Businesses in industries like retail, manufacturing, tech, and others gain a significant advantage when they master concepts like the profitability ratio. Profitability ratios and other metrics help businesses determine their potential earnings according to their revenues, operating costs, or shareholder’s equity, to name a few factors.

But the ability to do detailed profitability analysis is twice as important to financial institutions such as banks. For companies that operate in the finance industry, accuracy, precision, and a bigger-picture approach to profitability management are the keys to staying alive. Without a grasp of these, banks and other financial institutions could risk irrelevance when compared to their peers. In the worst-case scenario, being left behind may force them to eventually shutter their doors. 

If you work for a financial institution, how should you go about the process of profitability analysis? What questions should you be asking in order to get a bird’s eye view of your company’s profitability? To get you started on the best profitability management practices for your company, here are five important questions you should be asking:

Which Financial Products Are the Most Profitable, and Why?

The first thing you should measure to determine your overall profitability is the performance of each of your financial products. Which of your company’s lending or deposit products do you consider the strongest performers? Which of these products has the highest profitability ratio or generates the highest percentage of pure profit for your company? 

Once you have this kind of knowledge about your financial products, your analysis could provide you with several paths you may take. For example, you can decide to retain the strengths of the most successful products while adjusting others for greater viability. You can also set the direction for future product development efforts, such as whether to add a new rewards program.

Which Market Segments Yield the Most Potential for Profit, and Why?

The second thing you should identify through your profitability analysis is which market segments hold the most promise for your financial institution. Who are your most profitable clients: the individual consumers or the corporate entities that hold accounts with you? Are you most engaged with small-to-medium enterprises (SMEs) or larger conglomerates? What about your business model is working (or not working) for the market segments that you intend to reach?

Analyzing your business activity with these market segments will help you implement decisions that remain responsive to them. This knowledge will guide you in fine-tuning marketing strategies to yet-untapped segments, as well as cultivating loyalty in the segments where you have a positive impact. 

Which Regions Elicit Strong Sales Performances, and Why? 

If your financial institution operates in multiple regions, it would be good to do regular comparative analyses of how each regional office is performing. What are the potential reasons behind one office earning more than another? Does it have to do with how they’re engaging customers of a particular demographic within that region? Has that office developed good management practices that are worth rolling out on an organizational level? 

For a company that wants to sustain regional operations—and expand to new regions in the future—this metric is crucial. It’s not enough for just one branch to be responsible for much of the organization’s profits. The successes of the highest-performing regional offices are worth replicating in all of the others, too.  

Which Channels Are the Most Effective at Drawing Profit, and Why?

The fourth item to consider is that of the channels being utilized by your financial institution. This is a particularly timely concern, as many financial institutions have gone the digital route and invested in new channels like mobile app banking. How viable are these new channels compared to traditional ones, like over-the-counter transactions? How many customers across one point in time have patronized these channels, and which channels are proving the most popular?  

Based on what you find, you can decide to upgrade your company’s infrastructure to make these channels even more profitable and trustworthy. This is a prime example of how profitability analysis can guide you to expand your institution’s services across multiple channels. 

What Are the Greatest Risks to Your Financial Institution’s Profits, and Why?

The last thing to include in your profitability analysis is your company’s vulnerability to risk. Risk is an inevitable part of doing business in any industry. A company that has sound risk management processes in place has better chances of surviving even in times of financial crisis.

Your analysis should include data about potential risks to operations, causes of shortage to your liquidity, and the like. These will inform the risk management protocols you deploy for your company, which will go a long way towards protecting the value of your assets.  

Final Words: Profitability Analysis in the Proper Context, with the Proper Tools

Though these metrics will prove extremely useful for your overall profitability management, they can’t be taken in isolation. Your analysis of your financial institution’s profitability should also include considerations of the state of the finance industry at large. You should also be aware of what obstacles similar institutions are facing as well as your company’s own historical performance over the years. 

If you have the resources, consider investing in your own profitability analysis software to improve your current capacity to conduct such analyses. Such a toolset will allow you to sift through data more quickly and purposefully, which is a much better alternative to poring over unconsolidated reports for hours. 

When properly executed, profitability analysis can be your ticket to navigating an especially dynamic and competitive finance industry. Use this process to boost the profile of your company, reach out to new customers, and continue to serve loyal patrons in the long term.

Richard is an experienced tech journalist and blogger who is passionate about new and emerging technologies. He provides insightful and engaging content for Connection Cafe and is committed to staying up-to-date on the latest trends and developments.