Build Clarity Into Your Financial Statements

Simply using ROA to gauge success is shortsighted.

June 24, 2011

Financial institutions tend to have confusing financial statements, which makes it difficult for boards of directors to understand them and to use them in strategic planning, says Mike Higgins, a partner in the accounting firm Mike Higgins & Associates.

“You need to restructure your financials so you bring clarity out of confusion,” Higgins says. “Once you do this, your board can use your credit union’s financials to set relevant growth targets that create value for your members.

“Too many boards use net income or return on assets [ROA] as a benchmark of success, but that’s shortsighted and lacks strategic focus,” he continues. “It demonstrates ignorance of how a successful credit union operates. The bottom line isn’t really your true bottom line.”

Higgins said credit unions’ strategic priorities should be:

  • The strength of the net revenue engine—it seals your credit union’s fate;
  • Operating expenses relative to net revenue;
  • Credit loss tolerance;
  • An adequate capital-ratio range; and
  • Ongoing creation of value for members.

Boards should pay attention to and develop targets for their credit union’s product mix and expense ratios. “A focus on these areas will help your board stay focused on creating value for members,” he adds.

Higgins also suggests boards use a rolling 12-quarter budget or operating plan. “The annual budget has become a dinosaur—it’s too long of a time period.”

He says the ideal performance scorecard would include net revenue or ROA, account balance growth, product mix, rate differential, expense ratio, credit losses, capital ratio, and return on equity before and after credit losses.