To spin the words of a one-time Washington oracle, there areknown knowns, known unknowns and unknown unknowns – and for creditunions, they all converge in Q3. That's because the third quarteris when most institutions set their annual budgets. In recentyears, the challenges this brings to credit unions have grown,regardless of how well they try to line up their projections forthe coming year.

Budget setting is a difficult task for any business due to theproblems inherent to making decisions based on imperfect andincomplete information. Projections often end up being based onpast results, which may be accurate enough during periods ofstability, but the future tends to hold surprises – hence, theproblem of unknown unknowns.

Why Budgeting Is Now Harder for CreditUnions

For credit unions, the challenges are compounded by a number ofindustry-wide factors that have emerged in recent years. Theseinclude shifts in the regulatory environment affecting investments,compliance and risk as well as uncertainty about regulatoryexpectations going forward.

Another area of uncertainty is the potential effects of risinginterest rates, which offer credit unions both opportunities andrisk. Loosened underwriting standards, riskier loan portfolios,intense competition for loans, and growing concerns about datamanagement and reporting are also issues that complicate budgetforecasts.

Meanwhile, generational shifts and the speed of technologicaladvancement are driving systemic changes throughout banking.Although millennials are wedded to continuous technological change,many credit unions don't have the capacity for constantre-invention. Conservative and risk-aversive by nature, all banksare likely to face increased pressure to budget for new tools andplatforms in coming years.

Special Concerns for Credit Unions

For credit unions, these challenges are magnified by the impactof two issues that reflect their unique role as alternatives to thebig national banks.

One of these challenges has been how to drive members totransfer their deposit accounts. Credit unions may be able toidentify customers and prospects who have accounts with otherinstitutions, but they often find it difficult to motivate theseconsumers to consider a new banking partner.

Choosing a different bank for a mortgage or car loan has provento be less of a hurdle for members, since the value offered by acredit union can usually be quantified by more attractive interestrates or better cash flow requirements. But when it comes to theirchecking and savings accounts, many consumers do not seem to findthe benefits or value offered by credit unions sufficientincentives to counter the perceived hassle of changing financialinstitutions.

Many credit unions are also struggling to compete with theirlarger national rivals when it comes to filling entry-levelpositions for tellers, banking assistants and loan processors. Thechallenge has been to attract quality candidates for thesepositions and retain them to provide the continuity andinstitutional memory needed to differentiate any organization witha strong community presence.

How Not to Approach Budgeting

Unfortunately, there are many examples of less-than-optimalresponses to the budgeting pressures that are bearing down oncredit unions.

Driving them is often the challenge of getting accurate numbersto use when making projections. Collecting data for submission tothe budgeting process may not be a high priority for executiveswhen they are struggling to find solutions to today's problems.

The risk is that projections will fail to make appropriate riskadjustments, resulting in budgets that are overly optimistic.Expense growth, change factors and basic uncertainty are too oftenminimized; growth opportunities are over-emphasized, andconfirmation bias beats out the organization's real needs andlong-term strategic plans. Instead of understanding theorganization's actual capacity to execute on plans, budgets thenreflect unrealistic best-case scenarios.

How to Measure Success

For credit unions, ROI remains the final determinant of success,and staff accountability can be critical to achieving positiveresults. To measure the success of their budgeting experiences,credit unions can tie each initiative to an executive and trackperformance metrics throughout the year. The effectiveness of thebudget process is revealed by how close actual results come toprojections.

The goal is to build a budget that is timely, challenging,realistic and close to actual results as the year unfolds. This maynot resolve the problems of unknown unknowns, but an accuratebudget remains the best forward-looking tool for healthy creditunions.

Best Budgeting Practices

1. Stay focused on your strategic objectivesand do a thorough scan of the options that can deliver on thoseobjectives. Remember that each initiative must have a ROIcase, and actually build out that case for each one.

2. Use real-world reference data for thedrivers of revenue and expense, and adjust for risks and unknowns.Take into account both historical trends and future projectionswhen setting assumptions.

3. Get input from as many departments aspossible but create a uniform set of expectations for howthat data is to be submitted. Start the data collection processearly enough to give others adequate time to contribute.

4. Don't hesitate to be a demanding negotiatorwhen dealing with vendors and partners. Be sure your partner hasaccepted your budget goals and that they are as committed as youare to achieving them.

Cisco Sacasa is the CFO of Buzz Points. He can becontacted at 512-493-0713 or [email protected].