Plansmith Blog

Are you really planning, or are you just budgeting?

By this I mean, are you filling out the numbers on a spreadsheet or planning the actions needed to make it a reality?

It’s always gratifying when all the numbers come together in a neat package showing expected growth and earnings for next year. And, there were likely many contributors who verbally expressed their goals and plans on how they are going to reach them. The compiled financial targets are then presented to and accepted by the board, and your monthly comparisons begin. Budget “predictions” are compared to reality. Variances from “budget” are explained, and business continues as usual. In essence, that’s budgeting.

Our recent blog discussed Product Profitability, or the process of analyzing your product line by looking at each asset category and adjusting its yield by adding non-interest income, and subtracting applicable loan losses and overhead. The overhead we associated with the asset was its funding liability cost less applicable service charges. This gave us a more heightened awareness of the true earning potential of each earning asset.

As increased competition and consolidation challenge the financial industry, your business must continue to adapt using strategies for success, not unlike those of other businesses.

Manufacturing and retail have long used product management techniques to meet competitive pressures for pricing, product planning, and growth strategies. If financial institutions are to survive and prosper in this highly charged competitive environment, management must understand and control all components of profitability. Margin and equity risks have been addressed using regulatory rate shock methodologies, as well as recommended and required stress testing of the loan portfolio, including loan losses. Product profitability combines these concepts with an often-overlooked element of cost – overhead.

Uncertainty and volatility seem to be the only consistent elements concerning the post-COVID economy. So, how do you adequately measure the financial impact today’s economic landscape will have on your business? By utilizing a true planning model.

A professional forecasting platform for Budgeting and ALM/IRR adapts to changing conditions. As it is relationship-driven, it can be set to react to environmental changes, including rates. As the rate environment shifts, so should your balance sheet growth and product mix. Planning models help you test the impact of such changes and measure results in minutes, not hours.

For banks and credit unions, navigating the ever-evolving financial landscape requires more than just intuition and experience. It demands a clear vision, a roadmap etched with achievable goals, and a dedicated pursuit of those objectives. Goal setting emerges as the compass guiding organizations through market volatility, technological disruptions, and changing customer expectations. Effective goal setting empowers banks and credit unions to not only survive but thrive in a dynamic financial ecosystem.

Our recent blog discussed Product Profitability, or the process of analyzing your product line by looking at each asset category and adjusting its yield by adding non-interest income, and subtracting applicable loan losses and overhead. The overhead we associated with the asset was its funding liability cost less applicable service charges. This gave us a more heightened awareness of the true earning potential of each earning asset.

I’m often asked, “What are the differences between a plan, a budget, forecasting, reforecasting, what-ifs, and stress testing?” Although some of the actions are similar and often intermingled in conversation, it’s their purpose that defines them. If you’re a client, most even involve similar keystrokes using your Plansmith software navigation; yet each plays a unique role within your organization’s total planning process. Let’s discuss.

Budget

To start, everyone’s familiar with a budget, but let’s make sure we see it for what it really is. A budget is a prediction or forecast of a financial position at a set time in the future, typically one year. A budget represents a desired financial outcome and requires consent by your board of directors. Most often a Budget is primarily thought of as cost allocations, but when combined with ideas regarding new business, you will often hear it referred to as a Plan. Once approved, the Budget Plan never changes. It is ‘set in stone’ for the duration of your selected time period.

A common misconception is that planning is an annual event. Budgeting: setting targets and allocating expenses; true, but what happens next? As life goes on, rates fluctuate, new opportunities for growth appear, and your ever-changing customer expectations must be managed. Your budget, as it was initially locked in, must die and be reborn accordingly.

There are several ways to get a better handle on your financial future and get your plan back on track to meet your goals.

For many, the art of planning feels counterintuitive, as its core is not accounting-based as much as it’s a sociological experiment. We use a planning model to simulate the environment and measure the ramifications of change on the balance sheet. However, the real test is anticipating the resulting business hinging upon your customers’ changing needs.

You hear over and over again that the one thing you can always count on is change. Change is what you hope for as a financial intuition. It’s what drives business and profits. Rate change, as we all know, can be one of the most volatile components of your business, and at the same time, the very heart of banking itself.

With the increasing number of financial planning software options available, it can be difficult to determine which one is the right fit for your organization. That's why it's essential to consider several key factors before making a decision. In this blog, we'll examine how Plansmith's planning suite stands out from the competition and why it could be the perfect choice for your financial institution.