This article will focus on the Top Cloud-based Financial Planning &Analysis (FP&A) Budget Tools for Banks.
The way things used to be – When I first got into building a budget for a bank, we were using Lotus 1-2-3 spreadsheets that were stored on 5¼ inch floppy disks. The spreadsheet was basically a 24-month trial balance for each branch or department. The first eighteen months contained historical balances. The remaining eighteen months were the forecast for the rest of the current year and budget for next year.
My team spent a couple of weeks typing all the historical numbers into the spreadsheets to get them ready for dissemination. I would go on the road training the managers on how to enter the data into the spreadsheets. Once the first pass was done, all the 5¼ inch floppy disks were sent back via interoffice mail.
My predecessor lost his job as the budget manager because he could not figure out how to add all the spreadsheets together for consolidations. I wrote a simple macro to help out and was given the job. If you thought the first pass was painful, the revision process was much worse. Thank goodness we only did the budget once a year!
Fast forward to today – Today, branch managers are getting daily balance sheets that compare to the day before with alerts on any type of big balance changes in customers’ accounts. They get a daily feed from their CRM on which customers need to be cross sold what product.
Asset/liability managers are notified daily on any loan or deposit account that was sold the day before that did not conform to pricing guidelines. If the Federal Reserve Board changes interest rates, the AL manager immediately cranks out a new forecast for the net interest margin and guidance on pricing for new loans and deposits.
If an employee leaves the company, human resources starts gathering resumes from LinkedIn to fill the position. Marketing is able to reach out to the ex-relationship officer’s customers informing them who the new contact will be.
With the explosion of information and the speed that it is available, financial planning and analysis (FP&A) tools for banks have had a hard time keeping up. They days of creating Excel spreadsheets, emailing them to the field for input, and receiving them back some time later no longer cuts it.
Modern FP&A – FP&A Trends wrote an excellent article that deals with the changes in FP&A entitled “Modern FP&A: Some Important Techniques, Methods and Concepts.” It says that the world of financial planning and analysis has changed drastically over the past few years. In order to deliver a competitive advantage to a company, modern FP&A function needs to be flexible and dynamic, be based on sophisticated analytics, examine life-time values of the products and services, and encourage business partnering.
Flexible and dynamic planning process – Rather than a trial balance by branch, a flexible and dynamic planning process needs to be multidimensional, driver-based, events-driven and activity-based. It uses advanced analytics and is not limited to the accounting period. It encourages collaboration between asset/liability, human resources, marketing, and the branches.
Following are popular techniques for the flexible and dynamic planning process:
- Risk-adjusted planning – The budget needs to take into account rising and falling interest rates, changes in economic conditions, home building trends. There are many threats to business as usual and banks need to be prepared to face each of them with a strategy.
- Scenario planning – One pass is not enough. You need to entertain a few what-if scenarios such as rapid growth, slow growth, acquisitions, branch sales, and new product launches. Many banks will prepare at least three scenarios and end up adopting parts from each in the final budget.
- Rolling forecast – monthly variances to budget need to be explained. Are the variances temporary or will they be ongoing? If ongoing, what is the forecast to fix bad variances. If the variances are favorable, how can they be replicated elsewhere in the bank? According to APQC, use of rolling forecasting can save a median of 25 days on a bank’s annual budgeting cycle.
- Activity-based budgeting and planning – just saying that your loans and deposits are going to rise by 5% is meaningless these days. How many account are you going to open? What rates will you be charging? If you plan on opening many more accounts, you will need to add an FTE or two. Without knowing your activities, you will not accurately plan revenues and expenses.
Sophisticated analytics – Banks have recognized that spreadsheet-based planning methods are inefficient and have moved to specialized planning and forecasting systems. FP&A budgets for banks should be based on models with formulas tied to fundamental business drivers such as loan and deposit production.
Many banks have adopted advanced predictive analytics in their FP&A budget models. In order to feed the predictive models, banks need a data warehouse that can store all the inputs as well as results of the models. The results of the predictive models typically serve as one scenario of the plan. The predicted scenario is then compared to the plans entered from the field and typically a blend is chosen for the final plan.
Life time values of products and services – Net interest margin (NIM) is the lion’s share of a bank’s revenues. NIM is earned over time. It is five times more expensive to acquire new customers than it is to cross sell existing customers. Banks know that if they can increase the cross-sell ratio of the customers from say 1.8 to 2.1, the long-term impact on profitability will be huge.
Therefore, banks need to know the profitability of their products to know which ones need to be the focus of cross-sell campaigns. They also need to be able to track customer profitability to know which ones need to be retained and which ones can be let go. In order to track profitability properly, banks are using Funds Transfer Pricing and Activity Based Costing tools.
Encourage business partnering – Collaboration is key to any successful budgeting for banks. You cannot rely on the branch manager to know interest rates, advertising plans, future interest rates, and FICA tax rates for salaries. So many parts of the plan these days need specialists that web-based planning is the most efficient way.
The asset/liability manager needs to review what all the branches are planning in new loan and deposit production in order to figure out what rates need to be. Marketing will use the same information to figure out what ad campaigns need to be run.
They all need to immediate access to each other’s input so the plan can rapidly evolve and change for various scenarios.
Need for a Cloud solution – With changes happening so fast, banks can no longer spend months implementing the latest FP&A budget tools. It is very expensive to buy hardware and software these days as the cost of maintenance and security keep going up. To be competitive and free up resources, banks are warming up to cloud based solutions that are renting Software as a Service (SaaS).
With Cloud, new technologies can be implemented with weeks versus months. The maintenance and security is all handled by the Cloud provider. All the various department and branch managers need is an internet connection to start collaborating.
Top FP&A Budget Tools for Banks on Cloud – The requirements are that the tool needs to be flexible and dynamic, have a data warehouse to store all the results, have Funds Transfer Pricing and Activity Based Costing, and be Cloud-based for quick implementation, easy collaboration, and fast technology changes. Here are some to consider.
Host Analytics Business Analytics by Host Analytics – Along with being Cloud based only, you can build ad hoc reports, collaborate with other users, create dashboards, drill-down, and make financial reports. Host Analytics also runs on an OLAP cube and thus limiting the use of other tools for visualization.
Domo by Domo Technologies – Domo is another Cloud-only solution that offers the same ad hoc, collaboration, dashboard, drill-down, and financial report features. DOMO appears to be using AWS Amazon Relational Database Service (Amazon RDS) and Hadoop to store data in the cloud data warehouse models.
BI360 by Solver, Inc. – BI360 is offered both on-premise and Cloud. If you start with on-premise, you can always migrate to their Cloud version later on. All the necessary ad hoc, collaboration, dashboard, drill-down, and financial reporting features are included. BI360 uses SQL Server for its database engine. This is a nice feature in that it will allow other visualization tools access. BI360 also includes Funds Transfer Pricing and Activity Based Costing which allows banks to calculate product and customer profitability.
Wherever you are on your FP&A budgeting journey, BI360 by Solver is enabling world-class decisions for banks. Solver, Inc. is happy to answer any questions and review BI360’s easy-to-use, Excel-based budgeting and reporting solution for banking users. Stop mailing back and forth budget templates for countless revisions and get a top FP&A budget tool for banks on cloud today.