Creating a dynamic treasury function

By in Accounting and Finance

How does a CFO create a treasury function that fit’s the purpose of today and tomorrow?

For a CFO, balancing the treasury components to support an organisation in today’s environment can be both a challenge and an opportunity.

The economic back-drop is changing – an uncertain geopolitical environment framed by a mesh of traditional and new forms of investments, offering varied risks and expected returns. The landscape moves faster, regulation changes are the new constant and using tech to craft innovative solutions in real-time is the new normal.

In a volatile market place, a CFO must manage current financial risks and short-term performance, while ensuring the organisation’s strategy remains flexible to drive long term growth.

With all these forces at play even the most well-seasoned treasury department can find it hard; grappling with global economic complexity, as well as answering to the board with respect to the investment strategy on a risk v return basis and fit for the organisations strategic goals.

Creating a dynamic treasury function means taking control of operational, financial and risk factors, ensuring corporate governance and building diverse stakeholder relations. While it’s a good idea to seek professional help when managing a treasury function, here’s five focus areas for a CFO to get started on managing your organisation’s treasury function.

#1 Align goals and objectives

Managing a treasury is strategic and requires a holistic approach; It’s important to clearly define the treasury’s objectives and ensure they align to the organisational goals. The overall aim of a treasury is to balance future liabilities to fund operations and projects with growing the pot. With that in mind, the biggest question you must ask yourself is, what needs to be put aside for future funding and how do you achieve it? This involves identifying treasury needs in the short, medium and long-term:

Will you need money for the acquisition of a new building? Are you planning to expand operations? What funding is required and when?

It’s essential that the business goals and activities are fit for the treasury’s purpose; that the portfolio aids the function of those activities – from operational cash, through to growth.

#2 Devise an Investment policy statement

Once you have defined your goals and objectives, it’s time to formally document your plan, starting with an investment policy statement (IPS). An IPS lays out the ‘rules of play,’ and guides decision-making, by setting out the portfolio’s investment goals and objectives and strategies to meet them.
It also clearly outlines effective supervision, monitoring, and evaluation of the portfolio, giving clarity to both the manager of the portfolio and organisation.

The IPS should cover the following:
– What are the objectives of the business that require money?
– What strategies (asset allocation and time frames) will be used?
– What is the target return?
– What are the investment parameters?
– What is the governance process?
– What are the risks?

#3. Define the corporate governance process

While corporate governance is becoming more complex, it is an essential part of the treasury function. Tighter regulation, red tape, increased circumstances of fraud, as well as more multi-disciplinary teams means clearly stating roles and responsibilities and having internal controls in place that manages risk is vital.

It’s important to have clarity over the responsibilities of all involved parties, so that each party understands their role and can fulfil their duties effectively. This includes that of the board of directors, the finance committee, investment (asset) consultants and custodians (financial institutions who safe guard the assets).

Internal controls that mitigate risks should address the following:
— control of collusion;
— separate the transaction authority from accounting and record keeping;
— safekeeping; avoid physical delivery of securities;
— clearly delegate authority to investment officers;
— confirmation requirements for settlement of securities;
— compliance and oversight of investment parameters; and
— reporting of breaches

These controls should be guided by implemented policies and procedures that are regularly monitored and updated. The board should ensure internal controls and processes as well as investment objectives are being met through quarterly reporting, plus annual reviews.

#4. Design and engineer an investment strategy for each pool of funds

Effective portfolio management involves maximising returns for the lowest risk possible. Funds should be split into pools, each with a distinctly unique investment strategy to match their underlying purpose and time-period. For example:

— A ‘cash at call’ investment pool, which details the month-to-month operational costs. In this pool, liquidity is vital, as ‘cash at call’ covers immediate operational costs over a short-period and need to be readily accessed – typically within two days or less.
— The second investment pool is a ‘cash reserve.’ The strategy for the cash reserve is to fund short-term capital items such as equipment, tax and staff liabilities (e.g. redundancy and annual leave) as well as operational costs 6 months out. This pool should increase the cash income yield and top up the ‘cash at call pool’ when required throughout the year.
— The third pool, is the strategic ‘pool.’ this holds the project reserves. The key distinction of this pool to the other pools is the time frames, required return, the investment strategy, and therefore exposure to growth assets. The investment strategy for this pool requires careful analysis, if you’re going to require a portion of the funds in say 5 years’ time then you need to make sure that you have a high degree of probability that you’ll meet your target. Moreover, what strategic mix of investments will deliver on the outcomes required by the organisation.

#5. Regular reporting and monitoring.

A high-performance treasury function is one that is regularly reviewed and measures expected performance with actual performance. As part of this a well-defined monitoring and review process should be undertaken at scheduled times each year. This ensures portfolio performance and risk, are in compliance with the IPS and on track to achieve the primary objectives. Monitoring also involves comparing the return on investments against benchmarks, but also the performance of the portfolio managers deriving the return. It’s important to remember that you need to understand how the returns were derived not just that it was a good return, after all you want the maximum return of course, but also for the lowest risk possible.

Overall, creating a treasury is complex and requires careful planning. An advisor can help you clearly identify the strategic direction of the treasury function as well as design and manage portfolios in association with the board and treasury committee.

1 Comment

  1. James Wynn 1 year ago

    Solid and sensible steps to controlling and managing reserves generated across the SME business cycle.

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