In this story, we helped the bank quantify and focus on branch profit performance. They knew some branches needed to improve, and Simplified Profitability provides a rational, common sense comparison. Let’s see what I mean.
Here is an actual Simplified Profitability Story in a full motion graph.
First, scroll down to the bottom of this post to the motion chart. On the top right under Color, select ‘Unique Colors’ from the drop down. Then, just below that, from Size, select ‘Income’. Then for this scenario, check the boxes next to ‘Average’, ‘Branch 21’ and ‘Branch 40’. Below the branches un-check the ‘Trails’.
The branches are listed in the sidebar to the right. The sizes of the bubbles are the branches’ total loan and deposit income including interest, fees and interchange. Notice that one of the bubbles is the Average of all the branches. That Average bubble lets us see the overall effect of all the branches’ profit results over time.
The vertical axis shows the profit after loan loss expense, but before taxes, for each branch from our organizational profit model over a period of six months.
The horizontal axis uses calculated cost of direct and indirect controllable branch expenses as basis points of total funds used by the branch – taken from the funds transfer module.
What we want to see is the Average bubble moving up and to the right and growing larger. Certainly we want to see unprofitable branch bubbles display those improvement patterns.
Check it out! See what happens when you roll your cursor over any bubble. Then click the triangle button the box on the lower left to start the playback. Watch what happened with the branches you checked. One of them clearly improved. It became profitable and reduced expenses. The other did not.
The punchline – Some branches increased their monthly profit contributions, while lowering the basis points of their operating expenses. Other branches clearly struggled to move from losses to profits. </strong>.
Simplified Profitability includes ‘What If?’ modeling for branches that are losing money to estimate revenue and expense driver tactics to reach breakeven and produce profits – This motion chart is a powerful method of showing degree of success or failure of chosen tactics.
BTW you can speed up or slow down the playback with the small triangle just to the right of the playback button. Go ahead and play with the Trails, and other check boxes.
Credit for creating this kind of motion chart technology goes to Hans Rosling, gapminder.org, googlevis, and R. The data and implementation is copyright © 2013 Thomas N. Gerry.
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This Bank is a $900 million (assets) bank. The bank has eighteen branches. The result of implementation of an organization profitability analysis revealed three unprofitable branches. However, they also were able to predict the deposit levels required for these branches to breakeven and an action plan for them to become profitable.
They engaged RMA to assist and guide a special project to evaluate the feasibility of moving from an in-house core processing system to an outsourced system using the same Core system. Based on the success of the Migration Evaluation project and the demonstrated knowledge of cost accounting by RMA, the bank retained RMA to assist in the implementation of the an Organizational Profitability System. This became a joint effort between the software firm, bank accounting, and RMA.
- · Software firm: software development, interface to core, and report building
- · Bank Accounting: research, training in the use of the system, and ultimate production.
- · RMA: meet with senior management to guide them thru major policy decisions and analysis.
The process began in May, 2009 and the first report was produced for the month of Aug, 2009 and presented to Senior Management in Sept, 2009.
From this meeting several refinements were implemented. Fourth quarter, 2009 results were presented to senior management in Feb, 2010 and then rolled out to profit Center managers.
Significant profit improvement opportunities have resulted from this project. Another significant feature of the results of this approach was it became a senior management system, not just another accounting system. This also avoided a common error of many trial & error decisions.
The system balanced to the General Ledger I&E (within 1%) and was primarily “activity based”. There were no “negotiated” cost (subject to disagreement and arguments).
A $238 million Commercial Bank had eleven branches plus Centralized Lending and Investments. Organizational profitability analysis revealed that three of the branches were unprofitable. One was very new (just opened). Analysis showed it would break even in less than two years.
One was very unprofitable. Break even might occur in eight to ten years. It was losing over $30,000 per month. The directors made a united business decision to close the branch. The bank had invested a lot of money in leasehold improvements. However, the bank was ahead in the first year of closing the branch and writing off the unamortized asset. No employee was lost. No customers were lost.
The third branch is using several strategies to become profitable. Operational analysis shows that the lease is well above market (nothing to be done here). The productivity of the branch new accounts and tellers is better than the median for the bank (good job). However, we did find the telephone expense was very high and something could be done about it. The branch manager was involved and we further learned that the branch was providing daily service for several large accounts that were housed in the Main Office. All branches are reviewed matching deposit balances with servicing requirements. Finally, the bank used the Product profitability system to evaluate customer profitability to find ways to improve individual profitability. Cross selling will be the key here in existing and new accounts. Also, the marketing department is working on pricing options based on the product profitability system.
In short, this Bank will experience improvement of over $2,000,000 in before tax earnings over the next five years from these three branches. It could even be more. As an example Central Lending just determined what the incremental return would be on a targeted advertising campaign. What better way to improve than adding new profitable business.
A quiet $240 million Savings Bank determined it wanted to become a profitable and stable Commercial Bank. It choose organization and product profitability techniques to guide it to a before tax ROA of 2.65 over a five year perod.
The Bank sold the Board of Directors on restructuring the Mortgage loan portfolio based upon the use of organizational cost accounting and profitability analysis. Senior Management showed what the product mix and profitability were at that time and the quarterly effect on the profitability over time. The same format was used to report progress.
Senior Management also eliminated an unprofitable “investment services” venture and kept and expanded their consumer loan division. Senior Management “thought” that the Consumer Loan Division was unprofitable, but the analysis showed it just needed a slight increase in volume. Consumer lending has continued to be a profit contributor over the years. When FASB 91 came along, they used product costing to maximize the amount of loan production cost deferred, thereby minimizing the negative impact on profitability when deferring fee income.
Senior Management used the organization profitability analysis as the basis for their Management Performance Bonus system. Each manager up to the CEO received a bonus based on their ability to meet the planned contribution to profit. A budget was developed and converted to an Organizational Profitability analysis. After several iterations of approvals and final Board approval, the Profit Plan became the benchmark for the bonus next year. If a manager’s business unit met their goal they got the bonus. If they exceeded the goal they got more, and if they failed to meet the goal they got nothing.
