EXECUTIVE SUMMARY

Many treasurers aim to position themselves as a strategic

advisor within their organization — but how can this be achieved?

Quantifying treasury’s performance and communicating the findings

to internal stakeholders is an important part of the process.

While the prospect of inviting closer scrutiny may be daunting,

the use of key performance indicators (KPIs) can be a valuable

tool in driving performance improvements — and improving

treasury’s profile within the company.

TAblE of ConTEnTS

Why Measure? . . . . . . . . .2

Examples of Treasury KPIs . . . . . . . . . .3

Next Steps . . . . . . . . . . . .4

Key Performance IndicatorsDrive performance, get results.

FEBRUARY 2013

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Today’s corporate treasury professionals recognize the need to become more of

a strategic advisor rather than merely a tactician. In order to achieve this, it is

necessary to link treasury’s performance to the corporation’s objectives and goals.

Thus, treasurers looking to be viewed as a strategic advisor need to open up their

departments — and themselves — to greater levels of scrutiny than in the past.

In order to lead this transformation, treasurers must commit to improving

the operating performance of the treasury department. In many cases, this

will involve redesigning inefficient processes and overcoming performance

shortfalls, understanding why these shortcomings exist, re-educating staff

and driving improvements.

A key element of this exercise lies with the calculation and publication of KPIs.

A KPI is a numerical measure designed to identify and help manage specific

activities, financial line items or risk exposures present in ordinary operations.

KPIs can be used to identify areas needing improvement and, when used

continuously, they can also track whether performance is improving or

deteriorating over time.

WHY MEASURE?

The financial crisis of 2008 thrust most treasury departments into the

spotlight. Board level interest in treasury matters escalated rapidly and

demand for accurate information soared: How much cash was in the company’s

bank accounts? Where was it held? How accessible was it? What about the

investment portfolio? What credit lines were available if the need arose for

additional liquidity?

This new level of internal scrutiny led many CFos to question how much value

the treasury department was adding to the corporation and whether this value

could be measured. If so, the next step was to ask whether improvements, over

time, could be quantified — and whether the treasury’s performance was aligned

with the overall corporate goals.

A new age of accountability began and many treasurers began using KPIs

to a greater degree than in the past. Some treasurers began developing and

issuing KPIs to senior corporate leaders in order to demonstrate the treasury

team’s commitment to delivering quality performance and adding value to

the corporation.

Through measurement, treasury can make a very public statement about its

commitment to improving performance, thereby contributing to the corporation’s

future prosperity. Plus, inviting external scrutiny will lead to increased credibility,

as treasury meets the challenge of beating the published benchmarks.

Today’s corporate treasury

professionals recognize the

need to become more of a

strategic advisor rather than

merely a tactician. In order to

achieve this, it is necessary

to link treasury’s performance

to the corporation’s objectives

and goals.

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EXAMPlES of TREASURY KPIS

KPIs are calculated according to a predetermined formula at regularly scheduled

intervals. It’s important to set benchmarks that challenge, since meeting KPIs

that are easily obtained or exceeded is of little value.

For securities analysts, the KPI most widely used to evaluate a company’s

performance is earnings before interest, taxes, depreciation and amortization

(EBITdA). EBITdA provides an objective measure of whether the company is

meeting its operational goals and strategic objectives.

Where treasury’s KPIs are concerned, the focus should be on areas in which

treasury has the biggest impact: liquidity and debt management, interest income

and expense, foreign exchange exposures, and working capital management.

Tactical KPIs

Treasury KPIs may be strategic or tactical in nature. Tactical KPIs are used

to measure the effectiveness of various processes, error rates and asset

utilization. Such activities are recurring, so the relevance of these KPIs

continues throughout the corporation’s existence.

Tactical KPIs can cover the following areas of treasury:

y Error rate. In an ideal world, tasks and people would be error-free — but,

in practice, this is not always the case. KPIs can be used to measure the

percentage of payments containing errors, which can be broken down by

payment type (e.g., Fedwire, ACH, SWIFT or SEPA payments). The accuracy

of different types of forecasts can also be measured by comparing forecasts

to actual results. Useful KPIs include:

– Accuracy of cash flow forecast: (Actual cash balance minus forecasted

cash balance)/forecasted cash balance

– Accuracy of interest expense forecast: (Actual interest expense minus

forecasted interest expense)/forecasted interest expense

– Percentage of payments containing errors: Number of payments containing

errors/total number of payments

– Variance to market rate at time of trade: (Trade rate minus market rate

at time of trade)/market rate at time of trade

– Hedge percentage: Principal value of identified hedged exposures/principal

value of total identified exposures

– Fixed/floating rate mix: Total value of fixed rate exposure/(total value of

fixed and floating rate exposure)

KPIs are calculated according

to a predetermined formula at

regularly scheduled intervals.

It’s important to set benchmarks

that challenge, since meeting

KPIs that are easily obtained

or exceeded is of little value.

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y Debt management. Managing the corporate debt portfolio requires treasury

to focus on the term structure, interest rates and characteristics of the

obligations, and to ask whether the corporation has access to sufficient credit

facilities, should the need arise. debt management KPIs include:

– Available credit: Total principal value of drawn credit/total principal value of

all credit facilities

– “All-in” interest rate on debt instruments vs. benchmark

y operational performance. The treasury’s level of operational readiness can be

determined by measuring productivity and effectiveness using KPIs such as:

– Time required to determine daily cash position vs. benchmark

– Ratio of system-generated payments vs. manual payments

– Ratio of electronic vs. paper payments

– Number of bank accounts with non-relationship banks

– Actual bank fees vs. budgeted bank fees

– Time required to complete monthly financial close activities vs. benchmark

Strategic KPIs

In addition to the tactical KPIs detailed above, treasury may also use strategic

KPIs. These are used when the organization’s strategy or objectives have become

more ambitious and are developed on an as-needed basis to support specific

goals. These measures often reflect an organization’s response to change during

a limited period of time, and cease being relevant once the project or objective

has been completed. Strategic KPIs might focus on treasury’s contribution to

a system implementation, the integration of an acquired company’s treasury

function, or changes to the balance sheet or income statement.

nEXT STEPS

Measuring treasury’s performance against a predetermined benchmark enables

the treasury team to identify objectively whether things are going as well as

planned. However, measuring performance is only the first stage. In order to

benefit from the exercise, treasurers must use the data to analyze any shortfalls

in performance, ask what could be done to improve the outcome and take the

necessary steps to increase performance.

Meanwhile, the information needs to be communicated effectively. Less can be

more, and, in order to keep the message relevant, treasury should focus on the

most meaningful KPIs — usually no more than eight in total. Each of the chosen

KPIs should be linked to a specific corporate, divisional or departmental objective.

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“ Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., all of which are registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed. We do not provide legal, compliance, tax or accounting advice. ©2013 Bank of America Corporation AA-AA-0364ED 02-2013

When it comes to communicating treasury’s performance, it is important to

make the message clear and easy to understand. Graphics can help the reader

evaluate how effectively treasury is functioning and can be used to illustrate

actual performance versus designated benchmarks.

Regardless of which KPIs treasury decides to publish, the use of KPIs sends

a clear message that treasury is committed to making the function the best

it can be. The increased transparency brought by the use of KPIs may be

uncomfortable at first — but by meeting and exceeding the stated benchmarks,

treasury can identify and act on areas in which improvement is required, and

enhance its position as a strategic asset within the organization.