How to Anticipate Changes and Adapt Financial Plans
Regulatory pressures are forcing credit unions to operate under tighter margins and to reduce cost structures, all while striving to continue to deliver competitive, high quality products and superior customer service to their members.
These pressures require credit union finance teams to utilize more agile processes to analyze and manage balance sheet composition, as well as how they evaluate the impact of operational risk on the institution.
To meet these new demands, today’s credit unions must re-evaluate their financial management processes with the goal of creating a stronger link between finance strategy and execution. Finance must lead the charge to effectively define, communicate and align the entire institution around truly transformational activities. To enable this linkage between finance strategy and execution, credit unions must support three areas of strategic planning: strategy formulation, strategy alignment and performance monitoring.
Where do we want to go?
Strategy formulation should include determining key profitability drivers, performing “what if” modeling and scenario analysis to better prepare and respond to possible changes and allocating capital dollars to projects that most closely align to corporate strategy and contribute to the bottom line.
To achieve this goal and to help drive informed business decisions, it is imperative for credit unions to have a clear picture of how members, branches and products contribute to the bottom line. All of these components of strategy formulation are critical to develop a solid plan, but without execution, strategy formulation is a useless exercise.
How do we get there?
Once the strategy is defined, the next step is to execute the plan that best aligns with the strategy. Credit unions should focus on two approaches to assess the impact of the defined strategies:
Driver-based planning leverages relationships between volume and rate drivers across margin and departmental/product level plans. Any changes to variables or adjustments made to strategic initiatives can be made globally so that alternative scenarios can easily be processed and analyzed.
Initiative-based planning incorporates the initiative as a planning dimension, which allows the initiative to be modeled in detail across departments and incorporated into the baseline budget model in an incremental manner, providing a clear view of the impact that each initiative will have on the final budget.
Do our results match our plans?
To effectively manage defined strategies and financial plans, they must be continuously monitored and action should be taken where appropriate. There are three key techniques that credit unions can leverage to better understand how well they are executing against the defined strategy:
Rolling forecasts, which, when updated throughout the year instead of annually, allow organizations to monitor and trend performance against established financial targets and react quickly to competitive and market forces.
Role-based reporting directs end-users to the right level of information by role, eliminating information overload.
Alerts proactively highlight where variances exist and provide the ability to collect comments and action plans, creating a closed-loop reporting cycle across all levels.
Thriving in this new norm requires sophisticated performance management solutions that empower credit unions to be more responsive to their institution’s needs and navigate the challenging environment. However, many credit unions lack the technology, processes and frameworks needed to support strategic planning. By putting these processes in place, credit unions can quickly identify areas where strategies are underperforming and course correct, giving them a clear competitive advantage over their peers.
A platform approach that integrates multiple financial planning and performance monitoring processes such as multi-year financial forecasting, capital planning, detailed budgeting, strategic planning and financial and managerial reporting – enables credit union executives to produce clear directives in the form of actionable initiatives that are focused around growth, cost containment and process improvement. It is imperative that these functions are integrated within one platform. Otherwise, credit union’s run the risk of producing fragmented data.
Volatility and competitive pressures in the market are here to stay, so credit unions must clearly define the goals and objectives of their institutions and all the activities that surround them, allowing executive stakeholders to create various initiatives of all shapes and sizes.
Ken Levey is vice president, financial institutions, for Axiom EPM. He can be reached at 503-977-0234 or firstname.lastname@example.org.