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Beyond EBITDA Metrics for Treasury Function



Measurement Metrics for Treasury FunctionMany treasury departments find that their performance falls outside of a company’s normal set of performance metrics. The standard of performance is earnings before interest, taxes, depreciation and amortization (EBITDA), which essentially focuses on operational results. However, since the treasury department’s primary impact is on interest expense, foreign exchange exposure, and liquidity, it does not fall within the EBITDA metric. Thus, even a stellar treasury performance may go unnoticed! The treasury department needs to look outside of EBITDA for performance measures that reveal its true effectiveness.

This post discusses some possible metrics for the treasury function, beyond the common EBITDA. It comes with its application examples. Enjoy!



Borrowing Base Usage Percentage

The borrowing base usage percentage is an excellent measure for keeping track of the amount of debt that a company can potentially borrow, based on that portion of its accounts receivable, inventory, and fixed assets that are not currently being used as collateral for an existing loan. In short sentence, borrowing base usage percentage is perfect metric to answer “how much is company can borrow potentially?” question.

A treasurer should have this information available on all standard internal accounting reports so that the company’s available debt capacity is easily available. It is particularly useful when employed within a cash budget, so that one can see at a glance not only the amount of any potential cash shortfalls, but also the ability of the company to cover those shortfalls with collateralized debt from existing assets.

Follow these steps to calculate the borrowing base usage percentage:

  • Step-1. Multiply the current amount of accounts receivable, less those invoices that are more than 90 days old, by the allowable borrowing base percentage (as per the loan document).
  • Step-2. Multiply the current amount of inventory, less the obsolescence reserve, by the allowable borrowing base percentage (as per the loan document).
  • Step-3. Multiply the purchase value of the fixed asset, less the accumulated depreciation figure, by the allowable borrowing base percentage (as per the loan document).
  • Step-4. Sum the results of the above three calculations together to get a amount.
  • Step-5. Finally, divide the sum amount (on step-5) into the amount of debt outstanding.

Note: Many lenders do not allow a company to use fixed assets as part of its collateral, on the grounds that fixed assets are too difficult to liquidate (e.g. tools and equipments, furniture and fixture, old machineries, and old vehicles), therefore exclude these type fixed assets. However land and building is always acceptable.


The formula is as follows:

Borrowing Base Usage Percentage = Amount of Debt Outstanding / Total Borrowing Base


Total Borrowing Base = (Accounts Receivable x Allowable Percentage) + (Inventory x Allowable Percentage) + (Net Fixed Asset x Allowable Percentage)


Borrowing Base Usage Percentage = Amount of Debt Outstanding / [(Accounts Receivable x Allowable Percentage) + (Inventory x Allowable Percentage) + (Net Fixed Asset x Allowable Percentage)]


Case Example:

The Lie Dharma Company, maker of heirloom, has been in a breakeven cash flow situation for a number of years. The market for its products is gradually declining, and the CFO is searching for alternative products that will shift the company into a more profitable situation.

In the meantime, he needs to know the proportion of debt available under the company’s borrowing arrangement, in order to see how much funding is available to start new lines of business. Under the terms of the loan, the borrowing base percentage for accounts receivable is 70 percent, 50 percent for inventory, and 20 percent for fixed assets.

According to the company’s balance sheet, it has the following assets and liabilities:

Account                              Amount
Accounts Receivable          $350,000
Inventory                           $425,000
Fixed Assets                      $205,000
Accumulated Depreciation ($65,000)
Loans (debt outstanding)   $250,000

The borrowing base calculation for the denominator of the ratio is as follows:

$350,000 Accounts receivable x
70% borrowing base                              = $245,000

$425,000 Inventory x
50% borrowing base                              = $212,500

$140,000 Net fixed assets x
20% borrowing base                              = $  28,000

Total borrowing base                            = $ 485,500


(Note: The fixed assets borrowing base calculation was net of the accumulated depreciation figure; otherwise, the borrowing base would not properly reflect the reduced resale value of older fixed assets; $205,000 – $65,000 = $140,000).

Using the preceding borrowing base calculation, the CFO of Lie Dharma can complete the borrowing base usage percentage as follows:

= Debt Outstanding / Total Borrowing Base
= $250 000 / $485,500

= 51.5% Borrowing Usage Percentage

The CFO notices that about one-half of the total borrowing base has been used to collateralize existing debt levels. Also, by subtracting the numerator from the denominator, he sees that the company can borrow another $235,500 before the borrowing base is maximized.


Earnings Rate on Invested Funds

A company’s investments can include interest income or an increase in the market value of securities held. The earnings rate on invested funds is a good measurement for tracking investment performance.

To calculate the earning rate on invested funds: summarize the interest earned on investments, as well as the change in market value of securities held, and divide by the total amount of funds invested.

Note: Since the amount of funds invested may fluctuate substantially over the measurement period, this can be an average value. The amount of interest earned should not be based on the actual interest paid to the company, but rather on the accrued amount (since the date of actual payment may fall outside of the measurement period).


The earning rate on invested funds formula is as follows:

[Interest Earned Increase in Market + Value of Securities] / Total Funds Invested


Case Example:

The Lie & Lou Garden Centers corporate parent is earning a considerable return from its chain of small – town garden centers. Its treasurer wants to know its earnings rate on invested funds during the past year. It had $5,500,000 of invested funds at the beginning of the year and $6,200,000 at the end of the year. It earned $75,000 in interest income, and had a net gain of $132,000 on its short – term equity investments.

Its total earnings rate on invested funds was calculated as follows:

= [Interest Earned + Increase in Market Value of Securities] / Total Funds Invested
= [$75,000 + $132,000] / [($5,500,000 + 6,200,000) / 2]
= 3.5% Earnings Rate on Invested Funds

A company can place too great a degree of reliance on this measurement, resorting to increasingly risky investments in order to achieve a higher earnings rate. The board of directors must realize that a reasonable, but not spectacular, amount of return is perfectly acceptable, because a company should also focus its investment strategy on other goals, such as liquidity and minimal loss of principal, which tend to result in lower rates of return. Thus, the rate of return metric must be evaluated alongside a summary of the types of investments that the treasury staff engaged in to achieve the calculated results.


Other Useful Metrics for Treasury

Here are other metrics I consider as possibly useful for the treasury department in some particular circumstances:

1. Accuracy of Cash Forecast – If a company is operating in a negative or neutral cash flow situation and has minimal available sources of excess cash, then the accuracy of its cash forecast might be a useful metric. The treasury staff needs to predict cash balances as close to actual results as possible, so that the company does not find itself running out of cash. However, it is a difficult metric to hold the treasurer responsible, because the sources of information that comprise the forecast come from all over the company, and the treasurer is not responsible for those cash flows. Thus, even if the cash forecast is inaccurate, the cause may not lie within the control of the treasury department.

2. Bad Debts As A Percentage Of Sales – This metric is relevant only if the treasury department is responsible for the granting of customer credit. However, if the accounting department is responsible for collections, then this percentage is really the joint responsibility of the treasurer and the controller.

3. Transaction Error Rate – A more viable metric is a transaction error rate, which can be subdivided by each type of transaction in which the treasury staff engages. This can be a valuable tool for upgrading controls, procedures, and training, to mitigate the risk of such errors occurring again. This metric is not easily translated into a simplified presentation report that compares error totals by period because some errors may have much worse repercussions than others, and this is not readily apparent in a simplified report. It is also possible to track the cost of outside services. The most obvious one, and most easily derived, is the cost of banking services, which can be tracked on a trend line. This information can also be compared to benchmark information, or used to compare the fees of different provider banks; the comparison provides a tool for negotiating reduced service charges.

4. Un-hedged Gains and Losses – A final metric to consider is un-hedged gains and losses. These gains and losses can be quite large, and would initially appear to be a good way to judge the hedging activity of the treasury staff. However, the amount of hedging risk that a company chooses to expose itself to is set by the board of directors (admittedly with the advice of the treasurer), and the treasury staff is supposed to follow the board ’ s guidelines. If the board elects not to hedge, then there will be gains and losses, but they will not be the responsibility of the treasurer.

The treasury department is not easily measured, and in fact is particularly resistant to metrics. A well-run treasury department will produce unspectacular gains on its investments, and will manage to avoid outsized gains or losses on its currency positions, while ensuring that corporate cash needs are met in a steady and reliable manner. In short, the treasury department provides functions that appear to be largely invisible unless something goes wrong — and it is difficult to build metrics around such a situation. Of the two metrics fully explored here, the earnings rate on invested funds should be used with considerable caution, while the borrowing base usage percentage can provide useful information, but only in regard to what may be a limited amount of available borrowing capacity.

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