Quiz: Is Your Financial Factory Running at Peak Performance?

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Nikole John
Senior Analytics Performance Manager
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3 questions credit union CFOs can ask to find data-rich opportunities for finance excellence

Have you ever thought of your credit union as a financial factory? Probably not, as the comparison can seem a bit cold or impersonal. But, bear with me a minute. I think I can bring the metaphor home, and show you how thinking this way can make improving the financial lives of members a much easier lift.

At the Heart of the Factory is the Financial Engine

In the financial factory, member deposits and savings are the raw material. They are repackaged as banking services, checking accounts, cards and loans. Along the way, the factory procures additional inputs in the form of non-interest income, generally cultivated during the manufacturing process.

To run the financial factory requires staff, locations, utilities and equipment. The financial factory must also create a contingency plan for providing services against consumers that fail to pay for the goods and services they received.

Today’s financial factory runs 24 hours a day, 7 days a week. It services banking transactions and continuously accrues interest revenue income and expense.

At the heart of the financial factory is the financial engine, which represents the balance between high interest-bearing loans and low-interest or dividend-paying relationship shares. That balance determines the financial horsepower of your central engine... and ultimately, the capability your credit union has to be a change agent within its community.

It’s very hard to make a difference when you are struggling to make ends meet. Doing well reframes your mindset. Instead of focusing solely on survival, your thoughts are trained on generosity and purpose.

As credit union CFOs help guide colleagues and board directors through the different phases of the pandemic, maintaining financial excellence will enable greater flexibility, creativity and purpose-driven decision making. Below are three questions to ask to keep your financial factory running at peak performance.

1. Is Your Net Worth (Too Much) Higher than Your Asset Growth?

One fact of credit union life is that operating costs only go up. Another is that credit losses always occur. Both create a drag on a credit union’s net revenue return on assets. If left unchecked, costs and losses can create a subsequent drag on net worth or capital ratio.

Ensuring adequate capitalization via net worth is one of the most basic regulatory controls. The industry’s long-standing rule of thumb is that net worth growth must be equal to or greater than asset growth. However, this control can get out of hand, causing capital constraints that stifle much-needed assistance to members in need and even a credit union’s ability to grow.

Remember, too, that credit unions have a double bottom line mandate. The industry is supposed to direct its financial power to worthy causes, namely the betterment of its community. This may be extending assistance to the financially underserved. It may also be giving value back to members or ensuring staff are well-paid and cared for. The causes that a credit union deems “worthy” all depend on the strategic direction set by the board. But, at the end of the day, capitalization conversations should always gravitate around this central question: Are we doing well by doing good?

CFOs have a responsibility to keep financial excellence conversations on the purpose-filled path. They can do this by reporting on dual metrics: 1) Revenue necessary to outgrow costs and losses (grow capital ratio), and 2) Revenue necessary to make a difference for members, staff and the community.

2. Are You Earning Enough Non-Interest Income?

Growing revenue to outweigh the drag of costs and losses is a basic must-do. And, CFOs continually monitor balance sheet composition and calculate net interest margins to ensure adequate harmony between income and expense. However, cost control and interest rate adjustments are far from the only options credit unions have for building a strong capital ratio. Non-interest income (NII) is the elephant in the boardroom of many a financial cooperative.

NII can be the cherry on top, the gas in the tank, the oil to keep your financial engine running at unprecedented speeds. The revenue improves your financial factory power with little, perhaps even no, drag on your net worth ratio.

Granted, some NII is associated with lending products, which can create an extra layer of necessary analysis. Savvy CFOs often solve for this by breaking NII out into asset-related and non-asset-related income. It’s a job made much easier with the help of automated reporting, customized to the credit union’s financial reporting workflows (AdvantEdge Digital is here to help with this!).

3. When and How Often Are You Reporting on Financial Performance?

Speaking of reporting, how is a financial factory that runs 24x7 and accrues interest daily expected to perform at peak levels when it only measures that performance once a month? Sounds outrageous when it’s put like that, doesn’t it? Yet, historically, that’s how often a credit union’s board of directors is shown the numbers. That 30-page, often difficult-to-consume, board pack is their only view into the “real-time” performance of the credit union.

Given today’s awesome data and technology capabilities – not to mention the amped-up expectation for speed – it’s surprising that monthly reporting continues to be an acceptable practice.

Of course, there’s a sizable difference between financial reporting for the board or an examiner and internal measurement to stimulate strategic conversations around a credit union’s approach to a problem or opportunity. A CEO may only need to pull financial statements together on a periodic basis, but sales are occurring daily in the financial factory. When action happens daily, it needs to be measured just as often. Otherwise, leaders are flying blind. Especially today, with challenges from the pandemic to the election, natural disasters to struggling local economies, credit union CEOs, CFOs and their board advisors have to be able to make well-informed changes on a dime.

Waiting for a monthly balance sheet to make a critical decision can greatly (and maybe negatively) impact members, staff or the community. Take loans, for example. A credit union often determines peak performance by tracking production of new loans and receipt of new deposits. In fact, the net interest margin is the key input to the financial statement. Imagine the actionable insights that could come from daily monitoring and analysis of new loan production, month-to-date, by channel, branch, product or loan officer. Now imagine it’s all automated. And you can get to those insights from the smartphone in your pocket or the tablet on your passenger’s seat.

Investing in better business intelligence and financial data analytics puts CFOs and their credit unions in a much-improved position to meet that double bottom line mandate. Understanding – every single day – how strong the financial factory is performing is a surefire way to do well by doing good.