Treasury management is, at its most basic, the management of an organisation’s money. This includes cash flows, investments, borrowing, banking and money market and capital market transactions, alongside balancing the control of the associated risks and pursuing optimum performance.
To effectively implement what can be a complex picture, a plan is needed – typically in the form of a Treasury Management Strategy (TMS) or Policy document, updated annually to reflect changing circumstances and the ever-evolving world we live in. A good TM strategy will be a key part of sound financial governance for many organisations, particularly those with significant cashflows and balance sheet exposures as it provides a framework for managing risk, ensuring liquidity, safeguarding capital and supporting strategic objectives.
So what should be included in such a strategy? While the specifics and approach may differ depending on the type of organisation, the fundamental components remain largely consistent and include:
Objectives and Scope: Start at the beginning - defining the strategy’s objectives. This is typically to manage the organisation’s cashflows, investments, and borrowings in a manner that supports its financial sustainability and strategic priorities. It’s also a good idea to outline the scope of treasury activities covered.
Cash Flow Forecasting: Projections of the organisation’s medium and long term cash flows will be important in setting context and facilitating strategic decision making, which at its most simple is whether investing or borrowing will be the main focus of treasury activity. It also helps quantify the scale of risks which the organisation may be facing.
Risk Management Framework: A central purpose of treasury management is the mitigation of financial risks. The strategy should articulate the organisation’s approach to identifying, monitoring and managing key risks, including:
Where applicable, the strategy should also address other risks such as foreign exchange, inflation, price, collateral, legal and reputational risks.
Borrowing Strategy: Where borrowing is part of the organisation’s funding structure, the TMS should outline the approach to managing existing debt and undertaking new borrowing. This includes preferred instruments (e.g. loans, bonds, credit facilities), sources, target maturity profiles, the balance between fixed and variable rate debt and debt rescheduling opportunities.
Investment Strategy: An organisation’s appetite for investment risk should be clearly defined, particularly the priorities of security, liquidity, and (then) yield. The strategy should identify permissible investment instruments and counterparties, set limits to exposure, outline how credit risk is measured and monitored and address ethical or ESG considerations if relevant.
Performance Measurement and Monitoring: The TMS should define how treasury activities will be measured and monitored. This includes benchmarking returns, tracking compliance with strategy limits, and periodic reporting to the governing body. This may include detailed performance indicators and mid-year/annual reviews.
Policy Review and Approval: The strategy should include provisions for regular review (typically annually) or in response to material changes in the economic environment or organisational priorities. Approval procedures, including the roles of a board or committee, may also be specified.
Governance and Responsibilities: Clarity around decision-making structures is critical. Roles and responsibilities should be defined, including the oversight function of the governing body, the execution responsibilities of treasury staff, and the internal and external reporting arrangements. This is an important operational element and could be documented separately from the main TMS itself, depending on governance arrangements.
This isn’t an exhaustive list and there are other elements to be considered where appropriate. Indeed, it is important for each organisation to tailor its treasury strategy to reflect its risk profile, regulatory context, and financial structure.
In an environment of increasing complexity and scrutiny, a clear and disciplined approach to treasury management has never been more essential. At Arlingclose we have extensive experience in helping organisations construct, update and review their treasury strategies, and with the ongoing monitoring of treasury activity which should follow.
If your organisation could benefit from advice on its treasury management strategy and approach, please get in touch at treasury@arlingclose.com
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