358:, or profitability systems that they use to keep track of their customer/member relationship activities. The data in these systems can be analyzed and grouped to gain insights into profitability contribution of each customer/member, product, market, delivery channels, and salespeople. Reports illustrating the concentrations of net income are used by senior management to show (1) the location of the concentrations in the income statement, (2) the levels of the concentrations, and (3) the predictions for future earning losses to be drawn from the concentrations. Often, these reports examine earnings contributions by
330:
customer accounts, a loss of a limited number of products, a loss of a select market, a loss of a small number of delivery channels, and/or a loss of a few salespeople can result in significant net income volatility. At this stage, income loss risk is present and the company has reached a level of profit risk that is unhealthy for sustaining net income. The method for quantifying and assessing this potential income loss risk and the volatility that it creates to the company's income statement is profit risk measurement and management. For financial institutions, profit risk management is similar to the
346:, which states that approximately 20% of a company's customers drive 80% of the business. This rule and principle may be appropriate for some industries, but not for the financial services industry. According to Rich Weissman, it is true that this small group of customers dominate the income statement, but the old "80/20" rule no longer applies. "There are real-life examples where financial institutions have seen profit risk ratios as high as 300 percent. Their top 10 percent of customer/member relationships accounted for three times net earnings – a "300/10" rule!"
36:
320:
where the income statement lacks income diversification and income variability, so that the income statement's high concentration in a limited number of customer accounts, products, markets, delivery channels, and salespeople puts the company at risk levels that project the company's inability to
329:
When a company's earnings are derived from a limited number of customer accounts, products, markets, delivery channels (e.g., branches/stores/other delivery points), and/or salespeople, these concentrations result in significant net income risk that can be quantified. A loss of just a handful of
321:
grow earnings with high potential for future earnings losses. Profit risk can exist even when a company is growing in earnings, which can cause earnings growth to decline when levels of concentration become excessive.
292:
tool that focuses on understanding concentrations within the income statement and assessing the risk associated with those concentrations from a net income perspective.
602:
265:
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630:
520:
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408:
428:
334:
strategies commonly used for investment asset allocations, real estate diversification, and other portfolio risk management techniques.
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354:
To measure these concentrations and manage profit risk, the most important tools for financial institutions may be their MCIF,
1224:
1027:
549:
251:
623:
35:
362:(groupings of customers or other units of analysis by 10% increments), illustrating concentrations for each 10% group.
910:
802:
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643:
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920:
885:
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Reprinted with permission from The
Mortgage Press; Profit Risk: The third leg of risk management
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industry, in that it complements other risk management methodologies commonly used in the
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138:
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The concept of profit risk is loosely akin to the well known "80/20" rule or the
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455:", Michigan Bankers Magazine, March/April 2009, p 12-14, Retrieved 05/06/2010
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For Bank
Marketing, Re-Focus the Pareto Principle on Customer Profitability
1037:
316:(ALM). Profit risk is the concentration of the structure of a company's
1092:
300:
Profit risk is a risk measurement methodology most appropriate for the
1159:
359:
527:", Bank Systems and Technology, November 2009 Retrieved 05/06/2010
1174:
612:
415:", California Banker Magazine, August 2008 Retrieved 05/06/2010
556:", CUNA Operations and Sales/Services Council, August, 2005
435:", The Mortgage Press, December 2004 Retrieved 05/06/2010
468:", ABA Bank Marketing, Jan-Feb, 2006 Retrieved 05/06/2010
603:
Profit Risk: The Third
Critical Piece of Risk Management
481:", ABA Bank Marketing, March 2010 Retrieved 05/06/2010
446:
Bank
Marketers Measure Profit Risk in Changing Times
1015:
876:
841:
793:
705:
657:
650:
505:Pareto Principle and the Infinite Value of CRM
426:Profit Risk – The Third Leg of Risk Management
624:
259:
8:
654:
631:
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266:
252:
18:
567:Are You Getting the Most from Your MCIF?
406:Managing Profit Risk to Avoid a Meltdown
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229:
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151:
123:
75:
42:
26:
7:
466:Profit Decile Report: An Eye-Opener
14:
569:", ABA Banking Journal, June 1995
547:Pinpointing Preferences with MCIF
906:Conditional Value-at-Risk (CVaR)
34:
1225:Strategic financial management
1028:Asset and liability management
1:
464:Coffey, John and Palm, Gene "
803:Operational risk management
578:Retail Profit Management, "
1310:
975:Proportional hazards model
926:Interest rate immunization
492:Diversification Strategies
372:Asset liability management
314:asset liability management
277:
1294:Financial risk management
1258:
644:financial risk management
921:First-hitting-time model
886:Arbitrage pricing theory
278:Not to be confused with
1230:Stress test (financial)
936:Modern portfolio theory
507:" Retrieved 05/06/2010
494:" Retrieved 05/06/2010
310:credit risk management
1268:Investment management
1170:Investment management
896:Replicating portfolio
672:Sovereign credit risk
296:Alternate definitions
1273:Mathematical finance
1205:Risk-return spectrum
1195:Mathematical finance
1150:Fundamental analysis
1083:Exchange traded fund
667:Consumer credit risk
16:Risk management tool
1263:Financial economics
1220:Statistical finance
986:Value-at-Risk (VaR)
891:Black–Scholes model
731:Holding period risk
503:Website Magazine, "
479:Profit in the Drink
1240:Structured product
1235:Structured finance
1215:Speculative attack
901:Cash flow matching
864:Non-financial risk
761:Interest rate risk
687:Concentration risk
585:2010-03-22 at the
552:2011-07-25 at the
523:2010-03-23 at the
451:2010-06-11 at the
431:2011-07-10 at the
411:2011-07-10 at the
306:financial services
302:financial services
231:Non-financial risk
86:Interest rate risk
58:Concentration risk
1281:
1280:
1053:Corporate finance
1048:Capital structure
1002:Cash flow at risk
998:Liquidity at risk
971:Survival analysis
872:
871:
818:Reputational risk
692:Credit derivative
565:Duclaux, Denise "
276:
275:
190:Reputational risk
1301:
1155:Growth investing
1073:Enterprise value
1023:Asset allocation
1006:Earnings at risk
988:and extensions (
931:Market portfolio
795:Operational risk
780:Refinancing risk
655:
633:
626:
619:
610:
590:
576:
570:
563:
557:
545:Totty, Patrick "
543:
537:
534:
528:
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508:
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495:
488:
482:
477:Weissman, Rich "
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456:
444:Weissman, Rich "
442:
436:
424:Weissman, Rich "
422:
416:
404:Weissman, Rich "
402:
382:Pareto principle
344:Pareto principle
318:income statement
268:
261:
254:
195:Operational risk
134:Refinancing risk
38:
19:
1309:
1308:
1304:
1303:
1302:
1300:
1299:
1298:
1284:
1283:
1282:
1277:
1254:
1190:Systematic risk
1088:Expected return
1068:Economic bubble
1063:Diversification
1058:Cost of capital
1011:
868:
837:
789:
771:Volatility risk
735:Price area risk
701:
677:Settlement risk
646:
637:
598:
593:
587:Wayback Machine
577:
573:
564:
560:
554:Wayback Machine
544:
540:
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531:
525:Wayback Machine
516:Wang, Hongjie "
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490:Investopedia, "
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453:Wayback Machine
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433:Wayback Machine
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413:Wayback Machine
403:
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387:Risk management
368:
352:
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332:diversification
327:
298:
290:risk management
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153:Investment risk
111:Volatility risk
53:Settlement risk
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5:
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1016:Basic concepts
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994:Margin at risk
990:Profit at risk
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981:Tracking error
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963:
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951:Risk-free rate
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943:
938:
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849:Execution risk
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843:
839:
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836:
835:
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828:Political risk
825:
820:
815:
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805:
799:
797:
791:
790:
788:
787:
776:Liquidity risk
773:
768:
766:Inflation risk
763:
758:
756:Margining risk
753:
748:
746:Valuation risk
743:
738:
715:Commodity risk
711:
709:
703:
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699:
697:Securitization
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669:
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648:
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640:Financial risk
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596:External links
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280:Profit at risk
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240:Stranded asset
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205:Political risk
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172:Valuation risk
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167:Execution risk
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156:
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144:Margining risk
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128:
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125:Liquidity risk
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108:
106:Commodity risk
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91:Inflation risk
88:
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63:Sovereign risk
60:
55:
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40:
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31:
30:
28:Financial risk
24:
23:
15:
13:
10:
9:
6:
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3:
2:
1306:
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1245:Systemic risk
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1043:Capital asset
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1033:Asset pricing
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966:Sortino ratio
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859:Systemic risk
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840:
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808:Business risk
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772:
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764:
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629:
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588:
584:
581:
580:Decile Report
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181:Business risk
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145:
142:
140:
137:
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126:
122:
117:
116:Systemic risk
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112:
109:
107:
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102:
99:
97:
96:Currency risk
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78:
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69:
66:
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61:
59:
56:
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50:
49:
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45:
41:
37:
33:
32:
29:
25:
22:Categories of
21:
20:
1200:Moral hazard
1185:Risk of ruin
961:Sharpe ratio
853:
823:Country risk
784:Deposit risk
682:Default risk
574:
561:
541:
532:
512:
499:
486:
473:
460:
440:
420:
400:
353:
341:
328:
299:
285:
284:
223:
215:Moral hazard
200:Country risk
139:Deposit risk
68:Default risk
1250:Toxic asset
1210:Speculation
1143:social work
1128:engineering
956:Risk parity
941:Omega ratio
854:Profit risk
741:Equity risk
719:Volume risk
707:Market risk
659:Credit risk
377:Credit risk
350:Measurement
325:Description
286:Profit risk
224:Profit risk
101:Equity risk
77:Market risk
44:Credit risk
833:Legal risk
813:Model risk
727:Shape risk
723:Basis risk
651:Categories
393:References
308:industry:
210:Legal risk
162:Model risk
1180:Risk pool
1093:Financial
1288:Category
1103:analysis
1038:Bad debt
916:Drawdown
878:Modeling
583:Archived
550:Archived
521:Archived
449:Archived
429:Archived
409:Archived
366:See also
1118:betting
1108:analyst
1098:adviser
751:FX risk
360:deciles
1160:Hazard
911:Copula
778:(e.g.
717:(e.g.
1165:Hedge
1123:crime
1113:asset
946:RAROC
842:Other
338:Basis
288:is a
1175:Risk
1138:risk
642:and
312:and
1133:law
1078:ESG
356:CRM
1290::
1004:,
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973:(
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737:)
632:e
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253:v
Text is available under the Creative Commons Attribution-ShareAlike License. Additional terms may apply.
