No Crystal Ball: Why Financial Institutions Need Profitability Analysis

Oct  01 
Author Picture 
Danny Baker  Vice President, Market Strategy, Fiserv 

The right tools can help CFOs make good decisions, even amid uncertainty

Despite lengthy planning and budgeting cycles, CFOs still can't predict the future.

Case in point: COVID-19. The pandemic wasn't part of any financial institution's strategic plan or budget cycle, yet it is likely to change how the entire financial services industry operates. 

Even amid uncertainty, financial institutions need to make astute decisions about product and service delivery, and plan for more stable times. CFOs need to understand the value of each profit contributor – and how it responds to change – to offer guidance that goes beyond reporting and monitoring.

Model the Way  

Some of the changes prompted by COVID-19 were temporary, such as the Paycheck Protection Program. Others, including increased use of digital payments, will outlast the pandemic.

American Banker reports that ongoing uncertainty will especially challenge financial institutions that had acquisitions or investment activities on the horizon. For most financial institutions, the immediate focus is on cost-cutting rather than ramping up investments, and CFOs need to plan for more margin pressure. But how much pressure and for how long remains unknown.

Can CFOs successfully plan with so much volatility? How do they know which strategic actions will preserve the most revenue? The answers can be found in profitability analysis.

Even amid uncertainty, financial institutions need to make astute decisions about product and service delivery, and plan for more stable times.

When performed with budgeting and planning cycles, profitability analysis enables CFOs to model outcomes and measure potential effects before difficult decisions are made. For instance, financial institutions can capture profitability at the account level – aggregating by instrument, branch, product, officer or customer/member – to consistently and accurately measure performance and generate full profit and loss reports for any of those dimensions. Profitability tools automate report creation and distribution to executives and line-of-business owners, transforming raw data into actionable information.

Modeling different circumstances and decisions lowers organizational risk, especially during uncertain times. Leaders can design contingency strategies, compare what-if scenarios and monitor performance against financial targets. When conditions change, organizations can proactively address risk or pivot toward new opportunities.

Consolidating financial planning data into a single accessible platform shortens budget cycles and makes it easier to spot flawed or duplicate data, automate key reporting activities and find opportunities for increased revenue. A single tool for planning, budgeting and forecasting also supports a more collaborative planning cycle. Stakeholders across the organization can see the implications of various business drivers and better align on long-term institutional goals. 

Invest in Profitability

By focusing on forecasting rather than after-the-fact reporting, CFOs can strengthen their role as strategic, profitability-based advisors. But they need the right tools and organizational support.

When replacing or enhancing outdated enterprise performance management systems, there are several best practices for financial institutions to consider.  

  • Create a profitability mindset. As a best practice, measure profitability across dimensions and build it into the strategic decision-making process. Profitability can become a metric for compensation programs rather than traditional goals, such as hitting a planned volume level, which may or may not influence profitability 

  • Invest in skilled personnel. Employees and partners can redesign outdated planning processes and train employees on financial performance best practices. Build finance office teams with skills in data and analytics, not just accounting

  • Prioritize the right tools. Robust data, analytics, planning, management and reporting capabilities enhance strategic decision making, help CFOs communicate financial information and give organizations a competitive advantage

Preparing for What's Next

The ability to make better decisions is one of the most valuable contributions a CFO can provide. But rigid, point-in-time planning and forecasting tools often lead to inaccuracies rather than insights.

With an informed planning approach, CFOs can offer more accurate predictions – and better guidance. Although the pandemic disrupted budgeting cycles, financial institutions can adjust and prepare for whatever comes next.