Given the current economic uncertainty and volatility in financial markets it has never been more important for the treasurer to have a robust treasury policy. Over recent years there have been several well reported instances where ill-defined policies have contributed to unexpected positions and losses and I believe there are still too many businesses where policy quality is below required levels.
Treasury policies come in all shapes and sizes. A robust policy is one that can easily be understood and used on a day-to-day basis rather than being something that is brought out only when someone asks to see it. It should be succinct, not too long but also not too short as to be meaningless. It should be documented, reviewed at least annually for relevance and approved at the highest level.
In essence a treasury policy should tell the reader why and how all treasury risks are managed both in any treasury function and elsewhere in the business, what the limits, authorities and responsibilities are and how performance is measured.
Key elements to develop a robust treasury policy
The first step is to define the key treasury risks inherent in the business and develop treasury objectives. This requires a clear understanding of the business, its cycles and the cash flows plus an agreed risk appetite passed down from the Board. Without these key building blocks, which in my experience are often more challenging to finalise than might be expected, it is very difficult to move forward.
Secondly the policy needs to articulate the rationale, scope, approach and limits for each of the key risks. The five such risks for most organisations are:
- Liquidity/cash - risk of not having enough liquidity or cash resulting in missed business opportunities or not being able to meet day-to-day obligations in an orderly manner. How cash is forecast, positioned and managed are key elements of the treasury response.
- Foreign currency - risk of loss from changes in exchange rates. Such risks can often be difficult to forecast and measure. Mitigations may involve natural hedging (including pricing change) as well as the use of derivatives.
- Interest rate – risk of incurring variations in interest cost or income as a result of rate fluctuations. This has largely been benign for the past 25 years but is now making a comeback.
- Credit/counterparty – risk of incurring financial loss owing to the unwillingness and/or inability of a financial counterparty to meet its obligations.
- Operational - the risk of loss owing to operational mismanagement, error, fraud, or unauthorised activities.
Once these elements have been defined, a good practice policy will briefly define the key activities and controls, who will do what, what happens when something goes wrong and how the technology is used.
In achieving this I often find that a picture is worth a thousand words. An organisation chart showing the roles and interactions of treasury, finance and business teams, a technology map detailing how in-house and banking tools are used and a RACI chart articulating the responsibilities and accountabilities for key activities and those who need to be consulted or informed, are key tools I would recommend.
Summary
By recognising the benefit of robust treasury policies, treasurers reduce the chances of unexpected loss and are able to focus on the more interesting and career enhancing aspects of their role such as funding, supporting acquisitions and managing banks and investors.
To discuss the development of treasury policies or explore additional insight in this area, please do not hesitate to get in touch.
