How Should Treasury Measure its Success?

According to recent surveys by the Association for Financial Professionals (AFP), approximately 50% of treasuries have no success metrics. Among treasuries that do measure success, most do so via the profit and loss (P&L), a “business” that treasury has little impact over. Since treasury is in the liquidity and risk business, P&L oriented metrics are going to understate treasury’s importance or need to be consulted at the strategic level.

Also, it is human nature to ignore forces that do not directly impinge on one’s success. For example, if senior management receives a bonus based on earnings per share (EPS), earnings before interest, taxes, depreciation and amortisation (EBITDA) or sales growth, and not cash flow or FX gains/losses, then how important will treasury be ? The general consensus from senior management may ultimately be to ignore treasury’s requests for more resources since it appears to be “not important.”

Companies will always have a need to measure their success based on their P&L (e.g., metrics like EPS, EBITDA, etc. will always be in demand especially by external parties such as investors). However, the events of the past few years have shown a P&L perspective to be a one-sided view that created huge economic dislocations, massive penalties, etc. A more rounded perspective would include questions like:

  • How much liquidity is “enough” to remain competitive by investing in the future? A metric like free cash flow should be among any treasury’s “starter set” of success metrics.
  • How much risk is too much? An inappropriate financial structure or lack of operating cash flow is not always obvious when matching future sources and uses of funds. Leverage or FX exposure could be another series of metrics used to measure treasury’s success.

Arguably, the recent spate of tax inversions by select US companies is proof that a P&L focus is too narrow considering that one of the benefits of a tax inversion is access to cash (i.e. liquidity) “parked” outside the US. Also, not all companies are as creditworthy as Apple, which can simply borrow against its non-US cash balances to meet legitimate investor concerns like dividends. For those credit-challenged companies, treasury is more than just cost when it comes time to match sources and uses of funds. Perhaps at those companies treasury should have a seat at the table?

Answers to questions of liquidity and risk are not obvious, given use of the inwardly focused enterprise resource planning (ERP) systems, which are ignorant of the future (i.e. ERP systems are accrual-based accounting systems that focus on the past and lack a market focus – a reason why treasury management systems exist). Also, treasury is outgunned by most other financial areas when it comes to staff resources; it simply lacks the bandwidth to consider the strategic issues which are considered most important by, say the board of directors. Lack of metrics does not help either.


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