Liquidity Dominates Risk Concerns for Corporates

Publication: gtnews.com

In 2010, the gtnews Treasury Risk survey tracked the challenges that corporates are facing in mitigating risk and popular risk management methods. The results show that concerns over liquidity remain high on the corporate agenda. 

One of the major effects that the credit crisis has had on corporate treasury is the wide amount of risks that the function has to manage. In 2010, gtnews carried out research into this trend - looking at areas such as liquidity risk, the effect of risk on treasury within organisational structure, counterparty risk, foreign exchange (FX) risk, interest rate risk and financial crime - as well as asking corporates which risk they perceived as the top risk to be mitigated and managed in the next year. 

Six hundred and one corporates took part in the research, providing a comprehensive set of results. Respondents came from a crosssection of company sizes - most respondents came from companies with revenue of between US$10-500m (29.5%), closely followed by those with revenues of US$1-10bn (29%). The next most represented group was companies with annual revenues of more than US$10bn. A large majority of respondents to the Treasury Risk survey came from one of three regions - western Europe (37.3%), North America (28.8%) and Asia-Pacific (18.1%) 

Liquidity Risk on the Wane? 

For the first few years of this century, cheap liquidity was easy to come by if you were at a company with good credit ratings - whether this was through bonds, commercial paper, notes or uncommitted bank facilities. The credit crisis had the effect of abruptly cutting off many of these options, with costs also spiralling. So a couple of years after the credit crisis hit, we were keen to understand just how easy it was now for corporates to access liquidity. The results show a rather mixed picture. 

Forty-two percent of organisations reported that it was easier to access liquidity currently compared to 12 months previously. Another 28% noticed no change in access to liquidity, while the remaining 30% consider it more difficult to access liquidity than 12 months ago. 

Table 1: How Easy is it to Access Liquidity Compared to 12 Months Ago? 

Source: gtnews Treasury Risk Survey 2010

This split between those organisations finding it easier to access liquidity and those who aren't is played out across different regions. A majority of organisations in the Asia-Pacific region report easier access to liquidity currently compared to 12 months ago (58%) while 50% of organisations in Latin America found it more difficult. In North America, 38% of organisations report that access to liquidity is easier currently than a year ago while, at the same time, 26% found it harder. These results were closely mirrored by western European respondents, where 37% found liquidity easier to access, but 32% found it more difficult. 

The mix in results may lead one to suspect that the size of an organisation is critical when it comes to ease of accessing liquidity. However, the Treasury Risk survey suggests that this is not the case. Forty-two percent of larger organisations - companies with annual revenues between US$1bn and US$10bn - indicate it is easier to access liquidity today compared to a year ago, while 31% found it more difficult. A slight trend can be argued when looking at the results from the largest respondents - with annual revenues of US$10bn or more - where 52% found it easier to access liquidity than 12 months previously, while 23% found it more difficult. The same percentage of smaller companies - those with annual revenues below US$10m - report that access to liquidity is easier than it was 12 months ago as those between US1-10bn did (42%), while 32% found it more difficult. 

Overall there is a slight trend towards liquidity being easier to access for some corporates, but these results also show that corporates still face a struggle to access liquidity and the conditions that existed before the credit crisis remain a distant memory for most. It is likely that corporates are experiencing a variety of different conditions from banks that they are striking up new relationships with in the effort to manage counterparty risk. 

Treasury structure 

The 2010 Treasury Risk survey sought to find out the level to which firms had changed their treasury structure, if at all, as a result of the liquidity risks posed by the credit crisis. During the credit crisis itself, it was reported on gtnews that companies that had once had a decentralised approach to cash management, funding and hedging were centralising these activities to improve control over cash flow, reduce the cost of funding and manage credit, interest rate and FX risk more effectively. Had this continued into 2010? The Treasury Risk survey asked corporates if they'd changed their treasury structure in the previous 12 months in order to manage liquidity risk. 

Fifty-two percent of respondents had not changed their treasury structure over the past 12 months. This leaves nearly half of all respondents making some change to their treasury set-up. One-third said that they had changed their treasury structure as a result of liquidity risk - 28% becoming more centralised and 5% becoming fully centralised. Another 11% of respondents made changes to their treasury operations unrelated to the liquidity risk they faced. 

Table 2: In the Past 12 Months, Has Your Treasury Structure Changed as a Result of Liquidity Risk? 

Source: gtnews Treasury Risk Survey 2010

Looking to the future, the Treasury Risk survey indicates that a large majority of organisations feel they have made the necessary changes to ensure their treasury department is able to successfully manage liquidity risk. Eighty-two percent of organisations indicate they will not make any change over the next 12 months. Only 16% report they plan to further centralise their treasury operations, while the remaining 2% indicate they would decentralise their treasury operations. 

Efforts to improve cash flow forecasting being made 

Accurate cash flow forecasting and information on liquidity reserves are critical for corporates if they are to 'expect the unexpected'. Inaccurate or untimely data can lead to a string of surprises that can heighten liquidity risk and leave treasury in a dangerous position. And judging by the response to the Treasury Risk survey 2010, organisations are responding to this challenge. 

Seventy-seven percent of organisations indicate that they have improved their cash flow forecasting system within the past year. Within this number, 35% took steps to improve both accuracy of their data and their forecast window (by forecasting further ahead). Thirty-three percent solely focussed on improving the accuracy, while 9% took steps to forecast further ahead. 

Table 3: What Steps Have You Taken to Improve Cash Flow Forecasting in the Past Year? 

Source: gtnews Treasury Risk Survey 2010

The majority of organisations within each region changed their cash flow forecasting system within the last 12 months. Fifty percent of Latin American organisations improved both accuracy and forecasting, while a further 36% put in place efforts towards improving one or the other. Most effort was made by organisations in the Middle East and Africa - 45% of respondents here improved both accuracy and forecasting, while another 48% devoted efforts towards one or the other separately. In Asia-Pacific, 44% improved both accuracy and forecasting and 36% improved one or the other. Thirty-six percent of North American companies improved both, while this number dropped to 32% for companies in western European countries. One explanation for these figures could be that firms in western Europe and North America had more sophisticated cash flow forecasting systems in place before the onset of the credit crisis and, as such, felt slightly less need to change their way of operating once liquidity risks were raised. 

Post-credit crisis, the Treasury Risk survey 2010 shows that a majority of organisations believe they have a suitable cash flow forecasting system in place to mitigate liquidity risk concerns. Sixty-three percent do not plan to change their cash flow forecasting process in the next 12 months. More than one in five (22%) plan to improve only accuracy or forecasting, while 15% still target improvements in both concurrently. 

Counterparty Risk of Banking Partners High on Corporate Agenda 

One of the most noticeable effects of the credit crisis for corporates was for those with direct or indirect exposure to financial institutions that collapsed, were bought cheaply by rivals or required state support to remain in business. Organisations faced the prospect of losing credit lines or having to renegotiate lines they were dependent on for much higher fees. 

Corporates were well used to carrying out counterparty risk analysis on other organisations they dealt with - for example, suppliers - but the shock of the credit crisis meant that this now also became a top priority for their banking partners. And the Treasury Risk survey highlights the fact that this trend has continued after the credit crisis as corporates pay close attention to the credit ratings of their banks. An overwhelming majority of organisations regularly review their banking partners’ credit standing. Half of all organisations review credit standings at least quarterly, with 27% carrying out a review on a monthly basis. Six percent review every six months while 15% percent annually review their banking partners credit standings. A further 20% review on a 'random' basis. Only 9% conduct no review at all. 

Table 4: How Often do You Review the Credit Standing of Your Banking Partners? 

Source: gtnews Treasury Risk Survey 2010

Larger organisations (with annual revenues greater than US$1bn) are more likely to review bank credit standings on either on a monthly or quarterly basis than smaller companies. On average, 53% of these larger companies review standings either monthly or quarterly, compared to 43% of those organisations with revenues of less than US$1bn. And the process still has a way to go, according to the Treasury Risk survey, with one-third of respondents saying that they plan on increasing the frequency with which they review their banking partners' credit standing to some degree. 

Late settlement from bank partners infrequent 

Over the past 12 months, organisations very rarely (if at all) experienced a late settlement from a banking partner. Just three percent indicated their organisations regularly experienced late settlements from their bank partner. Sixty-two percent report having never experienced a late settlement, while 11% experienced a late settlement once. Twenty-four percent experienced a late settlement only occasionally. 

Primary Objective for Hedging Strategies 

Corporate priorities for hedging strategies can cast light upon the current markets that they are operating in and, just as importantly, business confidence. The Treasury Risk survey discovered that the primary objective of an organisation's hedging strategy when managing FX risk was to protect the organisation from adverse markets, with 62% of respondents selecting this option. The next most frequently cited objective was hedging at the most favourable level to gain a competitive advantage (11%). This suggests that corporates are overwhelmingly still thinking to protect what they have, rather than chasing growth. 

Table 5: What is the Primary Objective of Your FX Hedging Strategy? 

Source: gtnews Treasury Risk Survey 2010

This thought is further backed up by the fact that 73% of survey respondents indicate that they have not changed their approach to FX risk management in the previous 12 months. In addition, 21% say that they have made moves to protect themselves from adverse moves in the currency market, while just 6% have become more optimistic and thus made moves to gain competitive advantage through their FX hedging strategy. 

Organisations with annual revenues greater than US$1bn were more likely than smaller companies to have maintained the same FX risk management strategy (average of 76% percent versus an average of 69%, respectively). Also, smaller organisations tended to change their strategy to become more conservative (24% average) versus large organisations (19% average). 

Hedging tools 

Turning to hedging tools used to mitigate risk, the Treasury Risk survey looked at which methods are most popular when it comes to hedging interest rate risk. Over two-thirds of respondents - 72% - use swaps for this purpose. The next most popular method was forward rate agreements, used by 38% of organisations. 

Focus on short-term investments 

Before the credit crisis, corporates looked for potential yield in short-term investment instruments as the key factor in deciding where to place their cash. However, as many of the money markets collapsed and credit lines were threatened, organisations were far more focussed on the liquidity and security of cash. This is still the case, judging by the results of the Treasury Risk survey. When making short-term investments, security is the most important consideration for a majority of organisations (60%). Liquidity followed as the second most important (31%) while yield was only chosen by 9%. 

Critical Risks to Manage in the Next Year 

Organisations view liquidity, FX and counterparty risk as the most important risks for treasury to manage above other risk types during the next 12 months. A quarter of organisations view liquidity risk as the most critical, followed by FX risk (23%) and counterparty risk (17%). Less frequently cited risks include: 

• Interest rate risk (14%). 
• Operational risk (10%). 
• Investment risk (7%). 
• Financial crime (2%). 

Organisations in the Asia-Pacific, central and eastern Europe, Latin America, the Middle East and Africa and North America regions all indicated liquidity risk as their top risk to manage over the next 12 months. Those in western Europe ranked FX risk as the top priority (26%) followed by liquidity risk (24%), which could well reflect the difficulties currently faced by the euro. 

Both small and large organisations were most likely to identify liquidity risk as the most critical risk to manage over the coming 12 months. Beyond that, a greater percentage of small organisations consider interest rate risk and investment risk as a top priority over the next year while large organisations are more likely to be concerned with managing counterparty risk (19%). 

What is certain is that risk management will continue to be a major burden for corporate treasurers through 2011. Liquidity will remain a precious commodity, while FX markets may still remain volatile. You can read thought leadership pieces on the wide variety of risks that treasurers face here. Later this year, gtnews will carry out the 2011 Treasury Risk survey, the comparison data of which will track the trends that have been seen in these results and highlight how corporate risk management is evolving.

2010 in Review: Mounting Challenges for Treasurers

Publication: gtnews.com

This year has seen treasurers face challenges on several fronts. This review of 2010 examines industry trends and reveals the top 10 most read topics on gtnews this year. 

Looking back at 2010, it is fair to say that, thankfully, it has been less tumultuous than the couple of preceding years. This was the year that many economies around the world emerged from recession and, while not exactly sprinting into growth, the widely predicted doubledip recession has failed to materialise. So far, so good? 

Perhaps not - looking beneath the surface, there are clearly still many structural cracks in the global economy that could derail future stability. In Europe, the sovereign debt crisis threatens to catch up with many more countries in 2011, while the euro itself is under the most intense pressure of its short history. How long will German taxpayers be content to lead the bailout of other nations? 

In the US, the Dodd-Frank Act became law, creating huge changes for both banks and corporates in their accounting and reporting processes, while ‘QE2’ showed a marked difference in approach to deficit management compared with most European countries. Even China, seen by many in the west as the saviour of the global economy, has been struggling with a number of economic issues of its own. Under fire from the US and Asian neighbours for manipulating the value of the renminbi (RMB), the spectre of inflation also looms large in China. 

With considerations such as these, the role of the treasurer is not getting any easier. The rise in profile of the treasury department over the course of the credit crisis has been well documented, but in many cases this has not been matched by a similar rise in resources. So in a situation of having to do more with less, what have been the topics that gtnews subscribers have been reading the most this year?

Cash Management Concerns to the Fore 

Perhaps unsurprisingly, cash management issues dominate the ‘most read’ list for 2010. But within this broad umbrella description, a number of issues emerge, including cashflow forecasting, cash management systems and the centralisation of cash management processes. 

Forecasting 

Looking at cashflow forecasting, the gtnews Treasury Insider’s blog on the topic had the rather provocative title “Cash Forecasting: Is It Really Worth It?” In the post, the gtnews Treasury Insider explains that, while they don’t need convincing of the importance of cashflow forecasting, there are a couple of major challenges they face in their organisation: 

1. I need to encourage the subsidiaries to get into the habit of forecasting regularly, by which I mean once per week, with updates when necessary. 
2. I need to improve the accuracy of these forecasts. I am keenly aware that the nature of our business dictates the frequency required for forecasting. 

The Treasury Insider sees the issue for their company as being an internal personnel issue rather than a system issue. And the blog post gained a large response from the gtnews readers. Selected reader comments include: 

• “I can only support the absolute MUST of cashflow forecasting and also the need to have a at least three months outlook especially when you have to plan out your short-term financing needs, like we are having to do in my company.” 
• “We went from a loose two-week forecast model in 2008 to a very rigidly enforced 13 week model in early 2009 in response to the economic crisis. The outcome played a large part in ensuring that our company avoided any breach of financial limits or covenants - its simply that important.” 
• “Regarding your issue no 1, the best way to solve this is from the top down. Your CFO [chief financial officer] needs to be behind you. Anything less than that will get short-term attention.” 
• “Better cash forecasting will not occur until the link between profitability and liquidity is measured more precisely, and those involved are rewarded for meeting their goals.” 
• “... treasury needs to take the lead not only by owning the cashflow forecast process, but by clearly articulating the benefits across the organisation.” 
• “Technology also helps complete the information loop by quickly communicating back forecasting effectiveness at a level of detail that is actually useful to the remote user.” 

Clearly the optimum forecasting rate - daily, weekly or monthly - varies from company to company, and there were different views on this from the readers who commented. Common themes surrounded the importance of getting senior management onboard with the forecasting process, and also educating business units as to the importance of accurate and timely cashflow reports. To get a successful cashflow forecasting project off the ground, treasurers need to be adept at communicating the benefits to all invested parties. 

A centralised approach to cash management 

In their article that looks at centralising the cash management function, Diejana van der Wal and Heijmert Rijken from Rabobank acknowledge the role that cashflow forecasting can play as part of a centralisation programme. Integrated with cash pooling, it can be an important tool for improving cash management as it lets the treasurer have visibility of their company’s cash, no matter which country or currency the account is held in. 

In terms of pooling, one example of this helping to centralise liquidity management that is given is this article is the end-of-day sweep. This process makes it possible to transfer balances from local accounts to one central account or to centrally maintained accounts in the name of the local subsidiaries. It is also possible to automatically move the balances back to local subsidiaries, while profiting from the advantages of a central interest pool. 

Van der Wal and Rijken explain that this allows the treasurer to have better control over their cash, while they can also view it as a corporate asset within the organisation. 

System choices 

The most read piece of content on gtnews in 2010 was an article from Joergen Jensen at Nasarius, who provided a guide to cash management systems in Europe. In the article, Jensen examines a variety of areas related to cash management systems, such as the type of vendors (banks, enterprise resource planning (ERP) providers and specialist vendors), what you should look for in a system to suit your organisation, and how to approach the selection process. Jensen also takes a look at some of the specific offerings from the different types of vendors that are available, and offers some advice as to which types of systems may better suit which types of organisations. 

This year, gtnews also published a buyers guide to treasury management systems (TMS), providing a comprehensive report on the various issues that treasurers face when selecting and operating a TMS, featuring interviews and case studies from a variety of treasury professionals and a TMS matrix comparing the functionality of a large range of systems. You can download the TMS buyer's guide free of charge. 

SWIFT Success? 

Articles related to SWIFT take up two of the top four places in the most read chart on gtnews this year, demonstrating the demand for information that exists when it comes to the role that SWIFT can play in making corporate bank communication more efficient and secure. The content with most relevance to corporates in this list is Debunking the SWIFT Myth, written by Joy Macknight and published in July this year. In this feature, Macknight asked the question why, despite the benefits that SWIFTNet offered corporates by providing a single, standardised and secure channel, had not a greater number signed up to use the service? It certainly seems that preconceptions about the accessibility of the SWIFT network had played a role in the slow take-up, with many corporates questioning whether they have the volume of payment information necessary to justify the cost of gaining SWIFT connectivity. 

To combat this perception, SWIFT has launched a variety of different connection methods for corporates - from plugging in a USB stick to gain off-the-shelf connectivity through Alliance Lite, through to outsourcing connectivity to a SWIFT service bureau (SSB). The additional services that SWIFT is now looking to offer as part of an overall package is also helping to gain traction, through innovations such as: 

• Exceptions and investigations. 
• Trade finance. 
• Secure e-mail. 
• SWIFT Secure Signature Key (3SKey). 
• Electronic bank account management (eBAM). 
• Electronic invoicing (e-invoicing). 

As Marilyn Spearing, global head of trade finance and cash management corporates, Deutsche Bank, and chair of SWIFT’s Corporate Access Group, says in the feature: “Everybody is talking about electronic bank account management and e-invoicing - in other words really expanding what can be done through the same channel.” While SWIFT connectivity is still not going to be high on the agenda for some corporates, these value-added offerings look likely to give a welcome boost to SWIFT’s corporate numbers. 

To compare and contrast a selection of the SSBs available for corporates, download the buyer’s guide to SWIFT service bureaus that gtnews published this year. 

Evolution of corporate payments 

But there was a lot more going on in the world of corporate payments during 2010 than just debate over SWIFT. An article from Nigel McCook of Edgar Dunn & Company discusses the possibilities for future trends in payment systems. Analysing survey results, the article focusses on understanding the importance, both today and in the future, of individual payment products, as well as the key industry events that are expected to shape the payments markets over the coming five years. Some of the key findings discussed include: 

• Credit cards were the payment product given the highest rating in terms of current importance, followed by domestic debit cards. 
• Respondents from Asia gave comparatively higher ratings of importance to cash, mobile SMS, remote payments and remittance. 
• The top four payment products, in terms of their expected growth in importance over the next five years, are: 

1. Contactless cards. 
2. Mobile SMS/remote payments. 
3. Prepaid cards. 
4. Mobile NFC. 

These were among the payment topics under discussion at this year’s Sibos conference in Amsterdam. Following the past couple of years of battering this conference has taken - both from the Lehman Brothers’ collapse in 2008 and typhoon Koppu in 2009 - this year saw delegates and exhibitors alike emerge from their emergency shelters and hit the conference ready to do business and network. You can find full gtnews coverage of the conference here, including both the Corporate Blog and Banking Blog and a wealth of video interviews with perspectives from a number of industry experts. 

Risk Management Issues Rise 

One of the more blatant legacies of the credit crisis has been the rise of risk management and mitigation that treasurers are responsible for. A glaring example of this is the fact that corporates now actively need to carry out counterparty risk analysis of their banking partners - something completely at odds with the ‘one global bank’ policy that many corporates were actively pursuing when credit was both plentiful and affordable. 

A key area of risk management this year has been foreign exchange (FX) - from currency volatility in Europe and South America to concerns over ‘currency wars’ in Asia, corporate treasurers have had to be increasingly mindful of their FX exposures. As such, it is no surprise to find the article from SunGard’s Ryan Heaslip in the top 10 content list. Entitled Cost-effective Foreign Exchange Risk Management, the article looks at steps corporates can take to ensure they have an efficient FX risk management strategy in place. Some questions Heaslip suggests treasurers start by asking include: 

• Are you currently able to gather a complete dataset of exposures?
• Is exposure information provided in a timely, detailed and accurate manner? 
• Is there an operational focus on reducing exposure? 
• Are risk factors used to rank exposures? 
• Is there a strategy that prioritises the types of risk to hedge (e.g. balance sheet, short-term forecast, long-term forecast)? 
• What type of derivative strategies will be used to hedge, after operational considerations? 

The topic of FX risk management was also high on the agenda at the inaugural Global Corporate Treasurers Forum Europe that gtnews hosted at the Grosvenor House Hotel in London in June. The event is an annual independent forum bringing together European corporate treasurers to meet face-to-face, listen to leading speakers and network with industry peers in a high level and exclusive environment. 

Discussion at one session of the forum turned specifically to the transaction risk element of FX risk - where the risk of value changes depending on where the transaction is. Some transaction exposure is not shown in the profit and loss (P&L) because it has not yet been recognised, or the contract is anticipated rather than committed to. A couple of the questions raised at the forum referred to a) whether transaction exposure should be hedged; and b) if it was hedged, whose responsibility within the organisational structure was this? 

One group treasurer explained that their company had decided not to hedge its transaction exposure as they would have had to involve all of its investors, which would have added complexity. It has an impact on reporting - the company would have had to have shown like-forlike figures, and they wanted to protect this information. The factors involved in weighing up whether or not to hedge this risk requires a full evaluation by corporates. 

If you are a treasurer or group treasurer, and would like to find out more about the Global Corporate Treasurers Forum Europe and register your interest in attending the 2011 forum at the Ritz Hotel in Paris, click here. 

Growth in Supply Chain Finance 

Another area of interest to corporates that received a ‘boost’ from the credit crisis is supply chain finance (SCF). The contraction of available credit in the market led to an increased need for bank financing. With a dearth of liquidity solutions available, SCF solutions gained a much greater global popularity. Picking up this trend, Alexander Mutter from Deutsche Bank examined what the future may hold for SCF offerings in his article that rounds out our top 10 for 2010. 

Mutter sees the growth of SCF leading to more diversified and bespoke solutions emerging, driven by banks. He uses the example of a supplier portfolio where there are large, mid-sized and smaller enterprises involved. “Today, a similar supply chain finance solution will be offered to all of them. In the future, the offering to the individual supplier will be customised according to their balance sheet objective, based on the need analysis of this portfolio and risk policies, as well as financial needs,” suggests Mutter. By taking this approach, the SCF offering will be more flexible and tailored to suit the individual customer profile. 

Responding to the growth in popularity of SCF as a topic among corporate treasurers, this year gtnews has worked with Enrico Camerinelli, a senior analyst at Aite Group and SCF expert, to publish a monthly blog on key SCF issues. Topics covered in 2010 include the return on investment in SCF, the importance of sustainable supply chains and the need for an industry standard taxonomy in SCF. You can find every blog post on the topic here. 

Looking Ahead 

2010 proved that, while the role of the treasurer has grown in stature, the demands this places on the treasurer are fierce and come in many forms. The economic world can still be paranoid and reactionary in the aftermath of the credit crisis and, as many corporates stockpile cash, perhaps some treasurers could be accused of fuelling the fire in this regard. It seems that this year has answered a number of questions - regarding global recession and the credit crisis - but thrown up several more challenges. 

Despite this, there are excellent examples of corporate treasury departments and individual treasurers demonstrating best practice across the myriad different disciplines mentioned above. We were lucky enough to witness this first-hand at gtnews in 2010 through the quality and quantity of entries we received for our first annual Global Corporate Treasury Awards, which was this year held in Amsterdam alongside the Sibos Corporate Forum. As you can see from the winning projects, teams and treasurers, innovation is alive and well in treasury departments around the world. 

Coming up on 4 January in our first upload of 2011, we’ll be publishing a series of articles offering perspectives and predictions for the year ahead and mulling over the challenges that are likely to come the way of the treasurer. Until then, best wishes for the holidays from everyone here at gtnews.

Benchmarking the Strategic Role of Treasury

Publication: Global Treasury Briefing, Volume 3 Issue 4

The expanding role of the treasury department, with little or no additional resource to support this expansion, has been one of the key treasury issues of the past 18 months. This article presents a selection of results from the AFP Treasury Benchmarking Survey 2010, focussing the strategic role of treasury and the investments made in treasury staff.

Now in its third year, the Association for Financial Professionals (AFP) Treasury Benchmarking Survey is the result of a partnership between AFP, gtnews and the IBM Corporation underwritten by Deutsche Bank Global Transaction Banking. Its goal is to provide benchmark data for financial professionals so they can compare the performance of their organisations’ treasury operations against that of comparable organisations. 

Strategic Role of Treasury 

The 2010 survey focused on both the strategic role that organisations’ treasury department play and the investments organisations make in their treasury staff. The goal was to gain a better understanding of the role that both play in the treasury department’s performance. This analysis is based solely on data collected as a part of the 2010 survey. 

Maturity 

Just over half of participants in the 2010 survey characterise their treasury department as being an 'established department' that still has to change processes and procedures to meet new challenges. One out of five organisations have 'very mature' treasury operations that are able to address new challenges without needing to review/update processes, while just over a quarter of participants characterise their treasury department as being 'relatively new', with few established processes and procedures. Respondents from large organisations are far more likely than those from small ones to characterise their treasury operation as 'very mature'. A third of participants from smaller organisations characterise their treasury operation as being 'relatively new'. 

Figure 1: How Would You Characterise Your Treasury Department? 

Source: AFP Treasury Benchmarking Survey 2010

Functions 

Different organisations rate different activities as important in achieving the objectives of the treasury department. At least seven out of 10 organisations consider managing and reconciling cash positions, managing and overseeing banking relationships, managing financial risk and developing cash flow forecasts as important functions in meeting the treasury’s objectives for the organisations. 

In addition, at least half of organisations consider the following functions as also being critical: 

• Managing debt. 
• Processing and overseeing electronic fund transfers (EFTs). 
• Managing treasury policies and procedures. 
• Managing short-term investments. 

While the differences are not particularly substantive, organisations have a tendency to place more staff (in terms of full-time equivalents (FTEs) on a normalised basis) on functions that are rated as being important. This relationship is noted in the following treasury functions: 

• Managing financial risk. 
• Developing cash flow forecasts. 
• Managing debt. 
• Processing/overseeing EFTs. 
• Managing in-house bank accounts. 
• Analysing, negotiating, resolving, and confirming bank fees. 
• Managing intermediate and long-term investments. 

Figure 2: Importance of Function in Achieving Objectives of Treasury Department (percentage of participants rating the importance of the function as either a '4' or '5') 

Source: AFP Treasury Benchmarking Survey 2010

The definition of 'treasury' can differ significantly by organisation. Treasury currently incorporates a number of non-traditional treasury functions as organisations take advantage of the department's unique skill set. Treasury operations in large organisations - those with annual revenues of at least US$2bn - take on an average of 4.9 additional functions. They are more likely than those in small organisations to manage debt and corporate funding, act as an internal consultant to other departments, manage the organisation's financial risk activities, manage counterparty risk and support the organisation's merger and acquisition (M&A) activity. 

In what may initially seem counter-intuitive, treasury operations that manage a number of non-traditional functions tend to have fewer FTEs per US$1bn in annual revenue than those that perform only traditional functions. When treasury departments take on at least six of the eight 'additional' functions listed below, they typically have just over 2.0 FTEs in treasury operations per US$1bn in annual revenue. The median number of treasury FTEs in departments that perform no more than three of the non-traditional functions is 10.0. The relationship, however, reflects the fact that larger organisations tend to use fewer treasury FTEs on a normalised basis than do smaller organisations, but tend to have their treasury departments take on more non-traditional treasury functions. 

Figure 3: Additional Contributions, Beyond Traditional Functions, Where Treasury Makes a Significant Contribution (percent of organisations) 

Source: AFP Treasury Benchmarking Survey 2010

Personnel 

Many organisations rely on treasury and financial professionals with many years of experience to fulfil critical treasury responsibilities, although experience appears to be tied to certain function areas. Nearly half of organisations have staff with at least 10 years of experience managing the debt and funding needs/investments of the organisation and in financial risk management. 

Forty-four percent of organisations have staff with at least 10 years of experience serving their companies in cash management and treasury policies and procedures. There is little relationship between the experience of treasury personnel and performance when measured by cycle times. AFP analysed cycle times by the number of major treasury functional areas in which the average tenure in the role (for the employee's career, not just at the company) exceeded 10 years. For virtually all cycle times analysed, there is no difference for organisations that had personnel with average experience exceeding 10 years in at least five of six functional areas versus those that had similar experience in two or fewer functional areas. The lone exception is for the cycle time (in terms of hours) required to concentrate/physically pool cash and establish a daily cash position. Companies with a more experienced staff tend to complete the task in half of the time. Companies with experienced staff, however, tend to have fewer FTEs on a normalised basis than those with a less experienced staff. 

A significant share of organisations report that such experienced financial professionals have worked for the same company for many years. A third of organisations indicate that the staff working in financial risk management and in the debt and funding needs and investment area have been working in those positions at the organisation for at least 10 years. 

Companies with long-tenured employees tend to utilise a third fewer FTEs per US$1bn in annual revenues. Similar to the results on staff experience, there is not much of a relationship between the tenure in the position and the level of performance as measured by cycle times. AFP analysed cycle times by the number of major treasury functional areas in which the average length of time during which an employee has had responsibility for the function at the company exceeded 10 years. For virtually all cycle times analysed, there is no difference for organisations that had personnel with average tenure exceeding 10 years in at least five of six functional areas versus those that had similar experience in two or fewer functional areas. Again, the lone exception was for the cycle time (in terms of hours) required to concentrate/physically pool cash and establish a daily cash position. Companies with the longest tenured staff members tend to complete the task in half of the time. 

Most financial professionals hold at least a bachelors degree. In many cases, they have furthered their education to earn a MBA or some other graduate degree. At least half of organisations have at least one person who serves the organisation in the following treasury functions that holds a MBA or some other graduate degree: 

• Financial risk management (57%). 
• Debt and funding needs and investment (55%). 
• Treasury policies and procedures (51%). 

Companies with highly educated staff - in terms of the number of major function areas with at least one FTE that has either a MBA or some other graduate degree - tend to have fewer FTEs on a normalised basis than those that do not. Organisations with at least one employee with a MBA or graduate degree in at least five of six tracked treasury functional areas have nearly half as many FTEs per US$1bn in annual revenue than do organisations with MBAs (or holders of other graduate degrees) in two or fewer functional areas. 

Organisations with a greater number of MBAs/and graduate degree holders reconcile bank account discrepancies a half day sooner than do organisations with fewer (if any) MBAs. However, the latter group complete borrowing decisions a half hour sooner. There are no other reported differences in cycle times for the two groups. 

Professional certifications - such as AFP’s Certified Treasury Professional (CTP) - allow financial professionals to demonstrate their knowledge of and competency in the critical functions of their jobs. Three out of five organisations have at least one person in their treasury policies and procedures area who holds a professional certification. Fifty-four percent of organisations have at least one person who holds a professional certification in the cash management function area. 

Organisations with certification holders in at least five of six treasury functional areas have 3.0 FTEs per US$1bn in annual revenue. Organisations with certification holders in two or fewer treasury functional areas have 4.5 FTEs per US$1bn in annual revenue. Organisations with certification holders in more functional areas of treasury have shorter cycle times for developing cash flow forecasts and for concentrating/physically pooling cash and establishing a daily cash position. 

Figure 4: Percentage of Organisations Performing Key Treasury Functions with Personnel Holding a Professional Certification 

Source: AFP Treasury Benchmarking Survey 2010

Figure 5: Key Metric Comparisons by Prevalence of Personnel Holding Professional Certifications 

Source: AFP Treasury Benchmarking Survey 2010

Training 

Most companies encourage/fund/provide regular training so their staff can update and further refine their treasury operations skills. The typical organisation offers between three to five days of training in a year. Just 6% of organisations report their staff receive no treasury operations job training on an annual basis. 

Financial professionals (and their organisations) have a number of resources available to them that provide treasury operations job training. The two most widely cited sources are treasury-related conferences/seminars/forums and bank-sponsored events. Other resources that financial professionals may turn to include regional association meetings and self-paced courses. 

Management strategies 

In its ongoing quest to improve effectiveness and identify efficiencies, an organisation’s treasury department may use a number of formal and informal methods. Nearly four out of five treasury departments invest in reengineering or continuous business process improvement, albeit much of it informal. Fifty-nine percent of organisations use an informal process to streamline treasury processes. Among the most used formal processes are: 

• Lean Management (14%). 
• Business process reengineering (13%).
• Total Quality Management (6%). 
• Six Sigma (6%). 

Organisations using a formal process to improve effectiveness and create efficiencies tend to use fewer FTEs on a normalised basis than do organisations that either use an informal process or make no investment in these areas. However, some of this difference is due to the fact that larger organisations are significantly more likely to use a formal process - and these organisations already use fewer FTEs on a normalised basis than do their smaller peers. 

Further Analysis 

To provide further analysis of the relationship between investments made in treasury staff and performance, organisations were divided into three groups based on cycle times for seven treasury functions. 

• The benchmark group has the lowest average cycle time across seven treasury functions queried in the 2010 survey. (80th percentile or better). 
• The standard performance group has an average cycle time between the 20th and 80th percentile. 
• The least efficient performers have the highest average cycle time across seven treasury functions queried in the 2010 survey. 

Maturity 

Treasury departments that fall into the least efficient performers group are more likely to be relatively new treasury operations that lack established procedures and processes. Thirty percent of 'least efficient' treasury departments are newly established ones compared to just 10% of 'benchmark' treasury departments that are new. 

But the opposite is not true. There is no relationship between a 'very mature' treasury department with well-established procedures and its cycle time performance. Twenty percent of both 'least efficient' and 'benchmark' treasury departments have 'very mature' treasury departments. 

Figure 6: Maturity of Treasury Department by Cycle Groups (percentage distribution) 

Source: AFP Treasury Benchmarking Survey 2010

Experience

The relationship between the level of experience of treasury staff and cycle time performance is mixed. Benchmark treasury departments are more likely than standard or least efficient performers to have treasury staff with at least 10 years of experience in managing debt and funding needs/investments and managing treasury policies/procedures. However, for other functional areas, there is little difference in the professional experience of the treasury staff and cycle time performance, particularly for managing financial risk and managing in-house bank accounts. 

Figure 7: Percentage of Organisations with People Having at Least 10 Years of Experience in the Functional Role by Cycle Groups (percent of respondents by function) 

Source: AFP Treasury Benchmarking Survey 2010

Tenure 

The relationship between experience in the profession and cycle time performance is mixed at best. But for four of the six tracked treasury functions, tenure at the organisation is negatively correlated with efficiency. Benchmark treasury departments are less likely than are the least efficient departments to have employees with at least 10 years of tenure at the organisation fulfilling the management of cash, inhouse bank accounts, financial risks and treasury policies/ procedures. On the other hand, benchmark treasury operations are more likely to have staff with at least 10 years tenure at the organisation managing debt/funding needs/investment than are the least efficient performing treasury departments. 

Figure 8: Percentage of Organisations with People with Tenure of at Least 10 Years in Functional Role by Cycle Groups (percent of respondents by function) 

Source: AFP Treasury Benchmarking Survey 2010

Educational attainment 

Treasury departments with highly educated staff tend to have fewer FTEs on a normalised basis. But even if the departments are more efficient in terms of staffing, they are not necessarily more efficient in terms of cycle times. For only one of the six treasury functions studied - managing in-house bank accounts - are benchmark treasury departments more likely than least efficient performers to have an MBA (or holders of other graduate level degrees) performing that duty (27% versus 18%). In fact, there are three treasury functions in which benchmark companies are less likely to have MBAs serving those functional areas: 

• Managing debt/funding needs and investments. 
• Producing treasury accounting entries. 
• Managing cash. 

Figure 9: Percentage of Organisations with People in Functional Role Holding a MBA or Other Graduate Degree by Cycle Groups (percent of respondents by function) 

Source: AFP Treasury Benchmarking Survey 2010

Certification 

Treasury departments - from benchmark operations to the least efficient performers - rely on staff holding professional certifications. Benchmark departments are slightly more likely than the least efficient performing ones to have staff who hold professional certifications. For some functional areas - managing cash and debt/funding needs/investments - benchmark organisations are slightly less likely to have certification holders compared to the least efficient performers. 

Figure 10: Percentage of Organisations with People in Functional Role Holding a Professional Certification by Cycle Groups (percent of respondents by function) 

Source: AFP Treasury Benchmarking Survey 2010

Training

An organisation’s commitment to training its staff to build its treasury operations skills is correlated to cycle time efficiency improvements. However, there are significant diminishing returns from training. The least efficient treasury departments provide a median of 3.2 days of treasury-related training per year compared to 4.1 days of training in 'standard' treasury departments. However, the benchmark organisations provide slightly less training per year - 3.9 hours. 

Figure 11: Average Annual Number of Days of Training to Develop and Maintain Treasury Operations Job Specific Skills by Cycle Groups (percentage distribution) 

Source: AFP Treasury Benchmarking Survey 2010

Key Takeaways Regarding Investment in Personnel 

There is a weak relationship, at best, between cycle time performance and a number of personnel-related characteristics. However, companies that have treasury staff with more professional experience, greater educational attainment, and more certifications and when organisations invest in training, the treasury department has fewer full-time equivalents (FTEs) on a normalised basis in comparison to other companies. 

Again there is only a weak relationship between the professional experience of the treasury staff and cycle time performance. However, companies with staff holding at least 10 years of professional experience have 41% fewer FTEs per US$1bn of annual revenue than do organisations with fewer professionals with similar experience. 

Staff tenure at an organisation's treasury department is negatively correlated with cycle time performance in several key treasury function areas. However, companies with tenured staff tend to use fewer overall treasury FTEs per US$1bn in annual revenue (33% less). 

Educational attainment and certification have minimal impact on cycle time performance. However, organisations with MBAs in at least five treasury function areas have 48% fewer FTEs, on a normalised basis, in their treasury departments than do organisations with MBAs in two or fewer treasury function areas. - Organisations with personnel holding professional certifications in at least five treasury function areas use a third fewer FTEs per US$1bn in annual revenue in the treasury department than do organisations with MBAs in two or fewer treasury function areas. 

There is a positive relationship between the median number of days of treasury-related training offered per year and cycle time improvements. However, there are significant diminishing returns with the investment of staff training. 

Conclusion 

The metrics in the AFP Treasury Benchmarking Survey 2010 provides an insight into current treasury practices and budget allocation that corporates can measure themselves against. However, simply comparing your metric to that of other organisations is not benchmarking. It is not the metric itself that is the driver of change. Rather, it is the practice or process that produces the desired level of performance that is the driver of change. 

Improved business performance is an ongoing goal of all organisations. With competition reaching new heights, companies are seeking new and better ways to enhance their efficiency and effectiveness and to generate dramatically improved levels of performance. 

Benchmarking the practices and performance of one organisation against those of others can be a powerful tool. Its value lies in learning from the success of others and leveraging that knowledge in order to modify actions or behaviour to improve organisational performance.