4 minute read – More and more decision–makers are understanding how important it is to have a financial roadmap – similar to their technology roadmaps – that links to strategy.  After receiving great feedback on this topic, we have decided to remind leaders how important it can be to use roadmaps as a way to communicate longer-term financial outcomes to stakeholders and help align expectations in 2024 and beyond. 

To help connect the strategy to the longer-term financial future, a strategic financial plan should look out 3-5 years.  The intent is not to be precise, but to provide a rough sketch that builds on the current structure and trends, and layers on the financial consequences and timing of the strategy.  

The longer-term view is important because the budget usually captures only one year – often too short of a time frame to show the full costs and benefits.  In addition, layering on all major efforts to see how they work together financially, in combination over time, helps create a more complete financial picture.   

As you create your strategic financial plan, be sure to incorporate some key concepts:  

• Initially, create a path where current trends continue.  This paints a picture of where the institution is heading in the longer term.  Don’t get too detailed – this isn’t a budget.
• Then layer on your major initiatives with their timing and test a variety of outcomes, such as incurring the expenses and getting the benefit you expect and, alternatively, less benefit than you expect.  You may want your team to generate ideas for new initiatives, or ideas to increase non-interest income, or reduce expenses.  Include what-ifs that throw some stressors at the plan like lower (or higher) than expected loan growth, lower deposit growth, and higher provision for loan loss expense.
• For some initiatives, it may be hard to predict the benefits.  Strategic financial planning can help the team look at those initiatives from different points of view.  For example, a new commercial lending program will likely not be taken on without understanding the costs, but it may be difficult to predict how many new commercial loans will result over the next few years.  Creating a couple of different views of new commercial lending volumes can help clarify how much business must be generated for the program to be worth it.  This helps the team understand how important the new loan volumes are and can also help with setting goals.
• Since this is a business model-focused exercise designed to bring the team’s thoughts together, the entire leadership team should participate.  The finance department will provide the supporting modeling, but this is not a finance-department-only creation.  The conversations are one of the main benefits because they result in broader understanding as the plan reveals how various initiatives function as part of the whole and moves the spotlight from individual departments to the overall direction of the organization.

Many executive teams now consider strategic financial planning to be a part of their broader strategic planning process.  One organization we work with was happily surprised when, after creating their first financial roadmap, the Board said they were very impressed with the depth of thinking that went into it and liked how it completed the strategic picture for them.  The Board’s reaction was a happy surprise since the main reason they added a financial roadmap was for examiners, because they are heavily investing in infrastructure for the future and wanted to emphasize the longer-term view (the examiners were impressed, too). 

Another institution, that was wavering on whether to take on a particular initiative, said that the financial roadmap provided the view they needed to make a confident decision.  Even the leader who was pushing for the initiative, which they decided not to do, was on board with the decision.  One leader commented that the consensus they reached was a great example of the team leaving their silos.  A different leader, who does not claim finance as a strength, said that the roadmap helped him understand how critical the loan growth goal was for the financial success of the plan.  He found this knowledge to be very motivating. 

As soon as we begin to look beyond today, fuzziness becomes inherent, and that’s okay.  Creating a financial roadmap, or strategic financial plan, is a proven way to gain clarity and a deeper understanding of the organization’s longer-term financial future.