Budgeting and forecasting are key tools that are necessary to help banks navigate today’s volatile financial markets. Banks face interest rate cycles, margin compression, and increased scrutiny from regulators. These new market conditions have made budgeting and forecasting a must for banks to be able to adapt quickly.

A reliable budget gives banks a current foundation for what to expect in terms of revenue, expenses, and overall profit. And, a forecast aims to predict how those figures may change in the future. Both are needed for a bank to have a comprehensive financial and risk management plan.

This guide covers the significance of budgeting and forecasting for banks, as well as how each differs, alongside their common challenges and best practices. You’ll also learn how Empyrean’s platform can help banks streamline these processes to ensure their data comes from the same source of truth and their assumptions are sound.

What Is Budgeting?

Budgeting is the process of creating a financial plan over a period of time, often at least one year in length. This plan typically covers expected amounts for revenue, expenses, and profits. Financial institutions use it as a benchmark to determine if and when they need to take action to stay on track.

Budgets can be implemented not only on an organization-wide level but also on an individual team, department, or branch level. They help keep departments and teams accountable for performing and meeting goals, whether it’s generating revenue or cutting back on expenses. This effectively ensures each department takes actions that align with the company’s broader business initiatives.

Manual methods of developing and managing budgets tend to be at higher risk of oversights and human error. They typically don’t offer a centralized or integrated way of collecting and managing data. Manual budgeting methods can also increase overhead and operational costs.

Banks need more than Excel for budgeting. Modern solutions, like Empyrean, can help address these challenges.

Pro Tip: Budgets are most effective when tied directly to branch and product-level profitability. This is a critical step for community banks, where small shifts in deposit mix or loan growth can significantly impact margins.

Download free Empyrean budgeting and planning infosheet

What Is Forecasting?

Forecasting is a projection of expected outcomes based on trends, assumptions, and real-time data. While budgets give a predefined plan, forecasts change with shifts in the market. They’re designed to give the bank the ability to recognize and adapt to new environments.

Banks commonly use forecasts to predict changes in interest rates, loan demand, and deposit growth. These inform liquidity needs and help ensure there are sufficient reserves. Two types of forecasting include:

• Rolling Forecasts: Banks can pivot frequently with up-to-date views of performance instead of waiting until the end of the forecast period.
• Scenario-Based Forecasting: Banks can model outcomes for different circumstances, like rate hikes, to determine the potential impact on their finances.

With reliable data, forecasts allow finance leaders to prepare for multiple scenarios to ensure the bank will remain financially healthy. Forecasts can also serve to help leaders make strategic adjustments before potential risks turn into actual losses.

To see how you can improve your institution’s forecasting process, read our balance sheet forecasting best practices guide or our blog on balance sheet forecasting.

Pro Tip: Refresh forecasts monthly or quarterly to capture changes in deposit flows, loan demand, and local economic conditions. For community banks, agility is key since market shocks can quickly impact liquidity.

Key Differences Between Budget and Forecast

Although budgeting and forecasting are commonly used together, they each serve different purposes in financial planning and risk management:

• Budgets dictate the direction a bank wants to go, with specific targets for revenue and expenses.
• Forecasts reveal how budgeting figures can be impacted based on new data and anticipated market shifts.

Many banks create budgets for a 12-month period of time. Detailed thresholds are set for revenue and expenses, which are divided into specific line items by departments or branches. Budgets do not commonly change throughout the course of the year.

Forecasts, on the other hand, are more likely to shift. They consider new data that is likely to affect a bank’s finances. This can include anything from economic events and key drivers to interest rate changes or shifts in deposit demand.

Finance leaders generally update forecasts every quarter to ensure they have the opportunity to strategically respond to ever-changing market conditions.

Combined, budgeting and forecasting allow a bank to have a framework for managing risk and finances. The budget sets the initial targets. Meanwhile, the forecast informs leaders of any changes that are necessary to ensure finances stay on track.

Aspect	Budget	Forecast
Purpose	Sets financial targets and what the bank aims to achieve.	Projects expected outcomes based on current trends and assumptions.
Flexibility	Typically fixed for the period.	Updated regularly to reflect changing conditions.
Time Horizon	Usually 12 months; tied to the fiscal year.	Shorter rolling windows (e.g., 12-month rolling forecast).
Level of Detail	Highly granular, often departmental or branch-level.	More high-level, often focused on key drivers and trends.
Variance Analysis	Used as a benchmark to compare against actuals for accountability.	Helps guide midcourse corrections, but not typically for formal performance evaluation.

Pro Tip: Use variance analysis to bridge budgets and forecasts. It helps community bank leaders quickly explain unexpected shifts in margin or liquidity to their boards.

Benefits and Challenges of Budgeting and Forecasting in Banks

Done correctly, budgeting and forecasting help banks make smart data-driven decisions. This enables them to proactively plan and implement strategies to overcome challenges in a dynamic market.

Doing so can allow departments within banks to work more cohesively to meet financial targets. However, many banks still rely on outdated systems that make this challenging to implement.

Benefits

• Strategic alignment: Budgeting and forecasting allow banks to gain strategic alignment on goals. With a shared vision, teams across the organization work as a single unit across operations, lending, risk management, marketing, and more.
  
• Performance measurement: Measuring performance is also made easy through budgeting and forecasting. This is because actual results can be compared against the budget to identify strengths, weaknesses, and areas of improvement.
  
• Risk management: forecasting helps banks identify and respond to risks and economic events that may lead to changes in interest rates, loan demand, or liquidity risk.
  
• Stakeholder confidence: budgeting and forecasting help improve investor and regulator confidence. With their potential to improve strategic alignment and market adaptability, budgeting and forecasting enable banks to demonstrate sound financial planning.

Challenges

• Implementation difficulty: While the benefits can be numerous, it is also challenging for banks to implement budgeting and forecasting.
  
• Data fragmentation: Siloed data makes it difficult for teams to collaborate or ensure assumptions are being made using the same document versions.
  
• Human error: Manual systems are more prone to human error and may require additional staffing resources to perform updates.
  
• Staffing strains: Without sufficient personnel to input data that reflects current market conditions, forecasts can grow stale and result in inadequate projections of future risks.

Pro Tip: An integrated platform solves these challenges by linking assumptions across finance, risk, and profitability in real time. This can free up limited staff resources and reduce the reliance on Excel spreadsheets that dominate smaller institutions. Banks can also adopt this approach to benefit in other areas, since it extends naturally into asset and liability management.

Best Practices for Budgeting and Forecasting

Banks that want to stay competitive are shifting away from manual spreadsheet-based processes. Instead, they’re implementing data-driven approaches that allow for easy integration throughout the organization. Empyrean discusses the available techniques in our budgeting e-book.

Although budgeting and forecasting can be challenging, the following best practices can make the process simpler:

• Adopt Driver-Based Models: These models tie forecasts to operational levers, like loan growth and deposit flows, to measure how input changes impact performance.
• Use Rolling Forecasts: Instead of having one-time projections, rolling forecasts adopt a continuous outlook with more regular updates as market conditions change.
• Integrate Risk and Finance: Team alignment on assumptions for key financial metrics, such as rates, liquidity, and loan performance, can enable more streamlined decision-making.
• Standardize Templates: Standardized templates can improve clarity, reduce the time needed to complete tasks, and ensure consistency in the information shared across the organization.
• Involve Stakeholders Early: Early participation from department leads fosters an environment of accountability, alignment in vision, and transparency.

Pro Tip: Rolling forecasts paired with scenario analysis help community banks anticipate best- and worst-case outcomes, from rising rate impacts on deposit betas to sudden loan demand shifts in their markets.

To see how Empyrean helps banks with a modern approach to budgeting and forecasting, stream our budgeting webinar.

Stream our budgeting webinar

From Planning to Agility: How Empyrean Helps

Budgeting and forecasting are tools banks and credit unions need to manage margins, liquidity, and long-term growth.

Budgets set the direction for the bank with targets for revenue and expense thresholds to monitor. Forecasts project how those figures might change based on economic shifts and market trends. Combined, they provide the basis for banks to make informed business decisions.

Despite the importance of budgeting and forecasting, many banks may still be using manual and siloed processes.

These outdated approaches make it difficult for teams to collaborate or ensure they’re using the same datasets and assumptions. This often leads to inconsistencies in reporting. As a result, finance leaders may spend more time addressing discrepancies than adjusting strategy.

Empyrean’s platform aims to eliminate these inefficiencies:

• Budgeting and planning tools can ensure teams work off the same datasets and assumptions, effectively simulating real-time collaboration.
• Profitability tools help align aspects of planning to a bank’s performance, which provides insights into customers, branches, and product lines.
• ALM ties forecasts to the balance sheet, which allows finance teams to test liquidity under various scenarios.

Ultimately, Empyrean helps smaller credit unions and banks gain a greater ability to plan faster and more accurately. All this, without needing the staff or resources of a larger bank.See how Empyrean can help banks streamline budgeting and forecasting. Download our free budgeting and planning guide, or request a demo today.