Components of a Good Profitability System

Financial reports prepared for investors typically have a structure designed to make diverse companies and industries comparable. For example, the interest margin (Interest Income less Interest Expense and Loan Loss Provision) compares directly to the gross margin of a manufacturing company. Consider the following two income statements:

1. Ford Motor Company
   
2. Wachovia Corp.
   

A good profitability system will deviate from this structure and enhance it with a number of specialized analysis techniques. Some of these techniques are specific to banking; others originated in different industries and have been applied here. They are:

1. Funds Transfer Pricing. This is a way to value the source of funds independently of the uses you put it to, and vice versa.
2. Activity-Based Costing. The idea is to allocate costs based on the way resources are consumed.
3. Capital Allocation. This describes to those managing the institution how well the institution’s funds are deployed, particularly on a risk-adjusted basis.
4. Multi-dimensional Reporting. Unlike the consultant in the opening anecdote, our feet remain planted firmly on the ground. Multi-dimensional reporting in this context means reporting on the profitability of the important ways of viewing your business. Typically these are product, organizational and customer profitability.
5. Peer Group Reporting. We maintain a database of the results of all of our clients and integrate this information into a reporting package included as part of our service.