Getting the best out of treasury

In control with treasury performance management

Getting the best out of treasury

How can treasury expand its role and deliver more value to the company using a performance management reporting and control framework?

The treasury function is becoming increasingly integrated with the company’s core business operations, while another common model is to operate treasury as a cost or value-added center, with the aim of providing services to the business and supporting the execution of company-wide strategies. The result is that corporate treasury is under more pressure than ever before.

The department’s changing and expanding role means it is now more involved in financial processes that reside primarily outside treasury, notably the procurement-to-pay and order-to-cash cycles, but also trade and strategic finance, M&A activities and commodity risk management.

Treasury is increasingly considered as an internal financial consultant but to achieve this shift in focus, corporate treasurers will have to free up resources by standardizing and automating operational processes.

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Figure 1: Algignment of performance management model with the company’s vision, strategy and objectives

Performance measurement and management

The increased focus on the expanding role of treasury has increased the demand on timely, comprehensive and value-added performance management reporting and control. Performance measurement systems and frameworks enable the treasurer to gain insight into the performance of the organization as well as the effectiveness and efficiency of processes, systems and employees.

Performance measurement and management is important for organizations, not only to align mission, strategy, objectives and behavior, but also to focus on priorities and to numerically define the meaning of objectives and success.

Treasury performance management

Often treasury reporting is on a rather operational level and lacks strategic management and performance management reporting. However, treasury reporting and performance measurement should be aligned to the treasury objectives and policies, so that the efficacy of treasury execution can be measured. A treasury performance framework is an important aspect of the control environment of the company.

  • The characteristics of a good performance management framework are that: it is a continuous process; it focuses on goals and objectives; it ensures and integrates use of performance standards and benchmarks; it draws attention to deviations early in the process and serves as an early warning; it promotes continual improvements; and it assigns responsibilities and embeds them.

Taking performance measurement a step further, you get performance management. Here the measured results are used to assess the effectiveness and as steering-information to guide the improvement of performance. Monitoring certain indicators can provide concise information on the workings of the organization, which is visible at a glance.

These indicators can be qualitative as well as quantitative in nature and their advantage is twofold. First of all, it is a means for continuous improvement while, secondly, it ensures performance is in line with treasury objectives and policies, as well as demonstrating that treasury is on track to achieve its objectives in a quantifiable way.

The function of an indicator is not only to measure the performance, but also to create awareness about the organization’s goals. An indicator not only refers to the actual situation but can also show it against the desired objective situation or benchmark standard. Good objectives and indicators are defined in a SMART manner: Specific, Measurable, Achievable, Resultorientated and Time-phased.

Introducing a framework

A successful treasury performance and control management framework contains indicators and performance management processes on different levels. Roughly speaking, treasury’s performance can be measured and managed on three different levels:

  • Treasury operations
    Performance management on an operational level is focused on operational compliance and on improvement to achieve operational excellence in terms of efficiency. Indicators are used to monitor workload and processes, exception and escalation handling, management information and incentives. It is about managing cash and cash flows, managing treasury transactions and deals and workflows and processes.
    Real time key performance indicators (KPIs) can be used to manage and monitor treasury workflows and processes closely on a (intra-) daily basis. Ideally such KPIs should be produced by a treasury management system (TMS) without any manual intervention and are quantitative in nature on a real-time basis. By setting benchmark-based standards, treasury can also discover opportunities for process improvement, standardization and cost reduction.
  • Treasury metric
    Treasury’s mandate and responsibilities have been formalized in the treasury policy, which has a strong focus on risk management. Hence, key risk indicators (KRIs) can be used as indictors for the financial risks of the company. The KPIs and KRIs will have to be defined to not only measure compliance with policy, but also to measure the effectiveness of the policy in managing risks. This area will be predominantly managed by treasury mid-office and control. Some of the KPIs and KRIs are as follow:

    • FX risk management; interest rate risk management; commodity risk management credit risk managementlongterm liquidity risk managementshort-term liquidity risk managementcorporate finance and capital managementbank relationship management.
  • Value-adding activities
    The nature of these activities is more related to treasury’s value-adding activities based on interactions with other finance functions and business partners. More qualitative key value indicators (KVIs) can typically be used to measure the performance in this area. Performance is measured via periodic meetings and personal feedback on some of the following areas:
    • capital allocation and budgeting;
    • M&A and divestures;
    • tax and legal matters on intercompany structures and funding;
    • financial supply chain;
    • creating awareness of treasury matters related to business transactions;
    • treasury technology and infrastructure; and
    • non-recurring (treasury) projects such as a TMS implementation.

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Figure 2: Treasury performance and control management framework

Communication

With the changing and expanding role of treasury, a treasury performance and control management framework is inevitably a requirement to monitor activities and measure performance and control.

As the treasury model is integrated with the wider finance structure and operations, a treasurer can easily be misunderstood or misinterpreted by the rest of the organization. A performance and control framework will not only help to increase transparency but also illustrate and communicate the value of the treasury function.