Mitigating Risk in an Uncertain Financial Climate: How CFOs Can Plan for the Future

The financial industry faces powerful waves of disruption: Bank failures, rising interest rates, high inflation and a sluggish economy. Together, these circumstances have reshaped the sector and created a volatile climate.

In response to these factors, as well as regulatory pressure and dwindling public trust in the nation’s financial institutions, public sentiment has waned, echoing attitudes last observed during the 2008 banking crisis. One recent poll from The Associated Press-NORC Center for Public Affairs Research indicated just 10% of U.S. adults have high confidence in the country’s banks, down from 22% in 2020.

In this environment, it’s critical for CFOs and other credit union leaders to ensure that they can plan for the future, no matter the circumstances. While credit union leaders do not have control over the macroeconomic factors that can impact their institutions’ performance, scenario planning can help them predict and plan for a variety of possible futures.

Prioritizing Scenario Planning

Scenario planning enables credit union leaders to mitigate risk and prepare for market volatility. This method of strategic financial planning allows institutions to analyze a range of possible future events and determine how best to move forward with the organization’s long-term financial and strategic plans. Institutions can use scenario planning to evaluate the impacts of external forces, such as rising interest rates or increasing expenses, as well as internal forces, such as fluctuations in staffing levels.

With scenario planning as a crucial part of organizational strategy, CFOs can better understand how internal and external factors may impact their financial performance and take a proactive approach to long-term planning.

CFOs and other credit union leaders should take the following steps to implement effective scenario planning:

1. Identify key drivers. A solid scenario planning approach considers short- and long-term internal and external drivers that can impact the business. For instance, in today’s economic environment, leaders should monitor the continually rising inflation rate as well as stock fluctuations. From an institution-specific perspective, credit union leaders should assess drivers like loan growth expectations and credit quality assumptions that may impact the future profitability of their institution. With key drivers determined, leaders can begin to build out a range of potential scenarios. The scenarios should mix and match assumptions – such as inflation, interest rates and labor expenses – so that the institution can view a wide range of possible future situations.

2. Make it a collaborative effort. Credit union leaders should bring in subject matter experts from across the organization to review key drivers and plausible scenarios, and make adjustments as necessary. This can help confirm the severity of potential scenarios, secure buy-in from key stakeholders and establish a plan with minimal vulnerabilities.

3. Quantify the impact. With key drivers identified, credit union leaders can execute the scenario analysis, utilizing tools such as spreadsheets or more advanced scenario planning software solutions. This will allow CFOs and other leaders to understand the full financial impact of each scenario, including the impact on key performance indicators such as profitability. With this knowledge, credit union leaders can create more informed risk mitigation strategies and long-term plans.

4. Make your forecasting schedule flexible. During challenging times, annual or quarterly forecasting may not be enough. Consider creating monthly projections to help your organization remain nimble and adapt to constantly fluctuating economic factors. During highly uncertain times, some institutions may even look at performance daily to continually monitor how trends will impact key performance indicators.

5. Understand the impact of strategic responses. As you model scenarios and analyze how external forces may impact your institution, your credit union may suggest strategic responses to mitigate potential risks. You can use the same planning strategy to model how internal initiatives, such as reducing or pausing salary increases, will financially impact your organization and determine if they will have the desired effect.

Taking a Data-Driven Approach

Especially in an uncertain financial climate, implementing a data-driven strategy for long-term planning is critical. According to a study from Forrester, data-driven businesses are 16 times more likely to significantly surpass revenue goals than those that don’t leverage data. Effective scenario planning hinges on accessing timely and accurate data. While many financial institutions still use spreadsheets for scenario modeling, this approach often requires them to rely on preset external drivers rather than institution-specific data. With a more robust solution that incorporates organizational financial and operational data, CFOs can significantly increase the accuracy and range of their analyses.

When done well – and often – scenario planning doesn’t just protect financial institutions from challenging times; it equips them for a successful future. Credit union leaders must consider it a critical tool in their toolbox to navigate today’s challenges and make the most out of potential opportunities.

Eric Wheeler is Director, Product Management at Syntellis Performance Solutions, now part of Strata Decision Technology, and is based in Kansas City, Mo.