The FSA’s March 2013 newsletter on governance highlighted that in many cases credit unions are not using their business plans as an effective management tool. In this article we look at some of the common issues with credit union business plans that prevent them from being an effective management tool:
- Period covered- It is worth highlighting that the regulator expects the plan to cover the current year and the next two financial years. While many credit unions have a 3 year business plan in place, it will not meet the regulator’s guidance unless it is updated each year. A plan which only covers the next 12 months will be of limited value to management due to the short time horizon.
- Projections and the plan don’t match– A common issue is for the narrative plan and the projections to tell two different stories. For example, the credit union may be writing about how it is planning for a 20% increase in membership but the projections show loans, shares and staff costs remaining constant. In these cases the projections could be misleading and therefore have a detrimental effect.
- Relationship between figures– The projections should take into account the relationship between figures. For example if you are predicting membership to double then you would also expect to see staff costs increase. Failure to do this can lead to unexpected costs.
- Lack of consideration of ratio compliance– The projections should examine whether the credit union will continue to meet the regulator’s capital and liquidity requirements. Where this is not the case the Credit Union will need to develop alternative strategies to correct the problems and these should be built into the plan.
- Lack of Sensitivity Analysis/Scenario planning- In addition to the projections the credit union should include sensitivity analysis or scenario planning. These tools look at what would happen to the projected figures if certain factors changed. This can help the credit union assess its exposure to risk and plan for the future.
- Wishful thinking– In many cases projections are overly optimistic. Unrealistic projections are of little or no value and it is therefore important that the assumptions and projections are realistic. If there is likely to be future problems then the credit union needs to fully consider the issues and plan for how it will deal with them.
- Plan gathering dust– The best business plan in the world is of no use if it is put on a shelf somewhere and not used as a management tool. The plan should be used as a management tool and performance compared to the business plan on a regular basis.
If you require any assistance with your business plan please contact us at [email protected]. We have developed our own projection model specifically designed for credit unions to help create a useful management tool. This can be tailored to meet your credit union’s specific needs.