Budgeting at banks is a tricky balancing act that gets more challenging each year.

The financial crisis, and its aftermath, created a new layer of regulation to consider. A growing need to fund technology projects and an uncertain rate environment have only made it harder to forecast revenue and expenses.

As banks struggle with lower returns, compared to pre-crisis levels, finance officer will need to become more accurate with forecasting and budgeting, industry observers said. While there is no clear-cut solution, chief financial officers must rely more on input from business line heads, while increasing accountability when it comes to meeting goals.

"You have to make enough money to cover the increased financial burden of compliance," said Larry Sorensen, chief financial officer at Washington Trust Bank in Spokane.

"You also have to pay for operations, a reasonable return on equity and provide enough capital for future growth — all with diminished profitability," Sorensen added. "All of those have become more difficult, so there's a smaller tolerance for getting it wrong."

Trying to gauge the Federal Reserve's monetary policy has been particularly vexing. Fed Chair Janet Yellen recently indicated that it rates are unlikely to move this month following a disappointing jobs report. Before her statement, the prevailing view had been to expect a hike after the Fed's next policy meeting.

"The industry is facing decreased margins. If that's your main engine, how do you budget for it?" said Ed Vega, a consultant and former bank CFO. "There's little growth, especially for the community bank market."

Frequently updating forecasts can help. Such projections are usually less detailed than a budget, but they include economic outlooks, a bank's competitive landscape and views on interest rates. Doing so can help with risk management, which has become increasingly vital since the crisis, said Ken Levey, a vice president at Kaufman Hall's software division, which provides financial planning and performance management products.

"Hopefully banks are running multiple scenarios," Levey said. "It's not just budgeting, but also forecasting."

First Midwest Bancorp in Itasca, Ill., has attempted to make its budgeting process more efficient, said Rich Padula, the $10.6 billion-asset company's director of finance. The process includes outlining a larger strategic plan for a three- to five-year period while also laying out a one-year budget. Forecasts are completed monthly.

Involving other executives in the planning process is another key aspect of budgeting at First Midwest, Padula said. Increased participation makes it easier to handle tough calls, such as diverting resources to a fast-growing business line, even if it means shrinking elsewhere, he said.

Improved processes have helped First Midwest complete seven acquisitions since 2009, which in turn boosted net income by 227% from the first quarter of 2010 through the first quarter of this year. Those deals, and the financial boon each created, would have been impossible without a clear vision and efficient budgeting, Padula said.

"If you have profitability measured and you have transparency, it's hard to argue with" the results, Padula said. "If you establish that buy-in then people won't argue about what's good or bad."

A lack of accountability, which is often a function of a bank's culture, is one of the biggest issues for financial managers, industry observers said. Senior executives should consider making expense control targets part of their company's performance reviews and compensation structure, while scheduling regular meetings to track progress.

A lack of transparency around cost allocations can also present a challenge, said Steven Krueger, a principal in financial services at the consulting firm EY. As a result, any "actions taken often do not yield results that the business was aiming for," he said.

Problems arise when bankers fail to fully evaluate or understand the long-term implications of their actions, in terms of a change in expenses or revenue, said Claude Hanley, a partner at Capital Performance Group. Tracking those results will help bankers analyze what worked — or what didn't — so they can make improvements.

"At the end of the day, budgeting is a control function," Hanley said. "It gets back to the issue of … holding people responsible for particular initiatives. If these initiatives weren't successful then they need to figure out why so they can make a decision about the best way to go forward."

Still, banks must maintain a degree of flexibility, said Tom Hall, president and chief executive of the consulting firm Resurgent Performance. Hall recalled meetings with management teams that passed on an unexpected opportunity simply because they hadn't accounted for it in their budget. Missed opportunities can range from buying a branch to making a loan that doesn't quite meet prearranged standards.

"Most banks are good about adapting … but I do see some rigidity with banks that have outdated budgeting processes," Hall said. "This is a business where you have to focus on growth, and it doesn't always come in a linear fashion."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.