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

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

Why Budgeting Is Now Harder for Credit Unions

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

Another area of uncertainty is the potential effects of rising interest rates, which offer credit unions both opportunities and risk. Loosened underwriting standards, riskier loan portfolios, intense competition for loans, and growing concerns about data management and reporting are also issues that complicate budget forecasts.

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

Special Concerns for Credit Unions

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

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

Choosing a different bank for a mortgage or car loan has proven to be less of a hurdle for members, since the value offered by a credit union can usually be quantified by more attractive interest rates or better cash flow requirements. But when it comes to their checking and savings accounts, many consumers do not seem to find the benefits or value offered by credit unions sufficient incentives to counter the perceived hassle of changing financial institutions.

Many credit unions are also struggling to compete with their larger national rivals when it comes to filling entry-level positions for tellers, banking assistants and loan processors. The challenge has been to attract quality candidates for these positions and retain them to provide the continuity and institutional memory needed to differentiate any organization with a strong community presence.

How Not to Approach Budgeting

Unfortunately, there are many examples of less-than-optimal responses to the budgeting pressures that are bearing down on credit unions.

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

The risk is that projections will fail to make appropriate risk adjustments, resulting in budgets that are overly optimistic. Expense growth, change factors and basic uncertainty are too often minimized; growth opportunities are over-emphasized, and confirmation bias beats out the organization's real needs and long-term strategic plans. Instead of understanding the organization's actual capacity to execute on plans, budgets then reflect 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 positive results. To measure the success of their budgeting experiences, credit unions can tie each initiative to an executive and track performance metrics throughout the year. The effectiveness of the budget process is revealed by how close actual results come to projections.

The goal is to build a budget that is timely, challenging, realistic and close to actual results as the year unfolds. This may not resolve the problems of unknown unknowns, but an accurate budget remains the best forward-looking tool for healthy credit unions.

Best Budgeting Practices

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

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

3. Get input from as many departments as possible but create a uniform set of expectations for how that data is to be submitted. Start the data collection process early enough to give others adequate time to contribute.

4. Don't hesitate to be a demanding negotiator when dealing with vendors and partners. Be sure your partner has accepted your budget goals and that they are as committed as you are to achieving them.

Cisco Sacasa is the CFO of Buzz Points. He can be contacted at 512-493-0713 or fsacasa@buzzpoints.com.

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How Successful Credit Unions Tackle Budgeting Challenges

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