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Treasury Management

Developing and Automating Treasury Metrics

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September 12, 2011

By Mike Gallanis & Laurie McCulley, Treasury Strategies, Inc.

Treasury organizations are always on the lookout for meaningful metrics that can quickly highlight how various treasury functions are performing. Here are a few. 

How do you know when your treasury is operating effectively? Many treasury organizations are looking for meaningful metrics that can quickly highlight how various treasury functions are performing. And there is a significant opportunity right now for corporations to leverage treasury technology to automate key performance indicators (KPIs), as well as compliance and performance metrics.

This need for metrics is most urgent in times of market turmoil and economic distress—like over the past several years and from all signs, in the years ahead—when speed, compliance and efficiency are in demand. However, it’s a tremendous challenge to identify which activities should be measured, and how to quantify that activity in a meaningful way.

path to effectiveness

Working with corporations around the world, Treasury Strategies has identified three steps to take in order to establish effective KPIs:

1) Set overall objectives for the financial function and understand how treasury will support those objectives..

2) Decide on the specific operational, investment and strategic treasury activities needed to support financial objectives, and identify the factors that will determine success versus failure for each.

3) Establish processes and technology needed to execute and track these activities, as well as measure and report on progress toward achieving these objectives.

Objectives. The first step is to understand the overall financial goals of the corporation and set objectives for treasury to support those goals. Is your objective to minimize risk? Is it to have visibility to all of your cash worldwide? Is it to reduce errors within treasury operations or is it to streamline your banking structure?

What Should be Measured? Treasury should determine the critical activities it will manage to help achieve those objectives. With functions specifically identified, you can drill down within each to determine the parameters to monitor for ongoing performance. For example, if one objective is to ensure sufficient liquidity, treasury might designate its corporate finance, investment and cash management functions as necessary to help meet that objective. Within each of those activities, treasury would define exactly what to measure to determine the extent to which treasury is helping to maximize liquidity.

Supporting the organization

Most of the activities treasury would manage to support organizational objectives fall into three basic categories:

1) Operational activities: executing and settling financial transactions such as investments, FX and debt.

2) Portfolio analytics: tracking performance of investments, foreign exchange derivatives, commodities and debt, as well as compliance with corporate and regulatory policies.

3) Strategic initiatives: managing risk or leading efforts to enhance shareholder value in ways beyond traditional treasury.

Most companies focus their benchmarking and treasury technology on operational activities. Analytic and strategic KPIs are commonly overlooked. However, it is crucial to report meaningfully across all three categories.

Strategic KPIs are more difficult to track and report, but as clients undertake these activities they are asked for progress— sometimes it’s fairly evident.

The KPIs listed in the charts on the following page are directional illustrations. Specific KPIs for your company would be determined by industry, as well as the size and scope of treasury.

Technology’s role

Treasury technology tools provide the means to track and report on your treasury’s performance relative to its pre-defined KPIs. The technology tools you leverage can range from a full treasury management system (TMS) to a treasury intranet, bank websites, investment and multi-bank FX portals, as well as data providing companies like Bloomberg and Reuters.

A TMS is the main technology used to aggregate data from banks and subsidiaries, as well as track and report on financial transactions. It often helps to facilitate visibility to cash as well as the execution of cash forecasts. TMS vendors are adding functionality to incorporate compliance to policy limits, broader counterparty reporting and greater portfolio analysis. All of this functionality is critical to enable measuring and assessing the metrics
outlined above.

Most companies focus their benchmarking and treasury technology on operational activities. Analytic and strategic KPIs are commonly overlooked.

Treasury intranets are often used as the central hub for the company’s financial policies and procedures. It’s also leveraged to share materials and communicate with colleagues in multiple locations.

Bank websites are offering far more robust functionality. Beyond checking balances, now it’s possible to track intercompany loans and take advantage of working capital tools.

Our market research reflects the rapid adoption of trading portals in every region. Some trading portals allow a straight-through process for confirmation and settlement activities. Many KPIs can be tracked and reported through these portals, but this functionality often goes unused. Money market funds and providers are making great strides by adding compliance limits that are customized to your company’s investment policies.

Market data companies like Bloomberg and Reuters provide a variety of ways to obtain data—increasingly, treasuries are turning to these sources for data imports on counterparty risk into a treasury technology platform in order to evaluate that risk.

Each of these tools provides a valuable function that, when integrated, enable automated reporting in the form of a dashboard. It’s important to note that while implementing or updating technology may seem like a daunting task, it’s a necessary expenditure that no company can afford to avoid.

Operational KPIs

Analytical KPIs

Counterparty Risk

Strategic KPIs

Next Steps

So how will your organization move forward? The first step is to ensure that treasury understands the financial organization’s overall objectives. Then, treasury can identify the activities it manages that are critical to the success of those organizational goals. Treasury must then realistically define the performance expectations and parameters for each activity it manages.

Treasury technology is necessary in order to establish the most effective tracking and reporting on the performance of these metrics. With a solid framework of processes and technology, treasury will be able to ensure stable and reliable support.

The global economic and political crises witnessed in the past several weeks and months have truly demonstrated the need for effective treasury processes. Those processes should include measurable key performance metrics and meaningful reports that are supported by a reliable technology infrastructure.

Without these things, treasury has no means for supporting the organization and no way of telling whether its actions are advancing or deterring the organization’s efforts to reach its objectives.

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