Looking Beyond Cash Flow: A Fresh Approach to KPIs

Every treasurer measures, and is consequently measured by, the performance of a company’s treasury function. In many cases, businesses have built up complex and extensive scorecards of key performance indicators (KPIs) that evaluate different elements of accuracy, speed and productivity. What is often overlooked is that these KPIs contribute to overall business success, and focus on performance against individual metrics rather than the wider picture. Is the purpose of treasury to generate a cash flow forecast with over 90% accuracy against actual flows? Or is it to ensure that the business has liquidity to meet its financial obligations, pay down debt and deliver value to shareholders? While cash flow forecasting is essential to meeting these objectives, it is time to look beyond lower level KPIs and measure performance at a strategic level. This is the approach we have instituted at Hilton.

Hilton’s treasury team

We have a global treasury team of over 25 people located in three offices- two in the US in McLean, Virginia, and Memphis, Tennessee, and one in Watford, north of London in the UK. Across these locations, we have teams covering Asia Pacific, Europe, Middle East & Africa, and the Americas, who look after core cash and treasury requirements in the relevant countries. We also have corporate functions based in McLean that support activities such as cash flow forecasting, investment and intercompany lending, plus a middle office that manages the treasury management system (TMS) and monitors data, processes and controls.

Transformation principles

While our treasury function today is globally integrated and powered by leading-edge technology, this is a significant shift from how the function looked eight years ago. At that time, we had two distinct cash management teams based in Memphis and Watford that were connected only through email and using disparate spreadsheets. However, as a company, we have experienced a number of transformational corporate events, from the merging of Hilton and Hilton International in 2006, acquisition by Blackstone in 2007, our IPO in 2013, and the completion of the spin-offs of Hilton Grand Vacations and Park Hotels & Resorts earlier this year, that have elevated the importance of treasury within the business, and prompted us to focus on optimising our policies, processes, skills and infrastructure. 

There were three fundamental principles behind this transformation:

First is the importance of real-time data. It was critical for us that data generated in one part of the organisation was immediately and universally available to other authorised users without delays.

Second, we wanted to ensure that we had a treasury organisation with the right skills and resources covering all major activities. We created defined front- and middle-office functions, and refocused our resources away from operational tasks.

Third, and partly as a result of the first two, we aimed to expand and refine our processes and capabilities, including areas such as intercompany funding, balance sheet FX and cash flow, and FX risk management.

A new performance culture

Implementing these three principles, together with a state-of-the-art treasury technology infrastructure, has allowed us to enhance both the sophistication of our treasury function and the value we offer to the wider business. However, one of the challenges for all treasurers is how to measure this value in quantifiable terms, and demonstrate its growth over time. Every department has KPIs by which its relative and absolute performance is measured, and these typically form the basis on which individuals’ targets are set and monitored. The difficulty in treasury is that many of the ways in which the function adds value are quantitative rather than qualitative. Furthermore, the breadth and complexity of its role often leads to a large number of KPIs across the spectrum of its activities.

Fig 1 - Contributing to KPIs

For many corporations, this proliferation of KPIs creates a dilemma. With such a range, the temptation is to focus on monitoring and finding ways to improve individual indicators, therefore losing sight of treasury’s broader purpose, and how its activities contribute to the wider corporate strategy. Furthermore, the calculation of these KPIs can be labour intensive, diverting resources from value creation.

At Hilton, we have stripped back the number of KPIs we monitor, aligning these closely with corporate strategy and C-suite priorities. For example, when we relisted on the New York Stock Exchange in 2013, our priority was to have cash to pay back debt. Since then, having deleveraged the business to 3 – 3.5x EBITDA, we have implemented a strategy of returning capital to shareholders. We began issuing dividends in 2015 and we launched our share buyback programme in 2017, revising treasury’s KPIs accordingly. While both paying down debt and dividend and share buyback programmes require cash generation, debt repayment has an uneven cash flow profile according to debt maturities, while funding dividends and share buybacks requires steadier cash flow, resulting in a shift in our cash management approach.

From data-led to value-led

Focusing on corporate strategy does not imply that performance in areas such as cash visibility, cash flow forecasting, and cost of capital are not important: far from it, these are very important, but as a means to an end rather than an end in themselves (see figure 1). To meet our overall corporate objectives, we need to optimise the quality and efficiency of our processes, controls and decision-making. At Hilton, for example, timely, consistent and complete visibility of cash information across our business underpins all our processes and decisions. By focusing on what really matters, we are able to prioritise and spend more time on delivering on our core purpose rather than spending time on complex calculations and reporting that deliver little value.

Banks and technology vendors are increasingly focusing on data, and there is a great deal said about ‘big data’ and techniques such as machine learning. However, from a treasurer’s perspective, the focus on more data is not always helpful. What is it used for? How does it add value? By starting with the big picture rather than the minutiae, we can look at what is needed to achieve our corporate objectives, drilling down through different levels of detail to separate the priorities from the noise.