According to the sixth and latest version of the Association for Financial Professional’s Treasury Benchmarking Survey there are at least four metrics that can be used by corporate treasury departments as a starting point to measure their operations and benchmark their performance against others. The survey compares median benchmarks by industry and those from “world class” companies, defined as those in the 80th percentile among the 550-plus companies surveyed.

The metrics in the study are the following:

    • FTE (full-time-equivalent) staff levels. FTEs per billion dollars of sales for key activities such as cash management, debt and investments, in-house bank accounts, financial risks and treasury policies.

 

    • Treasury cost. Cost per $1,000 of revenue, including internal and external costs as defined in the survey.

 

    • Throughput. Units processed per FTE for activities such as payment transactions and bank accounts reconciled.

 

  • Cycle times. Days required to complete activities such as resolving bank account discrepancies, developing short-term forecasts and generating the daily cash position.

 

For the first time the AFP also asked a question about corporate “environment,” or use of formal policies and procedures that could contribute to or constrain treasury’s performance.

The survey results show a clear and wide disparity between a median company’s results and a world class one’s. These disparities exist across industries, company sales size and ownership (i.e., public vs. private). The survey suggests that an FTE or cost gap with peers could warrant more investigation by a company.

What is not clear from the survey’s results is whether closing any real or perceived gaps in the four metrics can be equated with treasury “success.”

Great minds may differ, but treasury is in the liquidity and risk business. Its success and the resources required for it should be closely linked to its ability to provide the business units it supports with the “right” amount of funds, at the right time, in the right place (i.e., currency) and at the right (market) price.

The commitment of treasury staff and budget need to be connected to a desired output to learn if a good plan was well executed. Knowing that a median company commits approximately 50 percent of its FTEs to “manage cash” doesn’t tell a CFO whether those resources have successfully managed that cash.

In reality, treasury’s success depends on how well it accomplishes the following outputs:

Matching sources and uses of liquidity. A business unit without the proper levels of liquidity can neither invest in the future nor pay its liabilities when they come due. Implicit in the liquidity matching process are metrics to measure returns on funds employed, the cost of raising funds and the cost of maintaining a desired capital structure. Treasury must possess the resources needed to meet market, industry and company targets. Using fewer resources may be desirable, but it’s like driving a car without the appropriate safety equipment — you save money but risk serious consequences.

Accessing funds from reliable counterparties. Maintaining a diverse set of funding sources is essential, especially in today’s volatile global markets. Different sources carry with them different costs (e.g., bank fees), and some are not easily calculated, like the cost of a debt covenant violation. Keeping costs low by relying on a single source, like always borrowing from or converting currency at one bank, can keep resource commitments low but could mean a lack of funds at any price if that single source grows weary of your company

Optimizing risk. The future is inherently uncertain. Executing future treasury activities creates risk and costs that can be partially outside of a company’s direct control, but become real costs that affect a company’s performance (e.g., foreign exchange gains & losses). These costs should be included in any measure of treasury performance. For some companies, bank costs far exceed treasury staff costs. Leaving out market costs seriously underestimates the possible consequences of having a thinly staffed treasury department.

Integrating liquidity and risk with profitability. Most companies emphasize profitability goals. But if liquidity and risk objectives are not well integrated, the company’s success could be short-lived. The old saying, “Penny wise, pound foolish,” comes to mind.  Cycle and turnaround times can be useful metrics but only if all parts of the process are included in the cycle. A savings in one area, like a business unit, can affect cycle times in other areas, like treasury, with dire results.

End-to-end process costs. Regardless of how treasury operating costs are defined, it is unlikely that they are the only costs for a given process, like cash management or investment management. Internal accounting, auditing and legal costs plus external bank or adviser costs all play a part. “Success” should reflect an enterprise wide-goal, a result the AFP survey indicates as desirable by a majority of those surveyed. Accomplishing this success requires a team effort and the metrics to prove it.

Good examples (or bad ones) of ignoring some of the above issues are evident when observing the long-term results of companies like Enron and MF Global. These companies were some of the most profitable until they weren’t, because these profits were earned, ultimately, at great risk to the investor. Arguably, the death of these companies was hastened by the market and their counterparties who, after a point in time, refused to provide liquidity to them. Unable to generate “enough” liquidity by themselves, these companies withered and died. Whether they had the “best” treasury FTE or cost ratio wasn’t really the best metric to track.

Metrics for 2014
There is no one right benchmark for treasury. However, the following metrics should be considered in any survey that seeks to measure treasury’s efficiency and effectiveness inside a world-class company:

    • Free cash flow. If sales growth, EBITDA or earnings per share are the “best” measures of profitability, then free cash flow can complement those measures. A company that generates profits but cannot generate enough operating cash flow to fund its future investments in new products or services will eventually find it difficult to survive as competitors bring new products to market.

 

    • Liquidity available. Measured as cash balances plus unused bank lines. This number could be compared to a target or expressed as a ratio of current and future (or short- and long-term) liabilities.

 

    • Cash conversion cycle. This metric measures how long before the company will obtain more liquidity through the operating cycle. A company with low liquidity can survive, but only if more cash is forecast to arrive quickly.

 

    • Risks. A benchmark that measures the costs associated with a desired capital structure, funding sources and FX exposures. These elements add a deeper perspective to the inevitability of completing a company’s plans.

 

  • Bank relationships. Misalignment of a company’s banks with its organizational structure can be costly in terms of “best” use of funds. A cumbersome operating structure carries operating risks and more bank and legal fees. Number of banks, bank accounts and bank fees per legal entity can be a useful measure to reflect the cost of complexity and the treasury resources needed to overcome any “friction” that results from the organizational structure.

 

The AFP is to be commended for raising a serious issue, namely a lack of metrics to measure treasury’s performance. The association’s 2011 survey of more than 430 companies showed that less than 50% of companies had any treasury metrics or communicated them to the board and senior management. Even this most recent AFP survey shows a dearth of formal policies; for instance, only 15% of companies surveyed this year have formal cash management policies.

This oversight of benchmarks and policies can only make treasury’s job harder. After all, according to Peter Drucker, “What gets measured gets managed.”

Bruce C. Lynn, CTP, is a managing partner at Financial Executives Consulting Group. He has more than 20 years of corporate and banking experience in all aspects of treasury and financial management, including treasury operations, cash management, strategic planning, credit and treasury systems. He is a Certified Treasury Professional and has an MBA from New York University’s Stern School of Business.

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