Building an accurate forecast relies heavily on your historical data. But it’s the hands-on business knowledge you apply to the forecast that helps make it a more predictive and actionable roadmap for your financial institution.
Before you start your forecasting process, take the time to gather updated information. For example, you should:
1. Consider future business decisions
What, if anything, may occur over the next 12 to 18 months that could help or hurt your institution’s performance? For example, you should know if there are plans to open or close branches, sell or purchase property, launch a new product offering, or grow or shrink the workforce.
2. Check in with the board
The board of directors may have plans that will affect future financial targets. They could include strategically resizing the company, offering it for sale, or planning an acquisition.
3. Contemplate interest rates
It’s important to think critically about what rates will do in the future. Historical data won’t be accurate enough for your forward-looking forecast. Additionally, as rates change, what will happen with the loan portfolio? Are there large loans that will renew or reprice? What’s in the loan pipeline?
4. Evaluate large expenses
Review expenses to determine if you have any new one-time or recurring expenses, or whether you have expenses that will roll off the books.
5. Confirm financial goals
Set the goal for your forecast based on the most current financial goals of for your institution. Surprisingly, this step does indeed get overlooked.
6. Set assumptions
Use the assumptions template in Banker’s Dashboard to set numbers or percentages for metrics such as charge-off ratio, risk-weighted assets/total assets, min tier 1 leverage ratio, targeted ROA and ROE, and more. You can make these assumptions at a macro (consolidated) or micro (cost center) level and apply them to your forecast.
7. Adjust the balance sheet
Using your Dashboard, adjust any numbers necessary to reach the goals of your forecast. Look for breaks in trends and normalize them by entering data manually.
8. Fine-tune the income statement
Work your way through the income statement in Dashboard until you have adjusted any percentages necessary to reach your forecast goal. Just like you did with the balance sheet, look for breaks in trends normalize them by manually entering data.
The sleuthing you do ahead of the forecasting process will help ensure that your forecast is accurate and helps guide you toward your goals. A critical step in the performance management cycle, the process of forecasting often reveals new financial opportunities–especially in the net interest margin. Take a close look when you do your next forecast.
If you would like to like more information about forecasting with Banker’s Dashboard & Credit Union Dashboard, there is a dedicated team ready to help.
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