Some credit unions believe that being a “Not for Profit” organization suggests that they don’t need to do profitability analytics beyond just looking at GAAP financial statements. Profitability analytics is often viewed as a profit maximization effort and thus inappropriate for credit unions. This is a false perspective.
Credit unions do not look to maximize profit, they strive to meet a “profitability target.” To accomplish this, they need to understand which members, delivery channels, credit tiers, products, etc. create or destroy overall membership value. Understanding these dynamics enables credit unions to be much more efficient in serving members and performing their fiduciary responsibility of safe and sound management of member shares. Here is how profitability analytics helps get this done:
- Sustainability: Credit unions need to ensure that they are generating enough revenue to cover their operating expenses and maintain their financial stability. Profitability analysis helps credit unions identify areas where they can improve efficiency and reduce costs.
- Member Services: Credit unions exist to serve their members, and profitability analysis can help them identify which products and services are most profitable and which ones are not. By focusing on profitable products and services, credit unions can offer better rates and benefits to their members.
- Regulatory compliance: Credit unions are subject to regulatory requirements, and profitability analysis can help them meet those requirements. For example, regulators require credit unions to maintain a minimum level of capital to ensure financial stability and that requires profits.
- Strategic planning: Profitability analysis helps credit unions make informed decisions about their future growth and development. By understanding which products and services are most profitable, credit unions can make strategic investments in areas that generate appropriate returns.
- Competitive advantage: Profitability analysis helps credit unions identify competitive advantages that they can leverage to improve member service. By understanding which products and services are appropriately profitable and why, credit unions can adjust their pricing, marketing, and product offerings to stay ahead of their competition.
- Capital management: Credit unions need to manage their capital effectively to ensure that they can meet the financial needs of their members. A good estimate of the profitability required to maintain capital is to multiply the annual growth rate times the current capital ratio.
- Risk management: Credit unions are exposed to various risks, such as credit, interest rate, liquidity, and operational risk. Profitability analysis helps credit unions assess the impact of these risks on their performance and take steps to manage them effectively.
- Board oversight: The board of directors is responsible for overseeing the credit union's financial performance. Profitability analysis provides the board with the information they need to make informed decisions about the credit union's strategic direction and financial health.
Overall, credit unions really do need access to profitability analytics just as much as a for profit bank if they want to stay competitive and serve members. Access to profitability analytics helps credit unions avoid mistakes in strategic direction and management of member’s money.