Hope For The Best, Budget For Reality
Recently, during The Economist’s Buttonwood Gathering, Raghuram Rajan, current professor at the University of Chicago’s Booth School of Business and former chief economist at the IMF, expressed concern over our government’s need to address the deficit. Rajan stated that, “We need to have a path which brings [the deficit] under control. It’s very important to tell the bond market and the public what that path is.”
Laying out a path to show how we will recover is important. Not doing so prevents us from addressing the problem which may cause markets to respond poorly, leading to further disaster.
The same logic applies for the credit union world at budget time. A realistic view of the situation and a path for handling it is the single best tool for dealing with what has been a difficult time for many credit unions. For example, in some regions loan demand has been very low. If that same level of loan demand continues, it could make for a tough 2011 for some institutions.
While unfortunate, that is the reality and credit unions shouldn’t “pretty it up” by making assumptions that next year will be better, unless there is reliable data that shows a change in trend. It is better to present the ugly reality and then identify a series of triggers that can be pulled to make the financial picture bearable. Only when the board is presented with the reality of the situation can they begin to make the tough decisions that are required. It may mean settling for losses in 2011 or difficult cuts in expenses but meeting the situation head-on is by far a better alternative than showing a happy budget that will only disappoint in the end.
