Counterparty risk cuts across all three perspectives. What happened the last time the company was exposed to a firm that went bankrupt or became impaired? What are the largest exposures today and what are the quality ratings or credit-default-swap spreads of counterparties? And, when a crisis or dramatic market shift occurs, how will the company handle it?
Companies that look only into the rear-view mirror risk missteps. For example, a hindsight-focused treasury team may build a cash-flow forecast based on the previous year’s numbers without factoring in a new sales discount or a shift in the macroeconomy, says Debbie McSheffrey, a director at Strategic Treasurer.
In reporting results-driven treasury metrics, the key is simplicity. “Most of our clients present them in a dashboard on a single sheet or use things like traffic-light indicators,” says Higdon. “That focuses the board’s attention on areas where treasury is close to a policy limit and needs advice.”
Vibhu Sharma, CFO of the North American commercial business for insurer Zurich Financial, uses a simple measure of how many times the company’s daily cash balance lands above or below its ideal level on both a weekly and a monthly basis. That metric is not reported to the board, but for a company that has $30 billion flowing through its treasury department it’s a gauge that affects profitability.
“We have to have the appropriate level of cash from a liquidity perspective, but not so much that we’re not earning a meaningful return,” says Sharma. (See “Cash: The Holy Grail” at the end of this article.)
Going a step further, some companies are building policy rules into their treasury-management systems for real-time alerting. “If you think about hedging ratios, rather than just presenting the result that the company is 67% hedged, the system would warn treasury that the ratio is below the policy standard of 70%,” says Higdon.
Treasury systems and banking portals don’t make constructing metrics easy. If a company wants to monitor the percent of cash held in a current account versus a deposit account, money fund, or other long-term deposit vehicle, for example, the raw data could reside in several places and in different formats. “It can be challenging to report across different asset classes,” Higdon says.
Zurich Financial is getting better at extracting information from systems, but “it’s by no means push a button and the information shows up on my iPad,” says CFO Sharma.
While CFOs don’t propose abandoning process benchmarks, they are using them with more awareness. Instead of searching for best-in-class metrics, many are starting with internal yardsticks. Why does one division have more bank accounts than another? Why does treasury spend 60% of its time on one division when that unit is far smaller than others?
“The good thing about benchmarking internally is you don’t have as much trouble getting and understanding the data, and it helps you identify the issues and see how useful the benchmarks are,” says Peter Pinfield, a partner at Treasury Alliance Group.