Risk Management

How useful are treasury KPIs?

Published: Mar 2013
Swimmer taking breath whilst swimming

What is a KPI?

A key performance indicator (KPI) is a metric used by organisations to gauge or compare performance in terms of meeting strategic and operational goals. There are two main approaches organisations use for measuring performance – qualitative and quantitative.

  1. Quantitative KPIs are typically based upon financial targets – ie costs as a percentage of total revenue.
  2. Qualitative KPIs can alternatively be used as a complimentary measure of non-quantitative targets, such as employee satisfaction. These are often measured using more subjective methods such as surveys or questionnaires.

Some types of organisation are likely to reap more benefits from KPIs than others. For large global organisations incremental improvements in efficiency are likely to have a much greater impact than smaller businesses. But this does not mean that the treasury department of smaller organisations will not benefit at all from frequent performance measurement and improving upon processes.

Choosing which aspects of the department’s performance to measure can itself be a complicated task. KPIs will often vary considerably between treasuries, reflecting differences in policies and objectives. In some organisations there may be a greater focus on external performance – the degree of success in its dealings with external entities. In other organisations there may be a greater emphasis upon internal performance metrics, such as transaction rates, and compliance with set limits.

The table above shows a number of KPIs currently being used to measure treasury performance, in order of their perceived importance. According to Treasury Today’s 2012 European Corporate Treasury Benchmarking Study, 55% of respondents used cash visibility as their prime KPI to measure overall treasury efficiency, with a further 45% monitoring cash pooling structures.

Treasury discipline No 1 KPI No 2 KPI No 3 KPI
Overall treasury efficiency Cash visibility Cash pooling structure Costs as percentage of total treasury costs or revenue
Core cash management efficiency Cash flow forecasting accuracy Cash pooling structures Balance transaction reporting
Working capital management Days sales outstanding (DSO) Days payables outstanding (DPO) Days inventory outstanding (DIO)
Liquidity management Cash flow forecasting Short-term investments Short-term funding
Risk management Mark-to-market Hedging effectiveness Value-at-risk (VaR)
Funding/balance sheet management Net debt/EBITDA Net interest expense Weighted average cost of capital (WACC)

Source: Treasury Today European Corporate Treasury Benchmarking Study 2012

Why measure treasury performance?

Treasurers are not salesmen; their performance cannot always be measured in tangible achievements. Furthermore, treasurers have many demands placed on them at the present time – managing dwindling liquidity, new regulations in the form of Basel III and Dodd-Frank, and also the migration to the Single Euro Payments Area (SEPA). With time resources so constrained, why should a treasurer bother making the effort to measure performance? Do they not have more important things to do than calculate the value of some abstract indicator?

Below we have outlined some of the reasons why, to the contrary, measuring treasury performance is very important:

  • Control

    Treasury KPIs can be a useful method for exerting control over treasury operations. By regularly assessing the various treasury metrics, management can be assured that all team members are operating as effectively as possible and, equally, any areas of concern will also be highlighted.

  • Risk awareness and mitigation

    The treasury function has assumed increasing responsibility for the management of financial risks in recent years. Keeping a close check on risk management KPIs can help the treasurer understand where the company’s main exposures reside and evaluate hedging effectiveness.

  • Illustrating value

    In the past, the treasury departments have sometimes had difficulty demonstrating the value they contribute to the organisation. As a consequence, there has sometimes been a downward pressure on resources. By regularly collecting KPI data, treasurers can overcome these doubts, providing senior management with conclusive evidence of the contribution made by treasury to the organisations bottom line.

  • Improving treasury processes

    KPIs are a great tool for evaluating the efficiency of specific treasury processes. Once treasurers have a snapshot of all the various inputs and outputs of a process, then they can consider ways in which the process can be altered and, if necessary, improved.

The role of treasury has changed significantly in the past three or four years. Now it is seen as a very strategic unit within an organisation. There is a lot more emphasis placed within the treasury on helping the business achieve its overall objectives and helping with the strategic direction that the corporate wishes to take.

Jiten Arora, Global Head of Sales, Transaction Banking at Standard Chartered

Are KPIs applicable to treasury?

Treasury has always been regarded as a cost centre within a corporate – that is a department which adds to operational cost but contributes only indirectly to the bottom line. But a consequence of this was that treasurers often found themselves on the margins of corporations, away from the attention of senior management, and frequently under pressure to minimise expenses and manage with increasingly diminishing resources. In such a setting, measuring treasury performance made little sense – KPIs were far more common in sales departments, where measuring achievement is, for obvious reasons, far more straightforward.

In addition, corporate treasury is largely perceived to be a ‘black box’ within an organisation – isolated from the rest of the business and, for the most part, impenetrable. Few outside of treasury know which KPIs to assign to them.

But this perception as to the usefulness of KPIs for treasury was to be swept away as events began to unfold in 2008. In the post-crisis setting, treasury tasks which before were considered to be routine, such as cash and risk management, quickly became recognised to be of critical importance to the profitability and even survival of a corporation. Treasury is no longer viewed as a functional unit within a corporation that simply ensured that the basics were competently administrated. It has been transformed into a centre of greater strategic importance, more closely integrated into the core business and this provided much more scope for the integration of sophisticated KPIs reflecting the businesses overall strategic objectives.

“The role of treasury has changed significantly in the past three or four years,” says Jiten Arora, Global Head of Sales, Transaction Banking at Standard Chartered. “Now it is seen as a very strategic unit within an organisation. There is a lot more emphasis placed within the treasury on helping the business achieve its overall objectives and helping with the strategic direction that the corporate wishes to take.”

In this context, Arora believes that the measurement of treasury performance has become increasingly vital. An optimally functioning treasury, he says, can be a big advantage to companies as they attempt to navigate through an increasingly testing economic climate. “In this changing environment we absolutely think that organisations should measure treasury performance. Probably the key component for treasury performance is working capital. If you look at how trade is becoming more expensive and banks’ balance sheets are shrinking with Basel III, it is important that corporates look at their long-term aspirations and derive a lot more from their working capital.”

Risk management KPIs are also very important, according to Arora. As companies grow and begin to move into new markets, particularly in emerging markets, they will be taking on more risk than before when operating in more established economies. “New suppliers, new buyers and being in heavily regulated environments in which they are facing issues such as trapped liquidity and heightened FX risk – all these are critical parameters which make it important for treasuries to look at their performance with respect to risk management.”

The most obvious metrics for risk management are hedging effectiveness and funding costs. But Arora says that another important dimension of risk that needs to be considered is found in the supply chain. This is particularly true for companies in the process of expanding and taking on new suppliers and buyers. But how can organisations measure the level of risk that they are taking on from new counterparties? By analysing their cash to conversion ratio across the supply chain, he says. “Corporates ought to be looking at new suppliers and buyers that they have been taking on, and measuring the counterparty risk. Are they making sure that they partner with banks that are able to mitigate some of those risks that come with the new business partners?”

Selecting the right KPIs

In recent years, performance measurement has become increasingly integrated into the treasurer’s day-to-day workflows. However, a consensus on which KPIs are most helpful or indeed relevant is still some way off within the treasury community. Martin Bellin, CEO of BELLIN, a German treasury management system (TMS) provider, believes there are several reasons why measuring treasury performance remains problematic for some organisations. “When you talk about KPIs, you are talking about something that you can achieve, something you can reach,” he says. “When you work within a sales department, for example, you have to perform to a certain level and that is measured by KPIs – so the number of new contracts won and the number of deals signed.”

Treasury is often hidden in the background, sometimes operating out of view – and that has to change. If it is to change then performance indicators are definitely something which can help to demonstrate to the management the work which treasury is doing, and how the department is contributing their power and knowledge to the company’s bottom line.

Martin Bellin, CEO of Bellin

“But treasury is different. The treasury department remains a cost centre or, as some see it, a service centre. So the treasury’s performance is very often driven by third-party requirements. Of course, it is important to define targets, but in the context of a cost centre I think that the term ‘KPI’ can be a little misleading.”

Measuring performance is important for treasuries, he acknowledges, as it is for other departments. It is just that the department’s unique role within a corporation demands that performance be measured differently than it is in other areas of the company. And getting this right, he says, can be very difficult – particularly when the setting of targets is undertaken exclusively by senior management without the involvement of treasurers themselves.

“It really depends who defines the performance indicator,” he explains. “They are normally set by senior management, but it is often the case that senior management is not as concerned about the detail of treasury operations as they should be – either they do not understand or are simply not interested.”

“However, when KPIs are set it is critical to have management on board. When you ask a CEO of a large company about their sales division, they will be able to tell you what they expect should be delivered. For KPIs to be effective, management needs to reach that same level of understanding with treasury. But if the treasury department cannot get a clear answer, then what is the point of KPIs?”

But having the right targets in place can certainly be beneficial for treasurers. Beyond providing treasurers with a means to review and benchmark their performance against their industry peers, KPIs are also useful for illustrating the value of the services provided to the rest of the business. In the past, Bellin adds, treasuries have sometimes been under resourced as a result of their failure to effectively demonstrate their value to the organisation. KPIs, Bellin believes, may be just the solution.

“Treasury is often hidden in the background, sometimes operating out of view – and that has to change. If it is to change then performance indicators are definitely something which can help to demonstrate to the management the work which treasury is doing, and how the department is contributing their power and knowledge to the company’s bottom line.”

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