assuming a slight decrease in new volume.

The combination of identifying key external forces, studying history, and having a discussion will better inform the forecast. Continue to use the what-if capabilities of your forecasting model to stress test the financial impact of changes in key market forces. Following this process will help decision-makers understand how external forces can impact the financial direction of strategic initiatives.

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Pay Attention to Liquidity

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As we conclude our budget and forecasting work with many credit unions, we continue to see expectations for loan growth to exceed share growth in 2017. Combining this trend with an assumption for higher interest rates could squeeze liquidity positions in 2017.

Callable bonds may no longer get called and mortgage related assets will extend if rates increase. In addition, deposit growth could slow or shift to more expensive deposits.

While we recently posted a blog on liquidity, we felt it was important to give another reminder to do advance planning in this arena.

Test your liquidity position under various scenarios. If you see pressure beyond your comfort zone, now is the time to have the strategic conversations about how the credit union will be prepared to respond without sacrificing longer-term strategic objectives.

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Best Laid Plans

Over the next few months, credit unions will be going through their strategic planning process to discuss the direction and goals for the credit union going forward. Often, we see actionable game plans with the best intentions to stay focused on implementation, which is when the real tough work begins.

Following are just a few tips to not allow the whirlwind of operations (or of life) to get in the way of strategic implementation (and the best laid plans):

  • Agree on how often progress will be reviewed
  • Keep the plan top of mind and connect it with day-to-day activities
  • Facilitate access to the right people who can make decisions on priorities

Each organization should set working agreements on how to maintain focus that suits the culture and ensures the success of the strategic plan. Ultimately, the key is to make sure the working agreements don’t let the whirlwind of real life take priority over strategic implementation.

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Prepare for Your Upcoming Exam

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A successful exam is often tied to the preparation done in advance. Simply having the most recent A/LM results ready, without understanding the overall risk profile and rationale for key assumptions, is not a recipe for success.

One best practice in preparation for an upcoming exam is to anticipate some questions that could arise and how management would respond. For example:

  • How is the credit union positioned with respect to interest rate risk and liquidity risk?
  • How did management determine their A/LM policy risk limits? Is the credit union within established limits?
  • What are the loan prepayment assumptions used in the A/LM modeling and how were they determined?
  • What are the non-maturity deposit assumptions used in the A/LM modeling and how were they determined?
  • Has management run stress tests in the A/LM model with other maturities, rate sensitivity factors, decay rates, prepayment assumptions and/or performed other what-if analysis? If yes, does it materially change the risk profile?
  • Does management document the model assumptions and any changes made to the model assumptions?
  • Have there been any major changes to the credit union’s strategic plan or business plan, or are there any future events that will change the credit union’s interest rate or liquidity risk position?

A/LM providers can be a resource for exam preparation. Quarterly results calls are a great opportunity for decision-makers to gain a better understanding of the credit union’s risk position. Also consider an exam prep call with your A/LM provider a week in advance of the exam. There is always an element of unpredictability when it comes to examinations but following this practice can better position the credit union for success.

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Making “No” Decisions

One of the key characteristics of a high-functioning credit union is the ability to make “no” decisions in order to stay focused on the credit union’s strategic direction. As this year starts and the project list grows, it will be important to keep a laser-like focus on the projects that the management team has determined are the most important for achieving the credit union’s strategic objectives.

With 100% certainty, there will be many “shiny new objects” throughout the year that will be highly tempting or considered “must haves.” Before committing to those “shiny new objects,” it will be critical to take the time to filter them through the credit union’s strategic direction and objectives to see if or how they fit.

If they truly fit, then deliberately consider the timing of taking on more. Are these “shiny new objects” really top priorities or would the credit union be better served by delaying the start date so as not to distract from current strategic objectives?

Mastering the skill of strategically allocating resources is exceedingly important because technology innovations are happening at lightning speed. In the meantime, distractions will need to be put in the “no” or “not right now” column.