Clear Treasury

Does your business have the right treasury policy?

Jordan Tilley

Jordan Tilley

Chief executive officer

A robust treasury policy

For businesses big and small, a robust treasury policy should be a basic requirement. A good treasury policy will articulate your business’s appetite for financial risk and approach to controlling it, with written guidelines describing the responsibilities of the treasurer and how they should conduct themselves in that role. It should be approved by the company board and reviewed annually to keep it aligned with that business’s objectives.

No matter if you’re a mid-sized corporate or a large multinational, you should be cognisant of the risk that comes from not having an approved treasury policy in place. Without one you leave your business far more susceptible to being mis-sold inappropriate products. Take for example the financial regulator’s imposition on high street banks to redress thousands of small businesses it had sold inappropriate interest rate derivatives to over a decade between 2002-2012.

It’s not just small businesses at risk, though. In the case of Australian mining company Pasminco, a two-billion-dollar company imploded when an ill-planned strategy based on increased debt and favourable foreign exchange (FX) movement failed. Or there’s South African Airways (SAA), which failed to properly allocate its foreign revenue streams and so unintentionally bet against the value of the South African rand rather than hedge their actual cash flows. The result? A 10 billion rand loss. Size and scale are no protection in place of a solid treasury policy.

And in today’s uncertain, some would say tumultuous, financial environment it’s never been more vital for treasurers to manage their financial risk. Indeed, in Ireland some banks now won’t let businesses draw down debt without a solid treasury policy already in place. If you’re operating internationally, the right policy can help you avoid the same fate as the SAA and Pasminco.

Corporates managing long-term debt should also consider how they would fare in a ‘normal rate’ environment and what impact that might have on their cash flow. And of course, every business needs to make sure its fraud and error prevention policies are up to speed and sufficient for their requirements.

What are a treasury policy’s objectives?

A sound treasury policy will meet several objectives. A Clear Treasury policy document sets out details of the causes and potential risks around your treasury exposure and the appropriate risk response for each. Using your organisation’s existing risk management framework, including risk measures, it focuses on producing policies that are consistent across your risk appetite and highlight where responsibility lies for managing it.

Interest rate risk

  • Identify the risk of changing interest rates
  • Assess the potential impact of this on key performance indicators (KPIs) and loan covenants
  • Evaluate the acceptability of interest rate risk exposure
  • Where the risk level is too high, implement a strategy to control exposure to it

Foreign exchange risk

  • Identify who in the company is responsible for managing foreign exchange risk
  • Ensure that person (or people) understands the board’s objectives and risk appetite in managing the company’s FX
  • Identify the committed and forecasted FX exposures
  • Assess whether to hedge only the committed exposure or include a percentage of forecasts as well

Counterparty credit risk

  • Identify the credit risk from exposure to banks and other financial institutions, which can often be larger than credit risk from sales
  • Establish whether credit limits have been set by counterparty and instrument type
  • Assess procedures in place to react to changes in counterparty risk

Operational risk

  • Identify the main sources of operational risk
  • Identify if and what performance indicators are being used to measure treasury operational controls

Talk to the experts

To speak to an expert about your treasury policy and procedures, get in touch with Clear Treasury for an obligation free, confidential conversation. Email us on info@cleartreasury.co.uk or call +44 (0) 207 151 4870.

Jordan Tilley

Jordan Tilley

Chief executive officer

Jordan has worked in financial services for 18 years across financial accounting, banking and foreign exchange.