Performance Measurement In Treasury

Performance

Measurement

in Treasury

Corporate Treasury Consulting

Key Performance Indicators (KPIs)

KPIs help companies measure the extent and effectiveness to which companies meet objectives against a defined

target. Performance can be tracked for processes, employees or systems.

Every business has a unique set of challenges and opportunities when defining relevant KPIs. Here are some general examples

– for a comprehensive review please reach out to your relationship manager.

Types of KPIs

n Quantitative: measurement based on numeric values.

n Qualitative: measurement based on interpretation Event-driven: measurement based on a pre-defined event.

Best Practices for Setting KPIs

n Use SMART goals to design target values and KPIs — Specific, Measurable, Achievable, Relevant and Timely

n Collaborate on performance measurement across departments to avoid competing KPIs

n Ensure measurement is feasible and does not exceed budget (if applicable)

n Implement a process to regularly review target values and adjust as needed

n Examine all KPI incentives to prevent undesired behavior

5 Key Treasury KPIs and Their Objectives

Cash and liquidity

Funding and investment

Market risk exposure

Treasury operations and

Risk management and

management management management accounting policy compliance

The business has the Funding is available and Future cash flows and Controlled, transparent and Financial risks are

cash it needs at the right financial assets are earnings are protected efficient transaction life monitored.

place and time. optimized. against market volatility. cycle management is

enforced.

Source: Journal of Corporate Treasury Management Volume 4, 4 293–310

KPI 1: Cash and Liquidity Management

To ensure that th e b u s iness h a s t h e c a s h it needs a t t h e rig h t pla c e a n d ti m e , c o n s id e r t h e follo w i n g

indicators:

Effectiveness and Accuracy Timeliness, Speed

n Cash visibility n Percentage of account balances reported on time

• Percentages and amounts of balances outside cash concentration

n Cash forecasting error:

structure and/or core banking group (i.e. “external liquidity”)

• Number of times reporting deadlines have been missed

• Number of times and percent in certain period of inaccurate cash

position revealed on T+1 (time since previous forecast)

n Cash forecasting error:

• Percentage forecast error by business unit

• Accuracy:

Actual–forecast

• Deviation in percentage:

Forecasted cash balance

• Number of times exceeding X% threshold

Process Efficiency Visibility, Control and Oversight

n Percentage of balances reported automatically vs. manually n Percentage and volume of accounts vs. all accounts for which

balances are regularly being reported

n Cash visibility

• Trend analysis of percentage of restricted (and/or trapped) cash vs.

n Cash visibility

total cash over the past number of months

• Minimum/maximum cash balances, amounts and percentage

• Trend analysis of days cash available: total available cash/average • Percentage of restricted (and/or trapped) cash vs. total cash

daily disbursement

total available cash

• Days cash available =

average daily disbursement

Cash forecasting:

• Trend analysis of percentage forecast error by business unit over

n Cash forecasting error:

the past number of months

• Internal competition: 3 most accurate business units per

month/period

KPI 2: Funding and Investment Management

To e n s u r e a v a ilable fundin g a n d optim iz e d use of f in a n c ial a s s e ts, c o n s ider t h e f o llowin g in d icato r s :

Effectiveness, Accuracy Timeliness, Speed

n Return on investment, planned vs. actual n Funding buffer: Number of times below threshold and exceeded

amount percentage against threshold amount

n Accuracy of interest expense forecast:

n Number of ad hoc funding requests after request deadline (e.g. T+2)

Actual − forecast

forecast interest expense

n Interest rate on debt instruments vs. benchmark

Process Efficiency Visibility, control, oversight

n Asset/liability mismatch (currency, interest, maturity) n Investment portfolio liquidity ratios (current, quick, debt/liquidity,

debt/assets)

n Funding buffer: volume

n Percentage of non-interest-bearing cash vs. total cash

n Cost of funds performance (cost/debt issued per tranche/annualized/

n Segmentation/concentration of investment portfolio by maturity, issuer,

across full program)

instrument type, credit rating

n Weighted average of credit rating of investments/issuers vs.

n Cash flow to debt ratio

investment policy

n Available credit: total principal value of drawn credit/total principal

value of all credit facilities

n Fixed/floating interest rate mix

n Percentage of committed credit facilities vs. all facilities

n Debt mix: short/long term vs. total outstanding debt

n Debt covenants (e.g. debt/EBITDA, interest coverage, debt/equity,

debt/assets, total assets, dividend payout ratio)

KPI 3: Market Risk Exposure Management

To e n s u r e t h a t th e v a lue o f f u ture c a s h f lo w s a n d e a r n in g s is p r o t e c t e d again s t m a r k e t v o la t ilit y,

consider the following indicators:

Effectiveness, Accuracy Timeliness, Speed

n Hedge ratio: n Time taken to confirm transactions

• Underlying transactions (i.e. exposure) vs. hedges in place for

n Execution speed: time between exposure identification by business

respective periods and currencies

unit/ subsidiary, reporting to Treasury headquarters and hedge

• Hedge ratio actual vs. outlined policy (% hedged deviating from execution

allotted limit)

n Unconverted balances held beyond time frame set in policy

n Accuracy of reported exposure vs. actual

n Accuracy of communication with counterparties

n Hedge Accounting: retrospective hedge effectiveness

Process Efficiency Visibility, Control and oversight

n Number and volume of trade errors, i.e. buy/sell wrong side, wrong

n Counterparty limit utilization

currency pair

n Hedge ratio breaches

n Market rate conformity check:

n Currency balances held unconverted in a currency account exceeding

• Number of times transaction rate is outside of range laid out in

internal threshold

policy—total, per staff member, per banking partner

• Total of (estimated) commission paid over number of trades—by

currency, banking partner

• Trend analysis of number and volume of trades per banking partner

KPI 4: Treasury Operations and Accounting

To e n s u r e c o n t rolle d , t r a n s p a rent a n d e ffic ie n t t r a n s a c tio n life c y c le m a n a g e m ent, c o n s ider t h e

following indicators:

n Delay time of trade-related settlements

n Number of days for cash transactions to hit the general ledger

n Time to determine daily cash position

n Percentage of payments released on time

n Number of late trade-related settlements

n Percentage of payments succeeding first time/STP

• Percentage of auto-reconciliation in ERP of daily transactions

on bank account

• Percentage of payments released on online platform vs. host-

to-host

• Number of system-generated payments (from ERP/TMS) vs.

manual

• Number and amounts of ad hoc payments outside of regular

payment runs of BU

n Number and percentage of repaired/rejected payments compared to

total payments

n Percentage of trade-related payments not using default settlement

instructions

n Number of payments authorized by signer not registered with Treasury

headquarters payments authorized

n Actual bank fees vs. budgeted bank fees

n Working capital (DPO, DSO, CCC)

Effectiveness, Accuracy

Process Efficiency

Timeliness, Speed

Visibility, Control and oversight

KPI 5: Risk management and policy compliance

To e n s u r e t h a t financia l r is k s a r e m onitored, c o n s ider t h e f o llowin g in d icato r s :

Effectiveness, Accuracy Timeliness, Speed

n Accuracy of staff reported for roles defined in policies (e.g. currency n Time since last account signer reconfirmation

manager) vs. recorded in systems

Process Efficiency Visibility, Control and oversight

n Number of accounts with full details (i.e. signers, purpose) reported to

n Net exposure to each counterparty across credit ratings (long- and

headquarters.

short-term)

n Number of times update from subsidiary to HQ exceeded allowed time

n Total value/cash flow/earnings at risk

frame

n External audit of treasury processes passed/minor findings

n Risk analysis:

• Impact of significant change in interest rates onto investments

• Value at Risk (VAR)

n Number of bank accounts with core and noncore banks

Data as the Backbone of KPI Measurement—and Beyond

A fragmented and often rudimentary system landscape can limit companies’ opportunities to collect and analyze

data to offer insights into strategic drivers of the business.

What Can Data Do for You?

Data enables optimization

n Meaningful data is necessary to

support making changes

Create stronger strategies based on

data with an active approach

Data is indisputable—actionable

analytics and insights take

subjectiveness from the equation

Data builds better customer and vendor relationships, including:

n Better website personalization and user experience

n Improved knowledge of customer and vendor communication preferences

n Awareness of client interests

Data strengthens internal teams’ ability to

focus on what matters

Data quantifies the purpose of your work, letting

the numbers speak for themselves

Use data as your shield—be prepared for

audit requests

Considerations for Your Data Path

n Put a data management team in charge (e.g., single source, single extractor)

n Identify critical and relevant data (e.g., what type, in which format, what is needed, what is nice to have)

Decide on method of data collection (e.g., data origin, availability, accessibility)

Data

Warehouse

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