One of the things we're always telling consumers is that if they want to become responsible homeowners, they're going to have to learn to manage their finances, and that means budgeting.
Sadly, we could use a reminder ourselves when it comes to budgeting for our companies. After all, the budget is the first step to implementing a strategy as I discussed in my
Every business should have an annual budget that allows all department heads to effectively implement their individual plans in support of the company's overall goals. Some really good companies have five-year plans that extend that budget out into the future.
Back in the day, when we were all reading about management fads instead of the many shades of grey, it was said that Japanese companies had strategic plans that stretched decades into the future.
There's a lot to be said about taking the long view, but that can be pretty tough when your industry is changing on what seems like a weekly basis. Change is a fact of life in our business and it makes effective budgeting very difficult. But it's still vitally important. So, how can you budget when everything around you is always changing?
Well, first of all, you have to count on change and make sure you build it into your plans. Don't ignore it. I have done work for banks where they have maintained a strict adherence to an approved budget despite changes in market conditions that render that budget unworkable or, at least, unprofitable.
They were, in effect, starving the beast in an environment where there was significant opportunity to capture volume and market share.
Some companies are making this mistake right now. Think about your government lending business. If you think that FHA lending is going up because of the cut in MIP premiums, as most of us likely do, would it make sense to ramp up spending on FHA underwriters even if they are not in the original budget? Those practicing strict adherence to the pre-approved budget would say, no! But that would be unwise.
So, having a budget for 2015 is a good start to a potentially good year, but it requires a willingness to be flexible when it comes to market conditions. One way to validate your budgeting assumptions is to have a good understanding of the market. It can be hard to know when to invest in your business if you only know what's happening inside your corporate walls and not what’s going on in the broader market.
I was recently working with a lender who originates very little nonconforming volume. I was astonished to find that the percentage of nonconforming business being written in that institution's geographic marketplace had increased by nearly 50%, but that my client has not focused any resources on seeking out nonconforming investors or loan products because so little of their customers were asking for that product. What a missed opportunity.
Another example of institutions becoming enslaved to their existing budgets and unable to adapt to a changing marketplace can be found in the marketing department.
Sometimes, lenders will maintain that they don't have the budget to do a direct campaign, to mail letters or send emails or reach out via social media. In their minds, they are thinking about the costs involved in attracting new customers and are reluctant to increase their budgets for something that has traditionally been so expensive. But they are missing out on the opportunity to be innovative in how they approach existing or former customers who may be in need of additional financing.
This is a particularly scary trap because very often, well-crafted direct marketing efforts can generate $5 to $10 in extra revenue for each dollar invested in marketing. So, while they may keep their marketing budget in line with expectations, they have missed out on the opportunity to grow their business and drive up their revenue.
In all my years in this business, I have yet to find a successful company that has grown its business by cutting its budgets.
The good news for our industry is that, unlike President Obama, we can create our budgets — and change them when necessary — without Congressional approval. Plus, we don't have to worry about trying to balance our budgets. In fact, it’s starting to look like 2015 will see well-managed mortgage companies growing.
Next time, I'll talk about some of the key elements you should have worked into your budgets for this year.
Garth Graham is a partner with Stratmor Group.
