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5 steps to improve financial institution budgeting and forecasting


In a majority of financial institutions, the traditional budget process is a comprehensive estimate of revenue and expenditures for the fiscal year. It summarizes estimated activity by way of interest income/expense and non-interest income, people costs, operating expense and budgeted balance sheet by department. It’s often top-down then bottom-up. Semi-annual and/or monthly forecasts utilize similar processes.

Today’s institutions still need a budget. It establishes/prioritizes the institution’s strategies, goals, objectives and tactics. Additionally, it sets operational and financial key performance indicators (KPIs) and accountability for employees. Chances are your institution has changed. Has your budgeting methodology kept up? As you start thinking about your next budget cycle, here are some things to consider:

  • How has our business changed? How will we compete? Do we have new products?
  • Will our current systems meet our current and future needs?
  • How will we align our resources with strategy? How will we measure progress?
  • How will we ensure accountability? How do we encourage desired behaviors?
  • Are we budgeting at the appropriate entity/account level?
  • When we forecast, do we need to do “all” accounts or just measurable changes?
  • How do we adjust for the changes in our customers, economy or business?
  • Are department heads managing to the budget?
  • Do center managers have access to the budget reporting to allow for identifying and addressing variances?

If your current planning, budgeting and forecasting activities are not adding clear value to your institution, there is a better way. Financial institution leaders were challenged to rethink conventional assumptions and learn about processes and technologies that can help institutions improve budget planning and performance against strategic objectives.

Best practices for budgeting and planning

To help derive maximum value in each budgeting and planning cycle, consider tapping the following six best practices:

1.  Frequency. While the annual budget plan has long been a cornerstone of financial institution planning, this approach      ignores market volatility, or when sudden course corrections are needed to navigate budget opportunities or constraints. A better way to align institutional strategy and operations is to use rolling forecasts, which force operating units to update business projections each month. This increased frequency provides a more accurate picture of current conditions and allows for more nimble management of staff time and financial resources.

Ask yourself: If the process was quicker and simpler how often would updates be useful?

2.  Level of detail. The key benefit of this best practice is simple: Make financial projections only down to the level that helps leaders make sound business decisions. Make sure that income and expense are tracked at a material level and not comingled. This approach looks at the cost-benefit of data; it eliminates clutter, improves efficiency and decreases the overall time everyone spends in the budget process. For example, is there a value in estimating bonuses by person or is it okay to budget dollars per department?

Ask yourself: Do you really need to budget at the GL level for every account, or just at the financial reporting line? If users had this data would they use it?

3.  Driver-based planning. Oftentimes we fall back on a standard “3percent increase.”  Given the amount of data easily available research industry trends, peer data or pertinent demographic information for key market drivers. Focus on those that will drive accuracy or are crucial to meeting financial goals. When done consistently, this practice can help provide leaders with confidence that budget and forecasts are formulated with both external and internal KPIs in mind. 

Ask yourself: What are those 2-3 key items that impact the institution?

4.  Participation and collaboration. Communicating the institution's strategy allows the business unit leaders to better provide the best projections for their areas. It also allows business leaders to plan not only operational but staffing expectations appropriately. If your information technology leaders don’t know you plan to open a branch, they will either be understaffed or won’t be able to accomplish other planned items.

Ask yourself: If the process was quicker and simpler, would it allow for wider participation throughout the organization?

5.  Leveraging technology. Excel spreadsheets have been a budget planning standard for many years. However, a new generation of software tools are not only more nimble and scalable, but can also automate key processes, provide business intelligence and deliver a unified solution for budgeting, forecasting and reporting. These tools also improve communication with functionality to allow visibility into the process for all stakeholders.

Ask yourself: Do we need a better way to budget and forecast?

Corporate performance management (CPM) tools
Today, there are a variety of CPM providers serving the middle market, offering tools that can help institutions convert data into actionable, fact-based information that can enhance institutional decision-making and strategic insight.

While CPM tools have clear advantages in budgeting, forecasting and reporting, they also deliver added benefits such as:

  • Shortens planning, month and year-end cycles
  • Defines and easily applies organization-wide factors (e.g. 3 percent increase on utilities)
  • Rapidly consolidates information and multiple scenarios
  • Creates financial reporting, dashboards and scorecards
  • Establishes allocations and financial logic, e.g. transfer pricing
  • Process workflows
  • Eliminates reliance on Excel spreadsheets and associated formula errors
  • Allows online access to multiple users, departments and simplifies processes
  • Modernizing your budgeting will allow you to create your budget and forecasts more quickly and accurately, and will reduce the effort from a tedious annual process to a normal operating procedure. Utilizing technology such as CPM in lieu of manual keying is another step towards improving your budgeting and forecasting process.