Operating Assumptions and the Great 2021 Budget Challenge

Budget season is among the year’s most stressful and aggravating times under the best of circumstances. Layer on our current uncertainty regarding the economy, public health and election outcomes and the challenge begins to feel insurmountable. With most credit unions entering their peak of 2021 planning, leaders may be reasonably questioning the value of an exercise seemingly less tethered to reality than usual. Let’s consider how to get the most from a necessary process in these difficult times.

In order for a budget to have practical value, it must be based on a set of common assumptions across all functional areas. For instance, it does no good for sales to budget revenue for a new product that developers have assigned no resources to build- or IT to implement- until December. It sounds basic, but it’s remarkable how often such disconnects crop up.

One of my former employers (not a financial institution) maintained a set of Operating Assumptions to keep all departments in sync. This was a painstaking document running dozens of pages detailing various initiatives and their functional interdependencies. In theory it was updated year-round, but naturally it received the most attention at budget season. A less exhaustive version of this document could be highly valuable for credit unions- not only as a budgeting tool, but as a strategic conversation starter.

Despite all the noise, there are a few 2021 assumptions most credit unions can safely make. The depressed interest rate environment shows no sign of recovery, which will inevitably squeeze revenue. On the other hand, the accelerated shift toward online and touchless payments should provide a boost to debit interchange revenue- though not by nearly enough to offset the interest margin squeeze. (For CUs with their own credit card portfolios the situation is more complex- volumes may be up, but outstanding balances are down and delinquencies pose a looming threat.) On the investment side I’d argue that bolstering the CU’s digital offerings and presence has to be the top priority- but this is more a matter for internal consensus than an external factor.

From there the crystal ball gets murkier, but it’s no less important to tee up the questions and agree on a planning scenario. Will all branches reopen, and in what form? Will capital spending be required to equip branches for the “new normal”? If call center staff continues to work from home, is new equipment required to optimize their productivity? Will re-training be necessary as skill set needs shift to accommodate members’ evolving banking patterns? More fundamentally, if revenue is poised to decline, how much is available to spend while remaining profitable?

Anyone who claims to know what our operating environment will look like next October is kidding themselves. While nearly all banks and credit unions build annual, calendar-year budgets, some may have the latitude in their governance to take a different approach. The company I mentioned above used to budget in four-month increments; it’s more work overall but enables more accurate (albeit short-term) assumptions. If there’s ever been a time when a partial year budget approach made sense, 2021 is it.

The key takeaway, however, is the need to agree across the organization on a shared set of assumptions. Here’s another common theme for 2020- it’s a difficult conversation, but a conversation worth having.