Pub. 10 2019 Issue 1

www.wvbankers.org 18 West Virginia Banker How to Accurately Conduct A Profitability Analysis By Rachel Messick, Visible Equity P rofitability analysis is central to your finan- cial institution’s very existence. A powerful blend of introspection and market assess- ment and comparison, profitability analysis find- ings should be applied to channel every aspect of your operation toward long-term viability — a positive for your members and customers as well as your bottom line. Profitability analysis is an element of enterprise resource planning, which aims to collect, evaluate, and present accurate and insightful data that drives business decisions. In doing so, you pro- vide various departments the perspective they require to properly handle internal accounting and decision-making. The importance of accurate accounting is self-ev- ident. But you also can’t underestimate the value of preventing poor decisions that ostensibly are fact based, but don’t take into account the whole picture. Ponder this example, derived from a DB Marketing case study: Because it’s been proven that branch visits are costlier per instance than using ATM, online, or mobile banking, some banks have tried to discourage this practice by charging branch visitors a fee. However, because branches are heavily used by the most profitable customers, as well as the least profitable, these fees stand a considerable chance of backfiring. One point worth noting before turning toward the specifics of profitability analysis: Because of their cooperative structure, many credit unions blanch at words such as “profitability,” concerned it conflicts with the credit unions mission of putting people before profit. But really, we’re talking about viability; just like banks, credit unions need to make money if they are to continue to exist. The difference is credit unions don’t pay shareholders but rather return that money to members by providing dividends, improving rates, and/or lowering fees. In fact, many argue that profitability analysis is more important for credit unions; lacking the ability to raise supple- mental capital, they must rely solely on operational efficiency and improvements to build capital. In a bank or credit union setting, profitability anal- ysis has five main goals: