Baseline Performance Forecasting is a Powerful Strategic Planning Tool

May 01, 2015 at 4:56 PM

It is well understood that when formulating a strategic plan the executive team sets a future vision for the organization, enumerates the strategic and financial goals that they wish to achieve, and specifies the strategies and initiatives to achieve those goals. A financial forecast can then be developed that encompasses the potential consolidated performance of the bank and measures whether or not the plan attains those goals.

There is a simple but powerful corresponding forecasting exercise that should also occur in the development of the strategic plan. That exercise is to forecast the financial performance of the bank over the plan horizon before considering any changes in strategy or resources. This provides a foundation for understanding the gap in performance between what the bank would achieve ceteris paribus and the financial targets that it aspires to achieve by the end of the plan horizon. This is called the Baseline or Momentum forecast.

The Baseline forecast should be derived from the bank’s recent actual financial performance, adjusted to exclude any non-recurring events that would result in a material misrepresentation regarding future performance. In essence, it is the estimation of future financial performance that assumes present trends continue.

The output of the Baseline forecast exercise should consist of the income statement and balance sheet for each year of the planning horizon, the actual and forecasted financial ratios and statistics used by business managers to evaluate financial performance, and documentation detailing the key assumptions underlying the Baseline forecast. The assumptions should be simple and should err on the side of conservatism. It is important to note that the Baseline forecast is not a representation of a bank’s annual plan or a representation of performance that the management would present to the board of directors.

The Baseline forecast serves as a quantitative foundation upon which strategies can be vetted and prioritized. It enables the executive team to quantify where financial performance must be improved in order to achieve the desired targets. Also, it dimensions the magnitude of the required improvement and therefore helps the executive team to focus on the strategies that will make a material contribution toward closing any shortfall.

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Quantifying the differences between baseline financial results and targeted results enables development of specific strategies to close any gap. Without this, financial forecasts and strategies are out of sync.

Eileen Sullivan

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