In total, 161 corporates from different industries based across the Nordics took part in Nordea’s Treasury KPI survey. 23% of the companies taking part can be described as medium sized corporates with a turnover of less than 500 mEUR. In comparison with the sample size as a whole, the survey results suggested that medium size companies were slightly more focused on operational KPIs whilst large corporates included treasury goals more aligned with those of the company.
Taru Möller, Head of Transaction Banking Propositions at Nordea, says: “For smaller companies introducing treasury KPIs for the first time, it’s often good to start with an operational focus because with these sorts of KPIs you can quickly begin to review the effects they are having on performance.”
1. Start with operational KPIs focusing on daily tasks and smooth processes
2. Consider how to benchmark your results with peers and your own performance over time
3. Add strategic KPIs that enable you to drive change in the long-term such as sustainability and digitalisation
For smaller companies introducing treasury KPIs for the first time, it’s often good to start with an operational focus because with these sorts of KPIs you can quickly begin to review the effects they are having on performance.
As medium and smaller sized companies face different business challenges, often with limited resources and fewer dedicated employees in their treasury function, finding a one size fits all group of KPIs to suit everyone is not possible. Vesa Paukku, from Nordea’s Cash Management Business Insights team, advises individual companies on the optimal way of organising their treasury function, the roles and responsibilities best suited to each company’s unique situation and the particular set of financial or treasury KPIs required to drive results.
Vesa says: “For any treasury department we are in a dialogue with, it’s of course critically important to help them establish how to measure whether they have succeeded or not. Finding out the KPIs to use which best suit their business is a collaborative process and is all about understanding the needs of their treasury and the company overall.”
Finding out the KPIs to use which best suit their business is a collaborative process and is all about understanding the needs of their treasury and the company overall.
According to Vesa, a set of KPIs that can be relevant to the majority of finance departments or treasuries regardless of the size and scope of the company are connected to operational efficiency and focused on optimising the funding of day-to-day business needs.
Vesa explains: “Making sure that you have a sufficient daily cash reserve in place for executing outgoing payments is of course vital for any business. Our first suggested KPI is related to monitoring how well the daily cash reserve is sufficiently covering the needs of the company. If you’re constantly using an overdraft because you haven’t exchanged currencies or gathered your liquidity in one place, for example, then you haven’t succeeded with establishing a suitable cash reserve which is one of the basic aims of a treasury.”
“The second suggested KPI is also related to this but using a different measurement unit, which is credit used versus available deposits. You obviously shouldn’t be using overdrafts or other credit instruments if you have excess cash lying on the accounts so it’s good to measure the relationships between used overdrafts and excess cash. Both of these KPIs can be tracked on a daily basis,” adds Vesa.
Many companies should have an FX and interest rate hedging policy in place as part of their common treasury policy. For example, deciding the percentage of their income in a particular currency that should be hedged. Once they have created this policy, KPIs should be in place to measure how well they are executing that policy.
The next set of KPIs relevant for the majority of companies are related to monitoring the defined treasury policy around hedging and payment terms.
Vesa continues: “Many companies should have an FX and interest rate hedging policy in place as part of their common treasury policy. For example, deciding the percentage of their income in a particular currency that should be hedged. Once they have created this policy, KPIs should be in place to measure how well they are executing that policy.”
“Also, in some cases it is the treasury’s job to create the payment terms policy and define whether this is 30 days, 90 days, etc. The treasury should set the specific payment terms for each customer and then follow how they are being executed,” adds Vesa.
Taru says: “This KPI is especially interesting as its connected with working capital management. It’s possible to be really effective with the utilisation of capital by putting the right KPI in place. Measuring payment terms can have a great impact and really influence overall working capital effectiveness.”
Another common KPI used by companies in numerous settings is related to cash forecasting and monitoring the accuracy of the cash forecast.
Vesa says: “Although cash forecasts are often made by the various sales teams across different business units, we think it is the treasury that should be monitored overall with regards to how well they match up to reality. By giving feedback to the sales teams making the forecasts, the treasury can create a culture of learning and increase the focus on developing the capabilities across the organisation to make highly effective cash forecasts.”
With regards to analysing the effectiveness of treasury processes, Vesa suggests developing KPIs that can be specifically attached to the automisation and centralisation of a company’s treasury set up.
In terms of efficiency, the more automated and smooth treasury processes are, the better it is for the company as a whole.
Vesa adds: “In terms of efficiency, the more automated and smooth treasury processes are, the better it is for the company as a whole. Here we are measuring how automated and centralised a company’s treasury set up is. For example, if you need to make a number of manual interventions to reconcile incoming payments or if you need to do manual runs to transfer payment files to different systems, then there is room for improvement.”
Taru continues: “It’s interesting to note that in the Treasury KPI report we don’t see the same focus on centralisation and digitalisation within the medium company segment as with the survey sample as a whole. Often this KPI is connected to understanding where the business is heading and the speed in which it is attempting to grow. By focusing on this KPI, a company can build the capabilities to streamline their organisation and introduce processes that enable them to grow more effectively and efficiently. So for companies wanting to gain faster growth, this area is very important.”
The final treasury KPI identified by Vesa is related to measuring meaningful and accurate reporting.
Vesa says: “The goal is to be accurate enough in your reporting to have the maximum benefit for the management group, auditors and business lines. Of course, defining a way of measuring the meaningfulness and accuracy of reporting is not entirely straight forward but a satisfaction survey amongst the management group is one possibility.”
Often this KPI is connected to understanding where the business is heading and the speed in which it is attempting to grow. By focusing on this KPI, a company can build the capabilities to streamline their organisation and introduce processes that enable them to grow more effectively and efficiently. So for companies wanting to gain faster growth, this area is very important.
For smaller companies and those just beginning to develop a set of financial or treasury KPIs, the majority of focus in the beginning is placed on operations and making sure that the treasury function is doing the critical activities that keep a business running. In many cases increasingly strategic treasury KPIs might be added at a later stage.
Taru concludes: “If your financial or treasury KPIs are already more established, then it’s possible to be a bit more ambitious and look at KPIs in terms of three categories. The first category is related to operational activities, meaning that you work with process smoothness connected to the execution and settlement of different kinds of transactions related to the finance or treasury function. Operational KPIs are generally followed on a daily, weekly or monthly basis. The second grouping is more to do with performance analytics where you benchmark your results against peers or your own performance over time. The third level of treasury KPIs can be described as strategic ones in terms of making sure that they are connected and aligned with the company’s overall goals such as linked to the company’s sustainability ambitions, for example. If the treasury is to meet its ambition of becoming more of a strategic player within the organisation, then more treasury KPIs from the third level can be added over time. Performance analytics and strategic KPIs are generally followed less frequently, for example, once a quarter or every half year.”
For more information about Nordea’s Treasury KPI Report, write to Taru at taru.moller [at] nordea.com (taru[dot]moller[at]nordea[dot]com).
To learn more, read the Treasury KPIs Report 2019.