Treasury policies and procedures form the backbone of a well-managed treasury function, ensuring alignment with corporate objectives, regulatory compliance, and efficient financial operations. These documents define the framework within which the treasury operates, covering areas such as cash management, risk mitigation, investment practices, and reporting standards. This chapter provides a comprehensive overview of treasury policies and procedures, highlighting their components, importance, and best practices for implementation.
- Importance of Treasury Policies and Procedures
1.1 Alignment with Corporate Strategy
Treasury policies ensure the treasury function supports overall corporate objectives, such as liquidity management, financial stability, and risk mitigation.
Example: A policy prioritizes cash preservation during uncertain economic periods to support business continuity.
1.2 Governance and Oversight
Establish clear roles, responsibilities, and accountability within the treasury function.
Example: Assign specific authority levels for approving investments or executing hedging transactions.
1.3 Risk Management
Provide a structured approach to managing financial risks, including interest rate, FX, credit, and liquidity risks.
Example: Define risk tolerance levels and permissible instruments for hedging.
1.4 Regulatory Compliance
Ensure adherence to legal, accounting, and tax regulations.
Example: Policies include guidelines for compliance with IFRS, Dodd-Frank, or EMIR.
1.5 Operational Efficiency
Standardize processes for cash flow forecasting, payments, and reconciliations to minimize errors and delays.
Example: A procedure outlines the workflow for managing daily cash positions.
- Key Components of Treasury Policies
2.1 Scope and Objectives
Definition of Scope
Define the areas covered by the treasury policy, such as cash management, investments, or risk mitigation.
Example: Policies may include detailed guidelines for FX risk management.
Objectives
State the primary goals of the treasury function.
Example: Ensure sufficient liquidity to meet operational and strategic needs while minimizing financial risks.
2.2 Governance Framework
Roles and Responsibilities
Assign roles to treasury staff, management, and oversight committees.
Example: A Treasurer oversees daily cash management, while the CFO approves strategic investments.
Approval Authority
Define approval thresholds for different activities.
Example: Treasury staff may approve payments up to $50,000, while the CFO approves amounts exceeding $1 million.
Audit and Compliance
Outline procedures for internal and external audits of treasury operations.
2.3 Risk Management Policies
Liquidity Risk
Define minimum cash reserve levels and access to credit lines.
Example: Maintain at least three months of operating expenses in cash or equivalents.
Market Risk
Provide guidelines for managing FX, interest rate, and commodity risks.
Example: Hedge 75% of forecasted FX exposure using forward contracts.
Credit Risk
Set criteria for counterparty selection and credit limits.
Example: Only transact with counterparties rated A- or higher by credit rating agencies.
2.4 Investment Policies
Permissible Instruments
Specify approved asset classes and instruments for short-term and long-term investments.
Example: Limit investments to government securities, money market funds, and high-grade corporate bonds.
Portfolio Diversification
Establish guidelines for concentration risk.
Example: No single investment should exceed 10% of the portfolio.
Performance Benchmarks
Define metrics for evaluating investment performance.
Example: Compare portfolio returns against a market index, such as the S&P 500.
2.5 Cash Management Policies
Bank Account Management
Outline procedures for opening, maintaining, and closing bank accounts.
Example: Require dual authorization for opening new accounts.
Daily Cash Positioning
Define processes for monitoring and managing cash inflows and outflows.
Example: Use Treasury Management Systems (TMS) to consolidate daily cash positions across accounts.
Concentration and Disbursement
Provide guidelines for centralizing funds and managing payments efficiently.
2.6 Reporting and Monitoring
Internal Reporting
Define frequency and content of internal reports.
Example: Weekly cash flow forecasts and monthly risk exposure summaries.
External Reporting
Outline regulatory and stakeholder reporting requirements.
Example: Quarterly compliance reports for hedge accounting under IFRS.
- Key Components of Treasury Procedures
3.1 Standard Operating Procedures (SOPs)
Cash Flow Forecasting
Detailed steps for preparing and reviewing cash flow forecasts.
Example: Collect input from finance, sales, and operations to project cash needs.
Payments Process
Procedures for initiating, approving, and reconciling payments.
Example: All payments above $50,000 require dual authorization.
Bank Reconciliation
Steps for matching bank statements with internal records.
Example: Reconcile accounts within five business days of month-end.
3.2 Risk Management Procedures
Hedging Execution
Steps for identifying exposures, selecting instruments, and executing trades.
Example: Execute FX forward contracts through approved counterparties.
Counterparty Management
Procedures for evaluating and monitoring counterparty creditworthiness.
3.3 Contingency Planning
Disaster Recovery
Steps to ensure business continuity during disruptions.
Example: Backup treasury data daily and test recovery systems quarterly.
Liquidity Contingency
Plans for accessing emergency funding.
Example: Maintain pre-approved credit lines with multiple banks.
- Developing and Implementing Treasury Policies and Procedures
4.1 Assess Organizational Needs
Evaluate financial risks, operational requirements, and regulatory obligations.
Example: Identify major FX risks due to international revenue streams.
4.2 Draft and Review Policies
Collaborate with key stakeholders, including finance, legal, and operations teams.
Example: Draft policies that balance risk mitigation with operational flexibility.
4.3 Approve and Communicate
Obtain approval from senior management or the board of directors.
Train treasury staff on policies and procedures to ensure understanding and compliance.
4.4 Monitor and Update
Regularly review policies to reflect changes in market conditions or business needs.
Example: Update investment policies annually to incorporate new asset classes.
- Challenges in Implementing Treasury Policies
5.1 Complexity in Global Operations
Managing policies across jurisdictions with varying regulatory requirements.
5.2 Resistance to Change
Overcoming resistance from staff or departments unfamiliar with new procedures.
5.3 Resource Constraints
Limited staff or technology to implement robust policies effectively.
- Best Practices
Leverage Technology
Use Treasury Management Systems (TMS) to automate processes and ensure compliance.
Conduct Regular Training
Keep treasury teams updated on policy changes and best practices.
Engage Stakeholders
Involve cross-functional teams in policy development to gain buy-in.
Focus on Scalability
Design policies that can adapt to future growth and complexity.
Conclusion
Treasury policies and procedures are essential for managing financial risks, ensuring compliance, and supporting corporate objectives. By defining clear frameworks and standardized practices, organizations can enhance efficiency, transparency, and resilience.
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