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Bank of America Merrill Lynch White Paper

Key Performance Indicators September 2013

Drive performance, get results

Executive summary Contents

Many treasurers aim to position themselves as a strategic advisor within their Why measure? . . . . . . . . . 2

organization — but how can this be achieved? Quantifying treasury’s performance

Examples of
and communicating the findings to internal stakeholders is an important part of treasury KPIs . . . . . . . . . . 3

the process. While the prospect of inviting closer scrutiny may be daunting, the use
Next steps . . . . . . . . . . . 4
of key performance indicators (KPIs) can be a valuable tool in driving performance

improvements — and improving treasury’s profile within the company.

Key Performance Indicators | 2

Today’s corporate treasury professionals recognize the need to become more of a Today’s corporate treasury
strategic advisor rather than merely a tactician. In order to achieve this, it is necessary
to link treasury’s performance to the corporation’s objectives and goals. Thus, treasurers professionals recognize
looking to be viewed as a strategic advisor need to open up their departments — 
the need to become more
and themselves — to greater levels of scrutiny than in the past.

In order to lead this transformation, treasurers must commit to improving the operating of a strategic advisor rather
performance of the treasury department. In many cases, this will involve redesigning
than merely a tactician.
inefficient processes and overcoming performance shortfalls, understanding why these
shortcomings exist, re-educating staff and driving improvements. In order to achieve this,
A key element of this exercise lies with the calculation and publication of KPIs. A KPI is
it is necessary to link
a numerical measure designed to identify and help manage specific activities, financial line
items or risk exposures present in ordinary operations. KPIs can be used to identify areas treasury’s performance to
needing improvement and, when used continuously, they can also track whether
performance is improving or deteriorating over time. the corporation’s objectives

and goals.
Why measure?
The financial crisis of 2008 thrust most treasury departments into the spotlight. Board level
interest in treasury matters escalated rapidly and demand for accurate information soared:
How much cash was in the company’s bank accounts? Where was it held? How accessible
was it? What about the investment portfolio? What credit lines were available if the need
arose for additional liquidity?

This new level of internal scrutiny led many CFOs to question how much value the treasury
department was adding to the corporation and whether this value could be measured.
If so, the next step was to ask whether improvements, over time, could be quantified — 
and whether the treasury’s performance was aligned with the overall corporate goals.

A new age of accountability began and many treasurers began using KPIs to a greater
degree than in the past. Some treasurers began developing and issuing KPIs to senior
corporate leaders in order to demonstrate the treasury team’s commitment to delivering
quality performance and adding value to the corporation.

Through measurement, treasury can make a very public statement about its commitment
to improving performance, thereby contributing to the corporation’s future prosperity.
Plus, inviting external scrutiny will lead to increased credibility, as treasury meets the
challenge of beating the published benchmarks.
Key Performance Indicators | 3

Examples of treasury KPIs

KPIs are calculated according to a predetermined formula at regularly scheduled intervals. KPIs are calculated according
It’s important to set benchmarks that challenge, since meeting KPIs that are easily obtained
or exceeded is of little value. to a predetermined formula

For securities analysts, the KPI most widely used to evaluate a company’s performance at regularly scheduled
is earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA
provides an objective measure of whether the company is meeting its operational goals intervals. It’s important to set
and strategic objectives.
benchmarks that challenge,
Where treasury’s KPIs are concerned, the focus should be on areas in which treasury has
the biggest impact: liquidity and debt management, interest income and expense, foreign since meeting KPIs that are
exchange exposures, and working capital management.
easily obtained or exceeded
Tactical KPIs
is of little value.
Treasury KPIs may be strategic or tactical in nature. Tactical KPIs are used to measure
the effectiveness of various processes, error rates and asset utilization. Such activities are
recurring, so the relevance of these KPIs continues throughout the corporation’s existence.

Tactical KPIs can cover the following areas of treasury:

yyError rate — In an ideal world, tasks and people would be error-free — but, in practice,
this is not always the case. KPIs can be used to measure the percentage of payments
containing errors, which can be broken down by payment type (e.g., Fedwire, ACH, SWIFT
or SEPA payments). The accuracy of different types of forecasts can also be measured by
comparing forecasts to actual results. Useful KPIs include:
––Accuracy of cash flow forecast: (Actual cash balance minus forecasted cash balance)/
forecasted cash balance
––Accuracy of interest expense forecast: (Actual interest expense minus forecasted
interest expense)/forecasted interest expense
––Percentage of payments containing errors: Number of payments containing
errors/total number of payments
––Variance to market rate at time of trade: (Trade rate minus market rate at time
of trade)/market rate at time of trade
––Hedge percentage: Principal value of identified hedged exposures/principal value
of total identified exposures
––Fixed/floating rate mix: Total value of fixed rate exposure/(total value of fixed
and floating rate exposure)
Key Performance Indicators | 4

yyDebt management — Managing the corporate debt portfolio requires treasury to focus

on the term structure, interest rates and characteristics of the obligations, and to ask
whether the corporation has access to sufficient credit facilities, should the need arise.
Debt management KPIs include:
––Available credit: Total principal value of drawn credit/total principal value of
all credit facilities
––“All-in” interest rate on debt instruments vs. benchmark

yyOperational performance — The treasury’s level of operational readiness can

be determined by measuring productivity and effectiveness using KPIs such as:
––Time required to determine daily cash position vs. benchmark
––Ratio of system-generated payments vs. manual payments
––Ratio of electronic vs. paper payments
––Number of bank accounts with non-relationship banks
––Actual bank fees vs. budgeted bank fees
––Time required to complete monthly financial close activities vs. benchmark

Strategic KPIs
In addition to the tactical KPIs detailed above, treasury may also use strategic KPIs.
These are used when the organization’s strategy or objectives have become more
ambitious and are developed on an as-needed basis to support specific goals.
These measures often reflect an organization’s response to change during a limited
period of time, and cease being relevant once the project or objective has been
completed. Strategic KPIs might focus on treasury’s contribution to a system
implementation, the integration of an acquired company’s treasury function,
or changes to the balance sheet or income statement.

Next steps
Measuring treasury’s performance against a predetermined benchmark enables the
treasury team to identify objectively whether things are going as well as planned.
However, measuring performance is only the first stage. In order to benefit from
the exercise, treasurers must use the data to analyze any shortfalls in performance,
ask what could be done to improve the outcome and take the necessary steps to
increase performance.

Meanwhile, the information needs to be communicated effectively. Less can be more,

and, in order to keep the message relevant, treasury should focus on the most meaningful
KPIs — usually no more than eight in total. Each of the chosen KPIs should be linked to a
specific corporate, divisional or departmental objective.
Key Performance Indicators | 5

When it comes to communicating treasury’s performance, it is important to make

the message clear and easy to understand. Graphics can help the reader evaluate how Mark Kirsch
effectively treasury is functioning and can be used to illustrate actual performance versus Treasury Practitioner Executive
designated benchmarks. Global Business Solutions

Regardless of which KPIs treasury decides to publish, the use of KPIs sends a clear
message that treasury is committed to making the function the best it can be.
The increased transparency brought by the use of KPIs may be uncomfortable at first — 
but by meeting and exceeding the stated benchmarks, treasury can identify and act on
areas in which improvement is required, and enhance its position as a strategic asset
within the organization.

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