Cash Management

Treasury: Bigger Is Better

The treasury departments of large, publicly held companies are outperforming those of smaller companies, and the gap is widening.
Vincent RyanNovember 9, 2010

There is a big disparity in the cost efficiency and productivity of corporate treasury departments, with larger and publicly held companies having a decided advantage over their smaller, privately held competitors, according to the 2010 Association for Financial Professionals Treasury Benchmarking Program survey, released Monday.

In most cases, that is translating into smaller companies paying more for the treasury function per $1,000 of annual revenue and employing more full-time equivalent (FTE) employees relative to revenue. Small companies (less than $500 million in revenue) also spend more time on basic treasury functions, such as managing and reconciling cash positions, than their larger counterparts do, and less time on analytical work that adds to the finance department’s strategic importance.

The typical large company (revenue greater than $2 billion) spends 32 cents per $1,000 of revenue on the treasury function; small and midsize companies spend 75% more, on average. But for companies of all sizes, the bulk of the cost is in people. Seventy-six percent of a treasury department’s cost is in personnel, compared with 9% for overhead and 7% for ongoing systems costs. The median personnel cost among respondents for FTE employees was $100,000, including salary and benefits, compared with $69,000 for FTEs in the finance department overall.

While companies spend most of their treasury operating budgets on personnel, that’s not where the root of efficiencies is. The AFP survey examined the ability of treasury departments to complete seven different critical tasks efficiently and effectively. Performance on so-called cycle times varied widely. For example, the typical organization took four hours to develop a short-term cash-flow forecast, but those in the top 20% of performers — “benchmark” companies — took only two hours. Similarly, the typical company needed 2 days to resolve a bank-account discrepancy, versus 1 day for a benchmark company. In some industries, treasury departments are wildly inefficient at this task: the average transportation and warehousing company needed 10 days to resolve such problems, while the average government organization took 5 days.

What may be distressing for the companies not in the top 20% of treasury performance is that the cycle-time gap widened between average and benchmark companies compared with previous years’ surveys, says Annette LaPrade of IBM Global Business Services. (IBM was one of the survey’s sponsors.)

Benchmark companies were aided by their efficient use of systems that typically can pull data from integrated, enterprisewide data sources. “Benchmark operations rarely use spreadsheets,” says Srikuma Vishwanathan, an executive at IBM GBS. And even with the deployment of systems, larger companies have cost advantages. On average, ongoing system costs in treasury represent 7% of the operating budget, but smaller and privately held companies spend more per $1,000 of revenue on treasury-supporting IT. “Because systems are typically very scalable, the greater transaction volume of large organizations can often be supported with little or no additional systems costs compared to those of smaller organizations,” the survey report said.

Sophisticated IT systems help leading treasury departments handle greater transaction volumes. For example, the survey found that larger companies process many more cash receipts per employee than small companies do. That frees up treasury personnel to focus less on rote finance functions and more on analytical work, says Vishwanathan. For example, treasury contributes to strategic M&A activity at 59% of companies with more than $2 billion in revenue, but does so only at 41% of smaller companies. Moreover, only 29% of treasury personnel at small and midsize companies manage counterparty risk and trading partners, while 58% of treasury teams at large companies do so.

The AFP survey also examined the influence of professional experience, staff tenure, educational attainment, and training on treasury-department performance. In general, the relationship between these factors and department efficiency was weak; however, at certain levels companies employing highly experienced, trained, and educated personnel were able to get the same amount of work done with fewer treasury employees. “The personnel element of treasury contributes only moderately to efficiency and cycle times — it’s more the technology,” says Vishwanathan.

Interestingly, the benefits of treasury staff training appear to be subject to the law of diminishing returns. Beyond three to five days per year, additional training days do not lead to efficiency improvements, the survey found.

The results of the third annual AFP survey were based on the responses of 520 companies; 25% had revenue of more than $1 billion.

IBM’s LaPrade cautions CFOs and treasurers about how to use the benchmarking data. “Look at the data as directional,” she says, “not as one cycle time or FTE count you need to achieve.”