Title: Activity-Based Costing and Managed Asset Programs in the Banking Industry
Abstract: INTRODUCTION Banks and other financial institutions are constantly revising, updating, and changing the types of products and services they offer their customers. Due to increasing competition from the Internet, third party money lenders, credit unions, and other types of financial institutions, many banks are reinventing themselves to stay on the cutting edge of business. Competition is more evident in the commercial lending sector than in almost any other facet of the banking industry. In a well-- saturated market like Evansville, Indiana, banks are constantly competing for the same customers, the same number of lending dollars. Banks differentiate themselves in a variety of ways: loan pricing, quality of customer care and service, and individualized attention programs. When a bank analyzes its lending programs, it has to ask itself, Are we providing the appropriate products and services to the right customers? In the commercial lending sector, the major types of products are: traditional lines of credit to support working capital, long term loans to purchase equipment and real estate, and other miscellaneous products, like letters of credit. Banks perform individualized analysis to offer the customer the right mix of loans that will adequately support his business needs. When determining whether to extend credit to customers, the bank must answer several interesting questions: Does the customer have adequate accounts receivable and inventory to support this line? What other assets can the bank use to collateralize this loan? How have previous lines of credit been used in the past? Is the company experiencing a growth spurt, and if so, how will that affect the amount of the line? From a lending risk perspective, offering a traditional line of credit to a customer may not always be the most prudent course of action. Customers, whose businesses do not have adequate cash flow, or customers who have negative net worth, may not qualify for a traditional line of credit. When a bank wants to extend credit to a customer who does not qualify for a line of credit, regardless of the reason, the bank must seek to offer alternate products. One alternative is an accounts receivable factoring program. Acting as a factor, the bank purchases invoices the customer has billed to a third party. The bank gives the customer cash for the invoices, less a fee and an amount to be held in reserve against bad debt. National Bank has been offering this product to its customers since 1997. While it has undergone several systematic changes over the last 5 years, the basic premise has remained the same. Currently, it is only being offered to problem customers as a temporary stop-gap measure. Customers with negative net income and poor cash flow are offered this product for a pre-determined length of time, typically one year. During this time, the bank will financially support the customer's operations. At the end of this period, if the business shows a profit and meets any other bank-- imposed requirements, additional credit will be extended to the customer. If the customer has failed to meet any of the requirements, the customer will be asked to leave the bank. In the course of administering this program, the bank incurs several types of costs: the cost of funds, employee costs, administrative costs, and overhead costs. The bank also earns several types of fees: initial fees for purchasing invoices, deficit fees, documentation fees, and miscellaneous fees. A true cost analysis of this program has not been conducted since its inception, primarily because it is too small to command the effort. This study will apply activity based costing (ABC) and management concepts to the factoring program. With this insight into the mechanics of the program, the bank will have a better understanding of this program's profitability, or lack thereof. THE NATIONAL BANK'S MANAGED ASSET PROGRAM Daily Activities:The Managed Asset Program is staffed by one employee: the Managed Assets Program Coordinator. …
Publication Year: 2002
Publication Date: 2002-01-01
Language: en
Type: article
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Cited By Count: 4
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