In part one of this series, we discussed establishing your goals and developing several alternatives or contingency funding plans. Next, we will discuss the remaining 3 rules.

RULE #3: RE-PLAN AS OFTEN AS YOU WISH TO GAIN CONTROL OF AN UNCERTAIN FUTURE

While many elements of a plan are not controllable and others are only slightly controllable, there are those parts that are truly controllable by management. This piece of the plan we call the budget. The budget usually deals with those items that are not likely to change but if they do, it is because you want them changed. These are items such as salaries, rent, utilities and some fee income items. These budget figures can be developed and monitored to maintain maximum control. They also provide a key area to increase income or decrease expense when all else fails, as is seen in the example above where institutions raise service charge income to compensate for diminishing interest margin. We also saw institutions become more cost-conscious, with cutbacks in personnel expense as well as many other budget areas. Budgets can be constructed and management can be held accountable for variations even on a monthly basis. This highly controllable area can be easily managed. Therefore, let’s establish our next rule.

RULE #4: BUDGET THE HIGHLY CONTROLLABLE ITEMS WITHIN THE PLAN AND MONITOR THEM ON A REGULAR BASIS

There are goals and objectives within the various departments of the institution of which department heads can be accountable. Each expense must be reviewed each year and weighed against the overall goals of the institution.

However, should circumstances warrant, these items can be changed to help reach the stated overall goal. For example: with respect to the stated corporate goal of 3.5% net interest margin and .75% return on assets. Budgets should be revised and the new figures used to monitor progress and provide control. It is important to remember that while the budget figures are relatively static, it is still necessary in the planning process to have access to the entire plan so that when assumption changes are made the model can consider the entire institution.

Using a computer model will greatly enhance the planner’s skill at determining the best course of action for many different environments. The user will want to work within four basic areas of the plan. These are:

1. Balance Sheet Data
   1. Balances
   2. Interest Rates on New Balances
   3. Maturities and Exit Rates
   4. Interest Income and Interest Expense
2. Non-Interest Income
3. Non-Interest Expense
4. Income Tax Parameters

While working with the model, the user will regularly perform three basic functions. These are as follows:

1. Edit or change the assumptions
2. Measure the effect of the changes on the plan
3. Produce appropriate reports and document the effects of the analysis

Once you have found an acceptable numeric plan, you must create a narrative action plan to go with it. This action plan is the part of the planning process most often overlooked by planners. Too often, the planner, in their zeal to arrive at an acceptable numeric plan, will assume they are finished. The specific actions that are necessary to accomplish the numeric plan are forgotten or not properly conveyed to the rest of the management team. This reflects an attitude about planning that says the planner is trying to predict the future rather than control it.

Here, then, is our final rule:

RULE #5: ALWAYS PREPARE AN ACTION PLAN TO ACCOMPANY THE NUMERIC PLAN

The action plan should be monitored as closely as your numeric plan in order to adequately judge performance. This monitoring activity will help you understand what factors brought about your current position. It will also provide the insight needed to effectively re-plan. Your numeric data, combined with your action plan, will become the blueprint for building your institution’s future.