What’s New?  

Many of our readers are familiar with our stance on budgeting -- it takes too much time, is often flawed, and as a result, creates little value.  Done properly and efficiently, budgeting is an extremely valuable exercise.  Recognizing this, we have developed a methodology called Budgeting for STAKEHOLDERS.

We have found that clients who do a good job of budgeting successfully manage the expectations of their board and employees alike.  They also have more consistent and defendable STAKEHOLDERS payouts (e.g., no accusations of “sandbagging” as the result of a large payout or setting expectations so high that no payout occurs).

Our budgeting methodology is comprised of three budgeting steps:  Contractual Cash Flow Budget, New Business and Offer Rate Budget, Non-Interest Income/Expense Budget.

• Contractual Cash Flow Budget:  Depending on the structure of the balance sheet, we know that between 50-85% of all net interest income for the upcoming year is under contract.  We define a contract as something you already know about.  For example, a loan will generate income and return principal based upon an amortization schedule (e.g., the contractual terms of the loan).  The same is true of investments, time deposits and borrowings.  We start by identifying the cash flow of each contract.  This sounds hard but it’s not.  We have a proprietary asset-liability software engine that “cash flows” each loan and time deposit contract individually (e.g., no portfolio aggregation like some popular ALM systems).  Our software evaluates hundreds of contracts a minute, resulting in an accurate and speedy contractual cash flow budget.

• New Business and Offer Rate Budget:  How much do you need to originate to grow your loan portfolio by 5.0% during the next year?  Don’t know?  We can tell you.  We already know your contractual runoff from the first budgeting step, so we use that information to help you set your sales and pricing targets (e.g., new business and offer rates).  You simply enter a growth rate or ending balance and we’ll tell you how much you have to sell each month to reach that target (we’ll even show you when an interest-only or balloon loan comes due).  You also enter an offer rate and we’ll tell you how much interest to expect (e.g., contractual interest plus offer rate interest equals total interest).  The result is better budgets to actively manage sales activity and pricing decisions which is what you do on a day to day basis.

• Non-Interest Income/Expense Budget:  This is the final part of the budgeting processes.  We provide you with recent months’ income and expense history so that you can more accurately project these amounts into the upcoming budget.

The logic of each budgeting step is clear, but what makes it easy is the software.  We have developed intuitive “point and click” software that allows users to develop budgets will little or no training at all.  You tell the software what you want to do and it loads the information into each month for you.  Since the software is in Excel, it will run on any Windows-based computer and the budgets can be easily exported into other systems.

The software also manages top-down and bottom-up budgets.  We can apply our three step budgeting process to any branch, department or individual (obviously, expense centers need only complete the non-interest income/expense step).  The software displays the variances between the top down and bottom-up budgets on a line item by line item basis.  You then decide which budget to adjust to eliminate the variance.

Finally, we can take the finalized budgets and use them to build your STAKEHOLDERS models, thus saving your time in this area as well.