There is a direct link between treasury leadership and financial performance according to a recent study from Citi. Using data on corporate profitability (measured by earnings/revenue ratios) and treasury performance (gathered via Citi’s own Treasury Diagnostics, CDT, between May 2019 and May 2023 that analyses treasury performance across six pillars) the study finds a correlation between top treasury performance and corporate profitability and growth.

“Company earnings-to-revenue ratio increases significantly between the bottom 25% and top 25% of treasuries, with the top 40 performing companies, as measured by this study, generating $44bn of additional earnings over the past five years,” states the report. “We find that revenue growth and earnings before interest, taxes, depreciation, and amortisation (EBITDA) growth correlates with treasury sophistication and the level of treasury digitalisation. Companies with the highest treasury sophistication and automation show the highest earnings-to-revenue ratio.”

Citi drew its results from 336 respondents of diverse organisations ranging from companies with revenues of less than $2bn to over $100bn and representing all sectors of the economy and all regions of the globe.

Billions in profits left on the table

Put another way, underperformance in treasury risks diminishing value and Citi estimates Fortune 500 companies may have left $165bn in profits behind in 2022 because of inefficient treasury processes. Similarly, top treasury performance and return on invested capital (ROIC) are correlated. ROIC increases from 5.8% for participating companies at the bottom quartile of treasury performance to 10% for those in the highest treasury performance quartile.

The study shows what differentiates top-performing treasuries. High performance in liquidity management, working capital management and technology (for automation and resilience) delivers value. “High-performing treasuries ensure that working capital is efficiently funded and liquidity is deployed to fund the company’s most important needs. They also proactively identify and mitigate financial risks.”

The report authors also argue that companies can leapfrog the historically lengthy process of becoming treasury leaders but leaning into technology as a key enabler. Higher-performing treasuries make better use of technology from systems providers and in banking services, states the report. They eliminate people-dependency with engineered processes and automation. As they advance, they put in place building blocks for digitalisation (including digital and data strategies) and use technology to transform how treasury operates. In short, companies have a path to building a high-performing treasury function and can accelerate their journey to treasury leadership by identifying the drivers of treasury performance and take advantage of solutions available today.

“The adoption and integration of treasury management systems drives the greatest improvement in overall treasury performance. Utilisation and integration of enterprise resource planning (ERP) and trading platforms with both banking systems and treasury management systems showed strong positive correlation with treasury sophistication as measured by the study.”

The report points out treasury performance has measurably improved across companies between 2019 to 2023. Larger companies (measured by annual revenue) tend to have higher-performing treasuries, mostly because larger companies have usually been around longer, offering more time for treasury to mature and have also, typically, invested more in their treasury function.

Also noteworthy is the data revealing companies headquartered in North America and Europe are more advanced. This raises the opportunity for companies headquartered in other markets to use the learnings in this study to leapfrog in treasury, as they may have in other areas of business.

The report also finds specific industries are better at integrating treasury efficiencies. Energy, power and chemicals (EPC) companies score the highest in levels of sophistication and automation. Technology, media and telecommunications (TMT) companies score at the lower end. “We also believe that TMT profitability and focus on growing revenue may have historically sheltered these companies from driving greater treasury efficiency and effectiveness.”

Effective cash and liquidity management — a minimum standard for corporate treasury — has progressed in the past four years and improving cash and liquidity management will have the most impact on improving treasury performance. The report finds the role of treasury is expanding in working capital management and treasuries increasingly address working capital management across both financing and operational aspects — engaging with procurement, payments, and credit and collections to improve practices, for example.

In contrast, risk management is an area where many companies can improve. Unexpected funding needs were required by one in five companies even if they had a process in place to assess liquidity and funding risk. The focus on counterparty risk management has risen, especially for larger companies. Interest rate exposure management is less robust at smaller companies and elsewhere the report found a significant fall-off in foreign exchange (FX) hedging beyond the 12-month horizon, with only one in three companies hedging out to a two-year horizon.

Sixty-three percent of all study participants have deployed a treasury management system (TMS) or enterprise resource planning (ERP) treasury module. Approximately 90% of larger companies (greater than US$10bn in revenues) report they are either fully or partially integrated with their banking partners for the purposes of bank statements and transaction processing. This drops to 59% for the smaller companies (below US$2bn in revenues). Sixty percent of companies are now looking for transformative opportunities leveraging technology across both their core business and treasury function, compared to 49% in 2018.

In general, companies are aspiring to deploy data and analytics. This includes using predictive analytics for forward-looking insights to make better-informed decisions. However, only 40% of participants have a data strategy in place for treasury. This suggests many companies still need to put in the building blocks necessary — such as data strategies and clean data — required to support decision making through predictive and prescriptive techniques.

There are greater opportunities for treasury through better use of data, process automation, and enhanced analytics to support decision making over the last few years. High-performing treasuries have experimented and adopted many of these new techniques that have proven valuable but the ability for corporate treasury to adopt these advances remains a challenge. Many companies need to resolve infrastructure challenges, disconnected processes, and fractured data.

Citi concludes with a playbook for companies to progress their transition to digital treasury. This includes shoring up fundamentals and seeking process efficiencies and cost savings to optimise treasury operations, higher levels of process automation and a move towards predictive analytics to enhance treasury decision making. All supporting treasury to become a value-add business partner through insights that enable business growth.