Advice General

Planning in An Uncertain World

Posted on December 15, 2020 Published by

Benjamin Franklin said, “If you fail to plan, you are planning to fail.” Given the events of 2020, this seems even more relevant than ever. A September 8, 2020 Forbes article by Louis Mosca highlighted the importance of having a business plan as you enter 2021. Mosca noted that a recent Gallup poll found that only about one-third of businesses have a formal, written business plan. This may sound astonishingly low. But the experiences of 2020 and the likely consequences we may see in 2021, seems that this would be a good time to change that percentage.

Planning in An Uncertain World

So where to start? For those of you who have a well-developed written plan and planning process, this may seem elementary; or perhaps it’ll be a bit of a refresher. For others, perhaps it is a good place to start. In our December 2018 blog, we looked at the planning process for the commercial lending and credit environment. Essentially, the planning process comes down to balancing three factors: Volume, Price, and Quality (V, P, Q). We considered how emphasizing any one of the three factors can (and will) impact the other two. Each institution should consider their goals in each of these categories against its available liquidity, people, processes, and infrastructure (notably equipment and technology).

If you had a plan going into 2020, compare actual results to the plan. Where significant differences exist, it would be instructive to consider the reasons for the differences, both positive and negative. In my role as Captain Obvious, credit quality is likely to be the biggest wild card for 2020 and into 2021. There are reasons to be cautiously optimistic about 2021. New COVID vaccines will be rolled out and we can start reopening or normalizing business operations. However, we certainly do not know the timing.

Financial Impact

Further, many (perhaps most) financial institutions have not even begun to see the full financial impact on their commercial borrowers, as year-end 2020 financial statements are yet to be provided. Each institution should be carefully considering the borrowers and industries that comprise their portfolio and the sensitivity to COVID restrictions, including government mandates. I have a great deal of admiration for the strength, resiliency, and creativity of our business owners. That said, so many variables were beyond their control during 2020. Commercial credit groups should prepare for lots of negative surprises. Better to be pleasantly surprised if bad news does not materialize than not be prepared when it does.

Volume is likely to be even more difficult to predict than in the past. New business formations are likely to be weak. However, market competitors may be forced to make difficult decisions. This is due to credit quality problems in their portfolio and a need to protect liquidity. A note of caution is in order here. Especially for those who may be tempted to add volume by expanding into a new geographic footprint or unfamiliar industries. Adding new volume through purchased participations can look attractive. But independent underwriting as the purchaser is important and knowing the lead institution is critical.

Pricing opportunities are likely to be plentiful as borrowers request loan restructures and/or covenant waivers. It is certainly appropriate and reasonable to obtain increased compensation as the risk profile of a borrower changes. The key is to not be greedy and over-reach. Balance is important as borrowers can have long memories.

Business Planning For The New Year

Even though we are only weeks away from the new year, it is not too late to do some business planning. It is always a process and should remain flexible and dynamic as you need to address challenges that you had not anticipated when the plan was originally written. The key is to have a plan, so you are not, as Old Ben said, “planning to fail.”

From all of us here at Enlighten Financial, we wish each of you a blessed holiday season and a most happy, healthy, and prosperous new year. Cheers!

 

Richard Rudolph is Senior Consultant at Enlighten Financial, a specialized consulting firm that focuses on loan review and risk management services to community banks and credit unions. Enlighten Financial has made it our business to shed light on the complex financial landscape. This helps lead clients in the right direction. We work with financial institutions and other providers to mitigate risk. To talk to Rick directly, please call: 920.445.8133.

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— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors.”
— Bill Beardsley, President, Michigan Business Connection
“The staff at Enlighten have been available for questions, in addition to the engaged work that they do. They've been very helpful as a resource beyond the major audit.”
— Meghann Kasper, Chief Credit Officer, Bank First
“Enlighten gives us a very good second set of eyes on our transactions. They're not afraid to challenge us on some of the work that we've done, which is what is needed. I don't need to pay somebody to tell me I'm good, I need to pay somebody to tell me where I've made mistakes.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“Enlighten provided industry best practices that weren’t going to show up in an audit report. They would say, ‘Hey, I noticed you do this. This is really unique, you do a really great job of it.’ And then they might add, ‘Some other clients that I have are doing something like this.’”
— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors."
— Bill Beardsley, President, Michigan Business Connection