Treasurers are grappling with increased expectations and demands from executive leadership, while  simultaneously battling the highest cost of capital in over a decade, navigating geopolitical and economic challenges, adopting new digital business models, and incorporating emerging technologies to drive growth and gain a competitive advantage. In their quest to create value for their organizations, treasurers are required to justify their investments and benchmark their treasury roadmaps against their peers.

To ascertain if companies need to accelerate investments to build a high-performing treasury function that helps organizations enhance their profitability and growth, Citi sought to answer three pivotal questions: Does leadership in treasury matter for a firm? What are the attributes of a leading treasury? And what are the key steps needed to get there?

Based on its Citi Treasury Diagnostics (CTD) global benchmarking service, Citi completed a comprehensive study of almost 350 corporate treasury practitioners from organizations that range from less than US$2 billion to over $100 billion representing a diverse set of industries and regions across the globe. This study is the fourth edition of its kind.

Here are the three key insights and findings from the latest Citi Global Perspectives & Solutions (GPS) study report titled Treasury Leadership: Does it Matter?

Organizations that nurture treasury leadership enjoy better financial performance

The new study from Citi finds that companies that “Have nurtured treasury teams to be leaders in their field enjoyed better financial performance. Top treasury performance and company profitability are correlated. The company earnings-to-revenue ratios increases from 0.75 to 1.37 between companies that have bottom quartiles vs. top quartile treasury performers.”

In the Citi study, earnings-to-revenue ratios refers to the ratio of EBITDA (earnings before interest, taxes, depreciation, and amortisation) to revenue, which in essence denotes that the company earnings-to-revenue ratios increased from 0.75 for the bottom-performing treasuries (bottom 25% of treasuries) to 1.37 for the top treasury performers (the top 25% of treasuries).

“Applying the earnings-to-revenue ratio of the bottom 25% of treasuries to the aggregate company revenues of the top 25% of treasuries,” Citi estimates the “Top 40 performing treasuries, as measured by this study, generated $44 billion of additional earnings over the last five years attributable to their better treasury performance.”

Additionally, when using the performance quartiles and ratios inferred from this study to a broader spectrum of companies, it becomes evident that “Fortune 500 companies may have left $165 billion in profits behind in 2022 due to underperforming treasury.”

Furthermore, the study reveals that just as top treasury performance and company profitability are correlated, there exists a correlation between treasury performance and return on invested capital (ROIC).

Citi’s analysis suggests that ROIC increases from nearly 6% for participating companies within the lowest quartile (bottom 25%) of treasury performance (classified as a laggard) to 10% for those in the highest treasury performance quartile (top 25%).

Lastly, when considering financial performance in absolute terms, participating companies with treasuries performing in the top 25% accounted for 59% of total revenues and 62% of total earnings.

Attributes of high-performing treasuries

Overall, companies are continually enhancing their treasury performance. That said, factors such as company size, headquarters location, and industry can offer some predictive insights into where a particular company may stand in terms of treasury performance.

According to the Citi study, larger companies (those with annual revenue over $10 billion) are generally more efficient and effective in their treasury policies, processes, and procedures than those smaller (annual revenue below $2 billion).

However, the most notable difference between small and large companies are observed in three of the six pillars of treasury, namely, Liquidity, Working Capital, and Systems & Technology. In these areas, larger organizations tend to outperform their smaller counterparts. This implies that for smaller companies, it becomes even more important to invest in these pillars and leverage them for the organization’s benefit.

While “Effective cash and liquidity management — a minimum standard for corporate treasury — has progressed in the past four years. However, for companies in the aggregate, further improving cash and liquidity management will have the most impact on improving treasury performance”, the study noted.

Articulating the attributes of top-performing treasuries, Shahmir Khaliq, Global Head of Services, Citi, said that “High-performing treasuries ensure efficient funding of working capital, proactively identify and mitigate financial risks, and deploy liquidity to fund the company's growth.”

Moreover, establishment of effective policies, processes, and procedures aligned with a documented treasury strategy and monitored with the help of key performance indicators (KPIs), constitute the foundation for cultivating an exemplary treasury function.

                                          Existence of Policies

Treasury policies are broadly adopted, with 70% of larger companies indicating their policies cover all areas of their treasury responsibilities. Policy gaps are more commonly observed in companies generating annual revenues less than $10 billion, particularly among smaller companies, where 14% have no policies in place.

When it comes to adoption and deployment of treasury objectives, plans, and procedures, the Citi study reveals “Low levels of documented treasury objectives, plans, and procedures across all study participants. One in five companies with annual revenues greater than $2 billion do not have any documented treasury procedures. Among companies of this size, a similar share (17%) report not having any documented objectives or plans.” Nevertheless, majority of the companies taking part in the Citi study have embedded KPIs into their treasury operations.

Another critical aspect of prudent treasury management is cash visibility, which helps treasuries make sound financial decisions, accurately forecast future cash flows, and invest cash strategically. Progress has been made in this direction, with majority of companies now having visibility of 75% or more over their cash and investments, as per the Citi study.

In addition, “Concentration of cash on a daily basis across multiple locations, entities, currencies, and banks into a central, global cash pool through a regular automated process is the basis of effective and efficient cash and liquidity management”, the study explains. This is precisely why cash concentration recognized as a treasury best practice has been broadly adopted by 78% of the study participants.

In-house banking is also a part of treasuries centre of excellence. While over a third (37%) of the companies included in this study have deployed an In-House Bank (IHB), the likelihood of implementing an IHB increases as companies scale their revenue. Specifically, 63% of companies with annual revenues exceeding $10 billion employ an IHB construct.

Further, the importance of technology as a powerful ally in improving operational efficiency and scalability for treasuries is proven, which is why “Larger companies are starting to move cash forecasting away from dependence on spreadsheets (85% down to 73%). Companies are also integrating data from ERP into their cash forecasting tools, with this increasing to 63% with larger companies”, the study mentioned.

Companies can expedite their journey to treasury leadership by identifying and comprehending the attributes that drive high-performing treasuries. In this connection, Khaliq advocates that companies use the learnings from Citi’s new study “To leapfrog what can be a lengthy process of becoming treasury leaders. And by doing so, accelerate their ability to increase company returns.”

Leading treasuries deliver high performance through digitalisation

“Higher-performing treasuries make better use of technology from systems providers and in banking services. They eliminate people-dependency with engineered processes and automation. As they advance, they put in place building blocks for digitalisation (including digital and data strategies) and use technology to transform how treasury operates”, the report further explains.

A key driver of overall treasury performance is the adoption and integration of treasury technology, usually in the form of a treasury management system (TMS) or treasury modules within the enterprise resource planning (ERP) system.

                                         TMS Usage by Company Size

Company size exhibits the strongest correlation (+133%) with investment in a TMS. Of the entire study participant pool, 63% have deployed a TMS. Yet, for smaller companies this figure drops to 39% and rises to 89% for larger companies.

Company size also influences the extent of  treasury system integration, with approximately 90% of larger companies stating that their TMS is either fully or partially integrated with their ERP.

                                         Systems (TMS/ERP) Integration with Bank Systems

Besides TMS deployment and treasury system integration with ERP, the integration with banking partners varies with company size as well, with 31% of larger companies confirming full integration with their banking partners for bank statements and transaction processing, while over a third of smaller companies remain completely manual.

The focus on digital adoption is on the rise, particularly for 72% of large companies, in contrast to 53% of smaller companies who view it as a priority for the year 2023. This prioritisation of digitalisation in treasury is another example that correlates with company size (by annual revenue).  

The Citi study goes onto elaborate that the data veracity (accurate, reliable, and timely data) “Necessary to support digitalisation, and in particular to enable predictive and prescriptive analytics to augment human decision making, is well documented. Despite this, only 40% of those participating in this study have a data strategy in place for treasury — well below the share that has mobilized data-led initiatives. We find that only the most sophisticated companies, that have mobilized transformation programs, have both a digital strategy and a Digital Officer in place.”

With leading treasuries forging ahead, leveraging digitalisation as a key enabler for core automation and harnessing data for insights to improve decision-making, the study results show that “Companies need to accelerate investments in treasury transformation”, remarked Stephen Randall, Global Head of Liquidity Management Services at Citi.

Expanding on his statement, Randall further mentions “The good news is that the latest generation of technology-based financial services equips treasurers to automate, manage risk, and use insights to support business growth and contribute to financial outperformance.”

In conclusion, the Citi study emphasises that top-performing treasuries adeptly finance working capital, employ liquidity judiciously, and proactively identify and mitigate risks. Furthermore, they establish fundamental structures to excel in each of these domains, shifting from dependence on individuals to well-defined processes. They also apply technology to automate repetitive tasks that would otherwise consume significant time. Moreover, they devise data strategies and make adequate investments to secure access to timely, complete, and accurate data.

Corporate treasury professionals will find valuable analysis and insightful perspectives in the new study from Citi GPS that can help them chart a course towards the development of a more performant treasury, thereby contributing to the profitability and growth of their organization as we transition into 2024 and beyond.