TREASURY AND  CASH MANAGEMENT ESSENTIALS

Governance

Effective oversight of treasury activities involves a clear definition of the organization’s strategic and financial objectives and its risk management guidelines. Formal documentation and regular reviews of policies, procedures and performance ensure compliance with Board intentions.

Treasury objectives
  • Has the Board’s financial risk appetite been quantified and clearly communicated to treasury?
  • Do the CFO, Audit Committee and Board of Directors understand the treasury function’s strategies?

It is not always easy to quantify the Board’s risk appetite. The potential impact on the financial statements, such as the Board’s maximum acceptable fluctuation in earnings, is one possible measure. To assist the Board in understanding its risk appetite, management accountants should model the impact of various scenarios (such as interest rate and foreign exchange rate movements) on earnings, cash flows and key balance-sheet ratios. They should also engage with treasury to consider options for mitigating the risks to key financial targets posed by factors like exchange and interest rate variability and to model the impact of mitigating options or derivative products.

Products like derivatives might have impacts on the presentation of the organization’s profit and loss and balance sheet under accounting and reporting regulations like IFRS and GAAP. They might even affect the company’s valuation. Gaining clarity on such matters prior to discussing them with boards and audit committees could improve the quality of discussion and avoid surprises down the line.

Treasury policy

Key questions to consider – Start the dialog

Management accountants should be able to answer the following questions affirmatively:

  • Is treasury policy aligned with financial strategy and the approach to risk?
  • Is treasury policy approved by the Board and reviewed at least annually?
  • Does the treasury policy set limits for each financial risk?
  • Is adherence to treasury policies reviewed by the Board and independently audited?

All well-managed treasury activities are backed by written treasury policies that have processes in place for managing regular updates. Treasury policy is a mechanism by which the Board and management can delegate financial decisions about the business in a controlled manner. It should give those responsible for treasury activities written guidelines on their areas of responsibility, how they should go about these responsibilities, what their boundaries are and how their performance will be measured. These guidelines can be developed in formal procedures.

The treasury policy document should explain:

  • The organization’s financial risk management objectives, which should reflect its goals, risk appetite and sources of risk for the specific business and the economic environment in which it operates
  • The risk management framework to be adopted by the organization (identify, assess, evaluate, respond, report)
  • For each financial risk, what is the risk and why is it being managed, all in the context of the organization’s risk appetite
  • Risk measures to set target outcomes and to model the likelihood of their occurring.
    This may include sensitivity analysis with indicative probabilities attached
  • Procedures for the day-to-day management of financial risks, including:
    • The delegation of responsibility for managing them
    • How treasury will relate to business operations where financial risks are identified and/or being managed
    • Financial risk targets and limits based on an acceptable level of risk, adapted as the organization evolves
    • Performance-reporting/feedback mechanisms.

Boards have ultimate responsibility for risk management and for approving risk policies. In larger organizations, risk management tasks may be delegated – but not abandoned – to a subcommittee of the Board, often called the Risk Management Committee (RMC). Those responsible for the treasury function should recommend financial risk management (and potentially other) policies to the RMC and ensure that the approved policies are followed. Tool: Treasury Policy

TOOL
Treasury Policy
 

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