The rule of thumb is that a bank should be growing annually in value at the rate of about 20%. This rule, however, depends on many factors such as
- Stable environment
- Capital adequacy
- High quality assets
- Efficient and effective management
- Well motivated staff
- Quality earnings
- Adequate liquidity
- Robust and up to date technology
- Compliance with Regulation and Internal Policies
The above list, if it is well managed by a bank, may help a bank to be among the most profitable or admired in the country but the “COST” profile can reduce its reputation or push the bank to the bottom of the ladder among its peers in performance metrics or lead to total distress.
Therefore the cost of funds and operating expenses can erode the revenue of a bank to zero if they are not properly managed. Simple and effective cost control techniques that a bank can adopt to manage its costs down and increase its revenue are discussed below. A bank should analyze its cost profiles diligently, identify and select the applicable techniques that can help to control the cost of doing business. Some of these techniques are:
- Cost of Funds Management – In banking, the higher the margin between the “revenue from funds” and “cost of funds” the more “the net profit” if the operating expenses is controlled. The following methods are recommended to manage the cost of funds:
- Weekly plan of deposits’ portfolio in advance using the cash flow format. This will allow the Treasurer to prepare for liquidity needs of the bank on weekly basis.
- The bank should maintain a good deposits structure that has cheaper deposits than volatile Interbank Funds.
- Daily survey of interest rates to know the market trend.
- Design of more electronic products to take advantage of the current global trend of “electronic funds transfer, lodgement and trading on different platforms”.
- The bank should maintain separate inter-bank trading funds for money market arbitrage.
- A system driven and robust deposits’ roll-over management process will enable the bank retain their deposit customers.
- Human capital cost. – In order to eliminate the hiding places and to reduce the cost of human resources a bank should slightly under-employ to enable the members of staff to stretch themselves. However, generous rewards, training and empowerment must be used to cushion the effect of the workload.
- Apply Henry Ford’s $1 Strategy – i.e. Reward a member of staff that can help to cut costs significantly by setting a target upfront as the condition to win the award. The policy should be open to all Staff.
- Value analysis – cut operating cost without reducing the quality of service in the Bank. This could be done by establishing the notional value that the cost control generates. The ultimate goal is to ensure that the measure does not reduce quality.
- Productivity Bargaining – mobilize the staff to cut costs by agreeing with them that the savings will be shared with Staff through “bonus or profit sharing schemes”.
- Method Study – study the process of every transaction from the onset to the final stage and remove superfluous functions. It could lead to redundancy of some members of staff. This should not be a problem if the consent of the Board, Management and Staff are secured before the exercise is carried out.
- Profit improvement planning – set targets or plan for costs and revenue lines that impact heavily on profit. Some banks refer to the process as “target setting”. You may adopt Peter Drucker’s “management by objective” The corporate planning department of a bank can easily handle this.
- Suggestion scheme – encourage employees to generate cost saving ideas, make suggestions and engage in open analysis of overhead problems. To encourage full participation the bank can attach “rewards and recognition” e.g. promotion for achievement.
- Inter-firm comparison – finding out how banks with similar characteristics are doing i.e. benchmark with banks that are doing well through the application of cost management.
- Zero defects operation – this is known as “error free operation” i.e. rework, mistakes or substandard processes must be avoided. This is an application of a branch of the popular Total Quality Management (TQM).
- Budgetary control measures – this tool helps to compel event to conform to plan. It involves monthly management performance review. The process is similar to the use of “variance analysis” i.e. comparing actual cost with budgeted cost to know whether the result is “adverse or positive”. It usually triggers further investigations for improvement.