Rolling Along

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Continuous budgeting becomes useful for changing times

By Vanessa Drucker

It’s a familiar scenario. You’re driving home in your car, and your GPS tracking device shows where you are. As you roll along, the flashing dot representing your car on your device’s screen moves in concert with your actual vehicle. Your progress is continually tracked, and your position is continually updated.

It’s a real-time feedback loop—smartly communicated with quick-to-understand graphics—of your real-world location and circumstances.

By analogy, a rolling budget approach—taking spending and income monitoring beyond a static, one-time annual budgeting process—being adopted by more business organizations today, and the ongoing forecasting associated with it, works similarly, corporate planning experts say. As events unfold over time and new information becomes available, a rolling budget process allows an organization’s spending to react to continually changing real-world events.

Just as a driver is always looking ahead and responding to new terrain and changing realities, a rolling budgeting and forecasting process does the same, planning experts say. Often only minor adjustments are needed along the way, but occasionally a major turn is necessary to avoid a crash or to take advantage of a new found shortcut.

Achieving short- and long-term goals should not be hindered by blindly or rigidly sticking with an outdated plan or budget, suggests Craig Hartman, founder and CEO of Plansmith Corp. in Schaumburg, Ill., that provides integrated planning and budgeting systems. “Static planning falls into a trap of using a milestone like year-end, but life is continuous,” he says.

Continuous budgeting is helping community banks stay nimble and on top of overall profitability in today’s competitive and faster-paced financial services industry, planning experts say. It allows more community banks to shift, slow and cut their spending—or potentially increase spending—as events require.

Benefits of a rolling budget are faster and more informed decisions based on keener insight into the bank’s future financial prospects, consultants say. The key to success is enhanced flexibility for seizing opportunities that might have been missed in an original annual budget. Overall profitability, income growth and efficiency ratios are more important to review and manage on an ongoing basis throughout the year than line items.

Another important feature of continuous budgeting is its ability to keep managers more accountable for their activities and the progress of their initiatives. “It also empowers executives to make suggestions in real time,” explains L.T. Hall, president and CEO of Resurgent Performance Inc., a consulting firm in Alpharetta, Ga. Smaller businesses, such as community banks, can take advantage of continuous budgeting most, by being able to update and take corrective actions more quickly than larger organizations, he says. Once the process and tools of continuous budgeting are in place, community banks can reap ongoing benefits.

Software technology is pivotal to allowing more banks to adopt a continuous budgeting process. Today’s budgeting and forecasting systems provide dashboard-type reporting that senior executives can check daily or weekly. The systems provide updates to better manage margins, track and gauge revenues, and control expenses. They also give banks timely information to follow more competitive decision-making processes, such as risk-adjusted asset and liability pricing, Hall says.

“A good forecasting process enables [banks] to adapt quickly to those [economic and marketplace] changes, rather than focusing on the rearview mirror,” he suggests.

Stepping it through

A continuous budgeting process is executed in a series of logical sequential steps, consultants say. It involves gathering the necessary data, interpreting the data and then reacting to it.

“Static planning falls into a trap of using a milestone like year-end, but life is continuous.”
—Craig Hartman,
planning and budgeting expert

The first step is to gather information on actual results, compared with what has been anticipated in the annual budget plan or forecast. Important metrics include the number of opened and closed customer accounts, data on loan-pricing changes, liquidity and funding costs, loan-to-deposits ratios, and net interest margin. Monthly credit-quality metrics would likely include collection rates, delinquency levels and variances on planned interest income and expenses.

The next step is to take a deep dive into the data on actual results to interpret what internal or external factors might be driving variances in a budget or determining unexpected results toward overall profitability or particular goals. “You might actually be doing everything right, but still be struggling,” says John Orlando, chief financial officer at budgeting and planning software provider Centage Corp. in Natick, Mass.

The final step in a continuous budgeting process is deciding what adjustments to make to improve or mitigate unexpected events impacting an overall budget or goals. At this stage, information should be shared with all participants to keep the chain of input and assumptions complete. Then a couple of iterations of possible adjustments should be run as with any budgeting process, to roll together all contributors’ input and mesh it with an overall financial result.

“It usually takes several iterations to ensure everyone is on the same page,” Orlando says, “especially if senior management is giving guidance to take a certain direction.”

Real-world adjustments

A continuous budget could help your community bank make adjustments based on new information that emerged, planning experts say.

For example, suppose your community bank were putting together a strategic plan to grow two major lines of business, such as a commercial factoring service and jumbo mortgage lending. Where would the best opportunities lie? A few months after income assumptions have been made for those projects and budgets have been established, one of these lines may not be living up to budgeted expectations. The reasons could involve a change in the local economy, changes by competitors or even some faulty initial assumptions.

“Do you plow on?” Orlando asks. “Or do you reallocate scarce resources and take advantage of the chance to make your better-performing line even stronger?”

Rolling budgets do pose some challenges. Annual budgeting is a long-established practice, with many loyal adherents. It takes time and effort to construct a budget, so participants may become overly invested in and protective of their own initial assumptions. Nothing, however, prevents a forecast from remaining in place as long as up-to-date assumptions stay on track, Orlando points out.

Several pitfalls can trip up the best intentions. It is important to watch for signs of a silo mentality. Implementing and following any budget—rolling or static—takes buy-in from the whole organization so that the operational teams remain aligned with finance and pull their workloads in the same direction. Finance must understand the sales philosophy, in terms of pricing and product strategy.

For any community bank considering adopting continuous budgeting, Hall advises to keep a pragmatic outlook and avoid striving for too much precision. “You don’t need excruciating detail, when the juice isn’t worth the squeeze,” he says.

Vanessa Drucker is a financial writer in New York City.