Has Budgeting Become a Lost Art?

Posted by John Mateker on Jul 29, 2015

Way back in early 1983, I was promoted to my first management position in a bank, Research and Adjustments Manager. It was an exciting time for me. I remember being very proud of the fact that I had moved into a managerial role faster than most of my peers after graduating from college in mid-1982. That was also the first time I learned about budgeting and the importance it can have on your knowledge of your operation or department.

My promotion was announced that first week of January to the department. A few days later, my manager (the VP of Check Processing) handed me a stack of green bar reports, informing me that this was my December financial report. I must prepare a report of budget variances for the month, quarter, and year-end of actual dollars spent versus the budget for those periods. When I was a management trainee, I never saw these reports, nor even knew we had to do these types of reports. For this bank, we had to report all variances of $500 or greater actual to budget, both positive and negative. I had 3 days to prepare a written report (on a typewriter). He smiled as he told me about this responsibility and welcomed me to the area of management reporting.budgeting

This initial experience taught me about the wonderful information contained within financial reports that can help managers reduce costs. Of course cost reduction is very important in financial institutions as a means to drive down the efficiency ratio. In an earlier blog, I talked about the role the efficiency ratio plays in organizations. Quite simply, the lower ratios equal greater efficiencies. And in another blog, we introduced the concept of using the general ledger to find non-interest expense issues that could result in savings to the bottom line. This blog is a bit different in that I believe organizations often fail to utilize their own budget processes in an efficient manner to help them manage the income and expenses.

Having spent time in several clients now, I was amazed at the lax nature in their approach to budgets, functional profitability, and variance reporting. While these organizations did do some reporting to their boards, and perhaps some quarterly reporting, individual department managers were not required to report on their variances; nor did they have a lot of input into the budgets for their own functions. These organizations did not have branch profitability reporting, and departmental managers had very little knowledge of how their functions might impact their institutions financially. As someone who grew up in the industry working at banks ranging in size from a little less than $1 billion in assets to larger regional players, the budget and budget reporting were regular events that provided strong insights into the functions I managed.

After spending time with clients and meeting with managers, I question whether financial reports are useful tools or not? I have a strong opinion that budgets and the reports they generate can help us manage our day-to-day operations more efficiently and effectively. When I managed operational groups, I found the monthly financial reports to be exceptionally useful.. Filling out variance reports was never a fun experience, but they did tell me where we might have issues or problems lurking within my groups, and could help me to plan for changes. Understanding the details of my financials helped me manage the overall performance of the group. With access to my financial numbers, I could calculate the cost of my products at a unit level and begin to build what-if scenarios without the use of “decision support systems."
Managing my budget made it much easier for me when planning and budgeting occurred each year. Even with a zero-based budget process at several FI’s, it was much easier to do when you understood your costs so well. Understanding my costs made it easier to both add and reduce staffing requirements for functions. Along with the cost data, I also relied heavily on productivity reporting (another blog topic for another day).

For the institutions that do not have their department managers performing this task, how would they ever be able to rely on those managers to find cost reductions or reduce staff? And if they do not have strong budgetary responsibilities, it makes it much harder to ask your managers to build standards in their own operations. Highly efficient organizations manage their performance, including their financial performance, and expect their management personnel to manage this at the cost center level. In organizations like this, each manager is basically running their department or function as a business. In some cases those businesses are simply cost centers, where they manage the overhead of the organization or through transfer pricing; seeing the revenue of our services in various other areas within the institution. Either way, the management team understands the cost of doing business and how to better manage change.optimization

For those FIs that have chosen not to produce a full monthly income statement for their branches, In my opinion, they are missing out on a wonderful opportunity to understand whether or not a branch is really generating a profit. Perhaps with transaction volumes in decline, they are afraid that if one or two branches are truly unprofitable, then they may have to make some very difficult decisions. At the end of the day, the branch is a business and should be treated like a business. At several FIs where I worked in the past, these organizations knew the breakeven point in terms of deposits, loans, and customer base for every branch in the network. At one large regional player, this was more than 1500 branches. If you do not know this information, then how can you as a senior or executive manager ever set accurate goals for branches?

The general ledger can be used as a tool to find where expenses might be that could lead to improvement opportunities. The same is true when an active financial management plan in place that requires management staff to manage their budgets, report on variances, and take ownership of the financial health of their organization. If every manager owned their own financial reporting and budgeting, then when asked to make organizational changes as markets fluctuate, they will have the tools available to make intelligent and correct decisions.


John Mateker

Vice President
Hometown: Houston, Texas
Alma Mater: St. Mary’s University
Sports Fan, especially the San Antonio Spurs. Enjoys traveling and visiting historical sites, Reading, Early morning elliptical sessions.

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