Results of the 2012 AFP Treasury Benchmarking Survey

Since 2008, the Association for Financial Professionals (AFP) and IBM have partnered on the AFP Treasury Benchmarking Programme. The programme’s goal is to provide benchmark data to treasury and finance professionals so they can compare the performance of their treasury operations against those of their peers. In 2012, financial services group PNC continued its underwriting support of this valuable contribution to the finance profession with the fifth annual survey.

As with the previous four surveys, the 2012 survey for the AFP Treasury Benchmarking Programme was supplemented by responses from alumni members of The Financial Executives Networking Group. AFP gratefully acknowledges all survey respondents for the investment of their time in contributing to this important research.

It is important to remember that comparing your metric results to those of other organisations is not benchmarking; the metric is not the change agent. Rather, it is the practice or process that produces the desired level of performance that is the driver of change.

The objectives of the 2012 survey of the AFP Treasury Benchmarking Programme were:

  • To determine performance levels achieved by all survey participants.
  • To define the world class (80th percentile) benchmark targets.
  • To analyse performance levels by peer groups.
  • To provide a basis of comparison for your business entity’s performance in order to identify performance gaps and evaluate opportunities for improvement.

The 2012 results underscore once again how treasury’s organisational footprint has grown in recent years through its leadership role across many financial functions and its mandate – broader at over half of organisations in the past five years. Treasury’s expanded role has consequences for operational performance, some of which may surprise.

Key Benchmarks and Metrics

The typical treasury and finance organisation uses:

  • 1.20 full-time equivalents (FTEs) for every US$1bn in annual revenue to perform cash management activities, while the benchmark organisation has 0.42 FTEs.
  • 0.76 FTEs for every US$1bn in annual revenue to manage debt and investments, while the benchmark organisation has 0.24 FTEs serving the function.
  • 0.60 FTEs for every US$1bn in annual revenue to manage financial risks, while the benchmark organisation has 0.21 FTEs serving the function.
  • 0.51 FTEs for every US$1bn in annual revenue to manage treasury policies and procedures, while the benchmark organisation used 0.17 FTEs for the same functional area.

The median number of cash receipts processed annually per ‘manage cash’ FTE is 16,667; at the 80th percentile 333,333 cash receipts are processed per FTE. The typical organisation reconciles 25 bank accounts per ‘manage cash’ FTE (including concentration, lockbox, disbursement, trust and fiduciary), while top performing organisations reconcile 99 bank accounts per ‘manage cash’ FTE.

Measures of Success

For 79% of organisations, a key metric of success for their treasury operation is its success in reducing banking expenses. Three out of four organisations link the ability of treasury to improve efficiency when determining the success of treasury, while two in three closely track the ability to reduce borrowing costs.

Many organisations also closely watch the effectiveness of the treasury function in meeting its objectives. Fifty-three percent of organisations closely watch the success of treasury managing risk, while half track the ability of treasury to meet or exceed liquidity targets. Other determinants of a successful treasury operation include:

  • Providing capital structure support (39%).
  • Reducing cycle times (35%).
  • Generating income (30%).

Table 1. Measures of Success for Treasury Departments (Percent of Organisations)

 

  All Under US$500m US$500m-
$1bn
US$1-
5bn
Over
US$5bn
Publicly
Traded
Privately
Held
Reduced banking expenses 79% 74% 75% 83% 82% 79% 75%
Improved efficiency 71 68 75 71 75 75 58
Reduced borrowing costs 65 53 72 69 75 75 58
Risk management effectiveness 53 41 64 52 67 62 41
Meeting/exceeding liquidity targets 50 47 44 50 59 54 51
Capital structure support 39 28 42 43 49 49 32
Reduced cycle times 35 36 42 30 37 30 42
Generating Income 30 28 25 33 32 29 24

 Source: AFP

There is a significant relationship between the expectations for treasury by management and key treasury metrics. For example, organisations that measure their treasury department’s success in improving efficiency have treasury departments with fewer FTEs and lower costs for treasury operations (both on a normalised basis) while matching the cycle times achieved by those that are not held to an expectation for improving efficiency.

Table 2. Relationship Between Measures of Success and Key Treasury Metrics (Organisations with Annual Revenues Greater than US$500m)

 

 

  Number of FTEs for treasury operations per US$1bn in annual revenue Total cost of treasury operations per US$1,000 in annual revenue Number of FTEs for the process “manage treasury policies and procedures” per US$1bn in annual revenue Number of FTEs for the process “manage cash” per US$1bn in annual revenue Cycle time in days from the time a discrepancy is discovered during bank account reconciliation until the discrepancy is resolved Cycle time in hours to develop short-term cash flow forecast
Reducing bank expenses is not a measure of success 2.00 .37 .24 .60 1.00 3.5
Reducing bank expenses is a measure of success 2.52 .30 .35 .82 2.00 4.00
             
Improved efficiency is not measure of success 2.73 .70 .25 .85 2.00 4.00
Improved efficiency is a measure of success 2.35 .28 .34 .65 2.00 4.00
             
Reduced borrowing cost is not measure of success 2.09 .25 .35 .73 2.00 4.00
Reduced borrowing cost is a measure of success 2.52 .38 .32 .80 2.00 4.00
             
Risk management effectiveness is not measure of success 2.20 .42 .36 .72 2.00 3.00
Risk management effectiveness is a measure of success 2.85 .29 .31 .77 2.00 4.00
             
Meeting/exceeding liquidity targets is not measure of success 2.67 .32 .25 .83 2.00 3.5
Meeting/exceeding liquidity targets is a measure of success 2.27 .35 .35 .63 2.00 4.00
             
Capital structure support is not measure of success 2.73 .29 .39 .76 2.00 3.00
Capital structure support is a measure of success 2.27 .44 .25 .76 2.00 4.00
             
Reduced cycle times is not measure of success 2.23 .29 .29 .76 2.00 3.00
Reduced cycle times is a measure of success 2.92 .48 .36 .73 2.00 4.00
             
Generating income is not measure of success 2.67 .32 .25 .83 3.50 2.00
Generating income is a measure of success 2.27 .35 .35 .63 4.00 2.00

 

Source: AFP
 
Mandate of Treasury

In a majority of organisations, treasury has taken on a number of additional functions over the past five years. Fifty-five percent of organisations have expanded the mandate of treasury over the past five years; only 5% have narrowed the focus. This phenomenon is more likely to have happened among larger organisations, particularly those with annual revenues greater than US$1bn.

Treasury operations that have taken on additional treasury responsibilities have done so with a normalised cost structure that barely differs from departments that have not seen a significant change in structure in recent years. The median total cost of treasury operations per US$1,000 in annual revenue at organisations that have broadened the scope of treasury over the past five years was US$0.32 versus US$0.28 at organisations that have not significantly altered the role of treasury.

The typical organisation responding to the 2012 survey of the AFP Treasury Benchmarking Programme places treasury in the leadership role in 10 of the 22 treasury and finance areas defined in the survey.

Table 3. Treasury Role in Key Financial Functions (Sorted by Participation)

 

  Leads Participates, but does not lead No significant Role
Cash flow forecasting 83% 17%
Bank relationship management 94 5 1
Borrowing: short-term 81 13 6
Working capital management (e.g. A/R, A/P, inventory) 42 52 6
Borrowing: long-term (capital funding/sourcing) 76 17 7
Investing: short-term 82 10 8
Risk management: financial 52 39 9
Financial planning and analysis 25 65 10
Investing: long-term 73 16 11
Internal financial consultant to other department’s business units and/or affiliated companies 35 51 14

 

Source: AFP

There is a strong negative relationship between the number of treasury/finance functions in which the treasury department leads and the resources used by the department. The typical treasury department that leads at least 12 of the treasury/finance functions listed in the 2012 survey of the AFP Treasury Benchmarking Programme has 2.04 FTEs per US$1bn in annual revenues and spends US$0.51 per US$1,000 in annual revenues to run treasury operations. This compares with 2.76 FTEs and US$0.14 in total costs for treasury departments that leads in seven or fewer function areas.

Management Support for Treasury Resources

A common complaint by treasury and finance professionals is that their treasury organisations do not have access to the same level of resources made available to other departments within the organisation.

Despite that perception, a majority of survey respondents indicate that their organisation’s executive management equally supports technology investments in treasury as they do to other departments within the organisation. Thirty percent of survey respondents report, however, that executive management is less willing to make technology investments to support treasury than it is for other departments.

Organisations in which executive management gives treasury an equal level of support for technology investments relative to other departments tend to have lower total cost for treasury operations and utilise fewer FTEs (both on a normalised basis) than organisations where treasury does not receive an equal level of support. The median total cost of treasury operations per US$1,000 in annual revenue was US$0.32 at organisations where treasury receives equal support for technology investments versus US$0.43 at organisations where treasury receives less support. Similarly, organisations supportive of treasury’s request for technology investments have 2.23 FTEs per US$1bn in annual revenues in treasury versus 2.73 FTEs in organisations where treasury receives less management support for technology investments.

Conclusion

What does a benchmark treasury function look like in 2012? At one level, the key operational metrics establish the contours for benchmark performance: cost of operations that are roughly one-quarter those of typical peers, FTEs that are one-third the levels of an average organisation, exponentially higher transaction volumes and faster cycle times.

Beyond such summary metrics, however, are a series of organisational factors that are no less integral to understanding benchmark performance. These are not confined to organisation size, industry and ownership, of course. Among the ones emphasised here, the growth of treasury’s organisational footprint – its mandate and leadership role – is important to defining a benchmark function and to resetting its performance expectations. Expectations and success metrics matter. As does management’s support for treasury; investments in technology and in human capital is a must-have to factor into performance levels (and to earn or maintain).

The full results of the 2012 survey for the AFP Treasury Benchmarking Programme was revealed at the AFP Annual Conference on Monday 15 October. Read the results here.

 

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