Cash Management

Beyond Benchmarks

Treasury is far more than a processing center, as companies that can measure its true value are learning.
Vincent RyanMarch 1, 2011

Bill Schumann, finance chief at FMC Technologies, tracks how many times a month his treasury team is able to settle the company’s cash position in Europe before 9 a.m. But such process-oriented benchmarks pale in importance to one aspect of treasury operations that the oil-and-gas equipment manufacturer really needs to manage well: $1 billion worth of foreign-currency exchange risk.

Undoubtedly it’s important for treasury to be efficient at constructing a cash position, but honing its expertise in hedging FX is where the bigger reward lies. FMC’s treasury team is so good, in fact, that it now gets involved in planning for anticipated transactions — such as assessing the FX risk the company may be exposed to between the time it bids on an international project and the date the contract is awarded.

Schumann is one of many CFOs who have come to realize that treasury benchmarking needs to be brought into the 21st century. The low-level, process-centric corporate treasury benchmarking typically touted in industry surveys and published by associations no longer delivers the insight that companies need.

Why? As the recession dragged on, executive management and boards of directors began to look to treasury for critical information, such as high-level data on the status of outstanding risks and market positions, says Paul Higdon, chief technology officer at IT2, a treasury management software and service provider.

“Workflows, segregation of duties, and key controls are important, but the board wants to know whether our capital is being preserved and if we are maximizing our use of cash,” says Higdon.

In addition, CFOs have finally realized that slavishly tracking efficiency rarely produces actionable information. Many treasury benchmarking surveys measure the number of bank accounts reconciled per full-time employee, for example. One survey found that “best in class” was 87 bank accounts reconciled. But a better question, since the advent of automated reporting and reconcilement software, is whether the company needs that many accounts in the first place, says Mark Webster, a partner at consultancy Treasury Alliance Group. Companies that consolidate may find that it takes longer to reconcile the accounts because they are higher-volume, however, so an efficient treasury department could underperform on the accounts-reconciled-per-FTE metric.

In short, the metric suffers even as the business process improves. Benchmark data can also be misleading without the context — if a company outsources payroll, for example, its processing efficiency measured by number of treasury employees would rank very high.

“Best practice has been important for the last decade, but what did best practice bring us?” asks Higdon.

Raising the Bar

Getting away from low-level benchmarks means “reframing treasury to focus on results rather than processes,” says Higdon. Financial institution counterparty risk is one example. A board concerned with capital preservation, for instance, wants to know how well treasury gauges counterparty risk and keeps exposures within policy targets.

Tracking treasury effectively now hinges as much on looking forward as looking back. Craig Jeffery, managing partner of Strategic Treasurer, a treasury consultancy, says companies must think of performance measurement from three perspectives: hindsight, insight, and foresight. Hindsight is learning from the past — how treasury can be more efficient and cut costs, for example. Insight is a current view, such as how many bank accounts the company has and what it uses them for, or, whether the company is in compliance with investment-concentration risk policies. And foresight is looking into the future and being more predictive.

Counterparty risk cuts across all three perspectives. What happened the last time the company was exposed to a firm that went bankrupt or became impaired? What are the largest exposures today and what are the quality ratings or credit-default-swap spreads of counterparties? And, when a crisis or dramatic market shift occurs, how will the company handle it?

Companies that look only into the rear-view mirror risk missteps. For example, a hindsight-focused treasury team may build a cash-flow forecast based on the previous year’s numbers without factoring in a new sales discount or a shift in the macroeconomy, says Debbie McSheffrey, a director at Strategic Treasurer.

In reporting results-driven treasury metrics, the key is simplicity. “Most of our clients present them in a dashboard on a single sheet or use things like traffic-light indicators,” says Higdon. “That focuses the board’s attention on areas where treasury is close to a policy limit and needs advice.”

Vibhu Sharma, CFO of the North American commercial business for insurer Zurich Financial, uses a simple measure of how many times the company’s daily cash balance lands above or below its ideal level on both a weekly and a monthly basis. That metric is not reported to the board, but for a company that has $30 billion flowing through its treasury department it’s a gauge that affects profitability.

“We have to have the appropriate level of cash from a liquidity perspective, but not so much that we’re not earning a meaningful return,” says Sharma. (See “Cash: The Holy Grail” at the end of this article.)

Going a step further, some companies are building policy rules into their treasury-management systems for real-time alerting. “If you think about hedging ratios, rather than just presenting the result that the company is 67% hedged, the system would warn treasury that the ratio is below the policy standard of 70%,” says Higdon.

Treasury systems and banking portals don’t make constructing metrics easy. If a company wants to monitor the percent of cash held in a current account versus a deposit account, money fund, or other long-term deposit vehicle, for example, the raw data could reside in several places and in different formats. “It can be challenging to report across different asset classes,” Higdon says.

Zurich Financial is getting better at extracting information from systems, but “it’s by no means push a button and the information shows up on my iPad,” says CFO Sharma.

While CFOs don’t propose abandoning process benchmarks, they are using them with more awareness. Instead of searching for best-in-class metrics, many are starting with internal yardsticks. Why does one division have more bank accounts than another? Why does treasury spend 60% of its time on one division when that unit is far smaller than others?

“The good thing about benchmarking internally is you don’t have as much trouble getting and understanding the data, and it helps you identify the issues and see how useful the benchmarks are,” says Peter Pinfield, a partner at Treasury Alliance Group.

But some CFOs still want to see how they stack up against their peers, so they can say that their treasury group affords them a competitive advantage. For that they need comparison data from within and outside their industry. That’s when surveys from associations and professional groups can still come in handy. When annual budgeting time rolls around, FMC’s Schumann, for example, still finds treasury head count per revenue dollar a useful metric.

Sharma tracks how Zurich Financial measures against its own historical standards for treasury, but he also likes to compare the insurer with its peers. “I want to be best in class,” he says.

Vincent Ryan is senior editor for capital markets at CFO.



Cash: The Holy Grail

Treasury departments’ performance runs the gamut, but even the best rarely excel at forecasting cash flows. Yet the volatility in the global economy, and banks’ continuing hesitation to lend to some companies, has made liquidity a top priority. In addition, as long-term interest rates rise and companies migrate out on the yield curve or invest cash in fixed assets, the danger of being surprised by cash needs increases. “More companies need to do detailed cash forecasting, but most just talk about it,” says Paul LaRock, a principal at consulting firm Treasury Strategies.

To effectively forecast cash, however, finance needs to gauge how expertly treasury can get at the inputs it needs to do the analysis. Cash visibility is one common stumbling block, says Dub Newman, head of global treasury sales at Bank of America. “Am I getting a day or two delay when I try to roll up accounts and see my cash position, or is this a real-time event?” asks Newman. Even companies that have solved that issue domestically often have pain points with cash overseas. Treasurers that have to poll local country managers every morning or evening to obtain a global cash view are at a disadvantage.

Every aggregate cash-position number has to be taken with a grain of salt, however, says Paul Higdon, chief technology officer at IT2, a treasury management software and service firm. “It’s the cash you don’t know about that’s the problem,” he says. Companies with tens or hundreds of bank accounts that don’t reconcile every account on a daily basis, usually for cost reasons, have to be particularly careful.

And CFOs can’t forget about the speed of money as it winds through the treasury department, says Dyfan Williams, a managing director at Fundtech, a payment systems provider to banks. Corporate disbursements are still very paper-based, he says, and paper-based systems slow down the process of generating liquidity. — V.R.

How CFOs get treasury data from their regional offices/headquarters