4 Focus Areas to Maximize COVID-19 Budgeting Efforts


As the world eagerly awaits a post-COVID-19 reality, credit union finance leaders should seize the opportunity to make improvements in their budgeting processes today. It starts with an honest assessment of whether your institution spends time, energy, and resources in the most impactful areas.

Looking to 2021, credit union leaders should take a step back and reassess their current budgeting and planning processes to ensure they focus time and resources on areas that matter the most to their institutions. Doing so enables your institution to better face both the challenges that you can see and the unknown challenges that lie ahead.

To get started, concentrate your efforts in these four keys areas:

  1. Balance sheet planning
  2. Non-interest income/expense
  3. Fee income
  4. Project-based planning

Balance Sheet Planning

Organizations should first consider the level of detail needed for balance sheet planning to support targeted balance sheet growth, net interest income plans, and capital needs. Net interest income comprises about 70% of total income for most U.S. credit unions, and as much as 80%-90% for some — making balance sheet and margin planning a primary focal point in overall planning. Devising a comprehensive balance sheet plan will best equip executives, senior managers, and line of business managers to develop better growth strategies and to understand the full financial and operational impacts of the plan.

Finance leaders have a few options for projecting balance sheet and margin, but we recommend performing cash flow-based planning within your budgeting and planning system. This allows institutions to take projected cash flows for all existing business instruments and aggregate them to any level needed for balance sheet and earnings planning, includingline of business, region, product, or even the business-unit level. In addition to modeling cash flows for existing instruments, cash flows from new volumes should be added over time and layered on top of these existing business runoff projections (Figure 1).

This approach provides enhanced accuracy for projections that allow credit unions to analyze different scenarios or reforecast, which we’ve seen often as organizations analyze the impacts of COVID-19.

Projections can be combined with non-interest income and expense forecasts to establish comprehensive budgets for each segment of the organization. Leaders then can analyze the budget, verify whether it meets strategic goals, and make adjustments to achieve their organizations’ growth and spread goals.

We also recommend forecasting net interest margin by including projected funds transfer pricing (FTP) rates and associated transfer credits and charges, and then applying those credits and charges against the projected interest income and expenses for specific instruments. This approach provides line of business and business unit managers with specific net interest margin targets, in addition to the traditional growth and yield/cost of funds goals.

Non-Interest Income/Expense

Finance leaders should also identify the biggest impact areas for non-interest income and expenses. Over the past three years, salaries and benefits have grown to nearly 50% of total non-interest expense for the banking industry. As a result, we have seen many credit unions begin to project salaries, benefits, and related payroll costs at the individual employee level. This provides the most accurate and flexible approach to payroll planning, and typically involves three key steps:

  • Establish high-level drivers for various employee groups related to salary and payroll expenses, such as targeted global merit increases, bonus assumptions, and payroll taxes
  • Apply those drivers and assumptions to individual employees to generate a detailed salary plan modeled at the employee level, providing an accurate projection of the financial impact
  • Account for any additional adjustments needed, such as employee transfers, early terminations, or new full-time employee (FTE) requests

To safeguard employee data, organizations must have appropriate security controls. Finance leaders also need to decide whether to allow managers to adjust targeted merit increases or bonuses for greater accuracy and whether to import employee-level data annually or monthly to support additional payroll reporting and analysis.

While we strongly recommend employee-level salary planning, it may not be the best option for all. Assess whether you have the data and tools needed, and whether the effort required is worth the additional accuracy.

Focus on Fee Income

In evaluating fee income, finance leaders should examine the best ways to grow income in the current margin environment. Many institutions generated additional fee income from the recent Paycheck Protection Program (PPP) and increases in mortgage refinance business; however, these fees may quickly dry up, and institutions should consider focusing on growth around additional fee-based services to make up for continued margin compression.

Credit unions should also look to improve their non-interest income planning processes. In the planning process, fee income can be projected from other account forecasts and drivers for improved accuracy and efficiency. For example, new loan assumptions can serve as a driver to determine origination fees and expenses. Service fees for deposits and early withdrawals or wealth management fees also can be linked to projected growth in those respective areas.

Certain fees and expenses depend on account projections or drivers for other accounts. Linking these projections will help increase understanding and buy-in from managers, leading to increased accuracy in your projections. Thorough analysis of historical relationships can be the first step in the process.

Project-Based Planning

Another best practice for non-interest income and expense planning is to use project-based planning whenever appropriate, typically for larger projects that involve numerous related expenses. Project-based planning involves evaluating all operating and capital expenses required for a specific project across various departments.

Project-based planning provides a complete picture of project expenses, allows leaders to simultaneously approve or reject a project and related expenses, and facilitates easier expense tracking for approved projects throughout the year.

Now is the optimal time to reexamine your organization’s planning processes — and its overall strategic and tactical plans — and make significant changes to determine the best course forward for your institution.

Bryan Ridgway is a Senior Solutions Engineer for Financial Institutions at Syntellis Performance Solutions.

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