It’s not all fun and games, but allocating funds with purpose can lay a foundation that allows your CU to build something great.
In many parts of the country, summer is fading away as fall comes in with the promise of cooler temperatures and school is in full swing. For businesses, fall is a time to take stock, look forward and think about the remainder of the year and “the year of the dog”—2018. For credit unions, this means budget allocation—the assignment of funding to each expenditure line.
Budgeting is a necessary evil and can sometimes become rather mundane. That is not to say no thought is put into budgeting but rather, nobody seems to break out the chips and salsa for budget meetings. It’s just not that kind of party; it’s work.
But, done right, budgeting is worth it.
Budgets that promote positive growth are those that are allocated with purpose. These are budgets that build a foundation, allowing you to build something great, like the Empire State Building, rather than a traveling circus show.
It is not enough to simply re-purpose (copy) last year's budget. Doing so may give you a solid framework to conduct business, but it will not generate any substantial growth. The reason? Credit union growth is not predictable. Over time, consumer spending, saving and investment habits change. Adaptation is necessary to spur growth. One of the best ways to do this is with purposeful budget allocation. Maybe you have a new product coming out, or maybe you want to focus more one particular demographic. Make sure you include those initiatives in your new budget.
So how do you allocate with purpose rather than burn your budget for the sake of using it up? There are a couple of things to keep in mind. One of them is a term you are familiar with. The other is something that has probably kept you awake at night during your leadership tenure. Let’s unpack this a bit further and explain.
Budget allocation for credit unions should ultimately be about growth and stability, but always with respect to net revenue. Viewing that as the heartbeat keeps allocation honest. Without strong net revenue, there will be no asset growth. This will affect things like operating expenses and credit losses. Your credit union will have to either lighten the load or encourage asset growth to keep net revenue healthy. Of course, the latter is preferred.
There are a few things you can do right now to see whether your budget is in line with current net revenue. First, go over each line item and compare it to past years’ budgets. Are there any blatant discrepancies? If so, look into them and find the cause. Chances are you will find one of two things: Either the expenditure in question cost more than anticipated or it did not produce as expected. Any item that is a cost drain or does not address productivity will have a negative impact on net revenue.
Once you find those items, take time to go through them and determine the underlying issues. Correcting them mid-year during allocation planning will keep net revenue strong and healthy.
The Hidden Heart Attack
So if we view net revenue as the lifeblood of credit union budget health, we can view this next topic as a heart attack: compliance. Even seeing the word might cause your heart to flutter unnecessarily. The Dodd-Frank Act saw the creation of the Consumer Financial Protection Bureau, which is this decade’s dominant watchdog for the financial services industry.
Compliance is a huge expense for credit unions. When approaching compliance and budget allocation, think of it this way: You can either deal with it now or be confronted with it later.
Dealing with it now means making sure all staff areas and systems are up-to-speed and in compliance. Pay particular attention to your forms. If you buy forms packages from a vendor, ensure they maintain compliance with state and federal regulations and integrate easily with your delivery systems.
A compliance examiner can walk through your doors at any time and levy a fine for the smallest thing. That’s why it is a good idea to mitigate any compliance concerns you have with budget allocation. Through allocation, you can meter out compliance maintenance costs during the year, rather than scrambling to find the dollars with each new rule change.
The best way to prevent a “compliance attack” is through regular maintenance. Look over areas of concern at your credit union and address them with your board. This way, everyone can be prepared to vote on and allocate funds properly.
The Perfect CU Maintenance and Prevention Vehicle
Budget allocation is necessary. But don’t spend for the sake of checking off one more board meeting item “boxes”—allocate with purpose. Make sure your budget serves to keep net revenue healthy, maintain stability and create growth. Allocate for compliance now to ease the burden of compliance costs later. (and keep you out of hot water with an examiner). Thoughtful time spent on budget allocation will yield great dividends later. It’s one more way to keep your credit union on pace with progress and the cutting edge of member service.
Richard Gallagher is the CEO of Oak Tree Business Systems, Inc. For more than 35 years, Oak Tree has provided forms, lending documents, and disclosures for credit unions in all aspects of operation: business, membership, home equity lending and consumer loans.