Treasurers use a wide range of metrics and key performance indicators (KPIs) to measure key areas of treasury, from capital structure to risk management. But a company’s needs can evolve over time – so it’s important to review those metrics on a regular basis and make sure they continue to support the overall business strategy.

You can’t manage what you don’t measure, as the old management adage goes. And in the world of corporate treasury there is much to measure. Indeed, research published in 2016 by KPMG found that almost two thirds (63%) of treasurers use a set of KPIs to measure the performance of their various treasury activities.

But while treasurers commonly use metrics and KPIs to assess the performance of treasury, there are different ways of approaching this task. Not all metrics will be applicable to every treasury – so it’s important to make sure that the measures looked at are the ones that are most relevant to the company and its strategic direction. Likewise, treasurers will sometimes need to review the metrics used to make sure they continue to reflect the company’s evolving strategy.

Why do KPIs matter?

Within the context of treasury, metrics can be used to measure outcomes in a variety of structures and activities, from capital structure to risk management. David Blair, an independent treasury consultant based in Singapore, says that the chosen metrics should support the treasury’s overall goal, which he defines as cost effective risk reduction (CERR), within the parameters defined by the board of directors. He points out that while costs can be measured easily, the definition of what is cost effective will vary from company to company – as will the acceptable level of risk.

When using KPIs and metrics, it’s important to have a clear view of what the treasury is trying to achieve. “KPIs are there to assess how well the treasury function is performing and how it could improve on that operation,” explains Karlien Porre, Partner, Global Treasury Advisory Services at Deloitte. “There are three topics here. There are the processes involved in developing the strategy – ‘what should we be doing?’ Then there’s the execution of the strategy – ‘are we doing it right?’ And thirdly there are the tools and enablers required to do the execution.”

Likewise, Porre identifies several different benefits that KPIs can bring:

• Controls.

  Testing the quality of controls within the treasury function and assessing how well these controls are applied.

• Process efficiency.

  Measuring how efficient processes are and identify opportunities for improvement.

• Risk management.

  Evaluating the effectiveness of the treasury’s risk mitigation strategies and techniques.

• Value.

  Demonstrating the value of the treasury function to the organisation.

Choosing the right KPIs

Not all companies are alike, and the KPIs used by treasuries will vary depending on the nature of the business. Respondents to the KPMG survey identified the most important KPI as visibility over cash (88%), followed by counterparty limit usage (63%) and forecast errors (50%). Other KPIs included portfolio value at risk (38%), cost of funds above benchmark (38%) and cash swept into in-house bank (38%).

Porre points out that some KPIs are industry specific. “In the energy and resources sector, companies may have lots of derivatives and potentially big swings in margin calls on derivatives,” she says. “In these organisations there are short-term daily liquidity targets, and KPIs against these will be very critical – whereas in other organisations those KPIs will be less relevant.”

Also key is the company’s current strategy in areas such as financing. Porre says that a company which is highly leveraged will typically have a far greater focus on metrics related to leverage and gearing, and a heavier focus on cash flow forecasts than businesses which are less highly leveraged. Even within the same company, the KPIs used by treasury can evolve over time, reflecting changes in the business model, company strategy and treasury priorities.

At Hilton, for example, the company’s strategic priorities have shifted somewhat in recent history. For several years, the treasury’s primary focus was on deleveraging, with the company moving from a highly leveraged to a more moderately leveraged organisation. But following the company’s IPO in 2013 – which raised over US$2.3bn – and the more recent spin-offs of its real estate and timeshare businesses, Hilton has achieved a more capital-light business model. As a result, Fred Schacknies, SVP & Treasurer, says there is a greater focus on returning capital to shareholders via dividends and buybacks.

This shift has had an impact on the treasury’s KPIs. “Looking back, leverage was the number one financial metric we were looking at,” Schacknies explains. “But going forward, while we’re still very mindful of our leverage – and have identified a target of 3-3.5X – our metrics have shifted to incorporate more free cash flow and the visibility needed to meet these targets.”

KPIs vs management metrics

These are not the only metrics that Hilton focuses on. Schacknies notes that like many treasuries, Hilton also measures operational activities such as forecast accuracy, the number of bank accounts, yield on cash and FX risk. “These are all things we do on a daily basis, and they are all very important in making sure we can do our most important job, which is delivering cash flow,” he says. “But to me, it’s important to make the distinction that these are all operational metrics. I wouldn’t go so far as to call them key performance indicators, because at the end of the day the board is less concerned with the efficiency of your bank account structure than with the company’s ability to achieve key financial priorities, such as buying back shares.”

In the energy and resources sector, companies may have lots of derivatives and potentially big swings in margin calls on derivatives. In these organisations there are short-term daily liquidity targets, and KPIs against these will be very critical – whereas in other organisations those KPIs will be less relevant.

Karlien Porre, Partner, Global Treasury Advisory Services, Deloitte

Schacknies emphasises that KPIs should not simply be about measurement but should also include goals for the treasury. “KPIs have to be aligned with the company’s strategic priorities – but they also, in my mind, have to be not only measurable, but also tied to some sort of objective target,” he says. “So if you are looking at free cash flow, you’ve got models that you are trying to achieve. If you’re looking at leverage, you’ve got known ranges, either that you are looking at, or that the credit rating agencies are looking at.”

In contrast, Schacknies says that metrics such as the number of bank accounts held by a company “may be measurable, but there’s no right or wrong answer for them. You can benchmark it; you can say, ‘I’ve got more or less than other companies do’ – but that in itself is only a relative observation and it has no objective truth in and of itself.”

He adds that while managerial metrics are important for carrying out day-to-day tasks, they are simply data points that come without any particular target attached. “KPIs, on the other hand, have got to be strategic and aligned, and they’ve got to have some sort of objective reality to them.”

Using KPIs and metrics effectively

KPIs and metrics can and do vary over time – so how important is it to review these on a regular basis? “Your KPIs need to be reviewed on a periodic basis, because the business might change over time,” explains Porre.

How often metrics are reviewed will vary from company to company depending on a number of factors. What’s important is making sure that the metrics continue to be a good fit for the company’s goals.

“We’ve got a few different cadences of reviewing these metrics,” comments Schacknies. “In some cases, those might be sit down meetings; in some they might just be emails. In the eight years that I’ve been here, we’ve had a number of major milestones such as the IPO – and for each of those, we’ve sat down and considered what that changes for us and what we need to focus on going forward.”

Another consideration is how companies report on KPIs. “Something to reflect on is how you efficiently and effectively report on KPIs,” Porre explains. “This links with your technology and processes – you need to know where you get the relevant information and how you can automate the collection of the data needed.”

Porre points out that the information needed may come from a variety of sources, including the core ERP system, the treasury management system, banking platforms and trading platforms. “The question is how you can pull those various information sources together in order to achieve some automation.”

Communicating the results

Finally, it’s important to know when and how to communicate the information gathered to the rest of the business.

“It really does come down to making sure your message is level-appropriate for the intended audience,” says Schacknies. “My goal is to make sure that my boss – the CFO – and everyone else above him knows what they need to know, which is anything impacting those strategic KPIs. Everything else that happens operationally in support of that is part of the ordinary course of business and need not dilute the communication with senior leadership.”

Schacknies says the same applies when his peers across the organisation have demands for information from treasury. “It’s very much on a need to know basis – it’s about respecting people’s time and ability to process information, and giving them information that’s most useful for them,” he concludes.