A Treasury Policy Document serves as the cornerstone of a well-structured treasury function, providing a comprehensive framework for managing liquidity, risks, investments, and operations. It establishes clear guidelines, governance structures, and procedures to align treasury activities with organizational goals while ensuring compliance with regulatory standards. This chapter provides a step-by-step guide to creating an effective treasury policy document, from its purpose and key components to best practices for development, implementation, and periodic review.
- Importance of a Treasury Policy Document
1.1 Strategic Alignment
Align treasury operations with the organization’s overall objectives, such as liquidity management, risk mitigation, or capital optimization.
Example: A policy prioritizes maintaining liquidity reserves to support business growth.
1.2 Risk Management
Provide a structured approach to managing financial risks, such as interest rate, foreign exchange (FX), credit, and operational risks.
Example: Define hedging strategies to mitigate FX exposure for cross-border transactions.
1.3 Regulatory Compliance
Ensure adherence to accounting standards, tax laws, and financial regulations.
Example: Incorporate guidelines for compliance with IFRS 9 or Dodd-Frank regulations.
1.4 Governance and Transparency
Establish accountability and transparency in decision-making and execution of treasury activities.
Example: Document roles, responsibilities, and approval processes for treasury transactions.
1.5 Operational Efficiency
Streamline processes and minimize errors through standardized procedures.
Example: A policy defines protocols for daily cash positioning and reconciliation.
- Key Components of a Treasury Policy Document
2.1 Purpose and Scope
Purpose
Clearly state the objectives of the treasury policy.
Example: “The purpose of this document is to establish guidelines for managing liquidity, mitigating financial risks, and ensuring compliance with organizational and regulatory requirements.”
Scope
Define the activities and areas covered by the policy, such as cash management, risk management, and investment activities.
Example: “This policy applies to all treasury operations across the organization, including subsidiaries and joint ventures.”
2.2 Governance Framework
Roles and Responsibilities
Specify the responsibilities of treasury staff, senior management, and oversight committees.
Example: The Treasurer manages daily operations, while the CFO oversees strategic decisions.
Approval Authority
Define approval thresholds for transactions and activities.
Example: Payments over $1 million require dual approval from the CFO and Treasurer.
Reporting Requirements
Establish guidelines for internal and external reporting.
Example: Weekly cash flow forecasts and quarterly risk management reports to the board.
2.3 Risk Management Policies
Liquidity Management
Define minimum cash reserve levels and access to credit facilities.
Example: Maintain cash reserves equal to three months of operating expenses.
Market Risk
Outline strategies for managing FX, interest rate, and commodity price risks.
Example: Use forward contracts to hedge 80% of forecasted FX exposure.
Credit Risk
Establish counterparty credit rating requirements and diversification limits.
Example: Limit exposure to any single counterparty to 10% of total assets.
2.4 Investment Policies
Permissible Investments
Specify approved asset classes and instruments.
Example: Government bonds, money market funds, and investment-grade corporate debt.
Risk Tolerance
Define acceptable levels of risk for investment portfolios.
Example: Target portfolio duration of less than one year to minimize interest rate risk.
Performance Benchmarks
Set benchmarks for evaluating investment performance.
Example: Compare returns to a money market index.
2.5 Operational Guidelines
Bank Account Management
Procedures for opening, maintaining, and closing accounts.
Example: Require dual authorization for opening new bank accounts.
Cash Flow Management
Guidelines for preparing, monitoring, and updating cash flow forecasts.
Example: Update forecasts weekly and adjust hedging strategies as needed.
Payment Processing
Define protocols for initiating, approving, and reconciling payments.
Example: All payments above $50,000 require dual approval.
2.6 Compliance and Audit
Regulatory Compliance
Ensure adherence to relevant laws and accounting standards.
Example: Include hedge accounting guidelines under IFRS 9 or ASC 815.
Internal and External Audits
Outline procedures for regular audits to verify policy compliance.
Example: Conduct annual internal audits of all treasury activities.
- Steps to Create a Treasury Policy Document
3.1 Assess Organizational Needs
Identify Key Risks and Objectives
Conduct a risk assessment and align the policy with strategic goals.
Example: Assess liquidity needs and FX exposures for global operations.
Engage Stakeholders
Collaborate with senior management, finance, operations, and legal teams.
Example: Gather input from the CFO, risk managers, and external auditors.
3.2 Draft the Policy
Structure the Document
Use a clear and logical format, including sections for purpose, scope, governance, risk management, and compliance.
Example: Include an executive summary for quick reference.
Use Clear Language
Avoid jargon and ensure the document is accessible to non-treasury professionals.
Example: Replace “liquidity horizon” with “time period for available cash.”
3.3 Review and Approve
Internal Review
Share the draft with relevant stakeholders for feedback.
Example: Circulate the draft to the Risk Committee and CFO for input.
Board Approval
Present the final document to the board of directors for formal approval.
3.4 Implement the Policy
Communicate to Staff
Train treasury and finance teams on the policy’s requirements.
Example: Conduct workshops on risk management strategies and reporting protocols.
Integrate with Systems
Use Treasury Management Systems (TMS) to automate policy implementation.
3.5 Monitor and Update
Periodic Reviews
Review the policy annually or in response to significant changes in market conditions or regulations.
Example: Update FX hedging guidelines following major geopolitical events.
Continuous Improvement
Incorporate lessons learned and feedback into policy updates.
- Best Practices for a Treasury Policy Document
Ensure Flexibility
Allow for adjustments to accommodate changes in business strategy or market conditions.
Example: Include provisions for emergency liquidity management.
Leverage Technology
Use technology to streamline compliance and reporting.
Example: Integrate policy guidelines into automated workflows.
Promote Transparency
Make the document accessible to all relevant stakeholders.
Example: Publish the policy on the company’s intranet.
Focus on Scalability
Design the policy to adapt to future growth and complexity.
Example: Include guidelines for integrating new subsidiaries into treasury operations.
- Common Challenges and Solutions
5.1 Complexity
Challenge: Creating a policy that balances detail with usability.
Solution: Use appendices for technical details, keeping the main document concise.
5.2 Resistance to Change
Challenge: Resistance from teams unfamiliar with formal policies.
Solution: Provide training and highlight the benefits of standardized processes.
5.3 Keeping Policies Updated
Challenge: Policies becoming outdated due to evolving risks or regulations.
Solution: Schedule regular reviews and assign responsibility for updates.
Conclusion
A comprehensive Treasury Policy Document is essential for managing financial risks, ensuring compliance, and supporting organizational goals. By defining clear guidelines, roles, and procedures, the policy provides a roadmap for effective treasury operations.
