Treasury key performance indicators are metrics used to track and analyze the performance of treasury. Due to the volatile economy and frequent market fluctuations, CFOs need to set the right treasury KPIs for liquidity, funding, financial risk management, and overall corporate governance.
When used correctly, KPIs can:
The components to consider when choosing key performance indicators are:
Cash management KPIs are metrics used to measure the efficiency and effectiveness of a company’s cash management activities.
Percentage of account cash balance reported daily
((Cash balances reported daily) / (Total balance estimated)) x 100
Percentage of cash transactions reconciled automatically
((Number of automatically reconciled items) / (Number of reported transactions)) × 100
Percentage of business units that miss forecasting dates
((Number of forecasts not received at the deadline) / (Number of forecasts expected)) × 100
Cash conversion cycle
Inventory days (Number of days stocks are held) + Debtor days (Number of days it takes to collect from customers) – Creditor days (Number of days it takes to pay suppliers)
Cash reserves in days
Cash reserves / Average daily expenses
Working capital ratio
Current assets / Current liabilities
Operating cash flow
Operating income + Depreciation – Taxes + Change in working capital
Free cash flow
Operating cash flow + Interest – CAPEX
Cash forecasting KPIs are metrics used to measure the accuracy and reliability of a company’s cash flow projections. They include indicators such as net profit margin, gross profit margin, inventory turnover, budget variance, and Payroll headcount ratio
Net profit margin
(Revenue – Cost) / Revenue
Gross profit margin
((Revenue – Cost of goods sold) / Revenue) x 100
Inventory turnover
Cost of goods / Average inventory
Budget variance
Budgeted amount of expense – Actual cost
Payroll headcount ratio
Full-time employees / Total number of employees
Debt management KPIs measure a company’s debt levels, while investment management KPIs measure investment performance. Examples include debt-to-equity ratio and ROI. Debt and investment management KPIs include fixed or floating ratio ratio, percentage of short-term debt, weighted average yield, and Weighted average cost of capital
Fixed or floating ratio
Total fixed-rate debt / Total debt
Percentage of short-term debt
The total amount of short-term debt / Total amount of debt
Weighted average yield
The weighted average yield on short-term investments
Weighted average cost of capital
((E/V) x Re) + ((D/V) x Rd x (1-Tc)),
Where:
E = Market value of a firm’s equity
D = Market value of a firm’s debt
V = E+D
Re = Cost of equity
Rd = Cost of debt
Tc = Corporate tax rate
FX (foreign exchange) and commodity management KPIs measure the effectiveness of managing currency and commodity risks. Examples include maximum percentage of investment exposure by counterparty, length of the production cycle, value at risk, hedging ratio, and purchase price.
Maximum percentage of investment exposure by counterparty
(Weighted average credit default swap (CDS) spread of credit line providers x Funding available from the provider)/Funding available from the provider
Value at risk
Vm x (Vi / (Vi-1))
Where:
Vi= number of variables on the day i
Vm= number of days from which historical data is taken
Hedging ratio
Value of hedge position / Value of total exposure
Risk management KPIs measure the effectiveness of identifying, assessing, and mitigating risks. Examples include number of risks identified, number of unidentified risks, predicted vs. actual severity of risks, etc.
The key goal of treasury management is planning, organizing and controlling cash assets to satisfy the financial objectives of the organization. The goal may be to maximize the return on the available cash, or minimize interest cost or mobilize as much cash as possible for corporate ventures.
Once the right KPIs for treasury are chosen, suitable cash management software is required to evaluate the KPIs frequently and ensure quality performance. Evaluating the KPIs regularly ensures end-to-end cash flow visibility and promotes proactive financial planning.
The HighRadius cash flow management tool is useful for keeping track of cash flow drivers and measuring progress towards treasury objectives. The tool provides real-time cash visibility at a global level, helps monitor intraday and previous-day cash positions, and translates cash balances into base currency with updated exchange rates. Moreover, the cash forecasting tool is useful to automate data gathering, drill down into the drivers of variance between forecasts and actuals, and continuously increase forecasts’ accuracy through artificial intelligence to make data-driven business decisions.
However, technology can only be useful with refinement in processes and upskilling people. Here are the 20 must-have treasury KPIs that help businesses understand the ways to enhance performance and improve current processes to achieve greater wins.
Automate manual processes, generate accurate forecasts, reduce errors, and gain real-time visibility into your cash position with our AI-powered Autonomous Treasury Software and maximize your cash flow.