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How to Revitalize Financial Planning

Sep  26 
Danny Baker  Vice President, Market Strategy, Fiserv 

Meet the challenges of today by focusing on these four key areas of planning and profitability.

Sometimes, facing obstacles means finding a new path. As financial institutions battle their way through current economic challenges such as increasing interest rates, liquidity management and pressure on non-interest income, they have an opportunity to revitalize their financial planning and profitability processes for better outcomes.

This reexamination starts with focusing time and resources on areas that matter the most and can bring the most growth. As financial institutions assess their processes, four key areas rise to the top for concentrated strategic planning.


1.     Project Noninterest Expenses and Income

Start the financial planning and analysis process by identifying significant noninterest expenses and income.

For example, salaries and benefits make up a high percentage of the U.S. banking industry’s total noninterest expenses. As a result, many financial institutions project salaries, benefits and related payroll costs at the individual employee level.

That is the most accurate and flexible approach to payroll planning. It typically involves three key steps:

  • Identify the drivers for employee groups’ salary and payroll expenses, such as targeted global merit increases, bonus assumptions and payroll taxes
  • Apply those drivers and key assumptions to individual employees, creating a detailed salary plan to accurately project salaries, benefits and their financial effects
  • Account for any additional adjustments, such as employee transfers, early terminations or new full-time employee requests

Employee-level salary planning requires specific analytics tools. Banks and credit unions that pursue employee-level salary planning need appropriate security controls to protect employee data. Financial institutions should evaluate whether the effort is worth the additional accuracy.

Fee income should also be a focus area of noninterest income. Finance leaders can examine the best ways to grow income in the current margin environment. Many financial institutions have room to improve their noninterest income planning processes. Some fees and expenses depend on account projections or drivers from other accounts.

Linking projections from other accounts increases understanding and buy-in from managers and increases accuracy across the organization. For example, new loan assumptions can help determine origination fees and expenses. Service fees for deposits and early withdrawals or wealth management fees can also be linked to projected growth in their respective areas. Start with a thorough analysis of historical relationships to see where fee-based income projections could be connected.


2.     Use Project-Based Planning

Project-based planning is a best practice for noninterest income and expense planning. It’s typically used for larger projects involving numerous related expenses, but it has usefulness in strategic and tactical planning.

Project-based plans consider all of the operating and capital expenses required for a specific project across various departments. The plan provides a complete picture of project expenses, allows leaders to approve or reject related expenses and facilitates easier expense tracking throughout the year.


3.     Devise a Comprehensive Balance Sheet Plan

Many financial institutions are reconsidering 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 a large percentage of total income for most U.S. financial institutions, making balance sheet and margin planning a primary focal point in overall planning.

A comprehensive balance sheet plan prepares executives, senior managers and business managers to develop better growth strategies and understand the plan’s full financial and operational scope.

Most budgeting and planning tools support cash flow-based planning, allowing institutions to aggregate projected cash flows from existing business units to any level needed for balance sheet and earnings planning, including line of business, region, product or business unit. Cash flows from new income streams can be added over time and layered on top of existing business projections.

That approach enhances accuracy and agility for projections and allows financial institutions to analyze different scenarios or reforecast. The method helped many organizations navigate the effects of COVID-19; tightly calculated balance sheet data was adjustable for “what if” scenarios. They could see what was happening in their institutions more clearly and plan for what was happening around them.

The strategy calls for more sophisticated planning and modeling tools and saying goodbye to limited, spreadsheet-based planning.


4.     Align Plans With Growth and Profitability Goals

Financial institutions can combine their more accurate and agile projections with noninterest income and expense forecasts to establish comprehensive budgets for each business segment. With the right profitability and planning processes and tools, leaders can analyze the budget and adjust toward their growth and profitability goals.

Line of business and business unit managers should be equipped with specific targets, such as net interest margin, in addition to traditional growth, yield/cost of funds and profitability goals.


Apply Lessons Learned

Now is the optimal time to reexamine your financial institution’s planning processes and overall strategic and tactical plans. With lessons learned from the challenges of the past few years, financial institutions can make significant changes and find the best course forward.