Design a Profitability Model for Banks in 8 Steps

Key Takeaways

  • Define your goals before starting the model design.

  • Design your model on paper before moving to digital tools.

  • Identify the necessary data and how to extract it.

  • Use a dedicated tool to build your profitability model.

  • Validate your outcomes and revise the model as necessary.

  • Automate as much of the process as possible to save time and effort.

  • Document every step of the process for future reference and continuity.

In the complex and dynamic world of banking, having a robust profitability model is essential. It provides a clear understanding of revenue streams, cost drivers, and the overall financial health of the organization. Here’s an 8-step guide to designing a profitable model for banks.

Step 1: Define Your Goals

Before you begin, it’s crucial to determine what you want to achieve with your profitability model. Are you seeking a monthly view of profitability per client, product type, branch, or channel? Do you want it on a monthly, quarterly, or yearly basis? Defining your goals will guide the design and implementation of your model.

Step 2: Design the Model

Once you have a clear goal in mind, you can start designing the model. This step involves creating a cause-and-effect relationship to understand how different factors affect profitability. It’s best to start this process on paper before moving to digital tools.

Step 3: Design Your Data Model

After designing your model, the next step is to figure out the data you need to support it. This involves identifying the data sources, how often they’re updated, and how to extract the data. You’ll need to map your design model to your data to ensure that you have all the necessary information.

Step 4: Start Modeling

With your data and design model ready, you can start building your profitability model using a tool. Avoid using Excel as it can lead to confusion and lack of transparency. Instead, use a dedicated tool like CostPerform or any other that suits your needs.

Step 5: Validate Your Outcomes

After building the model, you’ll have some outcomes. It’s crucial to validate these outcomes to ensure that your design was correct. This step involves an iterative process of checking the results, revising the design, and re-running the model.

Step 6: Build Your Reports

Once your outcomes are validated, you can start building reports. These reports should present the data in a clear and understandable format for those who will be using them.

Step 7: Automate the Process

To save time and effort, automate as much of the process as possible. This includes data inflow, creation of new months, and report building. Your profitability model tool should be able to assist with this automation.

Step 8: Document Everything

Lastly, document every step of the process. This ensures that if you’re unable to continue with the project, someone else can pick up where you left off. Documentation also serves as a valuable reference for future model building.

Part of Decoding Cost & Performance Series

Welcome to 'Decoding Cost & Performance,' where we bridge the gap between financial transparency and actionable insights. Dive deep with industry frontrunners as we address tough questions in bite-sized moments spanning 3-5 minutes each. With each episode, we aim to equip finance professionals with the skills and knowledge they need.