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Treasury Performance Measurement

Treasury Performance Measurement Assignment / Homework Help
An organization can achieve its objective of maximizing the profits and wealth only if the goals and targets set are achieved. Efficiency and performance of the Treasury Department in an organization plays a vital role. It is to say that measuring the treasury performance is as important as setting their targets. Any goal set should be practical, challenging, realistic and measurable. Actual performance should be compared with the targeted performance to evaluate how the treasury department has functioned during a period.

Comparison of actual performance and targets set on the below mentioned areas where Treasury adds value:

Increasing firm's value
  • Reducing operating flow volatility

    • Foreign exchange risk management
    • Commodity risk management
  • Improving absolute cash flows

    • Reducing banking costs
    • Reducing hedging costs
    • Value-oriented risk management
  • Reducing the Weighted Average Cost of Capital

    • Reducing net interest expense
    • Reducing after-tax interest
    • Reducing liquidity risk
For example, under the context of reducing net interest expense, comparison of previous period's interest expense with the present expense could be made. But while comparing, changes to the capital structure and level of sales should also be considered.

Major problems faced in Treasury Performance Measurement
  • The measurement is often not a GAAP measurement.
  • There are various factors that are beyond the control of the treasuries and these performance measurements alone cannot evaluate their overall performance and efficiency.
  • Only target-oriented kind of working may reduce the efficiency in at least few areas.

Possible solutions to the above problems
  • There could be market-based benchmarks or standards rather than fixed benchmarks when setting the target.
  • There could be more performance measures.
  • Determination of the Treasury accountability and responsibility in advance, rather than understanding it after the problem has happened.

A good and fair performance measure should have the following qualities:
  • A methodology or measure to calculate a number that summarizes the treasury activities over a specified period.
  • The standard or target fixed must be achievable.
  • Realistic and challenging targets so that the actual performance can be measured with the targeted one and ultimately decide if the performance is satisfactory.

Metric Types

Below given are some of the Metrics which could be evaluated to measure the performance:
  • Flow Values
    • Profit & Loss line items
    • EBITDA & EBIT
    • Cash flows
    • Forecast variances
  • Ratio Values
    • Average transaction rate
    • Weighted average return
    • Margin ratios
  • Portfolio Statistics
    • Total value of Portfolio
    • Risk measures
  • Cycle Times
    • Determination of cash position
    • Completion of monthly reports
  • Counts
    • Transaction volumes
    • Transaction errors
    • Number of staff involved etc.
The actual performance could be compared with the targeted performance for the current year as well as with previous and historical years. For example, the count or number of transaction errors could be compared with the number of errors committed in the previous years and if they have reduced, it means that the performance has increased. Evaluation of performance and progress must be carried on frequently and from time to time to increase the efficiency and capability of the Treasury.


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