Better Budgeting: Aim for the Moving Target

The market is uncertain, budgeting season is wrapping up and after all the iterations are complete, it leaves me to wonder…why do this at all?  Why do we spend so much time getting the budget correct when there is so much uncertainty? The targeted growth could be wrong, the product mix for what members need can change and/or the rate environment could shift. But then I remember a quote from Zig Ziglar that says, “If you aim at nothing, you will hit your target every time.”

Think about that. Without a target, we cannot possibly achieve the goal or even know which way to aim. The best possible target must be put in place to give us a clear starting point, a place to aim and a direction to focus. Even though it is quite possible your budget will be obsolete a few months from now, that does not mean the process should be skipped altogether or taken lightly. Without it, we cannot know where we want to go or that we are not meeting our goals.

Often times, credit union managers get frustrated with the budget process because it’s a known fact that there are endless variables, so your calculations will never be right. But the budget process is important and useful, particularly when we are examining the variances of the budget to the actual financials throughout the year. It keeps the goal top of mind, allowing our focus to be on achieving it.

Here are a couple encouraging thoughts I’d like to share about this process.

1. The budget process is a mix of accounting and finance. Accountants like to be exact, whereas the finance team works in the forecast environment. The two become intertwined within the budget, but both perspectives add value to the overall process. The budget process should be the best estimate of balance sheet growth, the rate environment and the product mix the credit union would like to achieve. This is a set-in-stone process that, as the year progresses, remains stable so that variances can be identified and explained. It is not an exclusive, siloed task of any one department, but should involve all perspectives to generate a reasonable estimate. A great example of this is the involvement of the marketing and sales teams. Without their knowledge and experience of the opportunities that exist in your footprint, other areas will not be able to accurately estimate growth potential. This can lead to unmet targets because the budget process did not involve additional teams’ input to identify both unleveraged opportunities, as well as unrealistic growth.
2. Once the budget is approved, the forecast process begins. This role, which is largely a finance team task, compares budgeted targets to actual results as the year progresses. As variances occur, the finance team might need to shift targets and create a new, adjusted plan. The adjusted plan is dependent upon why and how variances occur. Just like in the initial budgeting process, as the “reforecasted” budget is developed, it requires input from various stakeholders to ensure the revised target is within aim. As the timeline progresses, capturing the revised forecast is important, as it ensures a sound operational plan is in place to meet member needs.

If you are a smaller institution, don’t be discouraged; this process does not need to be daunting. Simple estimating tools can be leveraged in Excel to help forecast changes from both an earnings and liquidity standpoint. No matter how you look at it, whether you’re making the target or revising the target, the overarching idea of budgeting is to have a target to reach. It’s also wise, and a crucial element of this process, to keep retargeting in mind as you move toward your goal.

This coming year will be challenging, as it is expected to return to average growth patterns for both lending and share growth, while liquidity is also tightening and cost of funds remains uncertain. That means mid-course corrections could be more important than ever. Most credit unions are budgeting for low to moderate loan growth between three to six percent and share growth from two to seven percent. But despite the Federal Reserve’s easing on rates, the cost of funds will remain higher as the mix of shares shifts to term funding. Despite what others are projecting, think hard about your own niche and needs. What can you start offering or how can you highlight a current product that has growth potential?

No matter how you plan to finance your credit union’s goals in the coming year, the best actions you can take to create a fluid process are to identify your chosen target and path, get buy-in from all the necessary teams and be prepared to pivot. The balance sheet forecasts that I see with higher success rates are from organizations that have a defined target and carefully carve out a route to successfully achieve that goal. Try to hit your moving target in 2025 by paving your unique path and planning for adjustments along the way.

Melissa Scott serves as Vizo Financial’s vice president of ALM services. In this role, she is responsible for managing and providing ALM reporting, modeling, validation and consulting services to credit unions. She is also responsible for providing ongoing training, support and education for ALM users, management and their board of directors. She also holds the designation of certified public accountant (CPA) and is a member of the North Carolina Association of Certified Public Accountants.