How Can Treasury Measure Success?

How Can Treasury Measure Success?
Warren Davey
GTreasury
Bruce Lynn
The FECG

© G Treasury SS, LLC 2008 -2015
Agenda
Year ahead and what to watch for
What a starter set of metrics should look like
Why Treasury has been unsuccessful in measuring
success
Building a business case for change
Technology as a change agent
Conclusion & Action Plan
1
2
3
4
5
6

2/15/2015
© The Financial Executives Consulting
Group LLC
3
The Year Ahead
Business environment still not perfect
• US economy still not back to “normal”
• Global markets are cautious
• New sheriff in town: SEC, Basel III, etc
Profitability (“how much”) maybe key, but investors are
asking “when”:
• How much liquidity is “enough” for best use?
• How much risk is “too much” to get returns ?
• What are counterparties thinking?
It is all about risk since exposure to an uncertain future will place a
premium on liquidity

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The Year Behind - Borrowing
Banks continue to lend…to those who qualify
“Tightening Standards” implies :
• More restrictive covenants
• Lower loan limits
• Shorter maturities
• Higher loan spreads
• More collateral
Credit stds unlikely to loosen
more
Source: Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices – April 2015

Snapshot - S& P 500 Non Finacial Companies (426 co.)
12 Month Results as of March 2015
37
143
1
61 66 77
225
165
490
31 18
179
526
4
240
287
318
413
968
362
95
467
9 16 1 8 22
-63
66 80
166
6
-21
-200
0
200
400
600
800
1,000
1,200
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asic
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ealth
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11
-T
ransp
ortation
12
-U
tilities
$inBillions
Cash & S/T Equiv. L/T + S/T Debt Free Cash Flow
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Cash levels, Debt access, Free
cash flow not all equal by
industry
The Year Behind - Liquidity

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The Year Behind – Best Uses for Cash?
Investors will be seeking
higher payout %?

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The Year Ahead – Good News?
Growth Trend up, but it is taking longer

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The Year Ahead - Rates
Expect Fed Funds to be > 10X
today’s rates
Rates to rise – Expect your Interest Expense to Follow

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The Year Ahead – One Scenario
Is treasury equipped for this scenario?
Competitors actions remain uncertain Higher interest rates in 2015
Investors want cash to cash returns “now” Debt capacity maxed out?
Enough liquidity?
• More payouts = less cash remains for operations, debt repay, future investments
• Banks remain reluctant lendors (Basel LCR? RAROC?)
Stronger USD: Exports more expensive;
Fgn income worth less; lower Fgn investment costs
If so, what is a “successful” outcome ?
Is treasury equipped for this scenario?
Rely on organic growth or use cash for M& A?

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Treasury Priorities
The Role of Treasury (Top 10 of 20)
% Distribution of Responsibility within Organization 2014 2011
Bank Relationship Mgt 94 94
Borrowing: Short Term 86 89
Borrowing: Long Term 85 81
Investing Short Term 77 86
Investing: Long Term 62 74
Risk Mgt: Financial 53 44
Counterparty Risk Analysis 50 51
Working Capital Management 49 32
Insurance 47 39
46 N/A
Global Treasury Mgt ? 88
Cash Flow Forecasting ? 79
Sources: AFP 2011 Strategic Role of Treasury Survey (673 responses); 2014 Survey (243 responses; 55% Sales > 1Bn)
Act as Financial Consultant

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Risk
Mgt
(Mkt, Credit, Ops)
Cash Accounting
(focus on creating, posting,
reconciling transactions)
DebtInvestment
Cash Management
(focus on balances)
Treasury Reality vs Its Priorities
• Focused on internal
processing
• Resources devoted to
repetitive tasks
Cash
Tomorrow
Today

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Treasury Priorities - Resources
Allocation of Treasury Resources
(PWC Global Treasury Survey, Oct 2014,p5)
Cash Management
21%
Maintenance of TMSs
2%
Financial Risk Analysis
4%
Investment and Counterparty
Risk Mgt (Credit)
7%
Interest rate risk management
(Mkt)
7%
Commodity Risk Mgt (Mkt
Risk)
10%
Other Treasury Activities
10% Finanicng & Bank Mgt
13%
FX Mgt
12%
Back Office
14%
45% resources on cash, back office, other.
Too much processing?

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Treasury Performance – Few Metrics
Measurement & Communication of Results to
Executive Management & Board :
Treasury Contribution to Company Performance
All
Revenues
< 1BN
Revenue
s > 1Bn
No Measures / No Communication 51% 43%
Has Measures & Communicates 55% 49% 57%
Totals 100% 100% 100%
Source: AFP 2014 Strategic Role of Treasury Survey (243 responses)
45%

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Treasury Metrics – to Board
Results consistent with
AFP Survey
Source: PWC Global Treasury Survey, Oct. 2014. 110 Responses; 70% Sales > 3Bn

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Treasury Performance - Today
Company uses profits not liquidity or risk to measure success
Few treasuries successful because only some (55%) measure their
success
• Too much processing.. Not enough planning
• Missing data about operational cash flows.
• Result: over borrowed, under invested, over exposed: which is it & when do you
know?
• Problems are solved rather than prevented?
Resources constrained by past results
•“ERP system” consists of spreadsheets / emails
•Treasury systems not priority for IT
•No integrated view of global cash flows
•Staff levels - “outgunned” by Controllers or other financial or operating units

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Treasury Tomorrow
Profitability metrics will remain popular because they drive
bonuses. Examples:
• EPS – key external market measure
• Earnings growth – market and mgt measure
• EBITDA (operating earnings). Weakness:
• Capital is free (no interest, no dividends)
• No need for upfront cash (capex? R&D?)
• No gains /losses from change in mkt. rates
• After tax income the same around the world
Link liquidity to obtain “real” profitability
• How much liquidity is “enough”?
• Bringing it home: Fgn cash vs US uses (Apple)

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Treasury Metrics - Favorites
Key Metrics of Treasury
Success
All Revenues <
1BN
Revenues >
1Bn
Reduced Borrowing Expenses 58 57 59
Liquidity Targets 55 59 49
Reduce Banking Expenses 51 53 51
Risk Management Effectiveness 49 44 54
Capital Structure Support 47 29 62
Income Generation 28 36 24
Source: AFP 2014 Strategic Role of Treasury Survey (243 responses)
• Create time horizons for liquidity and risk metrics
• Tactical: time horizon < 90 days
• Strategic: time horizon > 90 days

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Ops cost = Treasury + bank + back office + FX losses
Leverage = debt / FCF; debt / equity
Debt headroom (% or $) = debt used vs credit limits
Burn rate ($ / day) = Avg. current liabilities / cash on hand.
Cash Conversion Cycle (days) = DSO + DIO – AP Days to pay
Free Cash Flow ($FCF) = op cash flow – CAPEX – Dvds (compared to uses?)
Cash on hand (by curr., entity, bank, etc)
Which of these does your TMS measure?
Treasury Metrics - Favorites

Building the Business Case for Change
To start:
• Treasury should own the cash flow statement
• Market prizes operational cash flows
Comply or die – Do NOT become MF Global
Create performance measures from 2 perspectives:
• Top Down – link uses with sources by SBU
• Bottom up – link sources and uses at transactional level
Think outside the silo & involve your “friends”:
• Operating units – they control operating cash flow
• Financial units – FP & A, Tax, Audit helps fin. cash flows
• Even your banks
Model the future with measurable results
• Interest Expense - Less borrowing vs. lower costs?
• Bank fees
• Staff costs - in & out of treasury?
• Lower exposures – to FX loses or (unknown) market changes
• Increases in debt capacity (more liquidity)
• Access to increased number of 3rd parties for debt or equity

TMS as a goal enabler
If your bonus is tied to some metrics do you want to automate,
consolidate and report?
OR
•Monitor, Act and Manage (MAM)
•If your time is spent documenting and show the results of the initiative
then it is not spent performing adjustments to attain the initiative
•MAM allows treasuries to adapt in real time in order to affect change, not
just show its net results

Technology as an aide
Common Known Advantages
Automate
Consolidate
Report

Technology as an aide
Lesser Known Advantages
Monitor
Act
Manage

Monitor
• Are all my banks reporting?
• Where are my balances
geographically?
• What currencies am I long/short?
• What are my exposures and how do
they align with policies?

ACT
• Move my money from A to B
• Target balancing
• Cross-institutional sweeps
• Pay someone, check the confirmation and send them the details
• Swap from this currency to another
• Invest/borrow

Manage

Manage
• Adjust balances
to conform to
policy limits
• Consolidate
overall liquidity
picture
• Adjust bank
signors
• Analyze fees
paid to
institutions

Advantages of technology
Alerts
• What is an alert?
• Do you need to be hit over the
head with a hammer?
• Common types
• Email notification
• Screen popups
• Web link
• Physical paper

Metrics Management
• Set SMART goals
• Specific, measureable, attainable, realistic & timely
• Everyone needs some skin in the game
• Forecasting example

Examples of Application (before)
Internal Systems
• 15 various
internal systems
and groups
sending
payments to 5
different FI
Forecasting
• Cash forecasting
was very difficult
to manage
resulting in an
excessive holding
of cash

Examples of application (after)
Centralized all payments improving timing
and accuracy of cash forecasting
Greater visibility into cash position
Reduced balance sheet cash assets
from 3.1% to 2.7%
Over $40M of new long-term
investment
Generating upwards of $1.7M/yr of
additional run-rate operating gain

Setting up Metrics (Existing TMS)
What if you have an existing solution, but no metrics?
Systems can be adapted to now current or outdates metrics
Do a system checkup – most vendors will offer this
If the system is wrong then switch
• Moving from one system to another is always easier than the first
system

Measuring Success with a TMS
Selection
Implementation
Post-Implementation

Measuring Success - Selection
Tie vendor success to your success
Happy clients make great references
Select a TMS that does your most important goals best
Too many times a catch all actually catches none
Tell your vendors/consultants what you are trying to accomplish
Get buy in from all parties
Establish goals ahead of selection

Measuring Success - Implementation
Test proactive and retroactive
Knowing your MAMs
Make sure you have the right Monitors, Actions and Management tools in place
Voice issues early and often
Communication is key

Measuring Success – Post -Implementation
Adapt and change – revisit metrics and the tools behind them on an
annual basis
Prepare, expect, and plan for turnover
Who is going to monitor
what/when/how
Is the process documented so that
people understand why they are doing
what they are doing?
Operations don’t stagnate – why should your
maintenance?

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Conclusions
• Get ownership over cash flow statement
• Set liquidity metrics (and rewards) by business levels
• Acquire global cash visibility as a market hedge
• Manage FX G & L (income statement)
Success constrained by
too much processing,
too little planning
Cost of “mistakes” set
to rise – find “cheap”
internal cash to reduce
market costs / exposure
• Work – what is NOT getting done?
• Cash – place exact amounts of “right” currency at right time,
in right place avoids borrowing
• Accounting – faster cycle time, less global staff, no errors
• Information – Why EOM instead of TODAY? Co. vs. Peer
performance?
Build a business case
based on “four flows”

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Action Steps (Ranked easy to hardest)
Rationalize
bank network
& align for
future
• Fewer banks?
• Fewer
accounts?
Set target
cash
balances
(could be
zero)
Re-bid bank
services at
market
prices; use
“best” ones
to reduce
processing
time/cost
Work with
business
units to
establish
joint liquidity
and risk goals
Upgrade
treasury
technology &
build in KPIs

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Action Steps (Ranked easy to hardest)
Set up pooling
or netting
arrangement
at
international
entities
Create in-
house bank
Obtain
analytical tools
to measure
risk
•Outside (market,
counterparties)
•Inside
(operational)
Work with
business units
as internal
consultant to
set “real” risk
limits
Imbed liquidity
and risk limits
into corporate
profitability
plans (RAROC)
& set bonuses
accordingly

QUESTIONS?
Warren Davey
GTreasury
Wdavey@GTreasury.com
Bruce Lynn
The FECG
blynn@thefecg.com

How Can Treasury Measure Success?

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