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Activity Based Costing, Profitability & Credit Granting
Presentation Contents <ul><li>ABC Definition, Model & Process </li></ul><ul><li>Deliverables & Objectives of ABC </li></ul...
A ctivity   B ased   C osting
What is ABC? <ul><li>ABC is a scientific method of  accurately allocating  costs to cost objects (products / client profil...
The ABC Model <ul><li>General Ledger costs represent  resources  (people / property / services / machines) </li></ul><ul><...
The ABC  Process General Ledger Department / Branch Costs Resources Activities Cost Objects 100% of R150m 100% of R150m 10...
Deliverables & Objectives <ul><li>Fixed and variable costing for products, client profiles and branches </li></ul><ul><li>...
ABC Project Key Components <ul><li>Data Warehouse: quality data in = quality data out </li></ul><ul><li>Metify Software: a...
Profitability of  Products
Products: Average Loan
Products: Average Revenue
Products: Average Cost
Products: Ave Contribution
Products: Min Loan Size
Profitability of  Client Profiles
Client Profiles: Bad Rates
Client Profiles: CIR
Client Profiles: ROE
Client Profiles: Ave Revenue
Client Profiles: Ave Cost
Client Profiles: Ave Contribution
Profitability &  Credit Granting
Profitability & Risk <ul><li>Traditionally credit granting decisions are based on risk odds </li></ul><ul><li>Risk odds ar...
Profitability Graph
Profitability Matrix  for   Products & Behavioural Client Profiles
Product / Profile Matrix: Bad Debt to Income 0.0% 0.4% 37.2% 1.6% Purple - Rehab. 108.4% 104.4% 32.5% 11.5% Ore 35.6% 31.8...
Product / Profile Matrix: Cost to Income Ratio 13.1% 35.1% 81.8% 426.0% Purple - Rehab. 67.6% 53.4% 54.3% 274.5% Ore 28.8%...
Product / Profile Matrix: Return on Equity 0.0% 351.6% -52.7% -1217.5% Purple - Rehab. -102.1% -182.1% 43.9% -1051.4% Ore ...
Product / Profile Matrix Average Profit before tax -  -  2,676  -  89  -  182  Purple - Rehab.  -  2,943  -  1,578  76  - ...
Profitability Matrix for Application Joint Odds
Application Joint Odds 146 126 106 86 66 46 26 0 145 125 105 85 65 45 25 3 144 124 104 84 64 44 24 2 143 123 103 83 63 43 ...
New Account FTL’s : Ave Contrib. 220  152  125  92  48  -  16  40  0 90  -  20  -  148  -  251  -  349  -  1,081  -  147  ...
New Account Re-apps: Ave Contrib. 317  287  207  149  81  16  -  41  -  7  -  947  -  1,104  -  1,171  -  695  274  -  88 ...
Summary & Conclusions
Practical Applications <ul><li>Empirical data for decision making </li></ul><ul><li>Understanding Profit, CIR, ROE per pro...
Practical Applications <ul><li>Which are your unprofitable client profiles – restrict credit </li></ul><ul><li>What are th...
Summary & Conclusions
Practical Applications <ul><li>Empirical data for decision making </li></ul><ul><li>Understanding Profit, CIR, ROE per pro...
Practical Applications <ul><li>Which are your unprofitable client profiles – restrict credit </li></ul><ul><li>What are th...
CI Decisions Made <ul><li>To discontinue lending the 12 month product to Bronze profile clients </li></ul><ul><li>To disco...
CI Decisions Made <ul><li>To reduce the approval rate on lending to new account profiles, particularly FTL’s and / or intr...
CI Next Steps <ul><li>Update the model with current data </li></ul><ul><li>Run a 6 & 12 month model as at 31/03 </li></ul>...
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Activity-Based Costing

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Transcript of "Activity-Based Costing"

  1. 1. Activity Based Costing, Profitability & Credit Granting
  2. 2. Presentation Contents <ul><li>ABC Definition, Model & Process </li></ul><ul><li>Deliverables & Objectives of ABC </li></ul><ul><li>Product & Client Profile Profitability </li></ul><ul><li>Profitability Based Credit Granting </li></ul><ul><li>Practical Application of Info </li></ul>
  3. 3. A ctivity B ased C osting
  4. 4. What is ABC? <ul><li>ABC is a scientific method of accurately allocating costs to cost objects (products / client profiles / branches) </li></ul><ul><li>It aims to avoid the arbitrary allocation of overheads to cost objects </li></ul>
  5. 5. The ABC Model <ul><li>General Ledger costs represent resources (people / property / services / machines) </li></ul><ul><li>Resources are used to perform activities (applications / approvals / payouts / receipts / credit control) </li></ul><ul><li>Activities are performed to service or deliver or provide cost objects (products / client profiles / branches) </li></ul>
  6. 6. The ABC Process General Ledger Department / Branch Costs Resources Activities Cost Objects 100% of R150m 100% of R150m 100% of R150m 100% of R150m Volume Drivers
  7. 7. Deliverables & Objectives <ul><li>Fixed and variable costing for products, client profiles and branches </li></ul><ul><li>Unit costs per activity </li></ul><ul><li>Profitability of each product, client profile and branch </li></ul><ul><li>Drill-down capability e.g. profitability of 12 month bronze clients in Durban </li></ul><ul><li>Monthly automated electronic model </li></ul><ul><li>Promote the profitable, review the unprofitable </li></ul>
  8. 8. ABC Project Key Components <ul><li>Data Warehouse: quality data in = quality data out </li></ul><ul><li>Metify Software: ability to drill down into detail => impossible in a spreadsheet </li></ul><ul><li>Consultants: knowledge of software, guidance of process, dedicated time </li></ul><ul><li>GL & Process Knowledge: must understand what drives the costs </li></ul><ul><li>O&M Expert: accurate work measurement of branch activities </li></ul>
  9. 9. Profitability of Products
  10. 10. Products: Average Loan
  11. 11. Products: Average Revenue
  12. 12. Products: Average Cost
  13. 13. Products: Ave Contribution
  14. 14. Products: Min Loan Size
  15. 15. Profitability of Client Profiles
  16. 16. Client Profiles: Bad Rates
  17. 17. Client Profiles: CIR
  18. 18. Client Profiles: ROE
  19. 19. Client Profiles: Ave Revenue
  20. 20. Client Profiles: Ave Cost
  21. 21. Client Profiles: Ave Contribution
  22. 22. Profitability & Credit Granting
  23. 23. Profitability & Risk <ul><li>Traditionally credit granting decisions are based on risk odds </li></ul><ul><li>Risk odds are a measure of bad debt only </li></ul><ul><li>Profitability is a measure of revenue, costs and bad debt </li></ul><ul><li>Minimising Bad Debt does not necessarily maximise profits </li></ul><ul><li>There is an optimal level of bad debt at which profits are maximised </li></ul>
  24. 24. Profitability Graph
  25. 25. Profitability Matrix for Products & Behavioural Client Profiles
  26. 26. Product / Profile Matrix: Bad Debt to Income 0.0% 0.4% 37.2% 1.6% Purple - Rehab. 108.4% 104.4% 32.5% 11.5% Ore 35.6% 31.8% 17.4% 6.6% Tin 21.8% 6.9% 11.1% 4.7% Steel 6.7% 4.5% 11.3% 6.9% Bronze 2.7% 4.4% 6.3% 2.4% Silver 1.6% 2.6% 4.0% 1.1% Gold 2.7% 2.3% 3.6% 0.8% Platinum 3.6% 2.7% 3.5% 0.1% Diamond 12 M REAPP 6 M REAPP 4 M REAPP 1 M REAPP  
  27. 27. Product / Profile Matrix: Cost to Income Ratio 13.1% 35.1% 81.8% 426.0% Purple - Rehab. 67.6% 53.4% 54.3% 274.5% Ore 28.8% 30.8% 45.4% 242.0% Tin 27.9% 27.0% 41.5% 249.2% Steel 28.9% 22.8% 45.5% 272.8% Bronze 16.6% 20.9% 51.1% 280.9% Silver 14.4% 20.7% 51.1% 275.4% Gold 15.5% 28.8% 76.6% 300.8% Platinum 14.6% 26.8% 67.4% 274.1% Diamond 12 M REAPP 6 M REAPP 4 M REAPP 1 M REAPP  
  28. 28. Product / Profile Matrix: Return on Equity 0.0% 351.6% -52.7% -1217.5% Purple - Rehab. -102.1% -182.1% 43.9% -1051.4% Ore 41.0% 96.9% 119.4% -877.6% Tin 51.8% 104.8% 153.5% -834.9% Steel 30.5% 134.6% 122.4% -909.2% Bronze 72.5% 171.3% 105.3% -873.5% Silver 79.0% 168.1% 107.4% -835.8% Gold 81.4% 116.8% 36.7% -942.8% Platinum 88.1% 117.6% 54.1% -846.8% Diamond 12 M REAPP 6 M REAPP 4 M REAPP 1 M REAPP  
  29. 29. Product / Profile Matrix Average Profit before tax - - 2,676 - 89 - 182 Purple - Rehab. - 2,943 - 1,578 76 - 155 Ore 902 785 232 - 140 Tin 1,206 640 310 - 129 Steel 584 818 247 - 144 Bronze 1,388 965 193 - 137 Silver 1,513 907 180 - 128 Gold 1,525 618 51 - 142 Platinum 1,675 628 82 - 134 Diamond 12 M REAPP 6 M REAPP 4 M REAPP 1 M REAPP  
  30. 30. Profitability Matrix for Application Joint Odds
  31. 31. Application Joint Odds 146 126 106 86 66 46 26 0 145 125 105 85 65 45 25 3 144 124 104 84 64 44 24 2 143 123 103 83 63 43 23 1 142 122 102 82 62 42 22 780+ 141 121 101 81 61 41 21 760-779 140 120 100 80 60 40 20 740-759 139 119 99 79 59 39 19 720-739 138 118 98 78 58 38 18 700-719 137 117 97 77 57 37 17 680-699 136 116 96 76 56 36 16 660-679 135 115 95 75 55 35 15 640-659 134 114 94 74 54 34 14 620-639 133 113 93 73 53 33 13 600-619 132 112 92 72 52 32 12 580-599 131 111 91 71 51 31 11 560-579 130 110 90 70 50 30 10 low-559 41+ 35-40 26-34 16-25 10-15 6-9 0-5 Score
  32. 32. New Account FTL’s : Ave Contrib. 220 152 125 92 48 - 16 40 0 90 - 20 - 148 - 251 - 349 - 1,081 - 147 3 - 255 - 386 - 235 - 336 - 422 - 118 - 1,202 2 - 339 - 554 - 385 - 306 - 280 - 260 18 1 434 417 309 263 164 184 457 780+ 443 391 244 215 176 71 5 760-779 410 371 256 214 103 81 - 1 740-759 422 332 217 155 76 54 27 720-739 384 341 226 133 48 29 68 700-719 310 262 182 105 13 8 - 87 680-699 320 323 209 133 85 - 172 - 111 660-679 336 296 213 139 88 - 16 - 140 640-659 357 292 221 149 108 10 77 620-639 357 333 243 164 77 - 38 61 600-619 355 289 230 175 135 211 - 414 580-599 259 262 208 88 110 - 425 143 560-579 291 252 150 142 92 - 51 286 low-559 41+ 35-40 26-34 16-25 10-15 6-9 0-5 Score
  33. 33. New Account Re-apps: Ave Contrib. 317 287 207 149 81 16 - 41 - 7 - 947 - 1,104 - 1,171 - 695 274 - 88 3 - 12,530 - 1,119 - 1,048 - 1,147 - 980 - 1,842 499 2 417 - 5,148 - 3,390 - 1,542 - 2,859 - 2,846 2 1 475 446 324 281 194 219 134 780+ 446 439 325 252 165 - 8 73 760-779 438 403 323 251 176 45 135 740-759 508 391 311 203 97 93 39 720-739 458 403 261 135 78 - 159 - 110 700-719 382 346 232 145 24 8 124 680-699 372 384 260 200 95 128 20 660-679 374 367 251 140 110 60 26 640-659 369 337 219 151 117 91 - 73 620-639 393 364 242 162 145 - 120 - 340 600-619 423 300 199 154 63 - 5 - 1,622 580-599 349 113 121 69 9 188 - 560-579 178 31 103 67 - 22 - - low-559 41+ 35-40 26-34 16-25 10-15 6-9 0-5 Score
  34. 34. Summary & Conclusions
  35. 35. Practical Applications <ul><li>Empirical data for decision making </li></ul><ul><li>Understanding Profit, CIR, ROE per product per profile </li></ul><ul><li>Which are the profitable products to promote </li></ul><ul><li>Which are the unprofitable products to re-price or discontinue </li></ul><ul><li>Which are your profitable client profiles to target </li></ul>
  36. 36. Practical Applications <ul><li>Which are your unprofitable client profiles – restrict credit </li></ul><ul><li>What are the minimum loan sizes per product for profitability </li></ul><ul><li>Understanding what approval / bad rates are optimum per product to maximise profits </li></ul><ul><li>Promoting a product / client profile mix that maximises profits </li></ul>
  37. 37. Summary & Conclusions
  38. 38. Practical Applications <ul><li>Empirical data for decision making </li></ul><ul><li>Understanding Profit, CIR, ROE per product per profile </li></ul><ul><li>Which are the profitable products to promote </li></ul><ul><li>Which are the unprofitable products to re-price or discontinue </li></ul><ul><li>Which are your profitable client profiles to target </li></ul>
  39. 39. Practical Applications <ul><li>Which are your unprofitable client profiles – restrict credit </li></ul><ul><li>What are the minimum loan sizes per product for profitability </li></ul><ul><li>Understanding what approval / bad rates are optimum per product to maximise profits </li></ul><ul><li>Promoting a product / client profile mix that maximises profits </li></ul>
  40. 40. CI Decisions Made <ul><li>To discontinue lending the 12 month product to Bronze profile clients </li></ul><ul><li>To discontinue the 1 month loan product </li></ul><ul><li>To discontinue lending to rehabilitated clients </li></ul><ul><li>To migrate as many clients as possible from 4 month loans to the 6 month loans within acceptable risk levels (Diamond to Bronze) </li></ul><ul><li>To introduce contribution break-even minimum loan sizes on all products </li></ul>
  41. 41. CI Decisions Made <ul><li>To reduce the approval rate on lending to new account profiles, particularly FTL’s and / or introduce a FTL fee of +/- R75 </li></ul><ul><li>To consider having two credit granting policies for FTL’s & Re-apps using the joint odds matrix, if the FTL fee doesn’t align profitability </li></ul><ul><li>To migrate more clients to metal profiles by changing the rules for allocating a profile </li></ul>
  42. 42. CI Next Steps <ul><li>Update the model with current data </li></ul><ul><li>Run a 6 & 12 month model as at 31/03 </li></ul><ul><li>Review the Credit related decisions with PIC Solutions </li></ul><ul><li>Update the CI internal application score </li></ul><ul><li>Run branch profitability workshops with the RM’s </li></ul><ul><li>Investigate branch optimum staffing solutions </li></ul>
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