General Budgeting Process
The following are the basic general steps and notes for creating budget simulations and budget sets:
| 1. | Establish a simulation model |
In Parameter Setup, up to seven simulations can be established. Set descriptions should be assigned to help determine the purpose of the simulation (Budget1 Stable, Budget2 Rising, etc.)
| 2. | In the Budgeting module, set assumptions for Growth, Index Rates, Reinvestment Rates, and Prepayment rates |
Growth is shared with Adv Income Shock. Therefore, changes made for the budget purpose will also reflect in the Adv Income shock and may invalidate the shock results. Conversely, if acceptable growth assumptions were already set in the Adv Income Shock, no changes will be required.
Baseline Index, Reinvestment and Prepayment assumptions can be established by copying assumptions from a selected scenario already developed in the Adv Income Shock module. For example, the +/-0 Shock scenario assumptions can be copied into the Budgeting assumptions. This would provide a baseline setup for assumptions that may then be modified as applicable on a period by period basis.
| 3. | Process the assumptions in Budgeting Process/Review and review the results |
This is an iterative process of modifications, processing, and review to determine if the assumptions produce reasonable and acceptable results for the budget. Processing is required after any change to produce revised results.
| 4. | Once acceptable results are established, save the results in a Budget Set |
The saved budget set can then be used for variance analysis in the future. Subsequent changes to the simulation will not change a budget set unless it is resaved.
Using IRR-Solutions® II to generate a budget involves setting assumptions in the Growth assumptions area that represents the institutions budgeting goals. This typically means applying the various growth target goals in the Asset and Liability sections of the balance sheet and entering Non-Interest Income and Expense expectations in the Income Statement area.
Budget Simulation:
Once all assumptions have been entered into the system and processed, the resulting projections for the coming year should be carefully reviewed. Revisions to the various assumptions can be made until acceptable results are being projected by the system. This process is called your Budget Simulation. You have the ability to create 7 different budget simulations.
Updates in the future to a Budget Simulation will alter results, but not the saved budget set, as actual new data can alter income calculations.
When transforming an institution's budget plan into IRR-Solutions® II assumptions, no single step by step set of instructions can be given. The reason for this is that institutions plan their budget with different goals in mind and at different levels in their account structure.
Example: One institution plans on a level growth in deposits across the various deposits accounts, while another institution may decide to make specific projections for only certain accounts.
Therefore, it is important to decide on which of the IRR-Solutions®II assumption methods to use. As outlined in the Assumption Process section, you could use the top-down distribution method at various levels in the account structure. Or, you could use the bottom-up method of summation of individual assumptions back up to the top level.
It is important to review the final set of growth assumptions in the budget simulation reports to ensure that they represent the desired budget goals.
Budget Set:
The final balance and income projections along with the associated assumptions can be saved as a budget set. This process typically takes place late in the fiscal year, and in the first month of the new year, budget variance reports can be created using data contained in the saved budget set. Subsequent changes to the model do not affect the saved budget sets. The default budget set is used for reports.