Defining success: key performance indicators for treasury operations
Peter Drucker, the management consultant
behind ‘The Practice of Management’ and many other seminal works, once said: “If
you can’t measure it, you can’t manage it”. When applied to treasury
management, Drucker’s quote is particularly apt. The global financial crisis took
many companies to the edge and some fell over it. For many more, it highlighted
internal inadequacies and inefficiencies that were leaving them exposed to
liquidity constraints caused by volatile economic conditions. But even beyond
the 2008 financial crisis for companies to ensure business sustainability, stay
strong and grow, they must run optimal internal operations and effectively deal
with external challenges.
Certainly, the role of the treasurer has both
evolved and grown. Today, treasurers not only manage cash, working capital,
risk management, funding options and overall treasury efficiency, they also
serve as internal advisors to their company. In addition to managing multiple
functions of critical importance, they must communicate their findings and
advice to other internal stakeholders who are perhaps less familiar with
treasury and finance processes.
This is no easy task, although it is made a
lot smoother through strong measurement. In order to improve the efficiency of
any process, the treasurer must evaluate how it used to work, how it currently
works, and how it should work in the future. Key performance indicators (KPIs)
are the treasurer’s strategic tools for such an evaluation – often quantifying
performance and enabling the treasurer to identify areas for improvement to
drive a business forward. They are becoming increasingly popular as more
companies recognise the importance of treasury efficiency.
While KPIs can be considered the most
valuable instrument in the treasurer’s toolbox, they can be challenging to
define and measure. As a general rule, a clear definition is essential for KPIs
to be actionable. Treasurers also need to ensure that the necessary data points
or information can be collected in an efficient manner. Lastly, the KPIs should
be conceptually simple – that is, easy to communicate to all stakeholders
Choosing the right KPIs for the company is,
therefore, imperative for successful treasury operations. As each organisation
is different, the treasurer must tailor his or her measurement tools to align
with the company’s strategic goals and objectives. In the process, both
quantitative and qualitative KPIs can be adopted. While each treasury operation
is unique, treasury responsibilities tend to focus around three core areas that
should form the key pillars of treasury KPIs. These are cash management,
funding and risk management.
Cash is the lifeblood of any company, and
ensuring that it is available and pumped into the right areas is vital. A
companies’ cash can be categorised into three types: operating cash to support
daily operations, reserve cash that can be available for unexpected needs, and
strategic cash to support long-term business growth plans. KPIs for cash
management can be set to quantify and compare how much of each type of cash a company
has, and whether it is available or trapped. They can also help treasuries
measure cash balances by different banks, business units, currencies, countries
Cash flow forecasting, whether it be for the
next day, week, or month, enables a company to establish the right level of
cash requirements for the future. To facilitate this process, KPIs can be set
to measure the variance between actual cash and forecasted cash – just as they
can be set to measure cash/ assets and cash/sales against similar ratios for
With good visibility over cash balance and
forecasted needs, treasurers will be well equipped to make informed decisions
for their investments. A KPI can be set to measure the yield improvement of
investment as well as the number of times that a treasurer had to make an early
redemption due to unexpected funding needs.
Another of the treasurer’s roles is to manage
funding and minimise the related costs. Quantitative KPIs can be used, for
instance, to demonstrate the number of days in overdraft, and the resulting
interest expense. Qualitative KPIs, on the other hand, are based on how those
funding activities help to achieve the company’s business objectives by timely
providing the most optimal funding solutions.
Finally, KPIs for risk management can be set
to evaluate the effectiveness of hedging activities. Metrics such as value of a
hedge to the value of the underlying exposure, as well as gain and loss of
hedges, are both good measurements of a treasury’s performance on risk
management. KPIs can also be set to measure the amount of booked, firmly
committed, forecasted and contractual exposures along with the hedge ratios
against set targets based on approved policy.
What’s more, on top of the core treasury
roles, KPIs can also help a company to analyse its performance on bank
relationship management. Common corporate metrics include the number of bank
accounts per legal entity, the compliance to the company’s defined counterparty
limits, and bank fees.
Of course, the point of gathering all this information is to put it to use in
driving business strategy and decisions. And in order to do so, it needs to be
communicated effectively. The treasurer must, therefore, not only choose the
right KPIs for the job, but also tailor them for relevant stakeholders and
their precise needs.
So who are the treasurer’s stakeholders?
Internally, the chief financial officer (CFO), chief executive (CEO) and the
board need to know how well the treasury is functioning. And they require
succinct information to help them make strategic decisions. The treasury team,
of course, needs the detailed information so that it can adapt processes to
improve performance. It is also the treasurer’s job to assign responsibility
for these jobs within the treasury team. Lastly, business units within the
company are internal clients of treasury. Treasury’s KPIs on cash, funding, and
risk management that support business flows and growth should be aligned with
business units’ key objectives.
Externally, banks, investors, insurers, rating
agencies and industry analysts deal with treasury as their primary contact of
the company. Measurement of the information for these touch points should be
considered in setting up the right KPIs for treasury too. These KPIs then will
be useful to communicate effectively with the relevant parties.
Driving Treasury Efficiency
To ensure business success in today’s challenging market environment,
treasuries are doing everything in their power to optimize efficiency. As
treasurers seek to increase the ways in which they add value, a high standard
of management reporting and KPIs have become critical components of success –
whether to drive progress towards business goals, create and measure value, or
in presenting this to key stakeholders.