I’m compelled to relate planning to everyday activity – after all, just because we are bankers, doesn’t mean we don’t experience life’s little pleasures (or displeasures) any more than, say, your average commuter. Today, while legally stopped in a left turn lane, waiting for traffic to clear before proceeding to Plansmith’s office, a man honked and gesticulated wildly because I didn’t pull into the intersection and ready myself for the turn. Never mind I couldn’t make the turn anyway. Conclusion: he didn’t plan well. If he was in a hurry, he should have planned to leave earlier, thereby beating me to the turn light where he, too, would sit and wait for traffic to clear. Maybe he took a different route from home, or maybe I did, causing this situation (I did stop at the dry cleaners – HA! solved).

The point is planning, like driving, is imprecise – we plan (or target) to achieve a goal (margin, profit, fill in the blank), but influencers along the way may send us in different directions or delay our success. Planning is not a collection of precise predictions, planning is preparation. It is about knowing what actions to take today to achieve the results we are looking for in the future.

Yet frequently we hear about industry experts pushing for more and more precision in our planning and risk systems as if they will accurately predict the future. To what end? More precision requires more assumptions – more things to be validated – to the detriment of expediency and trust. But once a few months go by, isn’t a forecast wrong again? All that work…

Don’t get me wrong, we advocate accuracy. You need to trust that the forecast upon which you are making decisions is accurate. That said, your forecast only needs to be in close range of where you intend to take the bank – not precise, but close enough. When preparing a forecast, budget or even interest rate risk (IRR) analysis, ask yourself "what additional confidence am I gaining by adding complexity (precision) to the model?" Will I take different actions as a result? And if you come up blank for an answer, remove the complexity and move on. In driving to work, we don’t follow a precise set of directions every day without deviation. Being effective means we’re open to detours that will get us to our goal.

Planning is preparation...

… so that when rates rise, you have a sense of which products impact your changing margin the most and how you will respond. Planning is not burning hours analyzing why the initial plan didn’t predict the actual result to 3 decimals (backtesting – more on that in a later post).

…so that you have a resource for capital if loan growth exceeds expectations. Planning is not determining the precise decay rate to apply for calculating market value at risk (complexity).

… and ongoing so that you have a rolling 12 – 24 month view of your direction and test results of your performance under a few different deviations (what-if scenarios). Planning is not setting a budget and printing variances for 12 months (repeat ad nauseam annually).

Planning is preparation – I hadn’t planned on stopping by the cleaners today, and just look what happened (I blogged about it).